The accompanying notes are an integral part of these condensed consolidated financial statements.

THE LOVESAC COMPANY

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

THE LOVESAC COMPANY

CONDENSED CONSOLIDATED NOTES TO FINANCIAL STATEMENTS

FOR THE THIRTEEN AND TWENTY-SIX WEEKS ENDED AUGUST 4,MAY 3, 2020 AND MAY 5, 2019 AND AUGUST 5, 2018

(Unaudited)

NOTE 1 –- BASIS OF PRESENTATION, OPERATIONS AND LIQUIDITY

The condensed consolidated balance sheet of The Lovesac Company (the “Company”) as of February 3, 2019,2, 2020, which has been derived from our audited financial statements as of and for the 52-week year ended February 3, 2019,2, 2020, and the accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting. Certain information and note disclosures normally included in annual financial statements, prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”), have been condensed or omitted pursuant to those rules and regulations. The financial information presented herein, which is not necessarily indicative of results to be expected for the full current fiscal year, reflects all adjustments which, in the opinion of management, are necessary for a fair presentation of the interim unaudited condensed consolidated financial statements. Such adjustments are of a normal, recurring nature. These condensed consolidated financial statements should be read in conjunction with the condensedCompany’s consolidated financial statements and the notes thereto includedfiled in our audited condensed consolidated financial statementsits Annual Report on Form 10-K for the fiscal year ended February 3, 2019.2, 2020.

Due to the seasonality of the Company’s business, with the majority of our activity occurring in the second halffourth quarter of theeach fiscal year, the results of operations for the thirteen and twenty-six weeks ended August 4,May 3, 2020 and May 5, 2019 and August 5, 2018 are not necessarily indicative of results to be expected for the full fiscal year.

The Company designs and sells foam filled furniture, sectional couches, and related accessories throughout the world. The Company operated 91 leased retail showrooms located throughout the United States which were closed as of May 3, 2020 (see below regarding COVID-19). In addition, the Company operates a retail Internet website and does business to business transactions through its wholesale operations principally with Costco and to a lesser extent Macy’s and Best Buy. The Company was formed as a Delaware corporation on January 3, 2017, in connection with a corporate reorganization with SAC Acquisition LLC, a Delaware limited liability company (“SAC LLC”), the predecessor entity to the Company.

In March 2020, the World Health Organization declared the outbreak of COVID-19 as a global pandemic, and, in the following weeks, many U.S. states and localities issued lockdown orders impacting consumer demand and resulting in the closing of all the Company’s showrooms. Since then, the COVID-19 situation within the U.S. has rapidly escalated. On March 18, 2020, the Company closed all showroom locations and currentlyon April 1, 2020, the largest stockholderCompany announced the extension of the showroom closures until it is safe and permitted to reopen the showrooms. The Company will follow the guidance of federal, state, and local governments, as well as health organizations, to determine when the Company can safely reopen its showrooms. Additionally, the Company implemented a reduction in workforce of approximately 445 part time employees (representing 57% of our total headcount) as well as a temporary reduction in executive cash compensation. Cash compensation was reduced by 20% for certain officers of the Company. PursuantThe base salaries of all other senior management and full-time headquarter team members has been temporarily reduced by graduated amounts. The Company’s Board of Directors has also agreed to the termsa temporary reduction of its retainer and monitoring fees and an extension of the reorganization, which was completed on March 22, 2017, SAC Acquisition LLC assigned,associated payment timeline. The Company continues to monitor the situation closely and it is possible that the Company assumed all rights, titlewill implement further measures to provide additional financial flexibility as it works work to protect its cash position and interest to all assets and liabilities of SAC Acquisition LLC, including the intellectual property that is currently owned by the Company, in exchange for 6,000,000 shares of common stock of the Company.

The Company designs and sells foam filled furniture, sectional couches, and related accessories throughout the world. As of August 4, 2019, the Company operated 80 leased retail showrooms located throughout the United States. In addition, the Company operates a retail Internet website and does business to business transactions through its wholesale operations.liquidity.

The Company has incurred significant operating losses and used cash in its operating activities since inception. Operating losses have resulted from inadequate sales levels for the cost structure and expenses as a result of expanding into new markets, opening new showrooms, and investments into advertising, marketing and infrastructure to support increases in revenues. The Company continuesplans to continue to open new retail showrooms in larger markets and increase its shop in shop relationships to increase sales levels and invest in advertising and marketing initiatives to increase brand awareness. Of course, there can be no assurance that anticipated sales levels will be achieved.

On June 22, 2018, the board of directors of the Company approved a 1-for-2.5 reverse stock split of the Company’s shares of common stock. The reverse stock split became effective immediately prior to the closing of its initial public offering (“IPO”). All stock amounts included in these financial statements have been adjusted to reflect this reverse stock split.

On June 27, 2018, the Company completed its IPO, selling 4,025,000 shares of common stock at a price of $16.00 per share. Net proceeds to the Company from the offering were approximately $58.9 million after legal and underwriting expenses. The Company believes that based on its current sales and expense levels, projections for the next twelve months, current cash on hand and the credit facility with Wells Fargo Bank, see Note 7, and the proceeds from the IPO, as well as the follow-on offering that was completed on May 21, 2019 in which the Company received approximately $25.6 million (see below), the Company will have sufficient working capital to cover operating cash needs through the twelve-monthtwelve month period from the financial statement issuance date.

On October 29, 2018, certain selling stockholders conducted a secondary offering of 2,220,000 shares of common stock of the Company. The Company did not sell any shares or receive any proceeds from the sale of the common stock by the selling stockholders.

On May 21, 2019, the Company and certain of the Company’s stockholders completed a primary and secondary public offering of an aggregate of 2,500,000 shares of common stock, which included 750,000 shares offered by the Company and 1,750,000 shares offered by certain selling stockholders of the Company, at a public offering price of $36.00 per share. Net proceeds to the Company from the offering were approximately $25.6 million after legal and underwriting expenses. On May 29, 2019, the underwriters also exercised an option to purchase up to an additional 375,000 shares of common stock from the selling stockholders. The Company did not receive any proceeds from the sale of the common stock by the selling stockholders.

Immediately prior to the follow-on offeringsoffering in October 2018 and May 2019, various investment vehicles affiliated with our equity sponsor Mistral and its affiliatesCapital Managements, LLC (“Mistral”), which included SAC LLC, owned approximately 56% and 41% of our common stock, respectively.stock. Immediately after the completion of the follow-on offerings, such entities owned approximately 41% and 28.8%29% of ourthe Company’s common stock, respectively.stock. As a result, we arethe Company is no longer a “controlled company” within the meaning of the corporate governance standards of Nasdaq, and we will, subject to certain transition periods permitted by Nasdaq rules,the Company no longer relyrelies on exemptions from corporate governance requirements that are available to controlled companies. In December 2019, SAC LLC distributed the shares of the Company’s common stock to its members, which included certain affiliates of Mistral. Following the distribution by SAC LLC, Mistral and its affiliates owned approximately 19% of the Company’s common stock. See Note 8.

NOTE 2 –- RECENT ACCOUNTING PRONOUNCEMENTS

Except as described below, the Company has considered all other recently issued accounting pronouncements and does not believe the adoption of such pronouncements will have a material impact on its financial statements. The Company, as an emerging growth company, has elected to use the extended transition period for complying with new or revised financial accounting standards.

The following new accounting pronouncements were adopted in fiscal 2020:

In August 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2015-14, which defers the effective date of ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) by one year. ASU 2014-09 is a comprehensive new revenue recognition model requiring a company to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. As a result, ASU 2015-14 is now effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, which for the Company is fiscal 2020. We reviewed substantially all our contracts and other revenue streams and determined that while the application of the new standard did not have a material change in the amount of or timing for recognizing revenue, it did have a significant impact on our financial statement disclosures which are further discussed in Note 12 – Revenue Recognition.

In August 2016, FASB issued ASU 2016-15, Statement of Cash Flows: Clarification of Certain Cash Receipts and Cash Payments, which eliminates the diversity in practice related to classification of certain cash receipts and payments in the statement of cash flows, by adding or clarifying guidance on eight specific cash flow issues. ASU 2016-15 is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. The Company adopted the guidance retrospectively effective February 4, 2019, which did not have a material effect on the Company’s condensed consolidated financial position and results of operations.

The following new accounting pronouncements, and related impacts on adoption are being evaluated by the Company:

In February 2016, FASB issued ASU No. 2016-02, Leases (Topic 842) amending lease guidance to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU No. 2016-02 is2019-10 extended the effective fordate to fiscal years beginning after December 15, 2019,2021, and interim periods within fiscal years beginning after December 15, 2020,2021, with early adoption permitted. ThisThe Company will adopt this standard will be effective beginning with ourin fiscal 2021.2022. Management is currently evaluatinghas evaluated the impact ASU No. 2016-02 will have on these condensed consolidated financial statements. We anticipateBased on the initial evaluation, we have determined that adopting this standard will have a material impact on our condensed consolidated balance sheet as we have a significant number of operating leases.

In June 2018, the FASB issued ASU 2018-07,Improvements to Nonemployee Share-Based Payment Accounting (Topic 718). ASU 2018-07 eliminates the separate accounting model for nonemployee share-based payment awards and generally requires companies to account for share-based payment transactions with nonemployees in the same way as share-based payment transactions with employees. The accounting remains different for attribution, which represents how the equity-based payment cost is recognized over the vesting period, and a contractual term election for valuing nonemployee equity share options. ASU 2018-07 is effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, but no earlier than an entity’s adoption of Topic 606. Management is currently evaluating the impact ASU 2018-07 will have on these condensed consolidated financial statements.

NOTE 3 –- INTANGIBLE ASSETS, NET

A summary of intangible assets follows:

Amortization expense associated with intangible assets subject to amortization is included in depreciation and amortization expense on the accompanying condensed consolidated statements of operations. Amortization expense on other intangible assets was $74,087$78,371 and $40,182 and $123,670 and $78,336$49,582 for the thirteen and twenty-six weeks ended August 4,May 3, 2020 and May 5, 2019 and August 5, 2018 respectively.

As of August 4, 2019,May 3, 2020, estimated future amortization expense associated with intangible assets subject to amortization is as follows:

NOTE 4 –- INCOME TAXES

The Company continues to provide a full valuation allowance against its net deferred tax assets due to the uncertainty as to when business conditions will improve sufficiently to enable it to utilize its deferred tax assets. As a result, the Company did not record a federal or state tax benefit on its operating losses for the thirteen and twenty-six weeks ended August 4, 2019May 3, 2020 and AugustMay 5, 2018.2019.

The Company does not anticipate any material adjustments relating to unrecognized tax benefits within the next twelve months; however, the ultimate outcome of tax matters is uncertain and unforeseen results can occur. WeThe Company had no material interest or penalties during the thirteen and twenty-six weeks ended August 4,May 3, 2020 and May 5, 2019, and August 5, 2018, respectively, and we dothe Company does not anticipate any such items during the next twelve months. Our policy is to record interest and penalties directly related to uncertain tax positions as income tax expense in the condensed consolidated statements of operations.

NOTE 5 –- BASIC AND DILUTED NET LOSS PER COMMON SHARE

The following table presents the calculation of loss per share for the thirteen and twenty-six weeks ended August 4, 2019 and August 5, 2018:

Diluted net loss per common share includes, in periods in which they are dilutive, the effect of those potentially dilutive securities where the average market price of the common stock exceeds the exercise prices for the respective periods.

As of August 4, 2019,May 3, 2020, there were 1,650,767,1,760,245 of potentially dilutive shares which may be issued in the future, including 116,281225,759 shares of common stock related to restricted stock units, 495,366 stock options and warrants to purchase 1,039,120 shares of common stock. As of AugustMay 5, 2018,2019, there were 1,509,0441,179,697 of potentially dilutive shares which may be issued in the future, including 428,319104,681 shares of common stock relating to restricted stock and warrants to purchase 1,080,7251,075,016 shares of common stock. These were excluded from the diluted loss per share calculation because the effect of including these potentially dilutive shares was antidilutive.

NOTE 6 –- COMMITMENTS, CONTINGENCY AND RELATED PARTIES

Operating Lease Commitments

The Company leases its office, warehouse facilities and retail showrooms under operating lease agreements which expire at various dates through January 2029.2031. Monthly payments related to these leases range from $2,500$2,040 to $30,000.$45,600.

Expected future annual minimum rental payments under these leases follow:

Severance Contingency

The Company has various employment agreements with its senior level executives. A number of these agreements have severance provisions, ranging from 12 to 18 months of salary, in the event those employees are terminated without cause. The total amount of exposure to the Company under these agreements was $3,165,978 at May 3, 2020 if all executives with employment agreements were terminated without cause and the full amount of severance was payable.

Legal Contingency

The Company is involved in various legal proceedings in the ordinary course of business. Management cannot presently predict the outcome of these matters, although management believes, based in part on the advice of counsel, that the ultimate resolution of these matters will not have a materially adverse effect on the Company’s condensed consolidated financial position, results of operations or cash flows.

Related Parties

Mistral Capital Management, LLC (“Mistral”), an affiliate of the largest stockholder of the Company, performs management services for the Company under a contractual agreement. Management fees totaled approximately $100,000 and $200,000 for both the thirteen and twenty-six weeks ended August 4,May 3, 2020 and May 5, 2019, and August 5, 2018 respectively, and are included in selling, general and administrative expenses. There were no$0 and $2,000 amounts payable to Mistral as of August 4, 2019May 3, 2020 and February 3, 2019.2, 2020, respectively and are included in accounts payable in the accompanying condensed consolidated balance sheets. In addition, the Company reimbursed Mistral for expenses incurred in the amount of $0 and $39,000 and $0 for management related feesout of pocket expenses for the twenty-six weeks ended August 4, 2019 and August 5, 2018, respectively. There were no such reimbursements during the thirteen weeks ended August 4,May 3, 2020 and May 5, 2019, and August 5, 2018, respectively. Management fees related to the IPO were $500,000 for the thirteen and twenty-six weeks ended August 5, 2018 and are included in selling, general and administrative expenses. There were no such management fees for the thirteen and twenty-six weeks ended August 4, 2019.

Satori Capital, LLC (“Satori”), an affiliate of two stockholders of the Company since April 2017, performs management services for the Company under a contractual agreement. Management fees totaled approximately $25,000 and $50,000 for both the thirteen and twenty-six weeks ended August 4,May 3, 2020 and May 5, 2019 and August 5, 2018 respectively, and are included in selling, general and administrative expenses. Amounts payable to Satori as of August 4, 2019May 3, 2020 were $126,401 consisting of $20,000 in management fees and February 3, 2019$106,401 of reimbursable expenses which were $25,000 and $0 respectively and are included in accounts payable onand accrued liabilities in the accompanying condensed consolidated balance sheets. ManagementAmounts payable to Satori as of February 2, 2020 were $95,000 consisting of $25,000 in management fees related toand $70,000 of reimbursable expenses which were included in accounts payable and accrued liabilities in the IPO were $125,000accompanying condensed consolidated balance sheets. In addition, the Company reimbursed Satori for expenses incurred in the amount of $36,401 and $0 for out of pocket expenses for the thirteen and twenty-six weeks ended AugustMay 3, 2020 and May 5, 2018 and are included in selling, general and administrative expenses. There were no such management fees for the thirteen and twenty-six weeks ended August 4, 2019.2019, respectively.

The Company engaged Blueport Commerce (“Blueport”), a company owned in part by investment vehicles affiliated with Mistral and an affiliate of Schottenstein Stores Corporation, an indirect investor in SAC Acquisition LLC, our largest shareholder, to evaluate a transition plan to convert to the Blueport platform.Mistral. Certain directors are members and principals of Mistral or employees of Schottenstein Stores Corporation. Thethe Company launched the Blueport platform in February 2018. There were $430,335$482,848 and $218,270$337,496 of fees incurred with Blueport sales transacted through the Commerce platform and on the conversion of the CommerceBlueport platform during the thirteen weeks ended August 4,May 3, 2020 and May 5, 2019, and August 5, 2018 and $767,831 and $551,543 during the twenty-six weeks ended August 4, 2019 and August 5, 2018, respectively. Amounts payable to Blueport as of August 4, 2019May 3, 2020 and February 3, 20192, 2020 were $0$398,138 and $93,210,$150,508, respectively, and are included in accrued expenses in the accompanying condensed consolidated balance sheets.

NOTE 7 –- FINANCING ARRANGEMENTS

The Company had a line of credit with Siena Lending Group, LLC to borrow up to $7.0 million, which matured on May 14, 2018. Borrowings were limited to the lesser of 75% of inventory or 85% of the net orderly liquidation value of inventory and may be reduced by certain liabilities of the Company. All amounts outstanding bore interest at the base rate, defined as the greatest of (i) Prime Rate published by The Wall Street Journal, (ii) Federal Funds Rate plus 0.5% or (iii) 3.25%, plus 3% (7.00% at February 4, 2018). The line was subject to a monthly unused line fee of 0.75%. The agreement was secured by the first lien on substantially all assets of the Company. In February 2018, the Company paid the outstanding loan balance of $405, an early termination fee of $70,000 and fully amortized the remaining deferred financing fees of $48,149 on its line of credit with Siena Lending Group, LLC.

On February 6, 2018, the Company established a line of credit with Wells Fargo Bank, National Association (“Wells”). The line of credit with Wells allows the Company to borrow up to $25.0 million and will mature in February 2023. Borrowings are limited to 90% of eligible credit card receivables plus 85% of eligible wholesale receivables plus 85% of the net recovery percentage for the eligible inventory multiplied by the value of such eligible inventory of the Company for the period from December 16 of each year until October 14 of the immediately following year, with a seasonal increase to 90% of the net recovery percentage for the period from October 15 of each year until December 15 of such year, seasonal advance rate, minus applicable reserves established by Wells. As of August 4, 2019,May 3, 2020, and August 5, 2018,February 2, 2020, the Company’s borrowing availability under the line of credit with Wells Fargo was $15.8$11.4 million and $10.5$12.5 million, respectively. As of August 4, 2019,May 3, 2020, and February 2, 2020, there were no borrowings outstanding on this line of credit.

Under the line of credit with Wells, the Company may elect that revolving loans bear interest at a rate per annum equal to the base rate plus the applicable margin or the LIBOR rate plus the applicable margin. The applicable margin is based on tier’s relating to the quarterly average excess availability. The tiers range from 2.00% to 2.25%. The loan agreement calls for certain covenants including a timing of the financial statement'sstatement’s threshold and a minimum excess availability threshold. On May 3, 2018, the Company elected a one-month revolving loan with a maturity date of June 4, 2018, that bears interest at the LIBOR rate plus the applicable margin for an all-in-rate of 3.1875%. The one-month revolving loan matured and was paid in full on June 4, 2018.

NOTE 8 –- STOCKHOLDERS’ EQUITY

Common Stock Warrants

In fiscal 2018, the Company completed financing transactions with funds and investment vehicles advised by Mistral, Satori, and executive management in which the Company originally issued 930,054 warrants to purchase common stock subject to adjustments in the exercise price as defined below. In consideration for agreeing to amend the outstanding preferred stock to automatically convert immediately prior to the completion of the IPO, on April 19, 2018, the Company and a majority of the holders of the warrants issued along with the preferred stock, agreed to amend and restate the warrants to replace the aggregate dollar value of each warrant with a fixed number of warrant shares. In order to prevent dilution of the purchase rights granted under the warrants, the exercise price was calculated based on certain factors described in the amendment.

On April 19, 2018, the above warrants were modified, and the Company updated the fair value of the warrants using the assumptions detailed below using a probability-weighted expected return. As the total fair value of the modified warrants was less than the total fair value of the original warrants, there was no financial statement impact on April 19, 2018. The modification resulted in the cancellation of the 930,054 warrants and the reissuance of 798,975 warrants.

On June 29, 2018, the Company completed a Qualified IPO and the exercise price was adjusted to equal the purchase price per share of common stock of $16.00. The Company computed the value of the warrants with the updated assumptions using the Black-Scholes Model, as described below, and recorded the difference between the fair value of the new warrants compared to the old warrants as a deemed dividend of $1,498,079. 

There were 281,750 warrants, with a five-year term, issued to Roth Capital Partners, LLC as part of the underwriting agreement in connection with the Company’s IPO. These warrants were valued using the Black-Scholes model, and remain outstanding as of August 4, 2019.

In the third quarter of fiscal 2019, the Company amended and restated warrants totaling 56,077 with a three-year term, valued using the Black-Scholes model. The Company recorded the difference between the fair value of the new warrants compared to the old warrants as a deemed dividend of $408,919. These warrants were exercised in September 2018.

In fiscal 2020, the Company issued 18,166 warrants to a third party in connection with previous equity raise. These warrants were valued using the Black-Scholes model, with similar assumptions to the June 2018 warrants.model. The warrants had a fair value of approximately $130,000. Of these warrants, 17,396 were exercised on May 14, 2019.

The warrants may be exercised at any time following the date of issuance during the period prior to their expiration date. The fair value of each warrant is estimated on the date of grant using the Black-Scholes model. Expected volatilities are based on comparable Companies’ historical volatility, with consideration of the Company’s volatility, which management believes represents the most accurate basis for estimating expected future volatility under the current circumstances. The risk-free rate is based on the U.S. treasury yield in effect at the time of the grant.

The following represents warrant activity during the twenty-sixthirteen weeks ended August 4, 2019May 3, 2020 and AugustMay 5, 2018:2019:

The majority of the 46,52110,625 warrants exercised in fiscal 2020 were cashless, whereby the holders received less shares of common stock in lieu of a cash payment the Company, which resulted in the issuance of 27,2465,138 common shares.

Equity Incentive Plans

The Company adopted the 2017 Equity Incentive Plan (the “Plan”) which provides for Awards in the form of Options, Stock Appreciation rights, Restricted Stock Awards, Restricted Stock Units, Performance shares, Performance Units, Cash-Based Awards and Other Stock-Based Awards. All awards shall be granted within 10 years from the effective date of the Plan.

In April 2018, the board of directors of the Company approved an increase in The Plan, as amended, reserves 1,414,889 shares of common stock reserved for issuance under the Plan from 420,000 to 604,612 shares of common stock.

On May 10, 2018, the Board of Directors approved an increase in shares of common stock reserved for issuance under the Plan from 604,612 to 615,066 shares of common stock.

On June 5, 2019, the shareholders approved an amendment and restatement of the Plan that among other things increased the number of shares of common stock reserved for issuance under the Plan from 615,066 to 1,414,889 share of common stock.

In October 2017, the Company granted 258,000 Restricted Stock Units to certain officers of the Company with a fair value of $2,792,849. The unit vesting was based on both time and performance. The time vesting units vest twenty-five percent on January 31, 2018, and twenty-five percent on each of the next three anniversaries of that initial vesting date. The performance vesting units vest annually upon the achievement of certain benchmarks. There were no Restricted Stock Units cancelled, forfeited, or expired during the thirteen and twenty-six weeks ended August 4, 2019 related to these grants. Due to an accelerated vesting clause in these specific grants, all the unvested time and performance units vested on March 21, 2019. There are no unvested units under these grants as of August 4, 2019.

issuance.

In March 2018, the Company granted 52,504 Restricted Stock Units to certain executive employees of the Company with a fair value of $568,356. The unit vesting was based on both time and performance. The time vesting units vest twenty-five percent on May 1, 2018, and twenty-five percent on January 31st of the following three years. The performance vesting units vest annually upon the achievement of certain benchmarks. As of August 4, 2019, there were 26,250 unvested units outstanding related to this grant. There were no Restricted Stock Units cancelled, forfeited, or expired during the thirteen and twenty-six weeks ended August 4, 2019, related to these grants.

On May 10, 2018, the Company granted 188,917 Restricted Stock Units to certain officers of the Company with a fair value of $2,800,695. The unit vesting is based on both time and performance. The time vesting units vest twenty-five percent on the closing of the offering, and twenty-five percent on January 31st of the following three years. The performance vesting units vest annually upon the achievement of certain benchmarks. There were no Restricted Stock Units cancelled, forfeited, or expired during the thirteen and twenty-six weeks ended August 4, 2019 related to these grants. Due to an accelerated vesting clause in these specific grants, all the unvested time and performance units vested on March 21, 2019. There are no unvested units under these grants as of August 4, 2019.

On June 20, 2018, the Company granted 68,378 Restricted Stock Units to certain executive and non-executive employees of the Company with a fair value of $1,014,046 of which 15,666 Restricted Stock Units, immediately vested. The unit vesting is based on both time and performance. The time and performance vesting units will vest twenty-five percent on July 1, 2019, and July 1, 2020 and between twenty-five to thirty-five percent on July 1, 2021. The performance vesting units will only vest upon the achievement of certain benchmarks. As of August 4, 2019, there were 29,243 unvested units outstanding related to this grant. There were 9,798 Restricted Stock Units forfeited and no units cancelled or expired from this grant during the twenty-six weeks ended August 4, 2019.

In September 2018, the Company granted 10,500 Restricted Stock Units to a certain executive employee of the Company with a fair value of $250,950. The unit vesting was based on both time and performance. The time vesting units vest twenty-five percent on October 4, 2018, and twenty-five percent on January 31st of the following three years. The performance vesting units vest annually upon the achievement of certain benchmarks. As of August 4, 2019, there were 5,250 unvested units outstanding related to this grant. There were no Restricted Stock Units cancelled, forfeited or expired from this grant during the thirteen and twenty-six weeks ended August 4, 2019.

In January 2019, the Company granted 10,500 Restricted Stock Units to a certain executive employee of the Company with a fair value of $246,120. The unit vesting was based on both time and performance. The time vesting units vest twenty-five percent on January 31, 2020, and twenty-five percent on January 31st of each of the following three years. The performance vesting units vest annually upon the achievement of certain benchmarks. As of August 4, 2019, there were 10,500 unvested units outstanding related to this grant. There were no Restricted Stock Units cancelled, forfeited or expired from this grant during the thirteen and twenty-six weeks ended August 4, 2019.

In March 2019, the Company granted 8,780 Restricted Stock Units to certain non-executive employees of the Company with a fair value of $264,015. The unit vesting is based on both time and performance. The time and performance vesting units will vest fifteen percent on July 1, 2020, 25% on both July 1, 2021 and July 1, 2022 and 35% on July 1, 2023. The performance vesting units will only vest upon the achievement of certain benchmarks. As of August 4, 2019, there were 6,620 unvested units outstanding related to this grant. There were 2,160 units forfeited from this grant and no units cancelled or expired during the thirteen and twenty-six weeks ended August 4, 2019.

In June 2019, the Company granted 38,318 Restricted Stock Units to certain officers of the Company with a fair value of $1,420,448. The unit vesting is based on both time and performance. The time and performance vesting units will vest 33.33% percent on June 5, 2020, June 5, 2021 and June 5, 2022. The performance vesting units will only vest upon the achievement of certain benchmarks. As of August 4, 2019, there were 38,318 unvested units outstanding related to this grant. There were no units forfeited, cancelled or expired during the thirteen and twenty-six weeks ended August 4, 2019.

In July 2019, the Company granted 100 Restricted Stock Units to a certain non-executive employee of the Company with a fair value of $3,131. The unit vesting is based on both time and performance. The time and performance vesting units will vest fifteen percent on July 1, 2020, 25% on both July 1, 2021 and July 1, 2022 and 35% on July 1, 2023. The performance vesting units will only vest upon the achievement of certain benchmarks. As of August 4, 2019, there were 100 unvested units outstanding related to this grant. There were no units forfeited, cancelled or expired from this grant during the thirteen and twenty-six weeks ended August 4, 2019.

In June 2019, the Company granted 495,366 Non statutory Stocknon-statutory stock options to certain officers of the Company with an option price of $38.10 per share. 100% of the stock options are subject to vesting on the first trading day after the date on which the closing price of the Company’s stock price has been at least $75 for 60 consecutive trading days so long as this goal has been attained by June 5, 2022 or the options will terminate. These options were valued using a Monte Carlo simulation model to account for the path dependent market conditions that stipulate when and whether or not the options shall vest. 

In December 2019, SAC LLC distributed the shares of the Company’s common stock it held. In connection with the distribution officers of the Company agreed to exchange and modify options that were held at SAC LLC for shares of vested common stock of the Company. Pursuant to the exchange SAC LLC transferred 175,478 shares of common stock to the Company and the Company immediately cancelled these shares. The Company then issued to the former option holders the number of those shares pursuant to the Plan and withheld 73,507 shares to satisfy taxes associated with the issuance.  

A summary of the status of our stock options as of August 4, 2019,May 3, 2020, and the changes during the twenty-sixthirteen weeks ended August 4, 2019May 3, 2020 is presented below:

A summary of the status of our unvested restricted stock units as of August 4, 2019,May 3, 2020, and changes during the twenty-sixthirteen weeks then ended, is presented below:

Equity based compensation expense was approximately $0.2$0.9 million and $3.4$3.2 million for the thirteen weeks ended May 3, 2020 and for the thirteen and twenty-six weeks ended August 4,May 5, 2019, and $2.0 million and $2.3 million and for the thirteen and twenty-six weeks ended August 5, 2018, respectively. In the thirteen and twenty-six weeks ended August 4,May 5, 2019, all the unvested restricted stock units for certain senior executives of the Company vested according to the accelerated vesting trigger in their restricted stock unit agreements. The triggering event was the market capitalization of the Company post IPO, exceeding $300 million for 60 consecutive trading days and the expiration of the lockup-lockup period. This accelerated vesting resulted in equity-based compensation in the amount of $2.9 million.

The total unrecognized restricted stock unit compensation cost related to non-vested awards was $1,138,151$4,113,742 as of August 4, 2019May 3, 2020 and will be recognized in operations over a weighted average period of 2.361.95 years.

NOTE 9 –- EMPLOYEE BENEFIT PLAN

In February 2017, the Company established The Lovesac Companythe TLC 401(k) Plan (the “401(k) Plan”) with Elective Deferrals beginning May 1, 2017. The Plan calls for Elective Deferral Contributions, Safe Harbor Matching Contributions and Profit-Sharing Contributions. All employees of The Lovesac Company (except for union employees and nonresident aliens) will be eligible to participate in the 401(k) Plan as of the day of the month which is coincident with or next follows the date on which they attain age 21 and complete one month of service. Participants will be able to contribute up to 100% of their eligible compensation to the 401(k) Plan subject to limitations with the IRS. The employer contributions to the 401(k) Plan were $116,880$117,280 and $88,995$74,232 for the thirteen weeks ended August 4,May 3, 2020 and May 5, 2019 and August 5, 2018 and $191,112 and $150,224 for the twenty-six weeks ended August 4, 2019 and August 5, 2018, respectively.

NOTE 10 –- SEGMENT INFORMATION

We haveThe Company has determined that we operatethe Company operates within a single reporting segment. The chief operating decision maker of the Company is the Chief Executive Officer and President. The Company’s operating segments are aggregated for financial reporting purposes because they are similar in each of the following areas including economic characteristics, class of consumer, nature of products and distribution method and products are a singular group of products which make up over 95% of net sales.

NOTE 11 –- BARTER ARRANGEMENTS

The Company entered into a bartering arrangement with Icon International, Inc., a vendor, whereas the Company provided inventory in exchange for media credits. During fiscal 2018,2020, the Company exchanged $577,326$1,097,488 of inventory plus the cost of freight for certain media credits. To account for the exchange, the Company recorded the transfer of the inventory asset as a reduction of inventory and an increase to a prepaid media asset of $534,407$1,055,185 which is included in “Prepaid and other current assets” on the accompanying condensed consolidated balance sheet. During the first quarter of fiscal 2021, the Company used $228,402 in media credits. There were no additional barter arrangements entered into the thirteen weeks ended May 3, 2020. The Company had $307,417$146,021 and $374,423 of unused media credits remaining as of May 3, 2020 and February 4, 2018 that were used in full during fiscal 2019. During the thirteen weeks ending August 4, 2019, the Company exchanged inventory with an estimated fair value of $530,196 plus the cost of freight for certain media credits. To account for the exchange, the Company recorded the transfer of the inventory asset as a reduction of inventory and an increase to a prepaid media asset of $530,196 which is included in “Prepaid and other current assets” on the accompanying condensed consolidated balance sheet. The Company has $530,196 of unused media credits remaining as of August 4, 2019.2, 2020, respectively.

The Company accounts for barter transactions under ASC Topic No. 845 “Nonmonetary Transactions.” Barter transactions with commercial substance are recorded at the estimated fair value of the products exchanged, unless the products received have a more readily determinable estimated fair value. Revenue associated with barter transactions is recorded at the time of the exchange of the related assets.

NOTE 12 –- REVENUE RECOGNITION

WeThe Company implemented ASU 2015-04, Revenue from Contracts with Customers (Accounting Standards Codification Topic 606, “ASC 606”), in the first quarter of fiscal 2020 using modified retrospective method, which required the company to apply the new guidance retrospectively to revenue transactions completed on or after the effective date. Adopting this new standard had no material financial impact on ourthe Company’s condensed consolidated financial statements but did result in enhanced presentation and disclosures.

OurThe Company’s revenue consists substantially of product sales. We reportThe Company reports product sales net of discounts and recognizerecognizes them at the point in time when control transfers to the customer, which occurs upon shipment is confirmed.

Estimated refunds for returns and allowances are recorded using our historical return patterns, adjusting for any changes in returns policies. We recordThe Company records estimated refunds for net sales returns on a monthly basis as a reduction of net sales and cost of sales on the condensed consolidated statement of operations and an increase in inventory and customers returns liability on the condensed consolidated balance sheet. As of August 4, 2019,May 3, 2020, and February 2, 2020 there was a returns allowance recorded on the condensed consolidated balance sheet in the amount $327,165,$1,885,464 and $2,177,715 respectively, which was included in accrued expenses and $83,942$347,039 and $442,390, respectively, associated with sales returns included in merchandise inventories.

In some cases, deposits are received before the companyCompany transfers control, resulting in contract liabilities. These contract’scontract liabilities are reported as deposits on the Company’s condensed consolidated balance sheet. As of August 4, 2019,May 3, 2020, and February 3, 2019,2, 2020, the Company recorded under customer deposit liabilities the amount of $1.6 million and $1.1 million,$4,738,974and $1,653,597 respectively. During the twenty-sixthirteen weeks ended August 4,May 3, 2020 and May 5, 2019, wethe Company recognized $1.1 millionapproximately $1,653,597 and $1,331,493, respectively, related to our customer deposits from fiscal 2019.

deposits.

Upon adoption of ASC 606, we havethe Company has elected the following accounting policies and practical expedients:

We recognizeThe Company recognizes shipping and handling expense as fulfillment activities (rather than as a promised good or service) when the activities are performed even if those activities are performed after the control of the good has been transferred. Accordingly, we record the expenses for shipping and handling activities at the same time we recognize revenue.

We excludeThe Company excludes from the measurement of the transaction price all taxes imposed on and concurrent with a specific revenue-producing transaction and collected by the entity from a customer, including sales, use, excise, value-added, and franchise taxes (collectively referred to as sales taxes).

The Company does not adjust revenue for the effects of any financing components if the contract has a duration of one year or less, as the Company receives payment from the customer within one year from when it transferred control of the related goods.

The Company offers its products through an inventory lean omni-channel platform that provides a seamless and meaningful experience to its customers in showrooms and through the internet. The other channel predominantly represents sales through the use of pop uppop-up shops that typically average ten days at a time and are staffed with associates trained to demonstrate and sell our product. The following represents sales disaggregated by channel:

See Note 10 for sales disaggregated by product.

NOTE 13 –- SUBSEQUENT EVENTS

The Company has evaluated events and transactions subsequent to August 4, 2019May 3, 2020 through the date the condensed consolidated financial statements were issued.

On June 4, 2020, the stockholders of the Company approved an amendment to the Plan that increased the number of shares of common stock reserved for issuance under the Plan by 690,000 shares of common stock.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q. As discussed in the section titled “Note About Forward-Looking Statements,” the following discussion and analysis contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those identified below and those discussed in the sectionsections titled “Risk Factors” under Part II, Item 1Aand “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Quarterly Reportour most recent report on Form 10-Q.10-K filed with the Securities and Exchange Commission.

We operate on a 52- or 53-week fiscal year that ends on the Sunday closest to February 1. Each fiscal year generally is comprised of four 13-week fiscal quarters, although in the years with 53 weeks, the fourth quarter represents a 14-week period.

Overview

We are a technology driven, omni-channel company that designs, manufactures and sells unique, high quality furniture comprised of modular couches called Sactionals and premium foam beanbag chairs called Sacs. We market and sell our products through modern and efficient showrooms and, increasingly, through online sales. We believe that our ecommerce centric approach, coupled with our ability to deliver our large upholstered products through nationwide express couriers, is unique to the furniture industry.

The name “Lovesac” was derived from our original innovative product, a premium foam beanbag chair, the Sac. The Sac was developed in 1995 and provided the foundation for the Company. We believe that the large size, comfortable foam filling and irreverent branding of our Sacs products have been instrumental in growing a loyal customer base and our positive, fun image. Sales of this product have been increasing on an annual basis, representing $9.6 million and $15.5totaling $9.7 million in the thirteen and twenty-six weeks ended August 4, 2019,May 3, 2020, as compared to $7.1 million and $15.1$5.9 million for the thirteen and twenty-six weeks ended AugustMay 5, 2018. We are currently reviewing our allocation methodology of the application of product discounts to each product segment of our business which we believe will provide a more comparative view of product category growth on a go forward basis.2019.

Our Sactionals product line currently represents a majority of our sales. Sactionals are a couch system that consists of two components, seats and sides, which can be arranged, rearranged and expanded into thousands of configurations easily and without tools. Our Sactional products include a number of patented features relating to their geometry and modularity, coupling mechanisms and other features. We believe that these high quality premium priced products enhance our brand image and customer loyalty and expect them to continue to garner a significant share of our sales. Our Sactionals represented 79.6% and 79.9%80.6% of our sales for the thirteen and twenty-six weeks ended August 4, 2019, respectivelyMay 3, 2020, or $38.3 million and $71.2$43.8 million as compared to 76.1% and 72.0%80.2% of sales for the thirteen and twenty-six weeks ended AugustMay 5, 20182019 or $25.3 million and $43.2 million, respectively. We are currently reviewing our allocation methodology of the application of product discounts to each product segment of our business which we believe will provide a more comparative view of product category growth on a go forward basis.$32.8 million.

Sacs and Sactionals come in a wide variety of colors and fabrics that allow consumers to customize their purchases in numerous configurations and styles. We provide lifetime warranties on our Sactionals frames and the foam used in both product lines, and 3-year warranties on our covers. Our Designed for Life trademark reflects our dynamic product line that is built to last and evolve throughout a customer’s life. Customers can continually update their Sacs and Sactionals with new covers, additions and configurations to accommodate changes in their family and housing situations.

We believe that our products complement one another and have generated a loyal customer base, evidenced by our recent estimate that 38% of our transactions in fiscal 2019 were from repeat customers. We believe the strength of our brand is reflected in the number of customers who routinely share their purchases of Lovesac products with their friends through social media, often displaying our logos or company name in their posts. Our customers include celebrities and other influencers who support our brand through postings made on an uncompensated and unsolicited basis. As of August 4, 2019, we had approximately 811,000 followers on Facebook and 379,000 followers on Instagram.

We currently market and sell our products through 8091 showrooms at top tier malls, lifestyle centers and street locations in 3235 states in the U.S. On March 18, 2020, we temporarily closed all showrooms as a result of COVID-19. We have started safely re-opening showrooms following the guidance of federal, state, and local governments, as well as health organizations. Our modern, efficient showrooms are designed to appeal to millennials and other purchasers looking for comfortable, enduring, premium furniture. They showcase the different sizes of our Sacs, the myriad forms into which our Sactionals can be configured, and the large variety of fabrics that can be used to cover our products. Our retail showrooms are technology driven and focused on educating prospective customers about the many benefits of our unique products, enabling us to requirehave an average of just 498 to 1,350895 square feet for each showroom.

As part of our direct to consumer sales approach, we also sell our products through our ecommerce platform. We believe our products are uniquely suited to this channel. Our foam-based Sacs can be reduced to one-eighth of their normal size and each of our Sactionals components weighs less than 50 pounds upon shipping. With furniture especially suited to ecommerce applications, our sales completed through this channel accounted for 19.6% and 20.1%55.3% of our total sales for the thirteen and twenty-six weeks ended August 4, 2019 and August 5, 2018, respectively,May 3, 2020; up from 16.6% and 16.8%20.7% for the thirteen and twenty-six weeks ended August 4, 2019 and AugustMay 5, 2018, respectively.2019. Our showrooms and other direct advertising and marketing efforts work in concert to drive customer conversion in ecommerce.

As a result of COVID-19, there has been a shift in focus to our ecommerce platform.

Despite the increase in sales of both our Sacs and Sactionals, net losses were $4.8 million and $13.9$8.3 million for the thirteen and twenty-six weeks ended August 4, 2019, respectivelyMay 3, 2020, and $7.0 million and $12.7$9.1 million for the thirteen and twenty-six weeks ended AugustMay 5, 2018, respectively2019, respectively. SG&A as a percent to net sales decreased 10.7% primarily duerelated to increased spending on showrooms, advertising, marketingleveraging of employment cost, rent, and financingprofessional fees as well as a decrease in equity based compensation, offset by increases in selling related costs.expenses.

Impact of COVID-19

In March 2020, the World Health Organization declared the outbreak of COVID-19 as a global pandemic, and, in the following weeks, many U.S. states and localities issued lockdown orders impacting the operations of our stores and consumer demand. Since then, the COVID-19 situation within the U.S. has rapidly escalated. On March 18, 2020, we closed all of our showroom locations and on April 1, 2020, we announced the extension of the showroom closures until it is safe and permitted to reopen the showrooms. We have started safely re-opening showrooms following the guidance of federal, state, and local governments, as well as health organizations. We will follow the guidance of federal, state, and local governments, as well as health organizations, to determine when we can safely reopen our showrooms. Additionally, we implemented a reduction in workforce of approximately 445 part time employees (representing 57% of our total headcount) as well as a temporary reduction in executive cash compensation. Cash compensation was reduced by 20% for Shawn Nelson, Chief Executive Officer, Jack Krause, President and Chief Operating Officer, and Donna Dellomo, Executive Vice President and Chief Financial Officer. The base salaries of all other senior management and full-time headquarter team members has been temporarily reduced by graduated amounts. Our Board of Directors has also agreed to a temporary reduction of its retainer and monitoring fees and an extension of the associated payment timeline. We continue to monitor the situation closely and it is possible that we will implement further measures.

Product Overview

We challenge the notion that a piece of furniture is static by offering a dynamic product line built to last and evolve throughout a customer’s life. Our products serve as a set of building blocks that can be rearranged, restyled and re-upholstered with any new setting, mitigating constant changes in fashion and style.

Sales Channels

We offer our products through an omni-channel platform that provides a seamless and meaningful experience to our customers online and in-store. Compared to traditional retailers, our showrooms require significantly less square footage because of our need to have only a few in-store sample configurations for display and our ability to stack our inventory for immediate sale. Our retail showrooms are technology driven and focused on educating prospective customers about the many benefits of our unique products, enabling us to require an average of just 498 to 1,350895 square feet for each showroom. The small footprint requirement provides a cost advantage and flexibility in locating our showrooms strategically in A-rated malls and street locations in our target markets. These logistical advantages underlie our broader tech-driven, Internet-based business model, where we leverage our showrooms as both a traditional retail channel to purchase our products and an educational center for prospective online customers to learn about and interact with our products in real time.

Through our fast growing mobile and ecommerce channel, we are able to significantly enhance the consumer shopping experience for home furnishings, driving deeper brand engagement and loyalty, while simultaneously driving favorable margin expansion. Our technology capabilities are robust, and we are well positioned to benefit from the growing consumer preference to transact via mobile devices. We leverage our strong social media presence and showroom footprint to drive traffic toward our ecommerce platform, where product testimonials and inspirational stories from our Lovesac community create a more engaging consumer experience for our customers. Additionally, our products’ compact packaging facilitates consistent production scheduling, outsourcing of delivery and lower shipping costs, allowing us to quickly and cost-effectively deliver online orders.

We have also enhanced our sales through the use of pop uppop-up shops and shop in shops. The pop uppop-up shop showrooms display select Sacs and Sactionals and are staffed with associates trained to demonstrate and sell our products. Unlike the pop up shops which are 10-day shows, and pop up locations, shop in shops will be designed to be in permanent locations carrying the same digital technology of our showrooms and will be staffed with associates trained to demonstrate and sell our products. We have an ongoing working relationship with Costco to operate pop uppop-up shop showrooms that typically average ten days at a time. The pop upDue to the success of our pop-up shops, we worked with Costco to bring eighteen-day Internet pop-up shops to Costco.com, in which our products are offered for purchase through the Costco.com website. We hosted 135 and 159 pop-up shop showrooms display select Sacsat Costco locations for the thirteen weeks ended May 3, 2020 and SactionalsMay 5, 2019, respectively. Due to the impacts of COVID-19, Costco cancelled 89 pop-up shops that were originally scheduled in the thirteen weeks ended May 3, 2020. Unlike the pop-up shops which are 10-day shows, and pop-up locations, shop in shops are designed to be in permanent locations carrying the same digital technology of our showrooms and will be staffed with our associates trained to demonstrate and sell our products. We have an ongoing working relationship with Macy’s to operate shop in shop showrooms and are currently expanding the use of this shop in shop format with Best Buy. Due to the successimpact of our roadshows, we worked with Costco to bring an eighteen-day Internet roadshow to Costco.com, in which our products were offered for purchase through the Costco.com website. The Costco.com Internet roadshow generated nearly $750,000 in the eighteen days and due to the success,COVID-19, we have scheduled an additional two Internet roadshows that will occur before the end of fiscal 2020. In the thirteen and twenty-six weeks ended August 4, 2019, we hosted over 209 and 368 pop upclosed our shop showrooms at Costco locations respectively; up from 137 and 257 Costco ship-in-shops hosted in the thirteen and twenty-six weeks ended August 5, 2018, respectively.shops. We continue to explore other pop-up and shop in shop and pop up shop partnerships and opportunities to promote our products and facilitate customers interacting with our products in the real world.products. Other sales which includes pop uppop-up and shop in shop sales accounted for 15.4%11.4% and 14.6%13.6% of our total sales for the thirteen and twenty-six weeks ended August 4,May 3, 2020 and May 5, 2019, respectively. Due to the regulations implemented by federal, state and August 5, 2018, respectively, up from 14.2% and 13.9% forlocal government in response to COVID-19, all shop in shops were temporarily closed through the thirteen and twenty-six weeks ended August 4, 2019 and August 5, 2018, respectively.

end of the quarter.

SELECTED CONDENSED CONSOLIDATED FINANCIAL INFORMATION

The following tables present our summary condensed consolidated financial and other data as of and for the periods indicated. The condensed consolidated statement of operations data and the condensed consolidated statement of cash flow data for the thirteen and twenty-six weeks ended August 4, 2019May 3, 2020 and the summary condensed consolidated balance sheet data as of August 4, 2019,May 3, 2020, are derived from our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report filed on Form 10-Q and have been prepared on the same basis as the audited condensed consolidated financial statements.

The summarized financial information presented below is derived from and should be read in conjunction with our audited condensed consolidated financial statements including the notes to those financial statements and our unaudited condensed consolidated financial statements including the notes to those financial statements both of which are included elsewhere in this Quarterly Report filed on Form 10-Q along with the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Our historical results are not necessarily indicative of our future results.