Restatement and Other Corrections of Previously Issued Consolidated Financial Statements

12 Months Ended

Jan. 29, 2023

Accounting Changes and Error Corrections [Abstract]

Restatement and Other Corrections of Previously Issued Consolidated Financial Statements

Restatement and Other Corrections of Previously Issued Financial Statements

The Audit Committee of the Board of Directors of Lovesac completed an independent investigation in August 2023 whereby the Company concluded $2.2 million of last mile shipping expenses relating to the fiscal year ended January 29, 2023 were improperly capitalized during the quarter ended April 30, 2023. Through this investigation, the Company also determined that the methodology used to estimate an accrual of last mile freight expenses at each period end was not accurate because the calculation did not use the correct number of shipments that were accepted by the shipper for delivery, but not yet invoiced to the Company. Management prepared a quantitative and qualitative analysis of these errors, along with certain other immaterial accounting errors, in accordance with the U.S. SEC Staff's Accounting Bulletin Nos. 99 and 108, Materiality, and concluded the aggregate impact of all the errors are material to the Company's previously reported interim, year-to-date, and annual financial statements as of and for the year ended January 29, 2023 and the Company’s previously reported interim financial statements as of and for the three-month period ended April 30, 2023 and immaterial to the previously reported interim, year-to-date, and annual financial statements as of and for the year ended January 30, 2022 (collectively the "previously reported financial statements"). As a result, the accompanying financial statements as of and for the years ended January 29, 2023 and 2022, and related notes hereto, have been restated or revised, as applicable, to correct these errors. The errors had no impact on the Company's previously financial statements as of and for the year ended January31, 2021.

A summary of the impacts of the adjustments on the previously reported financial statements are included below. Note 13. Quarterly Financial Data (Unaudited) discloses the impact of the adjustments on the Company’s unaudited condensed financial information for each interim period within the fiscal year ended January 29, 2023.

	Year Ended
	January 29, 2023				January 30, 2022
(in thousands)	As Previously Reported		As Restated		As Previously Reported		As Revised
Net sales	$	651,545	$	651,179	$	498,239	$	498,239
Gross profit	345,826		343,651		273,345		273,532
Operating income	39,017		36,966		38,441		40,578
Net income	28,242		26,488		45,900		47,488

	As of
	January 29, 2023				January 30, 2022
(in thousands)	As Previously Reported		As Restated		As Previously Reported		As Revised
Total current assets	$	194,041	$	187,715	$	225,158	$	221,731
Total non-current assets	224,013		220,911		146,421		147,353
Total assets	418,054		408,626		371,579		369,084
Total current liabilities	88,839		82,041		118,779		114,696
Total non-current liabilities	135,955		133,491		96,574		96,574
Total liabilities	224,794		215,532		215,353		211,270
Total equity	193,260		193,094		156,226		157,814

A description of the errors and their impacts on the previously issued financial statements are included below.

Description of Misstatement Adjustments

(a) Last Mile Freight

The Company recorded adjustments to correct misstatements identified in the internal investigation related to last mile freight expenses. The correction of this item represents the net impact of the findings from the investigation as noted above.

(b) Leases

The Company recorded adjustments to correct certain misstatements related to its operating leases. In the fiscal year 2022, the Company recorded an incorrect entry that resulted in the double-counting of rent expense associated with operating leases, with a corresponding impact on prepaid rent and lease liabilities as of January 30, 2022. In addition, the Company recorded an incorrect entry pertaining to incremental borrowing rate that resulted in misstatements associated with operating leases, with a corresponding impact on prepaid rent, right-of-use assets, and the current and long-term portion of operating lease liabilities, as of and during the fiscal year ended January 29, 2023

(c) Buyer’s Remorse

The Company recorded an adjustment to correct certain canceled sales orders related to buyer’s remorse, which resulted in an overstatement of net revenue and trade receivables as of and for the fiscal year ended January 29, 2023. The Company defines buyer's remorse as a customer who cancels an order within a short window of time after making a purchase.

(d) Supplier Rebates

During the quarter ended July 31, 2022, the Company received rebates from certain of its suppliers which was incorrectly recorded to cost of goods sold for the entire amount of the rebate received instead of deferring a portion of the rebate to inventory and recognizing the rebate in cost of goods sold as the related inventory was sold. We corrected these misstatements to defer the up-front consideration from suppliers when the retention or receipt of that consideration was to recognize the consideration as a reduction of cost of goods sold over the sell through rate of the inventory.

(e) Balance Sheet Reclassifications

The Company recorded adjustments to correct the classification of certain balance sheet reclassifications between short and long-term assets. These adjustments primarily related to the classification of prepaid expenses and other current assets and the classification of other assets (long-term). In addition, the Company recorded adjustments to correct the classification of tenant improvement allowances which resulted in a reclassification between prepaid expenses and other current assets and short-term lease liabilities.

(f) Income Taxes

The Company recorded adjustments to recognize the net impact on current and deferred income taxes associated with all the misstatements described herein. The adjustments to income taxes were recorded in the period corresponding with the respective misstatements. The correction of these misstatements resulted in a decrease in provision for income taxes of $0.3 million and a decrease in benefit from income taxes of $0.5 million, respectively for the years ended January 29, 2023 and January 30, 2022.

(g) Inventory and Cost of Goods Sold

The Company recorded adjustments to correct for a misstatement of an accrual related to a duplicate recording of a vendor invoice for freight charges. The Company recorded another adjustment to correct for the misstatement of inventory related to partial returned goods.

(h) Cash Flow Reclassification

The Company corrected the cash flow presentation related to purchases of property and equipment and patents and trademarks not yet paid for at period end. This resulted in a reclassification between cash flows from operating activities and investing activities for the fiscal year ended January 30, 2022 and for the fiscal periods ended October 30, 2022, July 31, 2022 and May 1, 2022. There was no impact to net change in cash and cash equivalents.

THE LOVESAC COMPANY

BALANCE SHEET

	January 29, 2023
(amounts in thousands, except share and per share amounts)	As Previously Reported		Corrections		Reference	As Restated
Assets
Current Assets
Trade accounts receivable	9,469		(366)		(c)	9,103
Merchandise inventories, net	119,962		(335)		(g)	119,627
Prepaid expenses and other current assets	21,077		(5,625)		(a)(b)(e)(f)	15,452
Total Current Assets	194,041		(6,326)			187,715
Operating lease right-of-use assets	138,271		(2,860)		(b)	135,411
Other Assets
Deferred tax asset	9,420		(743)		(f)	8,677
Other assets	21,863		501		(e)	22,364
Total Other Assets	32,838		(242)			32,596
Total Assets	$	418,054	$	(9,428)		$	408,626
Liabilities and Stockholders' Equity
Current Liabilities
Accrued expenses	23,392		2,025		(a)(b)(f)	25,417
Current operating lease liabilities	21,898		(8,823)		(b)(e)	13,075
Total Current Liabilities	88,839		(6,798)			82,041
Operating Lease Liability, long-term	135,955		(2,464)		(b)	133,491
Total Liabilities	224,794		(9,262)			215,532
Stockholders’ Equity
Accumulated earnings (deficit)	10,706		(166)		(a)(b)(c)(f)(g)	10,540
Stockholders' Equity	193,260		(166)			193,094
Total Liabilities and Stockholders' Equity	$	418,054	$	(9,428)		$	408,626

The description of each error is described above. The impact of each error for the corresponding period in the above table is described below:

(a) Last Mile Freight - The correction of these misstatements resulted in an increase to prepaid expenses and other current assets of $1.0 million, an increase to accrued expenses of $2.3 million, and a decrease to accumulated earnings of $1.3 million at January 29, 2023.

(b) Leases - The correction of these misstatements resulted in an increase to prepaid expenses and other current assets of less than $0.1 million, a decrease to operating lease right-of-use assets of $2.9 million, an increase to accrued expenses of $0.2 million, a decrease to current operating lease liabilities of $2.7 million, a decrease to operating lease liability, long-term of $2.5 million, and an increase to accumulated earnings of $2.1 million at January 29, 2023.

(c) Buyer’s Remorse - The correction of these misstatements resulted in a decrease to trade accounts receivable of $0.4 million and a decrease to accumulated earnings of $0.4 million at January 29, 2023.

(e) Balance Sheet Reclassifications - The correction of these misstatements resulted in a decrease to prepaid expenses and other current assets of $6.7 million, a decrease to current operating lease liabilities of $6.2 million, and an increase to other assets of $0.5 million at January 29, 2023.

(f) Income Taxes - The tax impact of all misstatements resulted in a decrease to prepaid expenses and other current assets of less than $0.1 million, a decrease to deferred tax asset of $0.7 million, a decrease to accrued expenses of $0.5 million, and a decrease to accumulated earnings of $0.2 million at January 29, 2023.

(g) Inventory and Cost of Goods Sold - The correction of these misstatements resulted in a decrease to merchandise inventories, net of $0.3 million and a decrease to accumulated earnings of $0.3 million at January 29, 2023.

THE LOVESAC COMPANY

STATEMENT OF OPERATIONS

	For the Year Ended January 29, 2023
(amounts in thousands, except per share data and share amounts)	As Previously Reported		Corrections		Reference	As Restated
Net sales	$	651,545	$	(366)	(c)	$	651,179
Cost of merchandise sold	305,719		1,809		(a)(g)	307,528
Gross profit	345,826		(2,175)			343,651
Operating expenses
Selling, general and administration expenses	216,103		(124)		(b)	215,979
Total operating expenses	306,809		(124)			306,685
Operating income (loss)	39,017		(2,051)			36,966
Net income (loss) before taxes	38,900		(2,051)			36,849
(Provision for) benefit from income taxes	(10,658)		297		(f)	(10,361)
Net income (loss)	$	28,242	$	(1,754)		$	26,488
Net income (loss) per common share:
Basic	$	1.86	$	(0.12)		$	1.74
Diluted	$	1.77	$	(0.11)		$	1.66

The description of each error is described above. The impact of each error for the corresponding period in the above table is described below:

(a) Last Mile Freight - The correction of these misstatements resulted in an increase to cost of merchandise sold of $1.5 million for the year ended January 29, 2023.

(b) Leases - The correction of these misstatements resulted in a decrease to selling, general and administrative expenses of $0.1 million for the year ended January 29, 2023.

(c) Buyer’s Remorse - The correction of these misstatements resulted in a decrease to net sales of $0.4 million for the year ended January 29, 2023.

(f) Income Taxes - The tax impact of all misstatements resulted in a decrease to provision for income taxes of $0.3 million for the year ended January 29, 2023.

(g) Inventory and Cost of Goods Sold - The correction of these misstatements resulted in an increase to cost of merchandise sold of $0.3 million for the year ended January 29, 2023.

THE LOVESAC COMPANY

STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE YEAR ENDED JANUARY 29, 2023

		Common
(amounts in thousands, except share amounts)	Restatement Reference	Shares	Amount		Additional paid-in capital		Accumulated (deficit) earnings		Total Shareholders' Equity
As Previously Reported
Balance - January 30, 2022		15,123,338	$	—	$	173,762	$	(17,536)	$	156,226
Net income		—	—		—		28,242		28,242
Balance - January 29, 2023		15,195,698	$	—	$	182,554	$	10,706	$	193,260
Adjustments/Restatement Impacts
Balance - January 30, 2022		—	$	—	$	—	$	1,588	$	1,588
Net loss	(a)(b)(c)(f)(g)	—	—		—		(1,754)		(1,754)
Balance - January 29, 2023		—	$	—	$	—	$	(166)	$	(166)
As Revised/Restated
Balance - January 30, 2022 (As Revised)		15,123,338	$	—	$	173,762	$	(15,948)	$	157,814
Net income (As Restated)		—	—		—		26,488		26,488
Balance - January 29, 2023 (As Restated)		15,195,698	$	—	$	182,554	$	10,540	$	193,094

See descriptions of the net income (loss) impacts in the statement of operations for the year ended January 29, 2023 sections above.

THE LOVESAC COMPANY

STATEMENT OF CASH FLOWS

	For the Year Ended January 29, 2023
	As Previously Reported		Corrections		Reference	As Restated
Cash Flows from Operating Activities
Net income (loss)	$	28,242	$	(1,754)	(a)(b)(c)(f)(g)	$	26,488
Adjustments to reconcile net income (loss) to cash used in operating activities:
Deferred income taxes	416		628		(f)	1,044
Change in operating assets and liabilities:
Trade accounts receivable	(921)		366		(c)	(555)
Merchandise inventories	(11,470)		335		(g)	(11,135)
Prepaid expenses and other current assets	890		2,197		(a)(b)(e)(f)	3,087
Other assets	(21,459)		546		(e)	(20,913)
Accounts payable and accrued expenses	(33,002)		1,664		(a)(b)(f)	(31,338)
Operating lease liabilities	(18,281)		(3,982)		(b)(e)	(22,263)
Net cash used in operating activities	(21,375)		—			(21,375)
Cash Flows from Investing Activities
Net cash used in investing activities	(25,549)		—			(25,549)
Cash Flows from Financing Activities
Net cash used in financing activities	(1,935)		—			(1,935)
Net change in cash and cash equivalents	(48,859)		—			(48,859)
Cash and cash equivalents - Beginning	92,392		—			92,392
Cash and cash equivalents - Ending	$	43,533	$	—		$	43,533

See descriptions of the net income (loss) impacts in the statement of operations for the year ended January 29, 2023 section above.

No other misstatements impacted the classifications between net operating, net investing, or net financing cash flow activities for the year ended January 29, 2023.

THE LOVESAC COMPANY

BALANCE SHEET

	January 30, 2022
(amounts in thousands, except share and per share amounts)	As Previously Reported		Revisions		Reference	As Revised
Assets
Current Assets
Prepaid expenses and other current assets	15,726		(3,427)		(a)(b)(e)(f)	12,299
Total Current Assets	225,158		(3,427)			221,731
Other Assets
Deferred tax asset	9,836		(115)		(f)	9,721
Other assets	—		1,047		(e)	1,047
Total Other Assets	11,393		932			12,325
Total Assets	$	371,579	$	(2,495)		$	369,084
Liabilities and Stockholders' Equity
Current Liabilities
Accrued expenses	40,497		362		(a)(f)	40,859
Current operating lease liabilities	16,382		(4,445)		(b)(e)	11,937
Total Current Liabilities	118,779		(4,083)			114,696
Total Liabilities	215,353		(4,083)			211,270
Stockholders’ Equity
Accumulated (deficit) earnings	(17,536)		1,588		(a)(b)(f)	(15,948)
Stockholders' Equity	156,226		1,588			157,814
Total Liabilities and Stockholders' Equity	$	371,579	$	(2,495)		$	369,084

The description of each error is described above. The impact of each error for the corresponding period in the above table is described below:

(a) Last Mile Freight - The correction of these misstatements resulted in an increase to prepaid expenses and other current assets of $0.1 million, a decrease to accrued expenses of $0.1 million, and a decrease to accumulated deficit of $0.2 million at January 30, 2022.

(b) Leases - The correction of these misstatements resulted in an increase to prepaid expenses and other current assets of $0.3 million, a decrease to current operating lease liabilities of $1.7 million, and a decrease to accumulated deficit of $2.0 million at January 30, 2022.

(e) Balance Sheet Reclassifications - The correction of these misstatements resulted in a decrease to prepaid expenses and other current assets of $3.8 million, a decrease to current operating lease liabilities of $2.8 million, and an increase to other assets of $1.0 million at January 30, 2022.

(f) Income Taxes - The tax impact of all misstatements resulted in an increase to prepaid expenses and other current assets of less than $0.1 million, a decrease to deferred tax asset of $0.1 million, an increase to accrued expenses of $0.5 million, and an increase to accumulated deficit of $0.5 million at January 30, 2022.

THE LOVESAC COMPANY

STATEMENT OF OPERATIONS

	For the Year Ended January 30, 2022
(amounts in thousands, except per share data and share amounts)	As Previously Reported		Revisions		Reference	As Revised
Cost of merchandise sold	224,894		(187)		(a)	224,707
Gross profit	273,345		187			273,532
Operating expenses
Selling, general and administration expenses	161,967		(1,950)		(b)	160,017
Total operating expenses	234,904		(1,950)			232,954
Operating income	38,441		2,137			40,578
Net income before taxes	38,262		2,137			40,399
Benefit from (provision for) income taxes	7,638		(549)		(f)	7,089
Net income	$	45,900	$	1,588		$	47,488
Net income per common share:
Basic	$	3.04	$	0.10		$	3.14
Diluted	$	2.86	$	0.10		$	2.96

The description of each error is described above. The impact of each error for the corresponding period in the above table is described below:

(a) Last Mile Freight - The correction of these misstatements resulted in a decrease to cost of merchandise sold of $0.2 million for the year ended January 30, 2022.

(b) Leases - The correction of these misstatements resulted in a decrease to selling, general and administrative expenses of $2.0 million for the year ended January 30, 2022.

(f) Income Taxes - The tax impact of all misstatements resulted in a decrease to benefit from income taxes of $0.5 million for the year ended January 30, 2022.

THE LOVESAC COMPANY

STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE YEAR ENDED JANUARY 30, 2022

		Common
(amounts in thousands, except share amounts)	Reference	Shares	Amount		Additional paid-in capital		Accumulated (deficit) earnings		Total Shareholders' Equity
As Previously Reported
Balance - January 31, 2021		15,011,556	$	—	$	171,382	$	(63,436)	$	107,946
Net income		—	—		—		45,900		45,900
Balance - January 30, 2022		15,123,338	$	—	$	173,762	$	(17,536)	$	156,226
Adjustments
Balance - January 31, 2021		—	$	—	$	—	$	—	$	—
Net income	(a)(b)(f)	—	—		—		1,588		1,588
Balance - January 30, 2022		—	$	—	$	—	$	1,588	$	1,588
As Revised
Balance - January 31, 2021		15,011,556	$	—	$	171,382	$	(63,436)	$	107,946
Net income		—	—		—		47,488		47,488
Balance - January 30, 2022		15,123,338	$	—	$	173,762	$	(15,948)	$	157,814

See descriptions of the net income (loss) impacts in the statement of operations for the year ended January 30, 2022 sections above.

THE LOVESAC COMPANY

STATEMENT OF CASH FLOWS

	For the Year Ended January 30, 2022
	As Previously Reported		Revisions		Reference	As Revised
Cash Flows from Operating Activities
Net income	$	45,900	$	1,588	(a)(b)(f)	$	47,488
Adjustments to reconcile net income to cash provided by (used in) operating activities:
Deferred income taxes	(9,836)		115		(f)	(9,721)
Change in operating assets and liabilities:
Prepaid expenses and other current assets	(2,459)		3,427		(a)(b)(e)(f)	968
Other assets	—		(1,047)		(e)	(1,047)
Accounts payable and accrued expenses	39,195		(1,008)		(a)(f)(h)	38,187
Operating lease liabilities	(14,400)		(4,445)		(b)(e)	(18,845)
Net cash provided by (used in) operating activities	34,018		(1,370)			32,648
Cash Flows from Investing Activities
Purchase of property and equipment	(15,887)		1,272		(h)	(14,615)
Payments for patents and trademarks	(601)		98		(h)	(503)
Net cash (used in) provided by investing activities	(16,488)		1,370			(15,118)
Cash Flows from Financing Activities
Net cash used in financing activities	(3,479)		—			(3,479)
Net change in cash and cash equivalents	14,051		—			14,051
Cash and cash equivalents - Beginning	78,341		—			78,341
Cash and cash equivalents - Ending	$	92,392	$	—		$	92,392
Supplemental Cash Flow Data:
Non-cash investing activities:
Asset acquisitions not yet paid for at period end	$	—	$	1,370	(h)	$	1,370

See descriptions of the net income (loss) impacts in the statement of operations for the year ended January 30, 2022 section above.

The cash flow classification, as described in item (h) in the description of misstatement adjustments section above, resulted in a decrease of $1.4 million in net cash provided by operating activities and an increase of $1.4 million in net cash provided by investing activities for the year ended January 30, 2022.

No other misstatements impacted the classifications between net operating, net investing, or net financing cash flow activities for the year ended January 30, 2022.