SEC Filing | Lulu's Fashion Lounge Holdings, Inc.

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 2, 2022


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________________ to ___________________

Commission File Number: 001-41059

Lulu’s Fashion Lounge Holdings, Inc.

(Exact Name of Registrant as Specified in its Charter)


Delaware	20-8442468
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
195 Humboldt Avenue Chico, California	95928
(Address of principal executive offices)	(Zip Code)

(530) 343-3545

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, $0.001 par value per share	LVLU	Nasdaq Global Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☐,	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☐
Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of November 11, 2022, there were 39,099,462 shares of the registrant’s common stock, par value $0.001, outstanding.

Table of Contents

TABLE OF CONTENTS

		Page
PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)
	Condensed Consolidated Balance Sheets as of October 2, 2022 and January 2, 2022	5
	Condensed Consolidated Statements of Operations and Comprehensive Income for the thirteen and thirty-nine weeks ended October 2, 2022 and October 3, 2021	6
	Condensed Consolidated Statements of Redeemable Preferred Stock, Convertible Preferred Stock and Stockholders’ Equity (Deficit) for the thirty-nine weeks ended October 2, 2022 and October 3, 2021	7
	Condensed Consolidated Statements of Cash Flows for the thirty-nine weeks ended October 2, 2022 and October 3, 2021	8
	Notes to Condensed Consolidated Financial Statements	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	42
Item 4.	Controls and Procedures	42

PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	43
Item 1A.	Risk Factors	43
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43
Item 3.	Defaults Upon Senior Securities	43
Item 4.	Mine Safety Disclosures	43
Item 5.	Other Information	43
Item 6.	Exhibits	44
Signatures		45

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FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q may be forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “targets,” “projects,” “contemplates,” “believes,” “estimates,” “forecasts,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to statements regarding our future results of operations and financial position, industry and business trends, stock compensation, business strategy, plans, market growth and our objectives for future operations.

The forward-looking statements in this Quarterly Report on Form 10-Q are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. Forward-looking statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements, including, but not limited to, the following: our ability to successfully maintain our desired merchandise assortment or manage our inventory effectively and attract a sufficient number of customers or sell sufficient quantities of our merchandise; the unpredictability and adverse effects of the COVID-19 pandemic; our ability to anticipate, identify, measure, and respond quickly to new and rapidly changing fashion trends, customer preferences and demands, and other factors; our efforts to acquire or retain customers; our ability to maintain a high level of engagement with our customers and increase their spending with us; our ability to provide high-quality customer support; our ability to maintain a strong community around the Lulus brand with engaged customers and influencers; our ability to operate in the highly competitive retail apparel industry; our ability to successfully implement our growth strategy; our reliance on third parties to drive traffic to our platform; our use of social media, influencers, affiliate marketing, email, text messages, and direct mail; our exposure to international business uncertainties, including inflation, interest rates and fuel prices; our reliance on consumer discretionary spending; system security risk issues, including any real or perceived failure to protect confidential or personal information against security breaches and disruption of our internal operations or information technology systems; any disruption caused by continual updates, augmentation and additions to our technology systems; our reliance on email and other messaging services; risks associated with sourcing, manufacturing, and warehousing; any disruptions to our three distribution facilities; our reliance on independent third-party transportation providers for substantially all of our merchandise shipments and any disruptions or increased transportation costs; risks associated with infringement upon the trademarks, copyrights or other intellectual property rights of third parties, including the risk that we could acquire merchandise from our suppliers without the full right to sell it; and the other important factors discussed in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K and our other filings with the SEC. The forward-looking statements in this Quarterly Report on Form 10-Q are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.

You should read this Quarterly Report on Form 10-Q and the documents that we reference in this Quarterly Report on Form 10-Q and have filed as exhibits to this Quarterly Report on Form 10-Q with the understanding that our actual future results, levels of activity, performance and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained in this Quarterly Report on Form 10-Q, whether as a result of any new information, future events or otherwise.

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BASIS OF PRESENTATION

On August 28, 2017, we executed a reorganization of our corporate structure. Our original parent company was called Lulu’s Holdings, LLC. This entity was converted to Lulu’s Holdings, L.P. (the “LP”). We formed two new subsidiaries, Lulu’s Fashion Lounge Holdings, Inc. and Lulu’s Fashion Lounge Parent, LLC, to sit between the LP and our operating company. Our operating company, previously known as Lulu’s Fashion Lounge, Inc., was converted from a California corporation to a Delaware limited liability company, Lulu’s Fashion Lounge, LLC, an indirect wholly-owned subsidiary of Lulu’s Fashion Lounge Holdings, Inc. In connection with our initial public offering, the LP was liquidated. Unless otherwise indicated or the context otherwise requires, references in this Quarterly Report on Form 10-Q to the terms “Lulus,” “we,” “us,” “our,” or the “Company” refer to Lulu’s Fashion Lounge Holdings, Inc. and its consolidated subsidiaries.

Our fiscal year is a “52-53 week” year ending on the Sunday closest in proximity to December 31, such that each quarterly period will be 13 weeks in length, except during a 53-week year when the fourth quarter will be 14 weeks. References herein to “fiscal 2022” and/or “2022” relate to the year ending January 1, 2023 and “fiscal 2021” and/or “2021” relate to the year ended January 2, 2022.

Throughout this Quarterly Report on Form 10-Q, we provide a number of key performance indicators used by management and typically used by our competitors in our industry. These and other key performance indicators are discussed in more detail in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Operating and Financial Metrics.” In this Quarterly Report on Form 10-Q, we also reference Adjusted EBITDA, Adjusted EBITDA Margin and Net Debt which are non-GAAP (accounting principles generally accepted in the United States of America) financial measures. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures” for a discussion of Adjusted EBITDA, Adjusted EBITDA Margin and Net Debt, as well as a reconciliation of net income to Adjusted EBITDA and a reconciliation to non-GAAP Net Debt from Total Debt. Net income is the most directly comparable financial measure to Adjusted EBITDA and Total Debt is the most directly comparable financial measure to Net Debt, required by, or presented in accordance, with GAAP.

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

LULU’S FASHION LOUNGE HOLDINGS, INC.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share amounts)

(unaudited)


	October 2,		January 2,
	2022		2022
Assets
Current assets:
Cash and cash equivalents	$	12,465	$	11,402
Accounts receivable		5,545		5,649
Inventory, net		49,416		22,176
Assets for recovery		6,685		3,754
Income tax refund receivable		—		748
Prepaids and other current assets		4,596		5,364
Total current assets		78,707		49,093
Restricted cash		507		506
Property and equipment, net		3,995		3,231
Goodwill		35,430		35,430
Tradename		18,509		18,509
Intangible assets, net		2,892		2,244
Lease right-of-use assets		31,627		—
Other noncurrent assets		8,492		4,763
Total assets	$	180,159	$	113,776

Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	6,349	$	4,227
Income taxes payable		3,183		—
Accrued expenses and other current liabilities		28,477		21,948
Returns reserve		18,827		9,731
Stored-value card liability		8,812		7,240
Lease liabilities, current		3,932		—
Total current liabilities		69,580		43,146
Revolving line of credit		15,000		25,000
Lease liabilities, noncurrent		28,554		—
Other noncurrent liabilities		120		1,108
Total liabilities		113,254		69,254
Commitments and Contingencies (Note 7)

Stockholders' equity:
Preferred stock: $0.001 par value, 10,000,000 shares authorized, and no shares issued or outstanding as of October 2, 2022 and January 2, 2022		—		—
Common stock: $0.001 par value, 250,000,000 shares authorized, and 39,095,778 and 38,421,124 shares issued and outstanding as of October 2, 2022 and January 2, 2022, respectively		39		38
Additional paid-in capital		235,491		222,080
Accumulated deficit		(168,625)		(177,596)
Total stockholders' equity		66,905		44,522
Total liabilities and stockholders' equity	$	180,159	$	113,776

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

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LULU’S FASHION LOUNGE HOLDINGS, INC.

Condensed Consolidated Statements of Operations and Comprehensive Income

(in thousands, except share and per share amounts)

(unaudited)


	Thirteen Weeks Ended				Thirty-nine Weeks Ended
	October 2,		October 3,		October 2,		October 3,
	2022		2021		2022		2021
Net revenue	$	105,275	$	106,320	$	348,689	$	278,861
Cost of revenue		60,942		55,553		191,211		145,561
Gross profit		44,333		50,767		157,478		133,300
Selling and marketing expenses		19,356		20,509		67,093		49,008
General and administrative expenses		24,418		21,196		75,644		57,436
Income from operations		559		9,062		14,741		26,856
Other income (expense), net:
Interest expense		(329)		(3,612)		(694)		(11,036)
Other income, net		21		16		102		74
Total other expense, net		(308)		(3,596)		(592)		(10,962)
Income before benefit (provision) for income taxes		251		5,466		14,149		15,894
Income tax benefit (provision)		678		(1,616)		(5,178)		(5,075)
Net income and comprehensive income		929		3,850		8,971		10,819
Allocation of undistributed earnings to participating securities		—		(1,574)		—		(4,322)
Net income attributable to common stockholders	$	929	$	2,276	$	8,971	$	6,497
Net income per share attributable to common stockholders:
Basic	$	0.02	$	0.13	$	0.23	$	0.37
Diluted	$	0.02	$	0.13	$	0.23	$	0.37
Weighted average shares used to compute net income per share attributable to common stockholders:
Basic		38,711,915		17,462,283		38,448,656		17,462,283
Diluted		38,898,416		17,462,283		38,699,110		17,462,283

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

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LULU’S FASHION LOUNGE HOLDINGS, INC.

Condensed Consolidated Statements of Redeemable Preferred Stock, Convertible Preferred Stock and Stockholders’ Equity (Deficit)

(in thousands, except share amounts)

(unaudited)


	For the Thirty-nine Weeks Ended October 2, 2022
										Additional				Total
	Redeemable Preferred Stock			Convertible Preferred Stock			Common Stock			Paid-In		Accumulated		Stockholders'
	Shares	Amount		Shares	Amount		Shares	Amount		Capital		Deficit		Equity
Balance as of January 2, 2022	—	$	—	—	$	—	38,421,124	$	38	$	222,080	$	(177,596)	$	44,522
Issuance of common stock for vesting of restricted stock units (RSUs)	—		—	—		—	228,387		1		(1)		—		—
Issuance of common stock for special compensation award							208,914		—		—		—		—
Shares withheld for withholding tax on RSUs	—		—	—		—	(28,295)		—		(265)		—		(265)
Offering costs related to Initial Public Offering	—		—	—		—	—		—		(290)		—		(290)
Settlement of distributions payable to former Class P unit holders	—		—	—		—	—		—		2,648		—		2,648
Equity-based compensation expense	—		—	—		—	—		—		5,126		—		5,126
Net income and comprehensive income	—		—	—		—	—		—		—		2,043		2,043
Balance as of April 3, 2022	—		—	—		—	38,830,130		39		229,298		(175,553)		53,784
Issuance of common stock for vesting of RSUs	—		—	—		—	196,808		—		—		—		—
Shares withheld for withholding tax on RSUs	—		—	—		—	(73,195)		—		(805)		—		(805)
Forfeited shares of restricted stock	—		—	—		—	(22,693)		—		—		—		—
Equity-based compensation expense	—		—	—		—	—		—		3,447		—		3,447
Net income and comprehensive income	—		—	—		—	—		—		—		5,999		5,999
Balance as of July 3, 2022	—		—	—		—	38,931,050		39		231,940		(169,554)		62,425
Issuance of common stock for vesting of RSUs	—		—	—		—	181,868		—		—		—		—
Shares withheld for withholding tax on RSUs	—		—	—		—	(17,140)		—		(80)		—		(80)
Equity-based compensation expense	—		—	—		—	—		—		3,631		—		3,631
Net income and comprehensive income	—		—	—		—	—		—		—		929		929
Balance as of October 2, 2022	—	$	—	—	$	—	39,095,778	$	39	$	235,491	$	(168,625)	$	66,905


	For the Thirty-nine Weeks Ended October 3, 2021
										Additional				Total
	Redeemable Preferred Stock			Convertible Preferred Stock			Common Stock			Paid-In		Accumulated		Stockholders'
	Shares	Amount		Shares	Amount		Shares	Amount		Capital		Deficit		Deficit
Balance as of January 3, 2021	7,500,001	$	16,412	3,129,634	$	117,038	17,462,283	$	18	$	10,622	$	(179,641)	$	(169,001)
Series B-1 redeemable preferred stock issuance, net of issuance costs of $23	1,450,000		2,908	—		—	—		—		—		—		—
Equity-based compensation expense	—		—	—		—	—		—		432		—		432
Net loss and comprehensive loss	—		—	—		—	—		—		—		(1,375)		(1,375)
Balance as of April 4, 2021	8,950,001		19,320	3,129,634		117,038	17,462,283		18		11,054		(181,016)		(169,944)
Equity-based compensation expense	—		—	—		—	—		—		681		—		681
Net income and comprehensive income	—		—	—		—	—		—		—		8,344		8,344
Balance as of July 4, 2021	8,950,001		19,320	3,129,634		117,038	17,462,283		18		11,735		(172,672)		(160,919)
Equity-based compensation expense	—		—	—		—	—		—		775		—		775
Net income and comprehensive income	—		—	—		—	—		—		—		3,850		3,850
Balance as of October 3, 2021	8,950,001	$	19,320	3,129,634	$	117,038	17,462,283	$	18	$	12,510	$	(168,822)	$	(156,294)

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

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LULU’S FASHION LOUNGE HOLDINGS, INC.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)


	Thirty-nine Weeks Ended
	October 2,		October 3,
	2022		2021
Cash Flows from Operating Activities
Net income	$	8,971	$	10,819
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		2,980		2,116
Noncash lease expense		2,390		—
Amortization of debt discount and debt issuance costs		118		2,041
Interest expense capitalized to principal of long-term debt and revolving line of credit		—		2,074
Equity-based compensation expense		12,245		5,522
Deferred income taxes		(3,757)		(2,144)
Loss on disposal of property and equipment		11		—
Changes in operating assets and liabilities:
Accounts receivable		103		(2,557)
Inventories		(27,240)		(6,505)
Assets for recovery		(2,931)		(5,126)
Income taxes payable		3,931		3,852
Prepaid and other current assets		5		(315)
Accounts payable		2,174		(1,989)
Accrued expenses and other current liabilities		19,544		34,836
Operating lease liabilities		(1,806)		—
Other noncurrent liabilities		(405)		(836)
Net cash provided by operating activities		16,333		41,788
Cash Flows from Investing Activities
Capitalized software development costs		(1,869)		(919)
Purchases of property and equipment		(1,902)		(668)
Other		(97)		—
Net cash used in investing activities		(3,868)		(1,587)
Cash Flows from Financing Activities
Proceeds from borrowings on revolving line of credit		20,000		—
Repayments on revolving line of credit		(30,000)		(8,580)
Repayment of long-term debt		—		(7,595)
Payment of debt issuance costs		—		(61)
Proceeds from the issuance of redeemable preferred stock, net of issuance costs		—		1,427
Principal payments on finance lease obligations		(541)		—
Payment of offering costs related to Initial Public Offering		(832)		—
Other		(28)		(19)
Net cash used in financing activities		(11,401)		(14,828)
Net increase in cash, cash equivalents and restricted cash		1,064		25,373
Cash, cash equivalents and restricted cash at beginning of period		11,908		16,059
Cash, cash equivalents and restricted cash at end of period	$	12,972	$	41,432

Reconciliation of cash, cash equivalents and restricted cash
Cash and cash equivalents	$	12,465	$	40,927
Restricted cash		507		505
Total cash, cash equivalents and restricted cash at end of period	$	12,972	$	41,432

			(Continued)

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LULU’S FASHION LOUNGE HOLDINGS, INC.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)


	Thirty-nine Weeks Ended
	October 2,		October 3,
	2022		2021
Supplemental Disclosure
Cash paid for income taxes, net	$	4,834	$	3,631
Cash paid for interest	$	542	$	6,996

Supplemental Disclosure of Non-Cash Investing and Financing Activities
Addition of right-of-use assets, including prepaid rent, net of deferred rent recorded upon adoption of ASC 842	$	28,018	$	—
Addition of lease liabilities recorded upon adoption of ASC 842	$	28,599	$	—
Right-of-use assets acquired under operating lease obligations	$	1,839	$	—
Assets acquired under finance lease obligations	$	4,750	$	—
Purchases of property and equipment included in accounts payable and accrued expenses	$	53	$	20
Shares withheld for withholding tax on restricted stock units	$	1,150	$	—
Debt issuance costs included in accrued expenses	$	—	$	917
Paid-in-kind interest added to principal balance of long-term debt and revolving line of credit	$	—	$	2,074
Deferred offering costs in accounts payable	$	—	$	1,654
				(Concluded)

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

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LULU’S FASHION LOUNGE HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

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 (“Lulus LLC”). Prior to the sale of the Company’s Series A convertible preferred stock in April 2018, the Company was wholly-owned by Lulu’s Holdings, L.P. (the “LP”). Prior to the Company’s initial public offering in November 2021, the Company was majority-owned by the LP.

Lulus LLC 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 Lulus LLC’s outstanding common stock in 2014. The Company, through Lulus LLC, is an online retailer of women’s clothing, shoes and accessories headquartered 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, 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

While there continues to be uncertainty related to the COVID-19 pandemic, we believe the significant impact of the pandemic on the demand for our product, related to social distancing mandates, lockdowns, cancelled social events and travel, has largely subsided. However, we are still susceptible to broader COVID-19 risks globally, especially in relation to our supply chain. We continue to take actions to anticipate changes in the business environment and supply chain pressures, including placing orders earlier than pre-pandemic times, leveraging our “test, learn and reorder” approach to test small order quantities and then graduate successful styles to our re-order algorithms and diversifying our supply chain network to mitigate rising costs and service delays. We have modified our business practices in response to the COVID-19 pandemic and plan to continue to take proactive measures.

Impact of Macroeconomic Trends on Business

Changing macroeconomic factors, including inflation, interest rates, fuel prices, and overall consumer confidence with respect to current and future economic conditions, have directly impacted our sales in fiscal 2022 as discretionary consumer spending levels and shopping behavior fluctuate with these factors. During fiscal 2022, we have responded to these factors by taking appropriate pricing, promotional and other actions to stimulate customer demand. These factors are expected to continue to have an impact on our business, results of operations, our growth and financial condition.

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LULU’S FASHION LOUNGE HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

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 condensed 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 condensed 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 SEC for interim reporting. As permitted under these rules, certain information and disclosures normally included in consolidated financial statements prepared in accordance with GAAP have been condensed or omitted. The interim condensed consolidated financial statements are unaudited. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company’s financial position as of October 2, 2022 and its results of operations for the thirteen and thirty-nine weeks ended October 2, 2022 and October 3, 2021 and its cash flows for the thirty-nine weeks ended October 2, 2022 and October 3, 2021. The results of operations for the thirty-nine weeks ended October 2, 2022 are not necessarily indicative of the results to be expected for the fiscal year ending January 1, 2023 or for any other future annual or interim period.

The condensed consolidated balance sheet as of January 2, 2022 was derived from the Company’s audited consolidated financial statements, which are included in the Company’s Annual Report on Form 10-K as filed with the SEC on March 31, 2022.

Significant Accounting Policies

The significant accounting policies used in preparation of these condensed consolidated financial statements are consistent with those discussed in Note 2 to the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended January 2, 2022, except as noted below and within the "Adopted and Recently Issued Accounting Pronouncements" section.

Use of Estimates

The preparation of condensed 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 condensed 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, lease right-of-use assets and related lease liabilities, 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.

Concentration of Credit Risks

Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash, cash equivalents and restricted cash. At times, 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

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LULU’S FASHION LOUNGE HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

has not experienced any losses on its cash deposits. As of October 2, 2022 and January 2, 2022, a single wholesale customer represented 23% and 24%, respectively, of the Company’s accounts receivable balance. No customer accounted for greater than 10% of the Company’s net revenue during the thirteen and thirty-nine weeks ended October 2, 2022 and October 3, 2021.

Leases

Prior to the adoption of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 842 on January 3, 2022

Leases were reviewed for classification as operating or capital leases. For operating leases, the Company recognized rent on a straight-line basis over the term of the lease. The Company recorded the difference between cash payments and rent expense recognized as a deferred rent liability included in other accrued and current liabilities and other noncurrent liabilities on the condensed consolidated balance sheets. Incentives granted under the Company’s facility leases, including allowances to fund leasehold improvements, were deferred and are recognized as adjustments to rental expense on a straight-line basis over the term of the lease. The Company changed its method of accounting for leases as of January 3, 2022 due to the adoption of FASB ASC 842, Leases (“ASC 842”).

Subsequent to the adoption of ASC 842 on January 3, 2022

Contracts that have been determined to convey the right to use an identified asset are evaluated for classification as an operating or finance lease. For the Company’s operating and finance leases, the Company records a lease liability based on the present value of the lease payments at lease inception. The present value of lease payments is determined by using the interest rate implicit in the lease, if that rate is readily determinable; otherwise, the Company uses its incremental borrowing rate (“IBR”). The determination of the IBR requires judgment and is primarily based on publicly-available information for companies within similar industries and with similar credit profiles. We adjust the rate for the impact of collateralization, the lease term and other specific terms included in each lease arrangement. The IBR is determined at the lease commencement and is subsequently reassessed upon a modification to the lease arrangement. The right-of-use asset is recorded based on the corresponding lease liability at lease inception, adjusted for payments made to the lessor at or before the commencement date, initial direct costs incurred and any tenant incentives allowed for under the lease. The Company does not include optional renewal terms or early termination provisions unless the Company is reasonably certain such options would be exercised at the inception of the lease. Lease right-of-use assets, current portion of lease liabilities, and lease liabilities, net of current portion are included on the condensed consolidated balance sheets.

Fixed lease expense for operating leases is recognized on a straight-line basis, unless the right-of-use assets have been impaired, over the reasonably assured lease term based on the total lease payments and is included in operating expenses in the condensed consolidated statements of operations and comprehensive income. Fixed and variable lease expense on operating leases is recognized within operating expenses in the condensed consolidated statements of operations and comprehensive income. Finance lease expenses are recognized on a straight-line basis. Fixed and variable expenses are captured within interest expense and depreciation expense, which has components within general and administrative expenses and cost of revenue. The Company’s non-lease components are primarily related to maintenance, insurance and taxes, which varies based on future outcomes and is thus recognized in lease expense when incurred.

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

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LULU’S FASHION LOUNGE HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

Company expects to receive in exchange for those products. The Company’s payment terms are typically at the point of sale for merchandise product sales.

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 condensed consolidated balance sheets and represents the expected value of the refund that will be due to the Company’s customers. The Company also has corresponding assets for recovery that represent 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 the thirteen and thirty-nine weeks ended October 2, 2022 and October 3, 2021 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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LULU’S FASHION LOUNGE HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

The following table summarizes the significant changes in the contract liabilities balances during the thirteen and thirty-nine weeks ended October 2, 2022 and October 3, 2021 (in thousands):


	Deferred		Stored-Value
	Revenue		Cards
Balance as of January 2, 2022	$	145	$	7,240
Revenue recognized that was included in contract liability balance at the beginning of the period		(145)		(1,786)
Increase due to cash received, excluding amounts recognized as revenue during the period		315		1,838
Balance as of April 3, 2022		315		7,292
Revenue recognized that was included in contract liability balance at the beginning of the period		(315)		(2,330)
Increase due to cash received, excluding amounts recognized as revenue during the period		101		3,140
Balance as of July 3, 2022		101		8,102
Revenue recognized that was included in contract liability balance at the beginning of the period		(101)		(3,568)
Increase due to cash received, excluding amounts recognized as revenue during the period		42		4,278
Balance as of October 2, 2022	$	42	$	8,812


	Deferred		Stored-Value
	Revenue		Cards
Balance as of January 3, 2021	$	792	$	4,973
Revenue recognized that was included in contract liability balance at the beginning of the period		(792)		(792)
Increase due to cash received, excluding amounts recognized as revenue during the period		5,949		741
Balance as of April 4, 2021		5,949		4,922
Revenue recognized that was included in contract liability balance at the beginning of the period		(5,949)		(542)
Increase due to cash received, excluding amounts recognized as revenue during the period		1,259		1,307
Balance as of July 4, 2021		1,259		5,687
Revenue recognized that was included in contract liability balance at the beginning of the period		(1,259)		(117)
Increase due to cash received, excluding amounts recognized as revenue during the period		247		924
Balance as of October 3, 2021	$	247	$	6,494

Selling and Marketing Expenses

Advertising costs included in selling and marketing expenses were $14.8 million and $13.9 million for the thirteen weeks ended October 2, 2022 and October 3, 2021, respectively, and $52.0 million and $34.0 million for the thirty-nine weeks ended October 2, 2022 and October 3, 2021, respectively.

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LULU’S FASHION LOUNGE HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

Net Income Per Share Attributable to Common Stockholders

The Company calculates basic and diluted net income per share attributable to common stockholders in conformity with the two-class method required for participating securities as the application of the if converted method is not more dilutive. The two-class method requires income available to common stockholders for the period to be allocated between common stock and participating securities based upon their respective rights to receive dividends as if all income for the period had been distributed.

The Company considered its redeemable preferred stock and convertible preferred stock outstanding during fiscal 2021 to be participating securities. In accordance with the two-class method, net income is adjusted for earnings allocated to these participating securities and the related number of outstanding shares of the participating securities, which include contractual participation rights in undistributed earnings, have been excluded from the computation of basic and diluted net income per share attributable to common stockholders. The redeemable preferred stock and convertible preferred stock contractually entitle the holders of such shares to participate in dividends but do not contractually require the holders of such shares to participate in the Company’s losses. As such, where applicable, net losses were not allocated to these securities.

Basic net income per share attributable to common stockholders is computed using net income attributable to common stockholders divided by the weighted average number of common shares outstanding during the period. Diluted net income per share attributable to common stockholders represents net income attributable to common stockholders divided by the weighted average number of common shares outstanding during the period, including the effects of any dilutive securities outstanding.

The following table presents the calculation of basic and diluted weighted average shares used to compute net income per share attributable to common stockholders:


	Thirteen Weeks Ended		Thirty-nine Weeks Ended
	October 2, 2022	October 3, 2021	October 2, 2022	October 3, 2021
Weighted average shares used to compute net income per share attributable to common stockholders – Basic	38,711,915	17,462,283	38,448,656	17,462,283
Dilutive securities:
Unvested restricted stock	38,845	-	67,197	-
Unvested restricted stock units	61,330	-	79,745	-
Special compensation awards	86,326	-	103,512	-
Weighted average shares used to compute net income per share attributable to common stockholders – Diluted	38,898,416	17,462,283	38,699,110	17,462,283

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LULU’S FASHION LOUNGE HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

The following securities were excluded from the computation of diluted net income per share attributable to common stockholders for the periods presented because including them would have been anti-dilutive (on an as-converted basis):


	Thirteen Weeks Ended		Thirty-nine Weeks Ended
	October 2, 2022	October 3, 2021	October 2, 2022	October 3, 2021
Series A convertible preferred stock	—	3,129,634	—	3,129,634
Stock options	322,793	322,793	322,793	322,793
Unvested restricted stock	164,547	—	164,547	—
Unvested restricted stock units	1,151,584	—	918,593	—
Employee stock purchase plan shares	46,494	—	46,494	—
Total	1,685,418	3,452,427	1,452,427	3,452,427

Recently Adopted Accounting Pronouncements

The Company is an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. The Company has elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that it (i) is no longer an emerging growth company or (ii) affirmatively and irrevocably opts out of the extended transition period provided in the JOBS Act. As a result, these consolidated financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), as amended, which requires lessees to recognize a right-of-use asset and lease liability on their condensed consolidated balance sheets for all leases with a term longer than 12 months. Under the new lease standard, the Company determines if an arrangement is a lease at inception. Lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected lease term. In determining the present value of lease payments, the Company uses its incremental borrowing rate based on the information available at the lease commencement date if the rate implicit in the lease is not readily determinable. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record right-of-use assets and lease liabilities for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less may be accounted for similar to existing guidance for operating leases today and are not recorded on the Company’s balance sheet. The Company adopted the new standard as of January 3, 2022 on a modified retrospective basis under the alternative transition method. The Company elected to take the practical expedient to not separate lease and non-lease components as part of the adoption. Lease agreements entered into after the adoption of Topic 842 that include lease and non-lease components are accounted for as a single lease component. Beginning on January 3, 2022, the Company’s operating leases, excluding those with terms less than 12 months, were discounted and recorded as assets and liabilities on the Company’s balance sheet. As of the effective date of adoption, the Company recognized lease right-of-use assets of $28.0 million, which included $0.4 million previously recorded as prepaid rent net of $1.0 million previously recorded as deferred rent, $2.2 million of current lease liabilities and $26.4 million in lease liabilities, net of current portion, related to its operating leases.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This standard is effective for fiscal periods beginning after December 15, 2021, including interim periods

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LULU’S FASHION LOUNGE HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

within fiscal years beginning after December 15, 2022, with early adoption permitted. The Company adopted this guidance on January 3, 2022, and it did not have a material impact on its condensed consolidated financial statements.

Recently Issued Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as amended, which amends guidance on reporting credit losses for assets held at amortized cost basis and available-for-sale debt securities from an incurred loss methodology to an expected loss methodology. For assets held at amortized cost basis, the guidance eliminates the probable initial recognition threshold and instead requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the assets to present the net amount expected to be collected. For available-for-sale debt securities, credit losses are recorded through an allowance for credit losses, rather than a write-down, limited to the amount by which fair value is below amortized cost. Additional disclosures about significant estimates and credit quality are also required. The guidance is effective for the Company for fiscal years beginning after December 15, 2022. The Company is currently assessing the potential impact of adopting ASU 2016-13 on its condensed consolidated financial statements and does not expect the adoption to have a material impact.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Accounting, which, as amended, provides optional guidance for a limited period of time to ease the potential burden in accounting for (or reorganizing the effects of) reference rate reform on financial reporting. This standard can be adopted immediately, however, the guidance will only be available until December 31, 2022. The Company is currently evaluating the potential impact of adopting this guidance on its condensed consolidated financial statements.

3.Fair Value Measurements

The Company’s financial instruments consist of cash and cash equivalents, restricted cash, accounts payable, accrued expenses, revolving line of credit and long-term debt. As of October 2, 2022 and January 2, 2022, the carrying values of cash and cash equivalents, restricted cash, accounts payable and accrued expenses approximate fair value due to their short-term maturities. The fair value of the Company’s New Revolving Facility that provides for borrowings up to $50.0 million (see Note 5, Debt) approximates its carrying value as the stated interest rates reset daily at the daily secured overnight financing rate (“SOFR”) plus an applicable margin and, as such, approximate market rates currently available to the Company. The Company does not have any financial instruments that were determined to be Level 3.

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LULU’S FASHION LOUNGE HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

4.Balance Sheet Components

Property and Equipment, net

Property and equipment, net consisted of the following (in thousands):


	Estimated Useful Lives	October 2,		January 2,
	in Years	2022		2022
Leasehold improvements	3-8	$	3,686	$	3,502
Equipment	3-7		2,127		3,278
Furniture and fixtures	3-7		1,765		2,123
Construction in progress			82		107
Total property and equipment			7,660		9,010
Less: accumulated depreciation and amortization			(3,665)		(5,779)
Property and equipment, net		$	3,995	$	3,231

Depreciation and amortization of property and equipment for the thirteen weeks ended October 2, 2022 and October 3, 2021 was $0.7 million and $0.3 million, respectively, and for the thirty-nine weeks ended October 2, 2022 and October 3, 2021, was $1.7 million and $0.9 million, respectively.

Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following (in thousands):