LVLU US Equity☆

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements based upon current plans, expectations and beliefs involving risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in Part I, “Item 1A. Risk Factors” and other factors set forth in other parts of this Annual Report on Form 10-K.

Overview

Lulus is a customer-driven, digitally-native fashion brand primarily serving Millennial and Gen Z women. We focus relentlessly on giving our customers what they want. We do this by using data coupled with human insight to deliver a curated and continuously evolving assortment of on-trend affordable luxury fashion. Our customer obsession sets the tone for everything we do, from our personalized online shopping experience to our exceptional customer service.

Initial Public Offering

On November 10, 2021, our registration statement on Form S-1 relating to its IPO was declared effective by the SEC and the shares of its common stock began trading on the Nasdaq Global Market on November 11, 2021. The IPO closed on November 15, 2021, pursuant to which we issued and sold 5,750,000 shares of our common stock at a public offering price of $16.00 per share. On November 15, 2021, we received net proceeds of approximately $82.0 million from the IPO, after deducting underwriting discounts and commissions of approximately $6.1 million and other issuance costs of approximately $3.9 million. Immediately prior to the completion of the IPO, we filed an amended and restated certificate of incorporation, which authorized a total of 250,000,000 shares of common stock at $0.001 par value per share, and 10,000,000 shares of preferred stock, $0.001 par value per share. Immediately prior to the completion of the IPO, all shares of the Series A Preferred Stock then outstanding were converted into 15,000,000 shares of common stock. Additionally, 215,702 shares of common stock were issued to the LP immediately prior to the completion of the IPO. All shares of the Series B Preferred Stock and the Series B-1 Preferred Stock were redeemed and extinguished for a total payment of approximately $17.9 million on November 15, 2021.

Impact of the COVID-19 Pandemic

The COVID-19 pandemic has had a material impact on the global fashion apparel, accessories and footwear industry as a significant portion of in-person social, professional, and formal events over the last 18 months were postponed or cancelled.

Historically, our business model has resulted in strong historical growth. Between fiscal years 2016 and 2019, we grew our net revenue by 179% to $370 million, or an annual compounded growth rate of 41%. In fiscal year 2020, our net revenue declined by 33% to $249 million as a result of the COVID-19 pandemic. Our business rebounded from the initial impact of the pandemic on consumer behavior and, for the three and 12-month periods ended January 2, 2022, we grew our net revenue by 77.5% and 51.1%, respectively, compared to the same periods of the prior year.

We expect ongoing volatility in these trends as the continued impact from COVID-19 remains uncertain. We may take further actions that impact our business operations as may be required by federal, state, or local authorities or that we determine to be in the best interests of our employees and our customers. For additional discussion of risks related to the COVID-19 pandemic and the impact of the COVID-19 pandemic on our Company, see “Risk Factors—Risks Related to our Business—The COVID-19 pandemic has had and may in the future have an adverse effect on our labor workforce availability, supply chain, business, financial condition, cash flows, and results of operations in ways that remain unpredictable.”

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Key Operating and Financial Metrics

We collect and analyze operating and financial data to assess the performance of our business and optimize resource allocation. The following table sets forth our key performance indicators for the periods presented (in thousands, except for percentages and Average Order Value).

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ Years Ended

​ ​ January 2, ​ January 3, ​ December 29,

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Adjusted EBITDA Margin (1) ​ 11.0 % 7.6 % 5.7 %

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Active Customers

We define Active Customers as the number of customers who have made at least one purchase across our platform in the prior 12-month period. We consider the number of Active Customers to be a key performance metric on the basis that it is directly related to consumer awareness of our brand, our ability to attract visitors to our digital platform, and our ability to convert visitors to paying customers. Active Customers counts are based on de-duplication logic using customer account and guest checkout name, address, and email information.

Average Order Value

We define Average Order Value (“AOV”) as the sum of the total gross sales before returns across our platform in a given period, plus shipping revenue, less discounts and markdowns, divided by the Total Orders Placed in that period. AOV reflects average basket size of our customers. AOV may fluctuate as we continue investing in the development and introduction of new Lulus merchandise and as a result of our promotional discount activity.

Total Orders Placed

We define Total Orders Placed as the number of customer orders placed across our platform during a particular period. An order is counted on the day the customer places the order. We do not adjust the number of Total Orders Placed for any cancellation or return that may have occurred subsequent to a customer placing an order. We consider Total Orders Placed as a key performance metric on the basis that it is directly related to our ability to attract and retain customers as well as drive purchase frequency. Total Orders Placed, together with Average Order Value, is an indicator of the net revenue we expect to generate in a particular period.

Gross Margin

We define Gross Margin as gross profit as a percentage of our net revenue. Gross profit is equal to our net revenue less cost of revenue. Certain of our competitors and other retailers report cost of revenue differently than we do. As a result, the reporting of our gross profit and Gross Margin may not be comparable to other companies.

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Non-GAAP Financial Measures

We report our financial results in accordance with generally accepted accounting principles in the U.S. (“GAAP”). However, management believes that certain non-GAAP financial measures provide investors of our financial information with additional useful information in evaluating our performance and that excluding certain items that may vary substantially in frequency and magnitude period-to-period from net income (loss) provides useful supplemental measures that assist in evaluating our ability to generate earnings and to more readily compare these metrics between past and future periods. These non-GAAP financial measures may be different than similarly titled measures used by other companies.

To supplement our audited consolidated financial statements which are prepared in accordance with GAAP, we use “Adjusted EBITDA” and “Adjusted EBITDA Margin” which are non-GAAP financial measures (collectively referred to as “Adjusted EBITDA”). Our non-GAAP financial measures should not be considered in isolation from, or as substitutes for, financial information prepared in accordance with GAAP. There are several limitations related to the use of our non-GAAP financial measures as compared to the closest comparable GAAP measures. Some of these limitations include:

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Due to these limitations, Adjusted EBITDA and Adjusted EBITDA margin should not be considered as measures of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using these non-GAAP measures only supplementally. As noted in the table below, Adjusted EBITDA includes adjustments to exclude the impact of depreciation and amortization, interest expense, income taxes, management fees, transaction fees, which represent the write-off of offering costs deferred during 2019 upon abandonment of a prior offering in 2020, and equity-based compensation. It is reasonable to expect that some of these items will occur in future periods. However, we believe these adjustments are appropriate because the amounts recognized can vary significantly from period to period, do not directly relate to the ongoing operations of our business and may complicate comparisons of our internal results of operations and results of operations of other companies over time. In addition, Adjusted EBITDA includes adjustments for other items that we do not expect to regularly record. Each of the normal recurring adjustments and other adjustments described in this paragraph and in the following reconciliation table help management with a measure of our core operating performance over time by removing items that are not related to day-to-day operations. Adjusted EBITDA Margin is a non-GAAP financial measure that we calculate as Adjusted EBITDA (as defined above) as a percentage of our net revenue.

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The following table provides a reconciliation for Adjusted EBITDA and Adjusted EBITDA margin:

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ Year Ended

​ ​ January 2, ​ January 3, ​ December 29,

​ ​ (in thousands)

Loss on extinguishment of debt ​ ​ 1,392 ​ ​ — ​ ​ — ​

Income tax provision (benefit) ​ 6,212 ​ (1,271) ​ 445 ​

Write-off of previously capitalized transaction fees (2) ​ ​ — ​ ​ 1,950 ​ ​ — ​

Transaction fees (3) ​ ​ 476 ​ ​ — ​ ​ — ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Adjusted EBITDA margin ​ 11.0 % 7.6 % 5.7 %

Adjusted Diluted Earnings (Net Loss) per Share

Adjusted Diluted Earnings (Net Loss) per Share is a non-GAAP financial measure that we calculate as diluted net loss per share attributable to common stockholders adjusted to exclude the per share impact of the deemed dividend due to triggering a down round feature as part of our IPO. This common feature provided protection to our convertible preferred stockholders by limiting the amount of dilution when the IPO was priced lower than previous rounds. We also excluded the impact of the acceleration of stock-based compensation expenses at the time of the IPO and a one-time stock dividend at the time of the IPO. We believe Adjusted Diluted Earnings (Net Loss) per Share is a measure that is useful to investors and management in understanding our ongoing operations and in analysis of ongoing operating trends. See Note 2, Significant Accounting Policies–Net Loss Per Share Attributable to Common Stockholders, of the accompanying notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for more information regarding our calculation of net loss per share attributable to common stockholders.

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A reconciliation of non-GAAP Adjusted Diluted Earnings (Net Loss) per Share from diluted net loss per share attributable to common stockholders for the years ended 2021, 2020 and 2019 is as follows (in dollars):

​ ​ ​ ​ ​ ​ ​ ​ ​

​ Year Ended

Deemed dividend to preferred stockholders (1) ​ 6.08 ​ ​ 0.03 ​ ​ —

Stock dividend issued to LP (2) ​ 0.17 ​ ​ — ​ ​ —

Stock compensation expense accelerated upon IPO (3) ​ 0.40 ​ ​ — ​ ​ —

Adjusted Diluted Earnings (Net Loss) per Share (7) $ 0.57 ​ $ (0.13) ​ $ (0.03)

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Net Debt

We define Net Debt as total debt, which includes short-term borrowings and long-term obligations, less cash and cash equivalents. We consider net debt to be an important supplemental measure of our financial position, which allows us to analyze our leverage.

A reconciliation of non-GAAP Net Debt as of January 2, 2022 and January 3, 2021 is as follows:

​ ​ ​ ​ ​ ​ ​

​ ​ As of

​ ​ (in thousands)

Revolving line of credit, current $ — $ (8,580)

Long-term debt, current ​ — ​ (10,125)

Revolving line of credit, long term ​ (25,000) ​ —

Long-term debt, net of current portion ​ ​ — ​ ​ (96,856)

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Factors Affecting Our Performance

Our financial condition and results of operations have been, and will continue to be, affected by a number of factors that present significant opportunities for us but also pose risks and challenges, including what is discussed below. See “Risk Factors.”

Customer Acquisition

Our business performance depends in part on our continued ability to cost-effectively acquire new customers. We define customer acquisition cost (“CAC”) as our brand and performance marketing expenses attributable to acquiring new customers, including, but not limited to, agency costs and marketing team costs but excluding any applicable equity-based compensation, divided by the number of customers who placed their first order with us in a given period. As a digital brand, our marketing strategy is primarily focused on brand awareness marketing and digital advertising in channels like search, social, and programmatic – platforms that enable us to engage our customer where she spends her time, and in many cases also quickly track the success of our marketing, which allows us to adjust and optimize our marketing spend.

Customer Retention

Our continued success depends in part on our ability to retain and drive repeat purchases from our existing customers. We monitor retention across our entire customer base. Our goal is to attract and convert visitors into active customers and foster relationships that drive repeat purchases. During the year ended January 2, 2022, we served 2.8 million Active Customers compared to 2.0 million for the year ended January 3, 2021.

Inventory Management

We utilize a data-driven strategy that leverages our proprietary reorder algorithm to manage inventory as efficiently as possible. Our “test, learn, and reorder” approach consists of limited inventory purchases followed by the analysis of proprietary data including real-time transaction data and customer feedback, which then informs our selection and customization of popular merchandise prior to reordering in larger quantities. While our initial orders are limited in size and financial risk and our supplier partners are highly responsive, we nonetheless purchase inventory in anticipation of future demand and therefore are exposed to potential shifts in customer preferences and price sensitivity over time. As we continue to grow, we will adjust our inventory purchases to align with the current needs of the business.

Investment in Our Operations and Infrastructure

We will continue to invest in our operations and infrastructure to facilitate further growth of our business. While we expect our expenses to increase accordingly, we will harness the strength of our existing platform and our on-trend fashion expertise to make informed investment decisions. We intend to invest in headcount, inventory, fulfillment, logistics, and our software and data capabilities in order to improve our platform, expand into international markets, and drive operational efficiencies. We cannot guarantee that increased spending on these investments will be cost effective or result in future growth in our customer base. However, we set a high bar for approval of any capital spending initiative. We believe that our disciplined approach to capital spending will enable us to generate positive returns on our investments over the long term.

Components of Our Results of Operations

Net Revenue

Net revenue consists primarily of gross sales, net of merchandise returns and promotional discounts and markdowns, generated from the sale of apparel, footwear, and accessories. Net revenue excludes sales taxes assessed by governmental authorities. We recognize net revenue at the point in time when control of the ordered product is transferred to the customer, which we determine to have occurred upon shipment.

Net revenue is impacted by our number of customers and their spending habits, Average Order Value, product assortment and availability, and marketing and promotional activities. During any given period, we may seek to increase sales by increasing promotional discounts, and in other periods we may instead seek to increase sales by increasing our selling and marketing expenses. We consider

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both actions together, so increased promotional discounts in a period, which would reduce net revenue accordingly in such period, might also result in lower selling and marketing expenses in such period. Similarly, if we increase selling and marketing expenses in a given period, promotional discounts may be correspondingly reduced, thereby improving net revenue. We expect our net revenue to increase in absolute dollars as we grow our business, although our net revenue growth rate may slow in future periods.

Cost of Revenue and Gross Margin

Cost of revenue consists of the product costs of merchandise sold to customers; shipping and handling costs, including all inbound, outbound, and return shipping expenses; rent, insurance, business property tax, utilities, depreciation and amortization, and repairs and maintenance related to our distribution facilities; and charges related to inventory shrinkage, damages, and our allowance for excess or obsolete inventory. Cost of revenue is primarily driven by growth in orders placed by customers, the mix of the product available for sale on our site, and transportation costs related to inventory receipts from our suppliers. We expect our cost of revenue to fluctuate as a percentage of net revenue primarily due to how we manage our inventory and merchandise mix.

Gross profit is equal to our net revenue less cost of revenue. We calculate Gross Margin as gross profit as a percentage of our net revenue. Our Gross Margin varies across Lulus, exclusive to Lulus, and third-party branded products. Exclusive to Lulus consists of products that we develop with design partners and have exclusive rights to sell across our platform, but that do not bear the Lulus brand. Gross Margin on sales of Lulus and exclusive to Lulus merchandise is generally higher than Gross Margin on sales of third-party branded products, which we offer for customers to “round out” the shopping basket. We expect our Gross Margin to increase modestly over the long term, as we continue to optimize our distribution capabilities and gain more negotiation leverage with suppliers as we scale, although our Gross Margin may fluctuate from period to period depending on the interplay of these factors.

Selling and Marketing Expenses

Our selling and marketing expenses consist primarily of payment processing fees, advertising, targeted online performance marketing and customer order courtesy adjustments. Selling and marketing expenses also include our spend on brand marketing channels, including compensation and free clothing to social media influencers, events, and other forms of online and offline marketing related to growing and retaining the customer base. As discussed in “Net Revenue” above, in any given period, the amount of our selling and marketing expense can be affected by the use of promotional discounts in such period. We expect our selling and marketing expenses to increase in absolute dollars as we continue to invest in increasing brand awareness.

General and Administrative Expenses

General and administrative expenses consist primarily of payroll and benefits costs, including equity-based compensation for our employees involved in general corporate functions including finance, merchandising, marketing, and technology, as well as costs associated with the use by these functions of facilities and equipment, including depreciation, rent, and other occupancy expenses. General and administrative expenses are primarily driven by increases in headcount required to support business growth and meeting our obligations as a public company.

In the near term, we also expect to incur significant legal, accounting, and other expenses that we did not incur as a private company. We expect that compliance with the Sarbanes-Oxley Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as rules and regulations subsequently implemented by the SEC, will increase our legal and financial compliance costs and will make some activities more time consuming and costly. We expect our general and administrative expenses to increase in absolute dollars as we continue to grow our business.

Other Income (Expense), Net

Other income (expense), net consists primarily of interest expense and other miscellaneous income.

Provision for Income Taxes

The provision for income taxes represents federal, state, and local income taxes. The effective rate differs from the statutory rate primarily due to non-deductible equity-based compensation expenses and state taxes. Our effective tax rate will change from quarter to quarter based on recurring and nonrecurring factors including, but not limited to, the geographical mix of earnings, enacted tax

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legislation, state and local income taxes, the impact of permanent tax adjustments, tax audit settlements, and the interaction of various tax strategies.

Our Results of Operations

The following tables set forth our consolidated results of operations for the years presented and as a percentage of net revenue:

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ Year Ended

​ ​ January 2, ​ January 3, ​ December 29,

​ ​ (in thousands)

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Other income (expense), net: ​ ​ ​

Loss on extinguishment of debt ​ ​ (1,392) ​ ​ — ​ ​ —

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Income (loss) before income taxes ​ 8,257 ​ (20,575) ​ (24)

Income tax (provision) benefit ​ (6,212) ​ 1,271 ​ (445)

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

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​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ Year Ended ​

​ ​ ​ January 2, ​ ​ January 3, ​ ​ December 29, ​

​ ​ ​ (in thousands, except percentages) ​

Cost of revenue ​ 53 ​ ​ 56 ​ 56 ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Gross profit ​ 47 ​ ​ 44 ​ 44 ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Selling and marketing expenses ​ 18 ​ ​ 19 ​ 20 ​

General and administrative expenses ​ 23 ​ ​ 27 ​ 20 ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Income (loss) from operations ​ 6 ​ ​ (2) ​ 4 ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Other income (expense), net: ​ ​ ​ ​ ​ ​ ​ ​

Interest expense ​ (3) ​ ​ (6) ​ (4) ​

Loss on extinguishment of debt ​ ​ — ​ ​ — ​ — ​

Other income, net ​ — ​ ​ — ​ — ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total other expense, net ​ (3) ​ ​ (6) ​ (4) ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Income (loss) before income taxes ​ 3 ​ ​ (8) ​ — ​

Income tax (provision) benefit ​ (2) ​ ​ — ​ — ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Net income (loss) ​ ​ 1 % ​ (8) % ​ — %

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Comparisons for the Fiscal Years Ended January 2, 2022 and January 3, 2021

Net Revenue

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ Year Ended Change

​ ​ January 2, ​ January 3, ​ ​ ​ ​ ​ ​

​ ​ (in thousands, except percentages) ​

​

Net revenue increased in 2021 by $127.0 million, or 51.1%, compared to 2020. The increase in revenue was primarily due to increases in Active Customers and customer spend coupled with fewer markdowns and promotional discounts compared to the same period of the prior year. The higher revenue was partially offset by higher sales returns in 2021. The 2020 return rate was suppressed due to a shift in our sales mix toward product categories with lower return rates as a result of the pandemic.

Cost of Revenue

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ Year Ended Change

​ ​ January 2, ​ January 3, ​ ​ ​ ​ ​ ​

​ ​ (in thousands, except percentages) ​

​

Cost of revenue increased in 2021 by $60.5 million, or 43.7%, compared to 2020, consistent with the increase in our net revenue. Additionally, there was a shift in sales mix to higher gross margin products combined with lower markdowns and discounts, driving the cost of revenue as a percentage of net revenue down in 2021 compared to 2020.

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Selling and Marketing Expenses

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ Year Ended Change

​ ​ January 2, ​ January 3, ​ ​ ​ ​ ​ ​

​ ​ (in thousands, except percentages) ​

​

Selling and marketing expenses increased in 2021 by $18.9 million, or 39.5% compared to 2020. Discretionary marketing spend was suppressed in 2020 in response to lower customer demand due to the COVID-19 pandemic. We ramped our marketing spend up in 2021 resulting in a $14.4 million increase in online marketing expenses to acquire new customers and retain existing customers compared to 2020. In addition, merchant processing fees increased by $3.7 million in 2021 compared to the same period of the prior year largely due to the increase in net revenue.

General and Administrative Expenses

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ Year Ended Change

​ ​ January 2, ​ January 3, ​ ​ ​ ​ ​ ​

​ ​ (in thousands, except percentages) ​

​

General and administrative expenses increased by $20.6 million in 2021, or 30.6%, compared to 2020. The increase was due to a $7.8 million increase in variable labor costs, which increased by 52.9% from 2020 to 2021, and was in line with our increase in net revenue. Fixed labor costs were $12.1 million higher driven by $5.9 million higher bonus costs due to improved business performance and $6.2 million higher fixed headcount costs compared to the previous year where costs were suppressed due to furloughs related to the COVID-19 pandemic.

Interest Expense

Interest expense decreased in 2021 by $3.3 million, or 20.3%, compared to 2020. The decrease was primarily due to a reduced amount of borrowings outstanding for 2021 compared to 2020 and the higher average interest rate through our previous Credit Facility that was comprised of a Term Loan and a Revolving Facility.

Loss on Extinguishment of Debt

Loss on extinguishment of debt in 2021 was $1.4 million, compared to $0 loss on extinguishment of debt in 2020. The loss on extinguishment of debt was incurred with the repayment and termination of our Credit Facility, at which time we recognized a write-off of $2.3 million in unamortized debt issuance costs and debt discounts and forgiveness of accrued debt modification costs of $0.9 million in accordance with the Fifth Amendment.

Income Tax (Provision) Benefit

Our income tax provision in 2021 increased by $7.5 million, or 589% to $6.2 million, compared to an income tax benefit of $1.3 million in 2020. The increase in the income tax provision was primarily due to an increase in our income before taxes coupled with an increase in non-deductible equity-based compensation expenses.

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Comparisons for the Fiscal Years Ended January 3, 2021 and December 29, 2019

Net Revenue

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ Year Ended Change

​ ​ January 3, ​ December 29, ​ ​ ​ ​ ​ ​

​ ​ (in thousands, except percentages) ​

Net revenue decreased in 2020 by $121.0 million, or 33%, compared to 2019. The decrease in net revenue was primarily driven by a decrease of 36% in the number of Total Orders Placed by customers caused by the COVID-19 pandemic. Consumer spending declined in 2020 due to the economic uncertainty surrounding the COVID-19 pandemic and lockdown restrictions, which resulted in a 31% decrease in Active Customers compared to 2019. While we saw improvements in units per transaction (“UPT”) and Average Order Value net of returns, our 2020 sales were heavier in markdowns and promotional discounts compared to 2019 in order to reduce event related inventory on hand. UPT represents the average number of items that a customer purchases per transaction. It is calculated by dividing the total number of items sold for a given period by the total number of orders placed during that same time period. A higher UPT indicates that customers are purchasing more items per transaction, while a lower UPT indicates that customers are purchasing fewer items per transaction.

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Cost of Revenue

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ Year Ended Change

​ ​ January 3, ​ December 29, ​ ​ ​ ​ ​ ​

​ ​ (in thousands, except percentages) ​

​

Cost of revenue decreased in 2020 by $70.1 million, or 34%, compared to 2019, consistent with the decrease in our net revenue.

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Selling and Marketing Expenses

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ Year Ended Change

​ ​ January 3, ​ December 29, ​ ​ ​ ​ ​ ​

​ ​ (in thousands, except percentages) ​

​

Selling and marketing expenses decreased in 2020 by $25.1 million, or 34%, compared to 2019. The decrease was primarily driven by our efforts to reduce discretionary marketing expenses and cash outlays in response to lower customer demand due to the COVID-19 pandemic. We reduced our online marketing investment to acquire new customers and retain existing customers by $21.3 million in 2020 compared to 2019. Other marketing expenses also decreased by $0.8 million. In addition, merchant processing fees decreased by $3.0 million in 2020 compared to 2019 due to the decline in net revenue.

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General and Administrative Expenses

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ Year Ended Change

​ ​ January 3, ​ December 29, ​ ​ ​ ​ ​ ​

​ ​ (in thousands, except percentages) ​

​

General and administrative expenses decreased in 2020 by $6.2 million, or 9%, compared to 2019. The decrease was primarily driven by a $15.9 million decrease in payroll and benefits expense as a result of lower direct labor costs in line with lower sales volumes, as well as a shift of approximately 60% of our employees to furlough in response to the COVID-19 pandemic who gradually returned to work throughout the year, a $3.0 million decrease in professional services, legal and accounting fees, and a $4.3 million decrease in hardware, software and fulfillment and office supplies. These decreases were partially offset by a $13.1 million increase in equity-based compensation due to award modifications and grants in 2020, which included a $6.1 million charge for the excess of fair value over

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consideration paid for the Series B Preferred Stock issued to an employee in June 2020. There was also a $2.3 million increase in management fees driven by recognition of the excess of fair value over consideration paid for Series B Preferred Stock issued to H.I.G. and IVP in June 2020.

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Interest Expense

​

Interest expense increased in 2020 by $0.8 million, or 5%, compared to 2019. The increase was primarily attributable to increased borrowings under our Credit Facility and higher variable interest rates in 2020 compared to 2019.

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Income Tax (Provision) Benefit

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Our income tax provision in 2019 decreased by $1.7 million to an income tax benefit of $1.3 million in 2020. The change in the income tax provision for 2020 as compared to 2019 was primarily due to an increase in our loss before taxes and a one-time benefit in 2020 for the release of certain interest and penalties related to uncertain tax positions as a result of settlements with taxing authorities, partially offset by an increase in non-deductible equity-based compensation expenses.

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Seasonality

Our results of operations for any interim period are not necessarily indicative of those for the entire year because our business is subject to seasonal fluctuations. We generally expect demand to be greater in our second and third fiscal quarters compared to the rest of the year. We believe that this seasonality has affected and will continue to affect our results of operations.

Liquidity and Capital Resources

Our primary sources of liquidity and capital resources are cash generated from operating activities, proceeds from the issuance of preferred stock and borrowings under our Credit Facility. Our primary requirements for liquidity and capital are inventory purchases, payroll and general operating expenses, capital expenditures associated with distribution, network expansion and capitalized software and debt service requirements.

Initial Public Offering

On November 15, 2021, we completed our IPO, in which we issued and sold 5,750,000 shares of our common stock at a price to the public of $16.00 per share and raised net proceeds of approximately $82.0 million, after deducting the underwriting discounts and commissions of approximately $6.1 million and other issuance costs of approximately $3.9 million.

Credit Facilities

During November 2021, we entered into a Credit Agreement with Bank of America to provide a revolving facility that provides for borrowings up to $50.0 million. During the term of the Credit Agreement, we may increase the aggregate amount of the New Revolving Facility up to an additional $25.0 million (for maximum aggregate lender commitments of up to $75.0 million), subject to the satisfaction of certain conditions under the Credit Agreement, including obtaining the consent of the administrative agent and an increased commitment from existing or new lenders. In addition, the Credit Agreement may be used to issue letters of credit up to $7.5 million. As of January 2, 2022, we had drawn $25.0 million under the New Revolving Facility and utilized $0.25 million under the letter of credit. As of January 2, 2022, we had $25.0 million available for borrowing under the New Revolving Facility and $7.25 million available to issue letters of credit.

The New Revolving Facility matures three years after November 15, 2021, and borrowings thereunder will accrue interest at a rate equal to, at our option, either (x) the term SOFR rate, plus the applicable SOFR adjustment plus a margin of 1.75% per annum or (y) the base rate plus a margin of 0.75% (with the base rate being the highest of the federal funds rate plus 0.50%, the prime rate and term SOFR for a period of one month plus 1.00%). The New Revolving Facility contains a financial maintenance covenant requiring a maximum total leverage ratio of no more than 2.50:1.00, stepping down to 2.00:1.00 after 18 months. A commitment fee of 37.5 basis points will be assessed on unused commitments under the New Revolving Facility.

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With the net proceeds from the IPO and borrowings from the New Revolving Facility, we repaid our Term Loan of $107.2 million on November 15, 2021, which comprised of $105.8 million in principal and $1.4 million of interest. The Credit Facility was terminated on November 15, 2021 and no prepayment penalties were incurred.

Availability and Use of Cash

As of January 2, 2022, we had cash and cash equivalents of $11.4 million and restricted cash of $0.5 million. We believe that our cash and cash equivalents, cash flows from operating activities and the available borrowings under our New Revolving Facility, will be sufficient to meet our capital expenditures, working capital needs and debt repayments for at least the next 12 months from the date of this Annual Report on Form 10-K. However, we cannot ensure that our business will generate sufficient cash flow from operating activities or that future borrowings will be available under our borrowing agreements in amounts sufficient to pay indebtedness or fund other working capital needs. Actual results of operations will depend on numerous factors, many of which are beyond our control as further discussed in Part I, “Item 1A. Risk Factors” included elsewhere in this Annual Report on Form 10-K.

Cash Flow Analysis

The following table summarizes our cash flows for the periods indicated:

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ Year Ended

​ ​ January 2, ​ January 3, ​ ​ December 29,

​ ​ (in thousands) ​ ​ ​

Net cash (used in) provided by: ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

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Operating Activities

Cash from operating activities consists primarily of net income (loss) adjusted for certain non-cash items, including depreciation and amortization, amortization of debt discount and debt issuance costs, interest expense capitalized to principal of debt, equity-based compensation, and the effect of changes in working capital and other activities.

In 2021, net cash provided by operating activities increased $22.0 million from $4.9 million in 2020 to $26.9 million in 2021. The changes in cash provided was primarily driven by an increase of $21.3 million due to the change from a net loss of $19.3 million in 2020 to net income of $2.0 million in 2021 and an increase of $9.5 million related to changes in our operating assets and liabilities from a net decrease of $2.9 million in 2020 to a net increase of $6.6 million in 2021, which was primarily driven by higher accrued expenses, including higher accrued compensation, bonuses and benefits, as well as an increase in the returns reserve as a result of higher sales coupled with a higher returns rate offset by increases in inventories, assets for recovery and prepaids and other current assets due to the overall increase in sales as the Company recovered from the impacts of COVID-19 during 2021. This was offset by a decrease of $8.8 million in non-cash items primarily due to the payment of interest capitalized to principal of long-term debt and revolving line of credit of $3.8 million in 2021 due to the repayment of the Term Loan upon the IPO, a decrease in equity-based compensation expense related to redeemable preferred stock of $7.1 million due to issuance of less redeemable preferred stock in 2021 and a decrease in write-off of deferred offering costs of $2.0 million as there were no such write-offs in 2021, offset by an increase in equity-based compensation expense related to the new CEO special compensation awards of $3.3 million in 2021 and loss on debt extinguishment of $1.4 million in 2021 due to the repayment of the Term Loan upon the IPO.

In 2020, net cash provided by operating activities decreased $7.0 million from $11.9 million in 2019 to $4.9 million in 2020. The changes in cash provided was primarily driven by a decrease due to the increase in net loss of $18.8 million, a decrease of $9.7 million related to changes in our operating assets and liabilities from a net increase of $6.8 million in 2019 to a net decrease of $2.9 million, which was primarily related to the overall decline in business due to the impacts of COVID-19. This was offset by an increase of $21.5 million in non-cash items due to an increase in equity-based compensation expense of $15.6 million due to the modification of Class P

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unit awards and the expense related to the issuance of redeemable preferred stock in 2020, an increase of $1.7 million due to interest capitalized to principal of long-term debt and revolving line of credit in 2020, and an increase of $2.0 million in write-off of deferred offering costs as there were no such write-offs in 2019.

​

Investing Activities

Our primary investing activities have consisted of purchases of equipment to support our overall business growth and internally developed software for the continued development of our proprietary technology infrastructure. Purchases of property and equipment may vary from period-to-period due to timing of the expansion of our operations. We have no material commitments for capital expenditures.

In 2021, net cash used in investing activities was $3.4 million, which was a $1.5 million increase from $1.9 million in 2020. This was attributable to capital expenditures relating to equipment for our general operations, software and hardware purchases, and internally developed software increasing due to initial investments in our new distribution facility in Ontario, California in 2021.

In 2020, net cash used in investing activities was $1.9 million, which was a $2.1 million decrease from $4.0 million in 2019. This was attributable to capital expenditures relating to equipment for our general operations, software and hardware purchases, and internally developed software decreasing due to general lower capital expenditures during a slower business period in 2020 due to COVID-19. In addition, 2019 included higher costs due to initial investments in our new distribution facility in Pennsylvania in 2019.

Financing Activities

Financing activities consist primarily of borrowings and repayments related to our Credit Facility and New Revolving Facility and issuance of common and preferred stock.

In 2021, net cash used in financing activities was $27.7 million, which was a decrease of $34.5 million from $6.8 million of net cash provided by financing activities in 2020. The decrease was due to an increase in repayments of our Term Loan of $107.1 million, redemption of our redeemable preferred stock of $17.9 million in 2021, and a decrease in proceeds from issuance of redeemable preferred stock of $5.9 million. Such decrease was offset by the $82.5 million of net proceeds from our IPO in 2021, an increase in net borrowings on revolving lines of credit of $11.9 million, and a decrease in repayment of advance from LP of $2.0 million.

In 2020, net cash provided by financing activities was $6.8 million, which was an increase of $16.5 million from net cash used in financing activities of $9.7 million in 2019. The increase was due to proceeds from issuance of our redeemable preferred stock of $7.3 million in 2020, an increase in net proceeds from borrowings under our Revolving Facility of $0.5 million, a decrease in repayments on our Term Loan of $10.1 million, a decrease in payment of debt issuance costs of $0.4 million, and a decrease in payment of deferred offering costs of $2.2 million, offset by a decrease in advance from LP of $2.0 million and the repayment on advance from LP of $2.0 million in 2020.

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Contractual Obligations and Other Commitments

Our most significant contractual obligations relate to our New Revolving Facility and operating lease obligations on our distribution facilities and corporate offices. For information on our New Revolving Facility, see Note 5, Debt, and for information on our contractual obligations for operating leases, see Note 6, Commitments and Contingencies, of the accompanying notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Critical Accounting Policies and Estimates

Our consolidated financial statements and the related notes thereto included elsewhere in this Annual Report on Form 10-K are prepared in accordance with GAAP. The preparation of consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from our estimates. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected.

We believe that the assumptions and estimates associated with revenue recognition, equity-based compensation, and income taxes have the greatest potential impact on our consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates. For further information on all of our significant accounting policies, please see Note 2, Significant Accounting Policies, of the accompanying notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Revenue Recognition

While our revenue recognition does not involve significant judgment, it represents an important accounting policy. We generate revenue from the sale of merchandise products sold directly to end customers. We recognize revenue when the product is transferred to the customer, which is generally upon shipment. We estimate a reserve of future returns based on historical return rates. There is judgment in utilizing historical trends for estimating future returns. Our refund liability for sales returns is included in returns reserve on the consolidated balance sheets and represents the expected value of the refund that will be due to our customers.

​

Equity-Based Compensation

Stock Options

We granted stock option awards to our CEO in April 2021 in accordance with terms of an Employment Agreement. We account for the related equity-based compensation expense by calculating the estimated fair value of each award at the grant date or modification date by applying the Black-Scholes option pricing model. The model utilizes the estimated per share fair value of our underlying common stock at the measurement date, the expected or contractual term of the option, the expected stock price volatility, risk-free interest rates, and the expected dividend yield of the common stock. Equity-based compensation expense is recognized on a straight-line basis over the period the executive is required to provide service in exchange for the award, which is generally the vesting period.

We base estimates of expected volatility on the historical volatility of comparable companies from a representative peer group selected based on industry, financial, and market capitalization data and recognizes forfeitures as they occur.

Determining the grant date fair value of options using the Black-Scholes option pricing model requires us to make assumptions and judgments. These estimates involve inherent uncertainties and, if different assumptions had been used, stock-based compensation expense could have been materially different from the amounts recorded.

Series B and Series B-1 Redeemable Preferred Stock

During June 2020, we issued and sold 7,500,001 shares of Series B Redeemable Preferred Stock (“Series B Preferred Stock”) at $1.00 per share to the general partner and a limited partner of LP and the holders of Series A Preferred Stock and during March 2021, we issued and sold 1,450,000 shares of Series B-1 Preferred Stock at $1.00 per share to current executives of the Company.

We elected to record our Series B Preferred Stock and Series B-1 Preferred Stock at the greater of its redemption value or the issuance date fair value, net of issuance costs, as it is probable of becoming redeemable due to the passage of time. For accounting

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purposes, we determined the fair value of the Series B Preferred Stock and Series B-1 Preferred Stock to be $2.21 per share and $2.02 per share, respectively at issuance. The excess of fair value over the consideration paid was recorded as equity-based compensation for shares purchased by entities related to current employees, board members, and service providers and as a deemed dividend for shares purchased by existing holders of Series A Preferred Stock.

The fair value of the Series B Preferred Stock and Series B-1 Preferred Stock was estimated using a two-step process. First, our enterprise value was established using generally accepted valuation methodologies, including discounted cash flow analysis and comparable public company analysis. These methods consider operating and financial performance including estimating future cash flows and discounting those cash flows at an appropriate rate, the lack of liquidity of capital stock and general and industry specific economic outlook, among other factors. Second, our enterprise value was allocated among the various classes of outstanding securities using the Black-Scholes option-pricing method. The option-pricing method treats all levels of the capital structure as call options on the enterprise’s value, with the exercise price based on the “breakpoints” between each of the different claims on the securities. The inputs necessary for the Series B Preferred Stock and Series B-1 Preferred Stock option-pricing model include our then-current enterprise value, breakpoints (the various characteristics for each class of equity, including liquidation preferences and priority distributions), time to liquidity (depending on the scenario), risk-free rate, and volatility. Certain of such assumptions involve inherent uncertainties and the application of significant judgment. As a result, if factors or expected outcomes change and we use significantly different assumptions or estimates, equity-based compensation could be materially different. We redeemed all of our Series B and B-1 Preferred Stock upon our IPO on November 15, 2021.

Class P Units

Prior to the dissolution of the LP and our IPO on November 15, 2021, we recorded equity-based compensation related to equity awards (consisting of Class P units) granted through our majority owner, LP. The LP’s Class P units were available to be issued as incentive compensation to employees, officers, directors, and other nonemployee service providers or consultants of the Company.

Through June 2020, we concluded that LP’s Class P units were not a substantive class of equity and any associated pre-vesting distributions allocated to LP’s Class P units were recorded as equity-based compensation once the contingent payment becomes probable of payment, which is upon vesting of the Class P units.

During June and July 2020, certain Class P units were modified to update forfeiture terms related to employment requirements and vesting conditions were added to some of the Class P units. Due to the modifications to the employment requirements, we concluded that the Class P units are a substantive class of equity to be accounted for under FASB ASC Topic No. 718, Compensation—Stock Compensation (“ASC 718”).

Equity-based compensation is measured at the grant date or modification date for all equity-based awards made to employees and nonemployees based on the fair value of the awards. Awards with only service conditions are recognized as expense on a straight-line basis over the requisite service period, which is generally four years.

Certain of the outstanding Class P units which were modified in fiscal year 2020 vest upon the satisfaction of both a service condition and a performance condition. The service-based vesting condition for these Class P units is satisfied by the end of 2022. When the performance-based vesting condition becomes probable, which is upon the completion of a qualifying distribution event, the Company will immediately record cumulative stock-based compensation expense using the accelerated attribution method for the awards that have met the service-based vesting condition. Upon our IPO on November 15, 2022, we recognized stock-based compensation expense for the performance-based Class P units as a qualifying distribution event.

The fair value of the Class P units at the modification dates during fiscal year 2020 was estimated using a two-step process. First, our enterprise value was established using generally accepted valuation methodologies, including discounted cash flow analysis and comparable public company analysis. These methods consider operating and financial performance including estimating future cash flows and discounting those cash flows at an appropriate rate, the lack of liquidity of capital stock and general and industry specific economic outlook, among other factors. The fair value of LP is determined based on the fair value of our common stock. Second, LP’s enterprise value was allocated among the various classes of units that comprise the capital structure of LP using the Black-Scholes option-pricing method. The option-pricing method treats all levels of the capital structure as call options on the enterprise’s value, with the exercise price based on the “breakpoints” between each of the different claims on the securities. The inputs necessary for the option-pricing model include LP’s current enterprise value, breakpoints (the various characteristics for each class of equity, including liquidation preferences and priority distributions, in accordance with the limited partnership agreement and the Class P units), term, risk-free rate, and volatility.

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See Note 9, Equity-Based Compensation, of the accompanying notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for more information concerning certain of the specific assumptions and methodologies we used to determine the estimated fair value of our stock options and Class P units and see Note 7, Preferred Stock, of the accompanying notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for more information concerning certain of the specific assumptions and methodologies we used to determine the estimated fair value of our Series B Preferred Stock and Series B-1 Preferred Stock. Certain of such assumptions involve inherent uncertainties and the application of significant judgment. As a result, if factors or expected outcomes change and we use significantly different assumptions or estimates, equity-based compensation could be materially different.

Income Taxes

​

We compute our provision for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities and for operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which they are expected to be realized or settled.

Deferred tax assets are evaluated for future realization and reduced by a valuation allowance to the amount that is more likely than not to be realized. We consider many factors when assessing the likelihood of future realization, including our recent cumulative loss, earnings expectations in earlier future years, and other relevant factors. We believe that it is more likely than not that forecasted income, together with future reversals of existing taxable temporary differences and results of recent operations, will be sufficient to fully recover the deferred tax assets. In the event that the Company determines all or part of the net deferred tax assets are not realizable in the future, the Company would record a valuation allowance.

Recent Accounting Pronouncements

See Note 2, Significant Accounting Policies—Recently Issued Accounting Pronouncements, of the accompanying notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for more information about recent accounting pronouncements, the timing of their adoption, and our assessment, to the extent we have made one, of their potential impact on our financial position and our results of operations.

JOBS Act Accounting Election

We are an “emerging growth company,” as defined in the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected to use this extended transition period until we are no longer an emerging growth company or until we affirmatively and irrevocably opt out of the extended transition period. Accordingly, our consolidated financial statements and our unaudited interim consolidated financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Our operations are solely based within the United States and the majority of our sales are within the United States. We are exposed to market risks in the ordinary course of our business, including the effects of foreign currency fluctuations, interest rate changes and inflation. Information relating to quantitative and qualitative disclosures about these market risks is set forth below.

Interest Rate Sensitivity

​

Cash and cash equivalents are held primarily in money market funds and cash deposits. The fair value of our cash and cash equivalents would not be significantly affected by either an increase or decrease in interest rates due mainly to the short-term nature of these instruments. Interest on any borrowings incurred pursuant to our New Revolving Facility accrue at a floating rate based on a formula tied to certain market rates at the time of incurrence; however, we do not expect that any change in prevailing interest rates will have a material impact on our results of operations.

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Foreign Currency Risk

All of our sales and operating expenses are denominated in U.S. dollars, and therefore, our net revenue are not currently subject to foreign currency risk.

Inflation

We do not believe that inflation has had a material effect on our business, financial condition or results of operations. We continue to monitor the impact of inflation in order to minimize its effects through pricing strategies, productivity improvements and cost reductions. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations.

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Item 8. Financial Statements and Supplementary Data.

LULU’S FASHION LOUNGE HOLDINGS, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

​ Page

​ ​

Report of Independent Registered Public Accounting Firm (PCAOB ID No. 34) 70

​ ​

Financial Statements: ​

​ ​

Consolidated Balance Sheets as of January 2, 2022 and January 3, 2021 71

​ ​

​ ​

​ ​

​ ​

Notes to Consolidated Financial Statements 76

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​

​

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the stockholders and the Board of Directors of Lulu’s Fashion Lounge Holdings, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Lulu’s Fashion Lounge Holdings, Inc. and subsidiaries (the "Company") as of January 2, 2022 and January 3, 2021, the related consolidated statements of operations and comprehensive income (loss), redeemable preferred stock, convertible preferred stock and stockholders’ equity (deficit), and cash flows, for each of the three years in the period ended January 2, 2022, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of January 2, 2022 and January 3, 2021, and the results of its operations and its cash flows for each of the three years in the period ended January 2, 2022, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Deloitte & Touche LLP

San Francisco, California

March 31, 2022

We have served as the Company's auditor since 2017.

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LULU’S FASHION LOUNGE HOLDINGS, INC.

Consolidated Balance Sheets

(in thousands, except share and per share amounts)

​

​ ​ ​ ​ ​ ​ ​

​ January 2, January 3,

Assets ​ ​ ​ ​ ​ ​

Current assets: ​ ​

Income tax refund receivable ​ 748 ​ 2,739

Prepaids and other current assets ​ 5,364 ​ 2,675

Property and equipment, net ​ 3,231 ​ 3,090

​ ​ ​ ​ ​ ​ ​

Current liabilities: ​ ​

Accrued expenses and other current liabilities ​ 21,948 ​ 7,533

Stored-value card liability ​ 7,240 ​ 4,973

Revolving line of credit ​ — ​ 8,580

Long-term debt, current portion ​ — ​ 10,125

Revolving line of credit ​ ​ 25,000 ​ ​ —

Long-term debt, net of current portion ​ — ​ 96,856

Other noncurrent liabilities ​ 1,108 ​ 2,504

Commitments and Contingencies (Note 6) ​ ​

​ ​ ​ ​ ​ ​ ​

Stockholders' equity (deficit): ​ ​ ​

Total stockholders' equity (deficit) ​ 44,522 ​ (169,001)

​

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

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LULU’S FASHION LOUNGE HOLDINGS, INC.

Consolidated Statements of Operations and Comprehensive Income (Loss)

(in thousands, except share and per share amounts)

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ Year Ended

​ ​ January 2, January 3, ​ December 29,

Other income (expense), net: ​ ​ ​ ​ ​ ​ ​ ​ ​

Loss on extinguishment of debt ​ ​ (1,392) ​ ​ — ​ ​ —

Income tax (provision) benefit ​ (6,212) ​ 1,271 ​ ​ (445)

Net income (loss) and comprehensive income (loss) ​ 2,045 ​ (19,304) ​ ​ (469)

Deemed dividend to preferred stockholders ​ (122,962) ​ (504) ​ ​ —

Stock dividend issued to LP ​ ​ (3,451) ​ ​ — ​ ​ —

Net loss attributable to common stockholders $ (122,948) $ (19,808) ​ $ (469)

​

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

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LULU’S FASHION LOUNGE HOLDINGS, INC.

Consolidated Statements of Redeemable Preferred Stock, Convertible Preferred Stock and Stockholders’

Equity (Deficit)

(in thousands, except share amounts)

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ For the Year Ended January 2, 2022

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Additional ​ ​ ​ ​ Total

​ ​ Shares Amount Shares Amount Shares Amount Capital Deficit (Deficit)

Equity-based compensation — ​ ​ — — ​ ​ — ​ — ​ ​ — ​ ​ 2,040 ​ ​ — ​ ​ 2,040

Equity-based compensation — ​ ​ — — ​ ​ — ​ — ​ ​ — ​ ​ 9,086 ​ ​ — ​ ​ 9,086

Equity-based compensation — ​ — — ​ — ​ — ​ — ​ 8,145 ​ — ​ 8,145

Net income and comprehensive income — ​ — — ​ — ​ — ​ — ​ — ​ 2,045 ​ 2,045

​

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

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LULU’S FASHION LOUNGE HOLDINGS, INC.

Consolidated Statements of Cash Flows

(in thousands)

​

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ Year ended

​ ​ January 2, ​ January 3, ​ December 29,

Cash Flows from Operating Activities ​ ​ ​

Loss on debt extinguishment ​ ​ 1,392 ​ ​ — ​ ​ —

Amortization of debt discount and debt issuance costs ​ 2,283 ​ 2,485 ​ 2,045

Write-off of deferred offering costs ​ — ​ 1,950 ​ —

Loss (gain) on disposal of property and equipment ​ 9 ​ (25) ​ —

Changes in operating assets and liabilities: ​ ​ ​ ​

Income tax (receivable) payable ​ 2,094 ​ (302) ​ 483

Prepaid and other current assets ​ (2,721) ​ 339 ​ (833)

Accrued expenses and other current liabilities ​ 21,263 ​ (9,346) ​ 3,118

Cash Flows from Investing Activities ​ ​ ​

Capitalized software development costs ​ (1,522) ​ (1,273) ​ (1,830)

Purchases of property and equipment ​ (1,447) ​ (700) ​ (2,212)

Advance to Parent ​ ​ — ​ ​ — ​ ​ (2,406)

Repayments of advance to Parent ​ ​ — ​ ​ — ​ ​ 2,406

Net cash used in investing activities ​ (3,394) ​ (1,913) ​ (4,042)

Cash Flows from Financing Activities ​ ​ ​

Proceeds from borrowings on revolving line of credit ​ 25,000 ​ 5,300 ​ 9,000

Repayments on revolving line of credit ​ (8,580) ​ (800) ​ (5,000)

Payment of debt issuance costs ​ (514) ​ (437) ​ (875)

Redemption of redeemable preferred stock ​ ​ (17,900) ​ ​ — ​ ​ —

Payment of deferred offering costs ​ ​ — ​ ​ — ​ ​ (2,156)

Advance from LP ​ — ​ 37 ​ 2,003

Repayment of advance from LP ​ — ​ (2,040) ​ —

Net cash provided by (used in) financing activities ​ (27,653) ​ 6,755 ​ (9,721)

​ ​ ​ ​ ​ ​ ​ (Continued)

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LULU’S FASHION LOUNGE HOLDINGS, INC.

Consolidated Statements of Cash Flows

(in thousands)

​

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ Year ended

​ ​ January 2, ​ January 3, ​ December 29,

Supplemental Disclosure ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Supplemental Disclosure of Non-Cash Investing and Financing Activities ​ ​ ​ ​

Debt issuance costs included in accrued expenses ​ $ — ​ $ 917 ​ $ —

Deemed dividend to preferred stockholders ​ $ (122,962) ​ $ 504 ​ $ —

Offering costs included in accrued expenses ​ $ 542 ​ $ — ​ $ —

​ ​ ​ ​ ​ ​ ​ ​ ​ (Concluded)

​

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

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LULU’S FASHION LOUNGE HOLDINGS, INC.

Notes to Consolidated Financial Statements

​

​

1.Description of Business, Organization and Liquidity

Organization and Business

Pursuant to a reorganization, Lulu’s Fashion Lounge Holdings, Inc., a Delaware Corporation (“Lulus”, or the “Company”), was formed on August 25, 2017 as a holding company and its primary asset is an indirect membership interest in Lulu’s Fashion Lounge, LLC (“LFL”). Prior to the Company’s initial public offering, the Company was majority-owned by Lulu’s Holdings, L.P. (the “LP”). In connection with the Company’s initial public offering, the LP was liquidated.

LFL was founded in 1996, starting as a vintage boutique in Chico, CA that began selling online in 2005 and transitioned to a purely online business in 2008. The LP was formed in 2014 as a holding company and purchased 100% of LFL’s outstanding common stock in 2014. The Company, through LFL, is an online retailer of women’s clothing, shoes and accessories based in Chico, CA.

Initial Public Offering

On November 10, 2021, the Company’s registration statement on Form S-1 relating to its initial public offering (“IPO”) was declared effective by the Securities and Exchange Commission (“SEC”) and the shares of its common stock began trading on the Nasdaq Global Market on November 11, 2021. The IPO closed on November 15, 2021, pursuant to which the Company issued and sold 5,750,000 shares of its common stock at a public offering price of $16.00 per share. On November 15, 2021, the Company received net proceeds of approximately $82.0 million from the IPO, after deducting underwriting discounts and commissions of approximately $6.1 million and other issuance costs of approximately $3.9 million. Immediately prior to the completion of the IPO, the Company filed an amended and restated certificate of incorporation, which authorized a total of 250,000,000 shares of common stock at $0.001 par value per share, and 10,000,000 shares of preferred stock, $0.001 par value per share. Immediately prior to the completion of the IPO, all shares of the Series A Preferred Stock then outstanding were converted into 15,000,000 shares of common stock. Additionally, 215,702 shares of common stock were issued to the LP immediately prior to the completion of the IPO. All shares of the Series B Preferred Stock and the Series B-1 Preferred Stock were redeemed and extinguished for a total payment of approximately $17.9 million on November 15, 2021.

Impact of COVID-19

The COVID-19 pandemic has had a significant impact on the broader economy and consumer behavior. As a result of these developments, the Company experienced an unfavorable impact on its revenue, results of operations and cash flows in 2020.

The Company may face longer term impacts from COVID-19 due to, among other factors, evolving federal, state and local restrictions and shelter-in-place orders, changes in consumer behavior and health concerns which may impact customer demand, as well as labor shortages, supply chain disruptions and higher shipping costs. The current events and economic conditions are significant in relation to the Company’s ability to fund its business operations. In response to the impact of COVID-19 primarily in 2020, the Company implemented a number of measures to minimize cash outlays, including reducing discretionary marketing and other expenses.

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LULU’S FASHION LOUNGE HOLDINGS, INC.

Notes to Consolidated Financial Statements

​

​

2.Significant Accounting Policies

Basis of Presentation and Fiscal Year

The Company’s fiscal year consists of a 52-week or 53-week period ending on the Sunday nearest December 31. The fiscal year ended January 2, 2022 (“2021”) consisted of 52 weeks, the fiscal year ended January 3, 2021 (“2020”) consisted of 53 weeks, and the fiscal year ended December 29, 2019 (“2019”) consisted of 52 weeks.

The consolidated financial statements and accompanying notes include the accounts of the Company and its wholly owned subsidiaries, after elimination of all intercompany balances and transactions. The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the Unites States of America (“GAAP”) and the requirements of the Securities and Exchange Commission.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. The significant estimates and assumptions made by management relate to sales return reserves and related assets for recovery, valuation of redeemable preferred stock, valuation of the LP’s Class P unit equity-based awards, valuation of stock options, valuation of common stock, and income tax valuation allowance. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. The Company adjusts such estimates and assumptions when facts and circumstances dictate. Changes in those estimates resulting from continuing changes in the economic environment will be reflected in the consolidated financial statements in future periods. As future events and their effects cannot be determined with precision, actual results could materially differ from those estimates and assumptions.

Segment Reporting

The Company manages its business on the basis of one operating and reportable segment, retail. The Company’s chief operating decision maker is its chief executive officer (“CEO”). All long-lived assets are located in the United States and substantially all revenue is attributable to customers based in the United States. International sales are not significant.

Concentration of Credit Risks

Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash, cash equivalents and restricted cash. Such amounts may exceed federally insured limits. The Company reduces credit risk by depositing its cash with major credit-worthy financial institutions within the United States. To date, the Company has not experienced any losses on its cash deposits. As of January 2, 2022 and January 3, 2021, a single wholesale customer represented 24% and 51% respectively, of the Company’s accounts receivable balance. No customer accounted for greater than 10% of the Company’s net revenue during 2021, 2020 and 2019.

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Cash, Cash Equivalents and Restricted Cash

The Company considers all highly liquid instruments purchased with original maturities of three months or less when issued as cash equivalents. These consist primarily of time deposit bank accounts and money market accounts. Due to the

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nature of the Company’s cash flow, amounts on deposit in individual banks may exceed the insured amount throughout the period.

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Restricted cash represents deposits with a financial institution to serve as collateral for the Company’s corporate credit cards.

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The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheets to the amounts shown in the consolidated statements of cash flows (in thousands):

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​ January 2, January 3, December 29,

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Accounts Receivable

Accounts receivable consist primarily of receivables from credit card processing agencies and wholesale customers. Based on historical collections from these agencies, no allowance for doubtful accounts was deemed necessary as of January 2, 2022 and January 3, 2021.

Inventory

Inventory consists of finished goods, which are recorded at the lower of cost or net realizable value, with cost determined using the first-in-first-out method. The cost of inventory consists of merchandise costs and inbound freight costs. Inventory levels are reviewed to identify slow-moving merchandise, and promotions and markdowns are used to clear merchandise. In the period in which the Company determines estimated selling price, less costs to sell, is below cost, or identifies excess, obsolete, or unsalable items, the Company writes its inventory down to its net realizable value.

Property and Equipment, net

Property and equipment are recorded at cost and depreciated on a straight-line basis over their estimated useful lives, which range from 3 to 8 years. Improvements that extend the life of a specific asset are capitalized, while normal maintenance and repairs are expensed as incurred. When assets are sold or otherwise retired, their cost and related accumulated depreciation are removed from the balance sheet with any resulting gain or loss reflected in general and administrative expenses in the consolidated statements of operations and comprehensive income (loss).

Goodwill and Tradename

Goodwill is stated at the excess of the acquisition price over the fair value of net assets acquired in a purchase acquisition and is not amortized. Goodwill arose from the LP’s purchase of 100% of the outstanding common stock of LFL on July 25, 2014 and the Company has one reporting unit. The Company’s tradename is an indefinite-lived intangible asset and is not amortized. The Company reviews its goodwill and tradename for impairment at least annually (on the first day of the fourth quarter) or more frequently whenever events or changes in circumstances indicate that the carrying amount may be impaired.

When testing goodwill for impairment, the Company first performs an assessment of qualitative factors (“Step 0 Test”). The qualitative assessment includes assessing the totality of relevant events and circumstances that affect the fair value or carrying value of the reporting unit. These events and circumstances include macroeconomic conditions, industry

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and competitive environment conditions, overall financial performance, reporting unit specific events and market considerations. The Company also considers recent valuations of the reporting unit, including the magnitude of the difference between the most recent fair value estimate and the carrying value, as well as both positive and adverse events and circumstances, and the extent to which each of the events and circumstances identified may affect the comparison of a reporting unit’s fair value with its carrying value. If the qualitative assessment results in a conclusion that it is more likely than not that the fair value of a reporting unit exceeds the carrying value, then no further testing is performed for that reporting unit. The Company performed the qualitative assessment of its goodwill and determined that it is more likely than not that the fair value of its reporting unit exceeds the carrying value of the reporting unit. As a result, there was no goodwill impairment during 2021, 2020 and 2019. There was no accumulated impairment of goodwill as of January 2, 2022 and January 3, 2021.

When testing the tradename for impairment, the Company first performs an assessment of qualitative factors. If qualitative factors indicate that it is more likely than not that the fair value of the tradename is less than its carrying amount, the Company tests the tradename for impairment at the asset level. The Company determines the fair value of the tradename and compares it to the carrying value. If the carrying value of the tradename exceeds the fair value, the Company recognizes an impairment loss in an amount equal to the excess. The Company performed the qualitative assessment of its tradename and determined that it is more likely than not that the fair value of the tradename exceeds the carrying value of the reporting unit. There were no additions to, disposals of, or impairments of the tradename during 2021, 2020 and 2019, There was no accumulated impairment of the tradename as of January 2, 2022 and January 3, 2021.

Intangible Assets, net

Intangible assets, net consists of capitalized internal-use software development, which is amortized over a 3-year period. The Company capitalizes certain costs in connection with obtaining or developing software for internal use. Additionally, the Company capitalizes qualifying costs incurred for upgrades and enhancements that result in additional functionality to existing software. Amortization of such costs begins when the project is substantially complete and ready for its intended use. Costs related to design or maintenance are expensed as incurred. Intangible asset amortization expense was $1.6 million, $1.7 million and $1.6 million during 2021, 2020 and 2019, respectively.

Intangible assets are amortized on a straight-line basis over the estimated useful life of the assets. The Company reviews intangible assets for impairment under the long-lived asset model described below. No impairment of intangible assets was recorded during the years presented.

Long-Lived Asset Impairment

The Company evaluates long-lived assets for impairment periodically whenever events or changes in circumstances indicate that their related carrying amounts may not be recoverable. In evaluating long-lived assets for recoverability, the Company uses its best estimate of future cash flows expected to result from the use of the asset and eventual disposition. To the extent that projected undiscounted future net cash flows attributable to the asset are less than the carrying amount, an impairment loss is recognized in an amount equal to the difference between the carrying value of such asset and its estimated fair value. There was no impairment recorded during the years presented.

Deferred Offering Costs

Deferred offering costs consist of expenses incurred in connection with an equity offering, including legal, accounting, printing, and other IPO-related costs. Deferred offering costs are written off to operating expenses in the consolidated statements of operations and comprehensive income (loss) upon the termination or significant delay of a planned equity offering. During 2020, approximately $2.0 million of deferred offering costs from an offering that was postponed were written off to general and administrative expenses in the Company’s consolidated statements of operations and

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comprehensive income (loss). There were no deferred offering costs related to the IPO capitalized in the consolidated balance sheets as of January 2, 2022 and January 3, 2021.

Revenue Recognition

The Company generates revenue primarily from the sale of merchandise products directly to end customers. The sale of products is a distinct performance obligation, and revenue is recognized at a point in time when control of the promised product is transferred to customers, which the Company determined occurs upon shipment based on its evaluation of the related shipping terms. Revenue is recognized in an amount that reflects the transaction price consideration that the Company expects to receive in exchange for those products. The Company’s payment terms are typically at the time of order processing and shipment.

The Company elected to exclude from revenue taxes assessed by governmental authorities, including value-added and other sales-related taxes, that are imposed on and concurrent with revenue-producing activities. The Company has elected to apply the practical expedient, relative to e-commerce sales, which allows an entity to account for shipping and handling as fulfillment activities, and not a separate performance obligation. Accordingly, the Company recognizes revenue for only one performance obligation, the sale of the product, at shipping point (when the customer gains control). Shipping and handling costs associated with outbound freight are accounted for as fulfillment costs and are included in cost of goods sold. The Company has elected to apply the practical expedient to expense costs as incurred for incremental costs to obtain a contract when the amortization period would have been one year or less.

Revenue from merchandise product sales is reported net of sales returns, which includes an estimate of future returns based on historical return rates, with a corresponding reduction to cost of sales. There is judgment in utilizing historical trends for estimating future returns. The Company’s refund liability for sales returns is included in the returns reserve on its consolidated balance sheets and represents the expected value of the refund that will be due to the Company’s customers. The Company also has a corresponding asset for recovery that represents the expected net realizable value of the merchandise inventory to be returned.

The Company sells stored-value gift cards to customers and offers merchandise credit stored-value cards for certain returns. Such stored-value cards do not have an expiration date. The Company recognizes revenue from stored-value cards when the card is redeemed by the customer. The Company has determined that sufficient evidence exists to support an estimate for stored-value card breakage. Subject to requirements to remit balances to governmental agencies, breakage is recognized as revenue in proportion to the pattern of rights exercised by the customer, which is substantially within thirty-six months from the date of issuance. The amount of breakage recognized in revenue during 2021, 2020 and 2019 was not material.

The Company has two types of contractual liabilities: (i) cash collections from its customers prior to delivery of products purchased (“deferred revenue”), which are initially recorded within accrued expenses and recognized as revenue when the products are shipped, (ii) unredeemed gift cards and online store credits, which are initially recorded as a stored-value card liability and are recognized as revenue in the period they are redeemed.

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Notes to Consolidated Financial Statements

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The following table summarizes the significant changes in the contract liabilities balances during 2021, 2020 and 2019 (in thousands):

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​ Deferred Stored-Value

​ Revenue Cards

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Cost of Revenue

Cost of revenue consists of the product costs of merchandise sold to customers; shipping and handling costs including all inbound, outbound, and return shipping expenses; rent, insurance, business property tax, utilities, depreciation and amortization, and repairs and maintenance related to the Company’s distribution facilities; and charges related to inventory shrinkage, damages and the allowance for excess or obsolete inventory.

General and Administrative Expenses