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What changed in Lulu's Fashion Lounge Holdings, Inc.'s 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of Lulu's Fashion Lounge Holdings, Inc.'s 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+401 added−354 removedSource: 10-K (2023-03-14) vs 10-K (2022-03-31)

Top changes in Lulu's Fashion Lounge Holdings, Inc.'s 2023 10-K

401 paragraphs added · 354 removed · 236 edited across 7 sections

Item 1. Business

Business — how the company describes what it does

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Biggest changeOur customer obsession sets the tone for everything we do, from our personalized online shopping experience to our exceptional customer service. We are focused on building authentic personal relationships with our customers and offering them coveted products they cannot purchase elsewhere.
Biggest changeWe do this by using data coupled with human insight to deliver a curated and continuously evolving broad assortment of on-trend, affordable luxury fashion for many of life’s moments. Our customer obsession sets the tone for everything we do, from our personalized online shopping experience to our exceptional customer service.
Additionally, we continually develop and evaluate new tools and programs designed to improve the key customer metrics that drive our business, such as frequency of purchase and Average Order Value through the following strategies: ● Optimization of our website and mobile experience through continued A/B and multivariate testing; ● Improvement of customer segmentation and personalization features; ● Leveraging our expanded multi-region distribution facilities to offer faster order delivery and developing new shipping options for loyal customers; ● Development of our loyalty program, including through the launch of our revamped loyalty program in February 2022, to engender even deeper brand engagement, drive repeat purchase behavior and increase wallet share; ● Enhancement of our customer service through the expansion of our Style Advisors, Fit Experts, and Bridal Concierge dedicated to creating a truly personalized digital boutique experience; ● Continued development of our affordable luxury brand positioning and content; and ● Incorporating new technology that enhances our customers’ experience.
Additionally, we continually develop and evaluate new tools and programs designed to improve the key customer metrics that drive our business, such as frequency of purchase and Average Order Value (“AOV”) through the following strategies: ● Optimization of our website and mobile experience through continued A/B and multivariate testing; ● Improvement of customer segmentation and personalization features; ● Leveraging our expanded multi-region distribution facilities to offer faster order delivery and developing new shipping options; ● Development of our loyalty program, including through the launch of our revamped loyalty program in February 2022, to engender even deeper brand engagement, drive repeat purchase behavior and increase wallet share; ● Enhancement of our customer service through the expansion of our Style Advisors, Fit Experts, and Bridal Concierge dedicated to creating a truly personalized digital boutique experience; ● Continued development of our affordable luxury brand positioning and content; and ● Incorporating new technology that enhances our customers’ experience.
Millions of customers have interacted with us, leaving detailed reviews, interacting with our on-demand Style Advisors, Fit Experts, and Bridal Concierge, and completing checkout surveys. Across Facebook, Instagram, Pinterest, Snapchat, TikTok, Twitter and YouTube, our over 7.8 million followers engage with us through their comments, feedback, and photographs, and support of our brand with their digital followers.
Millions of customers have interacted with us, leaving detailed reviews, interacting with our on-demand Style Advisors, Fit Experts, and Bridal Concierge, and completing checkout surveys. Across Facebook, Instagram, Pinterest, Snapchat, TikTok, Twitter and YouTube, our over 8.1 million followers engage with us through their comments, feedback, photographs, and support of our brand with their digital followers.
This efficient, data-driven process, coupled with human insight, allows us to respond to fashion trends with speed and precision while significantly reducing risk in our business. Marketing Our marketing strategy leverages our strong visual brand presence to build awareness and drive engagement with our large, diverse community of loyal customers.
This efficient, data-driven process, coupled with human insight, allows us to respond to fashion trends with speed and precision while significantly reducing risk in our business. 7 Table of Contents Marketing Our marketing strategy leverages our strong visual brand presence to build awareness and drive engagement with our large, diverse community of loyal customers.
As a result, we focus on offering the best possible assortment of Lulus products for our customers. ● Product Reviews: One of the most important aspects of our digital shopping experience is our extensive database of proprietary customer product reviews, which we first enabled in 2012 and now amounts to over 750,000 reviews.
As a result, we focus on offering the best possible assortment of Lulus products for our customers. ● Product Reviews: One of the most important aspects of our digital shopping experience is our extensive database of proprietary customer product reviews, which we first enabled in 2012 and now amounts to over one million reviews.
In some instances, we may be obligated to give customers the right to prevent sharing of their personal information with third parties.
In some instances, we may be obligated to give customers the right to prevent sharing or selling of their personal information with third parties.
We have built our own proprietary, integrated e-commerce backend system to minimize cost and maximize customer satisfaction. We have built our software development and deployment cycles such that software changes can be deployed daily after being verified by fully automated testing, as well as by human functional testing.
We have built our own proprietary, integrated e-commerce backend system to minimize cost and maximize customer satisfaction. 10 Table of Contents We have built our software development and deployment cycles such that software changes can be deployed daily after being verified by fully automated testing, as well as by human functional testing.
These laws and regulations 11 Table of Contents include federal and state consumer protection laws and regulations, which address, among other things, the privacy and security of consumer information, sending of commercial email, and unfair and deceptive trade practices.
These laws and regulations include federal and state consumer protection laws and regulations, which address, among other things, the privacy and security of consumer information, sending of commercial email, and unfair and deceptive trade practices.
We are able to offer standardized sizing across the Lulus assortment, simplifying the shopping experience and giving our customer confidence that she is selecting the best fit. 7 Table of Contents Leveraging Data to Best Serve our Customer: We have built a massive dataset which gives us strong insight into our customers.
Further, we are able to offer standardized sizing across the Lulus assortment, simplifying the shopping experience and giving our customer confidence that she is selecting the best fit. Leveraging Data to Best Serve our Customer: We have built a massive dataset which gives us strong insight into our customers.
We use contingent labor in varying levels throughout the year to augment our workforce. None of our employees are represented by a labor union, and we have had no labor-related work stoppages.
We use contingent labor in varying levels throughout the year to augment our workforce. None of our employees are represented by a labor union, and we have had no labor-related work stoppages. We believe that we have good relationships with our employees.
Data-Driven Product Creation Strategy: Our innovative product creation strategy leverages the power of data and our “test, learn, and reorder” approach to bring new styles online almost every weekday. We are able to optimize our inventory levels to meet customer demand and minimize markdowns.
Data-Driven Product Creation Strategy: Our innovative product creation strategy leverages the power of data and our “test, learn, and reorder” approach to bring new styles online almost every weekday. We are highly focused on optimization of inventory levels to meet customer demand and minimize markdowns.
We have a significant opportunity to grow our share of total apparel budget with expansion into these underdeveloped areas. For example, our recent success in bridal and swimwear demonstrates our ability to successfully launch and grow share in new categories.
We have a significant opportunity to grow our share of total apparel budget with expansion into these underdeveloped areas. For example, our success in apparel beyond our core dress categories demonstrates our ability to successfully launch and grow share in new categories.
Our competition includes traditional brands and retailers who market to consumers via offline and online channels. Our competition also includes e-commerce retailers that generally operate as online department stores for third-party and/or private label brands. Further, we may face new competitors and increased competition from existing competitors as we increase our brand awareness, expand our categories, and pursue international expansion.
Our competition also includes e-commerce retailers that generally operate as online department stores for third-party and/or private label brands. Further, we may face new competitors and increased competition from existing competitors as we increase our brand awareness, expand our categories, and pursue international expansion.
Our long term strategy is to increase our focus on global performance media and to optimize our platform and distribution processes for international customers, allowing for more flexibility across languages and currencies. We believe that providing a localized shopping experience will significantly enhance our ability to serve customers in international markets.
Our long-term strategy is to increase our focus on our platform and distribution process for international customers, allowing for a more optimized shopping experience, including more flexibility across languages and currencies. We believe that providing a localized shopping experience will significantly enhance our ability to serve customers in international markets.
We are also subject to a number of domestic and foreign laws and regulations that affect companies conducting business on the internet, many of which are still evolving and could be interpreted in ways that could harm our business.
We monitor changes in these laws and believe that we are in material compliance with applicable laws. We are also subject to a number of domestic and foreign laws and regulations that affect companies conducting business on the internet, many of which are still evolving and could be interpreted in ways that could harm our business.
Trademarks and Intellectual Property Our trademarks, including LULUS ® and ® , are registered with the United States Patent and Trademark Office. We also own the registrations for LULU’S ® , LOVELULUS ® , and COVETED CURATED COLLECTED ® . We own the domain name www.lulus.com.
Trademarks and Intellectual Property Our trademarks, including LULUS® and ®, are registered with the United States Patent and Trademark Office. We also own the registrations for LULU’S®, LOVELULUS®, and COVETED CURATED COLLECTED®. We own the domain name www.lulus.com. We believe the Lulus® trademark has significant value in the marketing of our merchandise.
As a vertically integrated business, we retain full control of critical aspects of our business including brand, product, marketing, distribution, and customer service. Our long operating history means that we have collected a valuable dataset over the last decade while refining an efficient, scalable business model.
As a vertically integrated business, we retain full control of critical aspects of our business including brand, product, marketing, distribution, and customer service. Our long operating history means that we have collected a valuable dataset over the last decade while refining an efficient, scalable business model. Seasonality We experience moderate seasonal fluctuations in aggregate sales volume during the year.
Customer-Centric Experience : We are passionate about building a brand synonymous with exceptional customer service. We have effectively brought the boutique experience online, developing one-on-one relationships with our customers in order to learn and then address their individual needs. The number one reason our customers contact us is for personalized fit and styling assistance.
Customer-Centric Experience : We are passionate about building a brand synonymous with exceptional customer service. We have effectively brought the boutique experience online, developing one-on-one relationships with our customers in order to learn and then address their individual needs.
We work with reputable cloud services providers across multiple data centers, with fully redundant infrastructure within each data center, as well as with full failover capability between data centers, which allows us to serve our customers at virtually any time.
We work with reputable cloud services providers across multiple data centers, with fully redundant infrastructure within each data center, as well as with full failover capability between data centers, which allows us to serve our customers at virtually any time. Our infrastructure is flexible and scalable to provide our customers with the best possible shopping experience.
These affinity groups create opportunities for employees to share their diverse perspectives and connect with each other on a deeper level and are intended to foster a culture that is open, inclusive and respectful. Available Information Our investor relations website is investors.lulus.com .
These Affinity Groups create opportunities for employees to share their diverse perspectives and connect with each other on a deeper level and are intended to foster a culture that is open, inclusive and respectful.
This includes collaborations with apparel brands and influencers, as well as adjacent category opportunities such as beauty, home, and lifestyle. Enhance and Retain Existing Customer Relationships We have a large and growing Lulus community and we served 2.8 million Active Customers during the year ended January 2, 2022.
This includes collaborations with apparel brands and influencers, as well as adjacent category opportunities such as beauty, home, and lifestyle. Enhance and Retain Existing Customer Relationships We have a large and growing Lulus community and 3.2 million Active Customers as of January 1, 2023.
Our international business is subject to additional laws and regulations, including restrictions on imports from, exports to, and services provided to persons located in certain countries and territories, as well as foreign laws and regulations addressing topics such as advertising and marketing practices, customs duties and taxes, privacy, data protection, information security and consumer rights, any of which might apply by virtue of our sales in foreign countries and territories or our contacts with consumers in such foreign countries and territories.
The growth and demand for e-commerce could result in more stringent domestic and foreign consumer protection laws that impose additional compliance burdens on companies that transact substantial business on the internet. ​ Our international business is subject to additional laws and regulations, including environmental laws and restrictions on imports from, exports to, and services provided to persons located in certain countries and territories, as well as foreign laws and regulations addressing topics such as advertising and marketing practices, customs duties and taxes, privacy, data protection, information security and consumer rights, any of which might apply by virtue of our sales in foreign countries and territories or our contacts with consumers in such foreign countries and territories.
In addition to the information about us contained in this Annual Report on Form 10-K, information about us can be found on our website. Our website and information included in or linked to our website are not part of this Annual Report on Form 10-K.
Our website and information included in or linked to our website are not part of this Annual Report on Form 10-K.
We also use external certified security partners to test for vulnerabilities in our software and infrastructure, and assist in our security practices, which are designed to comply with the Payment Card Industry Data Security Standard. Finally, we have implemented processes and procedures to allow customers to review and remove their non-transactional account data.
We also use external certified security partners to test for vulnerabilities in our software and infrastructure, and assist in our security practices, which are designed to comply with the Payment Card Industry Data Security Standard.
A key differentiator of our business model from traditional fashion retail is our use of data to optimize almost all elements of our business. Nowhere is this more pronounced than in our product creation and curation cycle.
Customers express their love for our brand on social media and by word-of-mouth (both in-person and online). A key differentiator of our business model from traditional fashion retail is our use of data to optimize almost all elements of our business. Nowhere is this more pronounced than in our product creation and curation cycle.
Regulation and Legislation We are subject to labor and employment laws, laws governing advertising and promotions, privacy laws, safety regulations, customer protection regulations and other laws that regulate retailers and govern the promotion and sale of merchandise and warehouse facilities. We monitor changes in these laws and believe that we are in material compliance with applicable laws.
We vigorously protect our intellectual property rights. ​ 11 Table of Contents Regulation and Legislation We are subject to labor and employment laws, laws governing advertising and promotions, privacy laws, safety regulations, customer protection regulations and other laws that regulate retailers and govern the promotion and sale of merchandise and warehouse facilities.
We believe that this seasonality has affected and will continue to affect our results of operations. We recognized 18%, 28%, 28%, and 26% of our annual net revenue during the first, second, third, and fourth quarters of the fiscal year ended January 2, 2022, respectively.
The seasonality of our business has resulted in variability in our total net revenue quarter-to-quarter. We believe that this seasonality has affected and will continue to affect our results of operations. We recognized 25%, 30%, 24% and 21% of our annual net revenue during the first, second, third and fourth quarters of 2022, respectively.
We believe the Lulus ® trademark has significant value in the marketing of our merchandise. We have registrations in Canada, the European Union (the “EU”), the United Kingdom, Australia, Mexico, China, and several other countries, as well as additional pending international applications. We vigorously protect our intellectual property rights.
We have registrations in Canada, the European Union (the “EU”), the United Kingdom, Australia, Mexico, China, and several other countries, as well as additional pending international applications.
We also use our technology to optimize our operational efficiency as e-commerce fulfillment and reverse logistics are critical to profitability. Our business model is characterized by high SKU velocity, low to no SKU affinity, quick order-to-to-ship requirements, short return-to-refund timelines, and fast inventory turnover.
Our business model is characterized by high SKU velocity, low to no SKU affinity, quick order-to-to-ship requirements, short return-to-refund timelines, and fast inventory turnover.
We aggregate and analyze data in order to optimize the customer experience internally, and do not monetize the information we collect by selling it to third parties for their own external purposes. We utilize both on-premise and cloud-based technologies and undertake technical and other administrative measures to ensure the protection of our systems and customer data.
Security and Data Protection We are committed to the security of our customers’ data and personal information. We aggregate and analyze data in order to optimize the customer experience internally, and do not monetize the information we collect by selling it to third parties for money for their own external purposes.
Competition The women’s apparel, footwear, and accessories industry is large, fragmented, highly competitive and rapidly evolving. The industry consists of various brands and retailers that employ several different operating models at varying price points, and consumers have the option to shop both offline and online.
The industry consists of various brands and retailers that employ several different operating models at varying price points, and consumers have the option to shop both offline and online. Our competition includes traditional brands and retailers who market to consumers via offline and online channels.
We use various in-house and third-party tools to support our security policies and procedures including user access controls, server monitoring, (web) firewalls, security content policies, and data encryption.
We utilize both on-premise and cloud-based technologies and undertake technical and other administrative measures to ensure the protection of our systems and customer data. We use various in-house and third-party tools to support our security policies and procedures including user access controls, server monitoring, (web) firewalls, security content policies, and data encryption.
Technology The www.lulus.com website, mobile app, merchandising, customer, order, and warehouse management systems are proprietary, purpose-built solutions with the goal of delivering the best possible customer experience and operational efficiency.
We take great effort to ensure that all suppliers share our commitment to quality and ethics, including through adherence to our Vendor and Supplier Code of Conduct. Technology The www.lulus.com website, mobile app, merchandising, customer, order, and warehouse management systems are proprietary, purpose-built solutions with the goal of delivering the best possible customer experience and operational efficiency.
Furthermore, there is also increased focus on EU and UK privacy laws in respect of cookies, tracking technologies and e-marketing, and there has been significant recent European court and regulatory decisions in this area, including through privacy activists.
These regulations impact the use of cookies, tracking technologies and other e-marketing efforts, and there has been significant recent European court and regulatory decisions in this area, including through privacy activists.
We incorporate the pulse of the consumer by engaging with her where she is: across the web, on social media and across our platform, through reviews, feedback and one-on-one interactions with our Style Advisors, Fit Experts and Bridal Concierge. Customers express their love for our brand on social media and by word-of-mouth (both in-person and online).
We are focused on building authentic personal relationships with our customers and offering them coveted products they cannot purchase elsewhere. We incorporate the pulse of the consumer by engaging with her where she is: across the web, on social media and across our platform, through reviews, feedback and one-on-one interactions with our Style Advisors, Fit Experts and Bridal Concierge.
Many of these laws may require consent from consumers for the use of data for various purposes, including marketing, which may reduce our ability to market our products. In many jurisdictions, there is great uncertainty whether or how existing laws governing issues such as property ownership, sales and other taxes, libel and personal privacy apply to the internet and e-commerce.
However, future changes to environmental laws or regulations may impact our operations and could result in increased costs. 12 Table of Contents In many jurisdictions, there is great uncertainty whether or how existing laws governing issues such as property ownership, sales and other taxes, libel and personal privacy apply to the internet and e-commerce.
See “Risk Factors—Risks Related to Our Business and Industry—A failure to comply with current laws, rules and regulations, or changes to such laws, may adversely affect our business, financial performance, results of operations, or business growth.” Human Capital Resources As of January 2, 2022, we had 736 full-time and part-time employees.
See “Risk Factors—Risks Related to Our Business and Industry—A failure to comply with current laws, rules and regulations, or changes to such laws, may adversely affect our business, financial performance, results of operations, or business growth.” Environmental, Social, and Governance (ESG) At Lulus, we believe in being responsible business stewards and strive to understand the impact that our business has on our employees, customers, and the planet.
Item 1. Business. Our Business 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-point, affordable luxury fashion.
Item 1. Business. Our Business Lulus is a customer-driven, digitally-native fashion brand primarily serving a large, diverse community of Millennial and Gen Z women, who typically meet us in their 20s and stay with us through their 30s and beyond. We focus relentlessly on giving our customers what they want.
In addition, the EU has implemented the General Data Protection Regulation (“GDPR”) which imposes stringent requirements regarding the handling of personal data of individuals from the EU and provides for substantial penalties for noncompliance.
In addition, the General Data Protection Regulation (“GDPR”), the UK General Data Protection Regulation (“UK GDPR”), the UK Data Protection Act 2018, and the Swiss Data Protection Act (“FADP”) impose stringent requirements regarding the collection, handling, use and transfer of personal data of individuals located in the European Economic Area (“EEA”) and provide for substantial penalties for noncompliance.
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. Why We Win Customer-Driven Fashion Brand: Lulus is one of the first digitally-native fashion brands in the United States primarily serving Millennial and Gen Z women.
This strategy allows us to rapidly convert new products into profitable sales on a consistent and repeatable basis while minimizing fashion and trend risk. Why We Win ​ Customer-Driven Fashion Brand: Lulus is one of the first digitally-native fashion brands in the United States primarily serving Millennial and Gen Z women.
Regulation of privacy and data security matters is an evolving area, with new laws and regulations enacted frequently. For example, California enacted legislation effective January 1, 2020 that, among other things, requires certain disclosures to California consumers, and affords such consumers new abilities to opt out of certain sales of personal information. Other states are following suit.
For example, California enacted the California Consumer Privacy Act (“CCPA”) which has been significantly amended and expanded by the California Privacy Rights Act (“CPRA”) and which, among other things, requires certain disclosures to California consumers, and affords such consumers new abilities to opt out of certain sales and sharing of personal information, including with regard to targeted advertising activities.
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This strategy allows us to rapidly convert new products into profitable sales on a consistent and repeatable basis while minimizing fashion and trend risk. We are proud of our large, diverse community of loyal customers. Our target customer initially meets us in her 20s and stays with us through her 30s and beyond.
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Our customers value Lulus for our personalized fit and styling assistance, which remains a top reason for customer contact when additional advice is required beyond that of our popular automated fit analyst tool.
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We design a broad assortment of affordable luxury fashion for many of life’s moments.
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Suppliers We collaborate with a network of more than 300 suppliers, who serve as our design and manufacturing partners. These suppliers often give us priority access and exclusivity to designs, given the strong relationships we have built over the last two decades. We do not have any long-term commitments requiring us to purchase minimum volumes from any supplier.
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Recent Developments On November 10, 2021, our registration statement on Form S-1 relating to our initial public offering (“IPO”) was declared effective by the Securities and Exchange Commission (“SEC”) and the shares of our common stock began trading on the Nasdaq Global Market on November 11, 2021.
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We also use our technology to optimize our operational efficiency as e-commerce fulfillment and reverse logistics are critical to profitability. We have implemented, and will continue to implement, robotics and other automation to support various processes and increase efficiency within our distribution facilities.
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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.
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Finally, we have implemented processes and procedures to allow customers to review and remove their non-transactional account data and to opt out of the sharing or selling of their personal information. Competition The women’s apparel, footwear, and accessories industry is large, fragmented, highly competitive and rapidly evolving.
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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.
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Seasonality in our business does not follow that of traditional retailers, such as a typical concentration of revenue in the holiday quarter. Historically, our net revenue is highest in our second and third fiscal quarters compared to the rest of the year due to higher demand for special event dresses and spring and summer fashion.
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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.
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Regulation of privacy and data security matters is an evolving area, with new laws and regulations enacted frequently.
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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.
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Additionally, Colorado, Connecticut, Virginia, and Utah have all enacted data privacy legislation and other states are following suit.
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Our infrastructure is flexible and scalable to provide our customers with the best possible shopping experience. ​ 10 Table of Contents Security and Data Protection We are committed to the security of our customers’ data and personal information.
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Many of these laws may require disclosure to and consent from consumers for the use of data for various purposes, including marketing, which may reduce our ability to market our products. In addition, in December 2022, a provisional political agreement was reached between the European Parliament and the Council of the EU regarding deforestation-free supply chains.
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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.
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The resulting proposed regulation, once it is formally adopted, is expected to require that certain commodities including cattle, cocoa, coffee, oil palm, soya, wood, and rubber, and certain products derived therefrom, that are placed on the EU market, or exported from the EU market, no longer contribute to deforestation or forest degradation.
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The growth and demand for e-commerce could result in more stringent domestic and foreign consumer protection laws that impose additional compliance burdens on companies that transact substantial business on the internet.
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This proposed EU regulation, of which draft text has been approved by the Permanent Representatives’ Committee (Interinstitutional File No. 2021/0366 (COD)), is expected at this time to contain requirements including due diligence and traceability obligations necessitating the linking of certain commodities and certain derived products to their place of production.
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We believe that we have good relationships with our employees. 12 Table of Contents Our human capital resources objectives include, as applicable, identifying, recruiting, retaining, incentivizing, and integrating our existing and additional employees.
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We do not know of any existing environmental law, regulation nor condition that reasonably would be expected to have a material adverse effect on our business, capital expenditures, or operating results.
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We believe our compensation programs are competitive relative to others in our industry and geography and are designed to attract, retain and reward personnel through the combination of cash-based compensation, equity-based compensation and benefits.
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We will look for opportunities to play a constructive role in addressing the environmental, social, and governance (“ESG”) challenges of the fashion industry while working towards creating long-term value for our Company and our stakeholders. Governance. Lulus’ ESG efforts are overseen by our Board of Directors through our Nominating and Corporate Governance Committee.
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In support of diversity and inclusion, we advanced our Belonging, Dignity, Justice and Joy (“BDJJ”) initiatives during 2021, including the creation of employee-led affinity groups backed by strong leadership support.
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Our Executive Chairman and General Counsel work with internal stakeholders, including a cross-functional ESG Steering Committee, as well as with outside specialists, to set and implement the Company’s ESG strategy. Our ESG strategy and initiatives are discussed regularly at the Board level. Approach. In 2022, we engaged a third-party ESG consultant to conduct a materiality assessment.
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Working with internal and external stakeholders, this process helped us to identify the priority material topics that our stakeholders care about. As part of our developing strategy, we plan to formalize a framework for our efforts and reporting around these topics and look forward to sharing our continued progress on ESG matters.
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We also engaged a third-party greenhouse gas (“GHG”) consulting firm to assess our 2021 Scope 1 and 2 GHG emissions and will be working with the same firm to assess our 2022 Scope 1 and 2 GHG emissions. This will enable us to set a baseline for our GHG Scope 1 and 2 emissions and create a plan for improvement.
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Laying the groundwork for a greater oversight of our suppliers and supporting the health and wellbeing of all the people who make our products, we formalized our Vendor and Supplier Code of Conduct which sets forth our expectations for working conditions in all factories producing Lulus products.
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We make available our Vendor and Supplier Code of Conduct free of charge through our investor relations website, which is located at https://investors.lulus.com . We also held a Vendor Summit on social aspects of the supply chain and began providing training to our vendors on responsible sourcing and production practices.
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We have engaged an outside supply chain risk management and audit company to evaluate our supply chain risks and develop an oversight and auditing program, which we will be starting in 2023.
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Recent Developments Leadership Changes ​ On November 11, 2022, our Board of Directors approved a leadership succession plan (“Succession Plan”) that took effect on March 6, 2023 (the "Effective Date"). Specifically, Crystal Landsem, former Co-President and Chief Financial Officer, became Chief Executive Officer as of the Effective Date.
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David McCreight, former Chief Executive Officer, became Executive Chairman as of the Effective Date and succeeded Evan Karp as Chairman of the Board of Directors. Mr. Karp will continue his service as a director on the Board of Directors.
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Mark Vos, former Co-President and Chief Information Officer, received a title change to President and Chief Information Officer and reports to the Executive Chairman as of the Effective Date. On March 5, 2023, Lulus entered into a new employment agreement with Ms. Landsem, reflecting her new role as Chief Executive Officer, which became effective on the Effective Date.
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On November 11, 2022, Lulus entered into a new employment agreement with Mr. McCreight, reflecting his new role as Executive Chairman, which became effective on the Effective Date. On March 5, 2023, Lulus entered into an amendment to the employment agreement with Mr.
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Vos reflecting the updates described above which became effective on the Effective Date. ​ 13 Table of Contents On March 6, 2023, the Board of Directors appointed Tiffany R. Smith as the new Chief Financial Officer, as of the Effective Date. On March 8, 2023, Lulus entered into an employment agreement with Ms.
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Smith, reflecting her role as Chief Financial Officer, which became effective on the Effective Date. ​ Human Capital Resources Employees and Demographics. Our employees, also known as the “LuCrew” are integral to the success of the Company, and we strive to prioritize our employees’ development, growth, and wellbeing. As of January 1, 2023, we had 805 full-time and part-time employees.
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As of January 1, 2023: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Gender Board of Directors ​ Leadership (1) ​ All Employees ​ Female ​ 44.4 % ​ 50.0 % ​ 65.6 % Male ​ 55.6 % ​ 50.0 % ​ 33.7 % Non-Binary ​ - % ​ - % ​ 0.7 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Age ​ ​ ​ ​ ​ ​ ​ ​ ​ Gen Z & Millennial (2) ​ 22.2 % ​ 60.7 % ​ 79.4 % All Other ​ 77.8 % ​ 39.3 % ​ 20.6 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Race / Ethnicity ​ ​ ​ ​ ​ ​ ​ ​ ​ Native American or Alaska Native ​ - % ​ - % ​ 0.5 % Asian ​ 33.3 % ​ 10.7 % ​ 6.7 % Black or African American ​ - % ​ - % ​ 5.8 % Hispanic or Latinx ​ - % ​ 14.3 % ​ 41.0 % Native Hawaiian or Pacific Islander ​ - % ​ - % ​ 0.4 % Two or More Races or Ethnicities (3) ​ 11.1 % ​ 7.1 % ​ 4.2 % White ​ 55.6 % ​ 67.9 % ​ 41.4 % ​ (1) Leadership includes all employees at the director level or higher .
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(2) Gen Z & Millennials includes individuals forty-one years of age or younger . (3) Individuals who identify as two or more races are included in “Two or More Races or Ethnicities” and excluded from other categories . ​ Company Culture and Values. We are proud of our strong culture, which is embodied by our diverse workforce.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeIf we are not able to develop and maintain positive relationships with our network of influencers or our online customer community, our ability to promote and maintain or enhance awareness of Lulus and leverage social media platforms to drive visits to www.lulus.com or our mobile app may be adversely affected.
Biggest changeIf we are not able to develop and maintain positive relationships with our network of influencers or our online customer community, our ability to promote and maintain or enhance awareness of Lulus and leverage social media platforms to drive visits to www.lulus.com or our mobile app may be adversely affected. 16 Table of Contents 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, and results of operations in ways that remain unpredictable. ​ 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.
Without stronger disaster recovery, business continuity and document retention plans, if we encounter difficulties or disasters with our distribution facilities or corporate offices, our critical systems, operations and information may not be restored in a timely manner, or at all, and this could have a material adverse effect on our business, financial condition, and results of operations. 28 Table of Contents We rely on third-party suppliers, manufacturers, distributors, and other suppliers, and they may not continue to produce products or provide services that are consistent with our standards or applicable regulatory requirements, which could harm our brand, cause consumer dissatisfaction, and require us to find alternative suppliers of our products or services.
Without stronger disaster recovery, business continuity and document retention plans, if we encounter difficulties or disasters with our distribution facilities or corporate offices, our critical systems, operations and information may not be restored in a timely manner, or at all, and this could have a material adverse effect on our business, financial condition, and results of operations. 32 Table of Contents We rely on third-party suppliers, manufacturers, distributors, and other suppliers, and they may not continue to produce products or provide services that are consistent with our standards or applicable regulatory requirements, which could harm our brand, cause consumer dissatisfaction, and require us to find alternative suppliers of our products or services.
If we are unable to establish or maintain appropriate internal financial reporting controls and procedures, it could cause us to fail to meet our reporting obligations on a timely basis, result in material misstatements in our consolidated financial statements and harm our results of operations. 43 Table of Contents In connection with the implementation of the necessary procedures and practices related to internal control over financial reporting, we may identify deficiencies that we may not be able to remediate in time to meet the deadline imposed by the Sarbanes-Oxley Act for compliance with the requirements of Section 404.
If we are unable to establish or maintain appropriate internal financial reporting controls and procedures, it could cause us to fail to meet our reporting obligations on a timely basis, result in material misstatements in our consolidated financial statements and harm our results of operations. 48 Table of Contents In connection with the implementation of the necessary procedures and practices related to internal control over financial reporting, we may identify deficiencies that we may not be able to remediate in time to meet the deadline imposed by the Sarbanes-Oxley Act for compliance with the requirements of Section 404.
We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year following the fifth anniversary of our IPO, (2) the last day of the fiscal year in which we have total annual gross revenue of at least $1.07 billion, (3) the last day of the fiscal year in which we are deemed to be a “large accelerated filer,” as defined in the rules under the Exchange Act, or (4) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.
We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year following the fifth anniversary of our IPO, (2) the last day of the fiscal year in which we have total annual gross revenue of at least $1.235 billion, (3) the last day of the fiscal year in which we are deemed to be a “large accelerated filer,” as defined in the rules under the Exchange Act, or (4) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.
Our failure to adequately prevent fraudulent transactions could damage our reputation, result in litigation or regulatory action and lead to expenses that could substantially impact our results of operations. 18 Table of Contents Risks Related to Our Growth The estimates of market opportunity and forecasts of market growth included in this Annual Report on Form 10-K may prove to be inaccurate, and even if the markets in which we compete achieve the forecasted growth, our business may not grow at similar rates, or at all.
Our failure to adequately prevent fraudulent transactions could damage our reputation, result in litigation or regulatory action and lead to expenses that could substantially impact our results of operations. 21 Table of Contents Risks Related to Our Growth The estimates of market opportunity and forecasts of market growth included in this Annual Report on Form 10-K may prove to be inaccurate, and even if the markets in which we compete achieve the forecasted growth, our business may not grow at similar rates, or at all.
Laws related to employee benefits and treatment of employees, including laws related to limitations on employee hours, immigration laws, child labor laws, supervisory status, leaves of absence, wages, mandated health benefits or overtime pay, could also increase compensation and benefits costs.
Laws related to employee benefits and treatment of employees, including laws related to limitations on employee hours, immigration laws, child labor laws, supervisory status, leaves of absence, wages, pay transparency, mandated health benefits or overtime pay, could also increase compensation and benefits costs.
The trading price of our common stock is likely to be volatile and subject to significant price fluctuations in response to many factors, including: ● market conditions or trends in our industry or the economy as a whole and, in particular, in the retail sales environment; ● changes in our merchandise mix and supplier base; ● timing of promotional events; ● changes in key personnel; ● entry into new markets; ● changes in customer preferences and fashion trends; ● announcements by us or our competitors of new product offerings or significant acquisitions, divestitures, strategic partnerships, joint ventures, or capital commitments; ● actions by competitors; ● inventory shrinkage beyond our historical average rates; ● changes in operating performance and stock market valuations of other retail companies; ● investors’ perceptions of our prospects and the prospects of the retail industry; ● fluctuations in quarterly results of operations, as well as differences between our actual financial results and results of operations and those expected by investors; ● the public’s response to press releases or other public announcements by us or third parties, including our filings with the SEC and/or negative earnings or other announcements by us or other retail apparel companies; ● announcements, media reports, or other public forum comments related to litigation, claims, or reputational charges against us; 39 Table of Contents ● guidance, if any, that we provide to the public, any changes in this guidance, or our failure to meet this guidance; ● changes in financial estimates or ratings by any securities analysts who follow our common stock, our failure to meet these estimates, or the failure of those analysts to initiate or maintain coverage of our common stock; ● the development and sustainability of an active trading market for our common stock; ● downgrades in our credit ratings or the credit ratings of our competitors; ● investor perceptions of the investment opportunity associated with our common stock relative to other investment alternatives; ● future sales of our common stock by our officers, directors, and significant stockholders; ● global macroeconomic conditions, including inflation, labor shortages, supply chain shortages, or other economic, political or legal uncertainties or adverse developments; ​ ● political unrest, terrorism and wars, such as the current situation with Ukraine and Russia, which could delay or disrupt our business, and if such political unrest escalates or spills over to or otherwise impacts additional regions it could heighten many of the other risk factors included in this Item 1A; ● other events or factors, including those resulting from system failures and disruptions, earthquakes, hurricanes, other natural disasters, pandemics, or responses to these events; and ● changes in accounting principles.
The trading price of our common stock is likely to be volatile and subject to significant price fluctuations, as observed in 2022, in response to many factors, including: ● market conditions or trends in our industry or the economy as a whole and, in particular, in the retail sales environment; ● changes in our merchandise mix and supplier base; ● timing of promotional events; ● changes in key personnel; ● entry into new markets; 43 Table of Contents ● changes in customer preferences and fashion trends; ● announcements by us or our competitors of new product offerings or significant acquisitions, divestitures, strategic partnerships, joint ventures, or capital commitments; ● actions by competitors; ● inventory shrinkage beyond our historical average rates; ● changes in operating performance and stock market valuations of other retail companies; ● investors’ perceptions of our prospects and the prospects of the retail industry; ● fluctuations in quarterly results of operations, as well as differences between our actual financial results and results of operations and those expected by investors; ● the public’s response to press releases or other public announcements by us or third parties, including our filings with the SEC and/or negative earnings or other announcements by us or other retail apparel companies; ● announcements, media reports, or other public forum comments related to litigation, claims, or reputational charges against us; ● guidance, if any, that we provide to the public, any changes in this guidance, or our failure to meet this guidance; ● changes in financial estimates or ratings by any securities analysts who follow our common stock, our failure to meet these estimates, or the failure of those analysts to initiate or maintain coverage of our common stock; ● the development and sustainability of an active trading market for our common stock; ● downgrades in our credit ratings or the credit ratings of our competitors; ● investor perceptions of the investment opportunity associated with our common stock relative to other investment alternatives; ● future sales of our common stock by our officers, directors, and significant stockholders; ● global macroeconomic conditions, including inflation, labor shortages, supply chain shortages, or other economic, political or legal uncertainties or adverse developments; ​ ● political unrest, terrorism and wars, such as the current situation with Ukraine and Russia and increased tensions between Taiwan and China, which could delay or disrupt our business, and if such political unrest escalates or spills over to or otherwise impacts additional regions it could heighten many of the other risk factors included in this Item 1A; ● other events or factors, including those resulting from system failures and disruptions, earthquakes, hurricanes, other natural disasters, pandemics, or responses to these events; and ● changes in accounting principles.
Our amended and restated certificate of incorporation provides that, unless we consent to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall, to the fullest extent permitted by law, be the sole and exclusive forum for any (1) derivative action or proceeding brought on behalf of the Company, (2) action asserting a claim of breach of a fiduciary duty owed by any of our directors or officers to the Company or our stockholders, (3) action asserting a claim against the Company or any director or officer of the Company arising pursuant to any provision of the DGCL or our amended and restated certificate of incorporation or our amended and restated bylaws, or (4) action asserting a claim against us or any director or officer of the Company governed by the internal affairs doctrine.
Our amended and restated certificate of incorporation provides that, unless we consent to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall, to the fullest extent permitted by law, be the sole and exclusive forum for any (1) derivative action or proceeding brought on behalf of the Company, (2) action asserting a claim of breach of a fiduciary duty owed by any of our directors or officers to the Company or our stockholders, (3) action asserting a claim against the Company or any director or 42 Table of Contents officer of the Company arising pursuant to any provision of the DGCL or our amended and restated certificate of incorporation or our amended and restated bylaws, or (4) action asserting a claim against us or any director or officer of the Company governed by the internal affairs doctrine.
We are unable to accurately predict the ultimate impact on our operations that the COVID-19 pandemic will continue to have on our operations going forward due to uncertainties that will be dictated by the length of time that such disruptions continue, which will, in turn, depend on among other factors, the currently unknowable duration, trajectory, and severity of the COVID-19 pandemic, 14 Table of Contents including with respect to variants, the impact of governmental regulations that might be imposed in response to the COVID-19 pandemic, the distribution, uptake, efficiency and efficacy of vaccination programs and other treatments, and overall changes in consumer behavior.
We are unable to accurately predict the ultimate impact on our operations that the COVID-19 pandemic will continue to have on our operations going forward due to uncertainties that will be dictated by the length of time that such disruptions continue, which will, in turn, depend on among other factors, the currently unknowable duration, trajectory, and severity of the COVID-19 pandemic, including with respect to variants, the impact of governmental regulations that might be imposed in response to the COVID-19 pandemic, the distribution, uptake, efficiency and efficacy of vaccination programs and other treatments, and overall changes in consumer behavior.
Any such limits may adversely affect our results of operations. 17 Table of Contents If we fail to provide high-quality customer support, it could have a material adverse effect on our business, financial condition, and results of operations. Our ongoing customer support is important to the successful marketing and sale of our merchandise.
Any such limits may adversely affect our results of operations. 20 Table of Contents If we fail to provide high-quality customer support, it could have a material adverse effect on our business, financial condition, and results of operations. Our ongoing customer support is important to the successful marketing and sale of our merchandise.
Complying with the GDPR in Europe, the UK General Data Protection Regulation (“UK GDPR”) and the UK Data Protection Act 2018 in the UK, the CCPA, CPRA, CDPA, CPA, or other laws, regulations, amendments to or re-interpretations of existing laws and regulations, and contractual or other obligations relating to privacy, data protection, data transfers, data localization, or information security may require us to make changes to our services to enable us or our customers to meet new legal requirements, incur substantial operational costs, modify our data practices and policies, and restrict our business operations.
Complying with the GDPR in Europe, the UK General Data Protection Regulation (“UK GDPR”); the UK Data Protection Act 2018, FADP, the CCPA, CPRA, CDPA, CPA, UCPA and CTDPA or other laws, regulations, amendments to or re-interpretations of existing laws and regulations, and contractual or other obligations relating to privacy, data protection, data transfers, data localization, or information security may require us to make changes to our services to enable us or our customers to meet new legal requirements, incur substantial operational costs, modify our data practices and policies, and restrict our business operations.
General Risk Factors There are claims made against us from time to time that can result in litigation that could distract management from our business activities and result in significant liability or damage to our brand. As a growing company with expanding operations, we increasingly face the risk of litigation and other claims against us.
There are claims made against us from time to time that can result in litigation that could distract management from our business activities and result in significant liability or damage to our brand. As a growing company with expanding operations, we increasingly face the risk of litigation and other claims against us.
The CPA and CDPA are similar to the CCPA and CPRA but aspects of these state privacy statutes remain unclear, resulting in further legal uncertainty and potentially requiring us to modify our data practices and policies and to incur substantial additional costs and expenses in an effort to comply.
The CPA, CDPA, UCPA and CTDPA are similar to the CCPA and CPRA but aspects of these state privacy statutes remain unclear, resulting in further legal uncertainty and potentially requiring us to modify our data practices and policies and to incur substantial additional costs and expenses in an effort to comply.
Therefore, our ability to fund and conduct our business, service our debt, and pay dividends, if any, in the future will depend on the ability of our subsidiaries and intermediate holding companies to make upstream cash distributions or payments to us, which may be 38 Table of Contents impacted, for example, by their ability to generate sufficient cash flow or limitations on the ability to repatriate funds whether as a result of currency liquidity restrictions, monetary or exchange controls, or otherwise.
Therefore, our ability to fund and conduct our business, service our debt, and pay dividends, if any, in the future will depend on the ability of our subsidiaries and intermediate holding companies to make upstream cash distributions or payments to us, which may be impacted, for example, by their ability to generate sufficient cash flow or limitations on the ability to repatriate funds whether as a result of currency liquidity restrictions, monetary or exchange controls, or otherwise.
Any such restatement could result in a loss of public confidence in the reliability of our consolidated financial statements and sanctions imposed on us by the SEC. 44 Table of Contents Short sellers of our stock may be manipulative and may drive down the market price of our common stock.
Any such restatement could result in a loss of public confidence in the reliability of our consolidated financial statements and sanctions imposed on us by the SEC. 49 Table of Contents Short sellers of our stock may be manipulative and may drive down the market price of our common stock.
We rely significantly on technology and systems to support our supply chain, payments, financial reporting and other key aspects of our business. Any failure, inadequacy, interruption or security failure of those systems could have a material adverse effect on our business, financial condition, and results of operations.
We rely significantly on technology and systems to support our supply chain, payments, financial reporting and other key aspects of our business. Any failure, inadequacy, interruption or security failure of those systems could have a material adverse effect on our business, reputation and brand, financial condition, and results of operations.
Although we are actively selecting systems and vendors and implementing procedures to enable us to maintain the integrity of our systems when we modify them, there are inherent risks associated with modifying or replacing systems, and with new or changed relationships, including accurately capturing and maintaining data, realizing the expected benefit of the change and managing the potential disruption of the operation of the systems as the changes are implemented.
Although we are actively selecting systems and vendors and implementing procedures to enable us to maintain the integrity 29 Table of Contents of our systems when we modify them, there are inherent risks associated with modifying or replacing systems, and with new or changed relationships, including accurately capturing and maintaining data, realizing the expected benefit of the change and managing the potential disruption of the operation of the systems as the changes are implemented.
If digital platforms change or penalize us with their algorithms, terms of service, display and featuring of search results, or if competition increases for advertisements, we may be unable to cost-effectively attract customers. Our relationships with digital platforms are not covered by long-term contractual agreements and do not require any specific performance commitments.
If digital platforms change or penalize us with their algorithms, terms of service, display and featuring of search results, or if competition increases for advertisements, we may be unable to cost-effectively attract customers. 18 Table of Contents Our relationships with digital platforms are not covered by long-term contractual agreements and do not require any specific performance commitments.
Litigation or threatened litigation, regardless of merit, could be costly, time consuming to defend, require us to redesign or rebrand our products or 30 Table of Contents packaging, if feasible, distract our senior management from operating our business and require us to enter into royalty or licensing agreements in order to obtain the right to use a third party’s intellectual property.
Litigation or threatened litigation, regardless of merit, could be costly, time consuming to defend, require us to redesign or rebrand our products or packaging, if feasible, distract our senior management from operating our business and require us to enter into royalty or licensing agreements in order to obtain the right to use a third party’s intellectual property.
Privacy Shield did not provide an adequate level of protection for data transfers from Switzerland to the 32 Table of Contents United States under Swiss data protection law. Following these decisions and subsequent guidance, it seems that reliance on standard contractual clauses alone may not necessarily be sufficient in all circumstances.
Privacy Shield did not provide an adequate level of protection for data transfers from Switzerland to the United States under Swiss data protection law. Following these decisions and subsequent guidance, it seems that reliance on standard contractual clauses alone may not necessarily be sufficient in all circumstances.
For example, the U.S. federal government could enact significant changes to the 34 Table of Contents taxation of business entities including, among others, a permanent increase in the corporate income tax rate, an increase in the tax rate applicable to the global intangible low-taxed income and elimination of certain exemptions, and the imposition of minimum taxes or surtaxes on certain types of income.
For example, the U.S. federal government could enact significant changes to the taxation of business entities including, among others, a permanent increase in the corporate income tax rate, an increase in the tax rate applicable to the global intangible low-taxed income and elimination of certain exemptions, and the imposition of minimum taxes or surtaxes on certain types of income.
EU and United Kingdom rules also relate to cross-border transfers of personal data out of the EEA and the United Kingdom, respectively. In July 2020, the Court of Justice of the European Union (“CJEU”) invalidated the EU-U.S.
EU, United Kingdom and Swiss rules also relate to cross-border transfers of personal data out of the EEA, the United Kingdom and Switzerland, respectively. In July 2020, the Court of Justice of the European Union (“CJEU”) invalidated the EU-U.S.
Customer complaints or negative publicity about our website or mobile app, products, merchandise quality, product delivery times, customer data handling and security practices or customer support, especially on social media, blogs, and in reviews, could rapidly and 13 Table of Contents severely diminish consumer use of our website or mobile app and customer and supplier confidence in us, and result in harm to our brand.
Customer complaints or negative publicity about our website or mobile app, products, merchandise quality, product delivery times, customer data handling and security practices or customer support, especially on social media, blogs, and in reviews, could rapidly and severely diminish consumer use of our website or mobile app and customer and supplier confidence in us, and result in harm to our brand.
If the trend of increasing enforcement by regulators of the strict approach in recent guidance and decisions continues, this could lead to substantial costs, require significant systems changes, limit the effectiveness of our marketing activities, divert the attention of our technology personnel, adversely affect our margins, increase costs and subject us to additional liabilities.
If the trend of increasing enforcement by regulators of the strict approach in recent guidance and decisions continues, this could lead to substantial costs, require significant systems changes, 37 Table of Contents limit the effectiveness of our marketing activities, divert the attention of our technology personnel, adversely affect our margins, increase costs and subject us to additional liabilities.
We could 26 Table of Contents be required to make significant additional expenditures to remediate any such failure, problem or breach. Any such events could have a material adverse effect on our business, financial condition, and results of operations. Further, we house many of our systems offsite at third-party data centers.
We could be required to make significant additional expenditures to remediate any such failure, problem or breach. Any such events could have a material adverse effect on our business, financial condition, and results of operations. Further, we house many of our systems offsite at third-party data centers.
Furthermore, the growth and development of e-commerce may prompt calls 35 Table of Contents for more stringent customer protection laws and more aggressive enforcement efforts, which may impose additional burdens on online businesses generally. Likewise, the SEC, the U.S. Department of Justice, the U.S. Treasury Department’s Office of Foreign Assets Controls (“OFAC”), the U.S.
Furthermore, the growth and development of e-commerce may prompt calls for more stringent customer protection laws and more aggressive enforcement efforts, which may impose additional burdens on online businesses generally. Likewise, the SEC, the U.S. Department of Justice, the U.S. Treasury Department’s Office of Foreign Assets Controls (“OFAC”), the U.S.
Among other difficulties that we may encounter, this growth may place a strain on our existing infrastructure, including our distribution facilities, 19 Table of Contents information technology systems, financial controls, merchandising, and operations personnel. We may also place increased demands on our suppliers, to the extent we increase the size of our merchandise orders.
Among other difficulties that we may encounter, this growth may place a strain on our existing infrastructure, including our distribution facilities, information technology systems, financial controls, merchandising, and operations personnel. We may also place increased demands on our suppliers, to the extent we increase the size of our merchandise orders.
International sales and increased international operations may be subject to risks such as: ● difficulties in staffing and managing foreign operations; ● burdens of complying with a wide variety of laws and regulations, including more stringent regulations relating to data privacy and security, particularly in the EU; ● adverse tax effects and foreign exchange controls making it difficult to repatriate earnings and cash; ● political, economic instability, terrorism and wars, such as the current situation with Ukraine and Russia; ● global macroeconomic conditions, including inflation, labor shortages, supply chain shortages, or other economic, political or legal uncertainties or adverse developments; ● natural disasters; ● trade restrictions; ● differing employment practices and laws and labor disruptions; 20 Table of Contents ● the imposition of government controls; ● an inability to use or to obtain adequate intellectual property protection for our key brands and products; ● tariffs and customs duties and the classifications of our goods by applicable governmental bodies; ● a legal system subject to undue influence or corruption; ● a business culture in which illegal sales practices may be prevalent; ● logistics and sourcing; ● military conflicts; and ● acts of terrorism.
International sales and increased international operations may be subject to risks such as: ● difficulties in staffing and managing foreign operations; ● burdens of complying with a wide variety of laws and regulations, including more stringent regulations relating to data privacy and security, particularly in the EU; ● adverse tax effects and foreign exchange controls making it difficult to repatriate earnings and cash; ● political, economic instability, terrorism and wars, such as the current situation with Ukraine and Russia and increased tensions between Taiwan and China; ● global macroeconomic conditions, including inflation, labor shortages, supply chain shortages, or other economic, political or legal uncertainties or adverse developments; ● natural disasters; ● trade restrictions; ● differing employment practices and laws and labor disruptions; ● differing consumer protection and product laws; ● the imposition of government controls; ● an inability to use or to obtain adequate intellectual property protection for our key brands and products; ● tariffs and customs duties and the classifications of our goods by applicable governmental bodies; ● a legal system subject to undue influence or corruption; ● a business culture in which illegal sales practices may be prevalent; ● logistics and sourcing; ● military conflicts; and ● acts of terrorism.
Further, we modify our policies relating to returns from time to time, which may result in customer dissatisfaction or an increase in the number of merchandise returns. Supplier non-compliance can also result in increased returns. From time to time our products are damaged in transit, which can increase return rates and harm our 24 Table of Contents brand.
Further, we modify our policies relating to returns from time to time, which may result in customer dissatisfaction or an increase in the number of merchandise returns. Supplier non-compliance can also result in increased returns. From time to time our products are damaged in transit, which can increase return rates and harm our brand.
We expect that our stock price will fluctuate significantly, which could cause the value of investments in our common stock to decline, and investors may not be able to resell their shares at a price at or above the price for which they purchased them.
Risks Related to Ownership of Our Common Stock We expect that our stock price will fluctuate significantly, which could cause the value of investments in our common stock to decline, and investors may not be able to resell their shares at a price at or above the price for which they purchased them.
Our business is affected by seasonality, which could result in fluctuations in our results of operations. We experience moderate fluctuations in aggregate sales volume during the year. Historically, our net revenue has been highest in our second fiscal quarter. The seasonality of our business has resulted in variability in our total net revenue quarter-to-quarter.
Our business is affected by seasonality, which could result in fluctuations in our results of operations. We experience moderate fluctuations in aggregate sales volume during the year. Historically, our net revenue has been highest in our second and third fiscal quarters. The seasonality of our business has resulted in variability in our total net revenue quarter-to-quarter.
Our success depends in part upon our ability to attract, motivate, and retain a sufficient number of employees who understand our business, customers, brand and corporate culture. Our planned growth will require us to hire 41 Table of Contents and train even more personnel to manage such growth.
Our success depends in part upon our ability to attract, motivate, and retain a sufficient number of employees who understand our business, customers, brand and corporate culture. Our planned growth will require us to hire and train even more personnel to manage such growth.
For example, in California, we are subject to record keeping and wage guarantor obligations pursuant to SB 62 (the “Garment Worker Protection Act”), for certain 29 Table of Contents items that we contract to manufacture, as well as AB 701, which requires us to ensure that quotas do not interfere with warehouse worker meal and rest periods under California's wage orders.
For example, in California, we are subject to record keeping and wage guarantor obligations pursuant to SB 62 (the “Garment Worker Protection Act”), for certain items that we contract to manufacture, as well as AB 701, which requires us to ensure that quotas do not interfere with warehouse worker meal and rest periods under California’s wage orders.
We cannot assure investors that we will continue to be able to compete successfully against existing or future competitors. Our expansion into markets served by our competitors and entry of new competitors or expansion of existing competitors into our markets could have a material adverse effect on us.
We cannot assure investors that we will continue to be able to compete successfully against existing or future competitors. Our expansion into markets served by our competitors and entry of new competitors or expansion of 25 Table of Contents existing competitors into our markets could have a material adverse effect on us.
It is often difficult for us to plan and prepare for potential changes to applicable laws, and future actions or increased costs related to these changes could have a material adverse effect on our business, financial condition, and results of operations.
It is often difficult 38 Table of Contents for us to plan and prepare for potential changes to applicable laws, and future actions or increased costs related to these changes could have a material adverse effect on our business, financial condition, and results of operations.
As a publicly traded company, we will incur significant legal, accounting, and other expenses that we were not required to incur in the recent past, particularly after we are no longer an emerging growth company as defined under the JOBS Act.
As a publicly traded company, we have incurred and will continue to incur significant legal, accounting, and other expenses that we were not required to incur in the recent past, particularly after we are no longer an emerging growth company as defined under the JOBS Act.
For example, natural disasters could increase raw material costs, impacting pricing with certain of our suppliers, or cause shipping delays for certain of our merchandise. Global climate change is resulting in certain types of natural disasters occurring more frequently 27 Table of Contents or with more intense effects.
For example, natural disasters could increase raw material costs, impacting pricing with certain of our suppliers, or cause shipping delays for certain of our merchandise. Global climate change is resulting in certain types of natural disasters occurring more frequently or with more intense effects.
Imitation of our name, concept, website design or merchandise in a manner that projects lesser quality or carries a negative connotation of our brand image could have a material adverse effect on our business, financial condition, and results of operations.
Imitation of our name, concept, website design or 35 Table of Contents merchandise in a manner that projects lesser quality or carries a negative connotation of our brand image could have a material adverse effect on our business, financial condition, and results of operations.
We may also share customers’ personal data with certain third parties as authorized by the customer or as described in our privacy policy.
We may also share customers’ personal information with certain third parties as authorized by the customer or as described in our privacy policy.
During November 2021, we entered into a Credit Agreement (the “Credit Agreement”) with Bank of America (the “New Revolving Facility”) to provide a revolving facility that allows for borrowings up to $50.0 million, under which we borrowed $25.0 million on November 15, 2021 that remained outstanding as of January 2, 2022.
During November 2021, we entered into a Credit Agreement (the “Credit Agreement”) with Bank of America (the “New Revolving Facility”) to provide a revolving facility that allows for borrowings up to $50.0 million, under which we borrowed $25.0 million on November 15, 2021 that remained outstanding as of January 1, 2023.
The occurrence of any of these risks could negatively affect our international business and consequently our overall business, financial condition, and results of operations. Risks Related to Our Industry The global apparel industry is subject to intense pricing pressure.
The occurrence of any of these risks could negatively affect our international business and consequently our overall business, financial condition, and results of operations. 24 Table of Contents Risks Related to Our Industry The global apparel industry is subject to intense pricing pressure.
In addition to our CEO, we have other employees in positions, including those employees responsible for our merchandising, marketing, software development, accounting, finance, information technology, and operations departments, that, if vacant, could cause a temporary disruption in our operations until such positions are filled, which could have a material adverse effect on our business, financial condition, and results of operations.
In addition to the aforementioned employees, we have other employees in positions responsible for our merchandising, marketing, software development, accounting, finance, information technology, and operations departments, that, if vacant, could cause a temporary disruption in our operations until such positions are filled, which could have a material adverse effect on our business, financial condition, and results of operations.
McCreight or any other of our key employees could impair our ability to manage our business effectively, as we may not be able to find suitable individuals to replace them on a timely basis or at all, which could have a material adverse effect on our business, financial condition, and results of operations.
The loss of services of these individuals or any other of our key employees could impair our ability to manage our business effectively, as we may not be able to find suitable individuals to replace them on a timely basis or at all, which could have a material adverse effect on our business, financial condition, and results of operations.
Our current and planned personnel, systems, procedures, and controls may not be adequate to support and effectively manage our future operations. Our collaborative culture is important to us, and we believe it has been a major contributor to our success.
Our current and planned personnel, systems, procedures, and controls may not be adequate to support and effectively manage our future operations. 23 Table of Contents Our collaborative culture is important to us, and we believe it has been a major contributor to our success.
Our supplier relationships, and therefore our business, could be materially adversely affected if our suppliers: ● raise the prices they charge us; ● change pricing terms to require us to pay upfront or upon delivery; ● reduce our access to styles, brands, and merchandise by entering into broad exclusivity arrangements with our competitors or otherwise in the marketplace; ● sell similar merchandise to our competitors with similar or better pricing, many of whom already purchase merchandise in significantly greater volume and, in some cases, at lower prices than we do; ● lengthen their lead times; ● decrease the quality of their merchandise; ● initiate or expand sales of apparel, footwear, and accessories to retail customers directly through their own stores, catalogs, or on the internet and compete with us directly; or ● otherwise choose to discontinue selling merchandise to us. 23 Table of Contents The success of our business is driven in part by the price-value proposition we offer our customers.
Our supplier relationships, and therefore our business, could be materially adversely affected if our suppliers: ● raise the prices they charge us; ● change pricing terms to require us to pay upfront or upon delivery; ● reduce our access to styles, brands, and merchandise by entering into broad exclusivity arrangements with our competitors or otherwise in the marketplace; ● sell similar merchandise to our competitors with similar or better pricing, many of whom already purchase merchandise in significantly greater volume and, in some cases, at lower prices than we do; ● lengthen their lead times; ● decrease the quality of their merchandise; ● initiate or expand sales of apparel, footwear, and accessories to retail customers directly through their own stores, catalogs, or on the internet and compete with us directly; or ● otherwise choose to discontinue selling merchandise to us.
Any actual or perceived failure by us to comply with these laws, regulations, or other obligations may lead to significant fines, penalties, regulatory investigations, lawsuits, significant costs for remediation, damage to our reputation, or other liabilities.
Any actual or perceived failure by us to comply with these laws, regulations, or other 36 Table of Contents obligations may lead to significant fines, penalties, regulatory investigations, lawsuits, significant costs for remediation, damage to our reputation, or other liabilities.
In the past we have purchased merchandise from our suppliers solely within the 33 Table of Contents United States. In the future, we expect to increase direct purchases from suppliers outside the United States, which may expose us to additional risks.
In the past we have purchased merchandise from our suppliers solely within the United States. In the future, we expect to increase direct purchases from suppliers outside the United States, which may expose us to additional risks.
Tax authorities in non-U.S. jurisdictions and at the U.S. federal, state and local levels are currently reviewing the appropriate treatment of companies engaged in internet commerce and considering changes to existing tax or other laws that could regulate our transmissions and/or levy sales, income, consumption, use or other taxes relating to our activities, and/or impose obligations on us to collect such taxes.
Tax authorities in non-U.S. jurisdictions and at the U.S. federal, state and local levels continue to review the appropriate treatment of companies engaged in internet commerce and consider changes to existing tax or other laws that could regulate our transmissions and/or levy sales, income, consumption, use or other taxes relating to our activities, and/or impose obligations on us to collect such taxes.
Our amended and restated certificate of incorporation and amended and restated bylaws include provisions that: ● authorize our board of directors (the “Board of Directors”) to issue, without further action by the stockholders, up to 10,000,000 shares of undesignated preferred stock; ● subject to certain exceptions, including that entities affiliated with H.I.G Capital, LLC (“H.I.G.”), Institutional Venture Partners (“IVP”) and the Canada Pension Plan Investment Board (“CPPIB”) hold at least 50% of our common stock, require that any action to be taken by our stockholders be effected at a duly called annual or special meeting and not by written consent; ● specify that special meetings of our stockholders can be called only by a majority of our Board of Directors, the Chair of our Board of Directors or our Chief Executive Officer; ● establish an advance notice procedure for stockholder proposals to be brought before an annual meeting, including proposed nominations of persons for election to our Board of Directors; ● establish that our Board of Directors is divided into three classes, with each class serving three-year staggered terms; ● prohibit cumulative voting in the election of directors; and ● provide that vacancies on our Board of Directors may be filled only by a majority of directors then in office, even though less than a quorum. 37 Table of Contents These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our Board of Directors, which is responsible for appointing the members of our management.
Our amended and restated certificate of incorporation and amended and restated bylaws include provisions that: ● authorize our Board of Directors (the “Board of Directors”) to issue, without further action by the stockholders, up to 10,000,000 shares of undesignated preferred stock; ● subject to certain exceptions, including that entities affiliated with H.I.G Capital, LLC (“H.I.G.”), Institutional Venture Partners (“IVP”) and the Canada Pension Plan Investment Board (“CPPIB”) hold at least 50% of our common stock, require that any action to be taken by our stockholders be effected at a duly called annual or special meeting and not by written consent; ● specify that special meetings of our stockholders can be called only by a majority of our Board of Directors, the Chair of our Board of Directors or our Chief Executive Officer; ● establish an advance notice procedure for stockholder proposals to be brought before an annual meeting, including proposed nominations of persons for election to our Board of Directors; ● establish that our Board of Directors is divided into three classes, with each class serving three-year staggered terms; ● prohibit cumulative voting in the election of directors; and ● provide that vacancies on our Board of Directors may be filled only by a majority of directors then in office, even though less than a quorum.
Although we take steps to protect our networks, systems, applications and data, we or our service providers may be unable to anticipate, defend against, or timely identify and respond to such activity, including hacking, malware, viruses, social engineering (such as phishing or other scams), extortion, account takeover attacks, denial or degradation of service attacks, supply chain attacks, computer and network vulnerabilities or the negligence and malfeasance of individuals with authorized access to our data.
As an online retailer, we may be targeted with similar attempts. 28 Table of Contents Although we take steps to protect our networks, systems, applications and data, we or our service providers may be unable to anticipate, defend against, or timely identify and respond to such activity, including hacking, malware, viruses, social engineering (such as phishing or other scams), extortion, account takeover attacks, denial or degradation of service attacks, supply chain attacks, computer and network vulnerabilities or the negligence and malfeasance of individuals with authorized access to our data.
Further, data protection authorities may require measures to be put in place in addition to SCCs for transfers to countries outside of the European Economic Area, or EEA, as well as Switzerland and the United Kingdom, or UK. Our third-party service providers may also be affected by these changes.
Further, data protection authorities may require measures to be put in place in addition to SCCs for transfers to countries outside of the EEA as well as Switzerland and the UK. Our third-party service providers may also be affected by these changes.
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 fund other working capital needs. 36 Table of Contents Risks Related to Our Company and Our Ownership Structure The transition to managing a public company will present new challenges.
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 fund other working capital needs. Risks Related to Our Company and Our Ownership Structure Operating and managing a public company presents new challenges.
In addition, our employees or third parties acting at our direction may knowingly or inadvertently make use of social media in ways that could lead to the loss or infringement of intellectual property, as well as the public disclosure of proprietary, confidential or sensitive personal information of 16 Table of Contents our business, employees, customers, or others.
In addition, our employees or third parties acting at our direction, including our large network of social media brand ambassadors, may knowingly or inadvertently make use of social media in ways that could lead to the loss or infringement of intellectual property, as well as the public disclosure of proprietary, confidential or sensitive personal information of our business, employees, customers, or others.
For example, online businesses have been targeted with attacks aimed at compromising the security of payment card information submitted by customers for online purchases, including by injecting malicious code or scripts on website pages or by gaining unauthorized access to payment systems. As an online retailer, we may be targeted with similar attempts.
For example, online businesses have been targeted with attacks aimed at compromising the security of payment card information submitted by customers for online purchases, including by injecting malicious code or scripts on website pages or by gaining unauthorized access to payment systems.
U.S. import taxation levels may increase and could harm our business. Increases in taxes imposed on goods imported to the United States have been proposed by U.S. lawmakers and the President of the United States and, if enacted, may impede our growth and negatively affect our results of operations.
Increases in taxes imposed on goods imported to the United States have been proposed by U.S. lawmakers and the President of the United States and, if enacted, may impede our growth and negatively affect our results of operations.
Income and results of operations are difficult to forecast because they generally depend on the volume and timing of the orders we receive, which are uncertain. Additionally, our business is affected by general economic and business conditions around the world.
We base our current and future expense levels on our operating forecasts and estimates of future income. Income and results of operations are difficult to forecast because they generally depend on the volume and timing of the orders we receive, which are uncertain. Additionally, our business is affected by general economic and business conditions around the world.
In addition, these stockholders could take actions that have the effect of delaying or preventing a change-in-control of us or discouraging others from making tender offers for our shares, which could prevent stockholders from receiving a premium for their shares. These actions may be taken even if other stockholders oppose them.
In addition, these stockholders could take actions that have the effect of delaying or preventing a change-in-control of us or discouraging others from making tender offers for our shares, which could prevent stockholders from receiving a premium for their shares.
We are subject to requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which will require us to conduct due diligence on and disclose whether or not our products contain conflict minerals.
We are subject to requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which will require us to conduct due diligence on and disclose whether or not our products contain conflict minerals for the fiscal year ending December 31, 2023 and going forward.
These regulations and laws may involve taxes, privacy and data security, customer protection, the ability to collect and/or share necessary information that allows us to conduct business on the internet, marketing communications and advertising, content protection, electronic contracts or gift cards.
These regulations and laws may involve taxes, privacy and data security, customer protection, the ability to collect and/or share necessary information that allows us to conduct business on the internet, marketing communications and advertising, content protection, electronic contracts or gift cards. Furthermore, the regulatory landscape impacting internet and e-commerce businesses is constantly evolving.
Use of social media, influencers, affiliate marketing, email, text messages, and direct mail may adversely impact our brand and reputation or subject us to fines or other penalties.
Use of social media, influencers, affiliate marketing, email, SMS, podcast advertisements, promotional partnerships and direct mail may adversely impact our brand and reputation or subject us to fines or other penalties.
With respect to our marketing channels, we rely heavily on relationships with providers of online services, search engines, social media, directories, and other websites and e-commerce businesses to provide content, advertising banners, and other links that direct customers to our websites. We rely on these relationships to provide significant traffic to our website.
Our success depends on our ability to attract customers cost effectively. With respect to our marketing channels, we rely heavily on relationships with providers of online services, search engines, social media, directories, and other websites and e-commerce businesses to provide content, advertising banners, and other links that direct customers to our websites.
If we do not accurately anticipate, identify, forecast, or analyze fashion trends and sales levels, it could have a material adverse effect on our business, financial condition, cash flows, and results of operations.
If we do not accurately anticipate, identify, forecast, or analyze fashion trends and sales levels, it could have a material adverse effect on our business, financial condition, cash flows, and results of operations. We rely on third parties to drive traffic to our platform, which could negatively affect our business, financial condition, cash flows, and results of operations.
It is possible that other jurisdictions in which we operate or do business could react to the BEPS initiative or their own concerns by enacting tax legislation that could adversely affect us through increasing our tax liabilities. The application of indirect taxes could adversely affect our business and results of operations.
It is possible that other jurisdictions in which we operate or do business could enact tax legislation that could adversely affect us through increasing our tax liabilities. The application of indirect taxes could adversely affect our business and results of operations.
If the costs of the raw materials, for example cotton, synthetics, and trim, or other inputs, such as energy costs or prevailing wages, used in producing our merchandise increase, our suppliers may look to pass these cost increases along to us.
The success of our business is driven in part by the price-value proposition we offer our customers. If the costs of the raw materials, for example cotton, synthetics, and trim, or other inputs, such as energy costs or prevailing wages, used in producing our merchandise increase, our suppliers may look to pass these cost increases along to us.
Anti-takeover provisions in our amended and restated certificate of incorporation and bylaws and under Delaware law could make an acquisition of us more difficult, limit attempts by our stockholders to replace or remove our current management and limit the market price of our common stock.
These actions may be taken even if other stockholders oppose them. 41 Table of Contents Anti-takeover provisions in our amended and restated certificate of incorporation and bylaws and under Delaware law could make an acquisition of us more difficult, limit attempts by our stockholders to replace or remove our current management and limit the market price of our common stock.
In addition, we may not be able to maintain our recent rate of growth in net revenue if there is a decline in customer spending. 22 Table of Contents Risks Related to Our Merchandise and Inventory If we are not able to successfully maintain our desired merchandise assortment or manage our inventory effectively, we may be unable to attract a sufficient number of customers or sell sufficient quantities of our merchandise, which could result in excess inventories, markdowns, and foregone sales.
Risks Related to Our Merchandise and Inventory If we are not able to successfully maintain our desired merchandise assortment or manage our inventory effectively, we may be unable to attract a sufficient number of customers or sell sufficient quantities of our merchandise, which could result in excess inventories, markdowns, and foregone sales.
The CPRA, which takes effect on January 1, 2023 and significantly modifies the CCPA, could result in further uncertainty and require us to incur additional costs and expenses in an effort to comply.
Additionally, a new privacy law, the CPRA, took effect on January 1, 2023 and significantly amends and expands the CCPA, which could result in further uncertainty and require us to incur additional costs and expenses in an effort to comply.
Wayfair that a U.S. state may require an online retailer to collect sales taxes imposed by that state, even if the retailer has no physical presence in that state, thus permitting a wider enforcement of such sales tax collection requirements. Most U.S. states have enacted or are enacting new sales tax laws following the decision in South Dakota v. Wayfair.
Wayfair that a U.S. state may require an online retailer to collect sales taxes imposed by that state, even if the retailer has no physical presence in that state, thus permitting a wider enforcement of such sales tax collection requirements.
If we are unable to acquire suitable merchandise in sufficient quantities, at acceptable prices with adequate delivery times due to the loss of or a deterioration or change in our relationship with one or more of our key suppliers or if events harmful to our suppliers occur, it could have a material adverse effect on our business, financial condition, and results of operations.
If we are unable to acquire suitable merchandise in sufficient quantities, at acceptable prices with adequate delivery times due to the loss of or a deterioration or change in our relationship with one or more of our key suppliers or if events harmful to our suppliers occur, it could have a material adverse effect on our business, financial condition, and results of operations. 27 Table of Contents If new trade restrictions are imposed or existing trade restrictions become more burdensome, our ability to source imported merchandise efficiently and cost effectively could be materially adversely affected.
Our current growth plans may place a strain on our existing resources and could cause us to encounter challenges we have not faced before. As we expand, our operations will become more complex. We have grown rapidly, with our net revenue increasing from $133 million in 2016 to $370 million in 2019.
Our current growth plans may place a strain on our existing resources and could cause us to encounter challenges we have not faced before. As we expand, our operations will become more complex.
We use social media including Facebook, Instagram, Pinterest, Snapchat, TikTok, Twitter and YouTube, as well as affiliate marketing, email, SMS, and direct mail as part of our multi-channel approach to marketing, and we encourage our customers to use social media while shopping.
We use social media including Facebook, Instagram, Pinterest, Snapchat, TikTok, Twitter and YouTube, as well as affiliate marketing, email, SMS, podcast advertisements, promotional partnerships and direct mail as part of our multi-channel approach to marketing, and we encourage our customers to use social media while shopping. We utilize various marketing-related contests and giveaways that are subject to applicable laws.
Our core market of apparel, footwear, and accessories for women is subject to new and rapidly changing fashion trends, constantly evolving consumer preferences and demands, and a modest brand loyalty.
Our success depends on our ability to anticipate, identify, measure, and respond quickly to new and rapidly changing fashion trends, customer preferences and demands and other factors. Our core market of apparel, footwear, and accessories for women is subject to new and rapidly changing fashion trends, constantly evolving consumer preferences and demands, and a modest brand loyalty.
We may be unable to maintain a high level of engagement with our customers and increase their spending with us, which could harm our business, financial condition, cash flows, or results of operations.
If we are unable to cost-effectively drive traffic to our website or mobile app, our ability to acquire new customers and our financial condition would suffer. We may be unable to maintain a high level of engagement with our customers and increase their spending with us, which could harm our business, financial condition, cash flows, or results of operations.
Any failure by us or our suppliers to comply with product safety, labor or other laws, or our standard terms and conditions, or to provide safe factory conditions for their workers may damage our reputation and brand and harm our business. The merchandise we sell to our customers is subject to regulation by the U.S.
Any failure by us or our suppliers to comply with product safety, labor or other laws, our Vendor and Supplier Code of Conduct, or our standard terms and conditions, or to provide safe factory conditions for their workers may damage our reputation and brand and harm our business.
The California Attorney General can enforce the CCPA, including seeking an injunction and civil penalties for violations. The CCPA also provides a private right of action for certain data breaches that is expected to increase data breach litigation. Additionally, a new privacy law, the California Privacy Rights Act (“CPRA”), was approved by California voters in the November 3, 2020 election.
The California Attorney General can enforce the CCPA, including seeking an injunction and civil penalties for violations. The CCPA also provides a private right of action for certain data breaches that is expected to increase data breach litigation.
Our shipments are subject to risks, including increases in fuel prices, which would increase our distribution costs, and employee strikes and inclement weather, which may impact the third party’s ability to provide delivery services that adequately meet our needs. For example, it can take as long as six to seven days to get shipments from our distribution facilities.
Our shipments are subject to risks, including increases in fuel 34 Table of Contents prices, which would increase our distribution costs, and employee strikes and inclement weather, which may impact the third party’s ability to provide delivery services that adequately meet our needs.
Instead, we purchase nearly all of our merchandise from third-party suppliers. In the year ended January 2, 2022, our top 12 suppliers accounted for approximately 50% of our purchases, with no single supplier accounting for more than 9.7% of our purchases.
Instead, we purchase nearly all of our merchandise from third-party suppliers. During 2022, our top 11 suppliers accounted for approximately 50% of our purchases, 26 Table of Contents with no single supplier accounting for more than 9.1% of our purchases.
Historically, the shipping and handling fees we charge our customers are intended to partially offset the related shipping and handling expenses. Pure-play and omni-channel retailers are increasing their focus on delivery services, as customers are increasingly seeking faster, guaranteed delivery times and low-price or free shipping.
Pure-play and omni-channel retailers are increasing their focus on delivery services, as customers are increasingly seeking faster, guaranteed delivery times and low-price or free shipping.
Increased scrutiny and changing expectations from investors, customers, employees and others regarding our environmental, social and governance practices and reporting could cause us to incur additional costs, devote additional resources and expose us to additional risks, which could adversely impact our reputation, customer acquisition and retention, access to capital and employee retention.
If any such climate changes or additional climate change were to occur, they could have an adverse effect on our financial condition and results of operations. ​ Increased scrutiny and changing expectations from investors, customers, employees and others regarding our environmental, social and governance practices and reporting could cause us to incur additional costs, devote additional resources and expose us to additional risks, which could adversely impact our reputation, customer acquisition and retention, access to capital and employee retention.
If our marketing efforts are not successful in promoting awareness of our brands and products, driving customer engagement or attracting new customers, or if we are not able to effectively manage our marketing expenses, our business, financial condition, and results of operations will be adversely affected.
If our marketing efforts are not successful in promoting awareness of our brands and products, driving customer engagement or attracting new customers, or if we are not able to effectively manage our marketing expenses, our business, financial condition, and results of operations will be adversely affected. 17 Table of Contents We obtain a significant amount of traffic via social networking platforms or other online channels used by our current and prospective customers.

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Item 2. Properties

Properties — owned and leased real estate

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Biggest changeSee Note 11 – Related Party Transactions of the accompanying notes to our consolidated financial statements included elsewhere within this Annual Report on Form 10-K for additional information. ​ ​ ​ ​ ​ ​ Location Type Chico, California Distribution facility and office space ​ Chico, California Corporate headquarters ​ Chico, California Office space ​ Chico, California Retail space ​ Los Angeles, California Office space ​ Ontario, California Distribution facility ​ Easton, Pennsylvania Distribution facility ​ ​ ​ ​
Biggest changeSee Note 6, Leases, of the accompanying notes to our consolidated financial statements included elsewhere within this Annual Report on Form 10-K for additional information on our leases. ​ ​ ​ ​ ​ ​ ​ ​ ​ Square Footage Location Type (approximate) Chico, California ​ Distribution facility and office space ​ 109,600 Chico, California ​ Corporate headquarters ​ 7,600 Chico, California ​ Studio space ​ 7,400 Chico, California ​ Retail space ​ 8,400 Los Angeles, California ​ Office and studio space ​ 26,800 Ontario, California ​ Distribution facility ​ 140,400 Easton, Pennsylvania ​ Distribution facility ​ 258,200 ​ ​ ​
We operate three leased distribution facilities: a facility (which includes office space) located in Chico, California; a facility located in Easton, Pennsylvania; and a facility located in Ontario, California. Our creative buying and inventory planning offices are located in Los Angeles, California in a leased facility. Some of our facilities located in Chico are leased from related persons.
We operate three leased distribution facilities: a facility (which includes office space) located in Chico, California; a facility located in Easton, Pennsylvania; and a facility located in Ontario, California. Our creative buying and inventory planning offices and our creative studio are located in Los Angeles, California in a leased facility.

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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Biggest changeWe are not presently a party to any legal proceedings that we believe would, if determined adversely to us, materially and adversely affect our future business, financial condition, cash flows, or results of operations. ​ ​ 45 Table of Contents
Biggest changeWe are not presently a party to any legal proceedings that we believe would, if determined adversely to us, materially and adversely affect our future business, financial condition, cash flows, or results of operations. ​ ​ 50 Table of Contents Item 4. Mine Safety Disclosures Not applicable. ​ ​ ​ ​ ​ 51 Table of Contents PART II ​

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeThe comparisons are based on historical data and are not indicative of, nor intended to forecast, the future performance of our common stock. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ November 11, ​ January 2, Company/Index 2021 2022 Lulu's Fashion Lounge Holdings, Inc. ​ $ 100.00 ​ $ 78.33 S&P 500 Index ​ $ 100.00 ​ $ 102.51 S&P Retail Select Industry Index ​ $ 100.00 ​ $ 89.54 ​ Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities ​ Recent Sales of Unregistered Securities ​ None. ​ Use of Proceeds from Registered Securities 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 $92.0 million or $16.00 per share.
Biggest changeThe comparisons are based on historical data and are not indicative of, nor intended to forecast, the future performance of our common stock. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ November 11, ​ January 2, ​ January 1, Company/Index 2021 2022 2023 Lulu's Fashion Lounge Holdings, Inc. ​ $ 100.00 ​ $ 78.33 ​ $ 19.22 S&P 500 Index ​ $ 100.00 ​ $ 102.51 ​ $ 82.58 S&P Retail Select Industry Index ​ $ 100.00 ​ $ 89.54 ​ $ 60.37 ​ Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities ​ Recent Sales of Unregistered Securities ​ None. 53 Table of Contents Purchases of Equity Securities by the Issuer and Affiliated Purchasers None. ​ 54 Table of Contents Item 6. [Reserved] ​
Our future ability to pay cash dividends on our capital stock is limited by the terms of our New Revolving Facility and may be limited by any future debt instruments or preferred securities. ​ Performance Graph ​ The following graph and table compare the performance of (1) an investment in our common stock over the period of November 11, 2021 through January 2, 2022, beginning with an investment at the $13.06 closing market price on November 11, 2021, the end of the first day our common stock traded on the Nasdaq following our initial public offering at $16.00 per share, and thereafter based on the closing price of our common stock on the Nasdaq, with (2) an investment in the S&P 500 and the S&P Retail Select Industry, in each case beginning with an investment at the closing price on November 11, 2021 and thereafter based on the closing price of the index.
Our future ability to pay cash dividends on our capital stock is limited by the terms of our New Revolving Facility and may be limited by any future debt instruments or preferred securities. ​ ​ 52 Table of Contents Performance Graph ​ The following graph and table compare the performance of (1) an investment in our common stock over the period of November 11, 2021 through January 1, 2023, beginning with an investment at the $13.06 closing market price on November 11, 2021, the end of the first day our common stock traded on the Nasdaq following our initial public offering at $16.00 per share, and thereafter based on the closing price of our common stock on the Nasdaq, with (2) an investment in the S&P 500 and the S&P Retail Select Industry, in each case beginning with an investment at the closing price on November 11, 2021 and thereafter based on the closing price of the index.
The graph and table assume $100 was invested on the starting date at the price indicated above and that dividends, if any, were 49 Table of Contents reinvested.
The graph and table assume $100 was invested on the starting date at the price indicated above and that dividends, if any, were reinvested.
Prior to that date, there was no public trading market for our common stock. ​ Holders of Record ​ As of March 28, 2022, there were 43 number of holders of record of our common stock. ​ Dividends We currently intend to retain all available funds and future earnings, if any, to fund the development and expansion of our business, and we do not anticipate paying any cash dividends in the foreseeable future.
Prior to that date, there was no public trading market for our common stock. ​ Holders of Record ​ As of March 10, 2023, there were 113 holders of record of our common stock. ​ Dividends We currently intend to retain all available funds and future earnings, if any, to fund the development and expansion of our business, and we do not anticipate paying any cash dividends in the foreseeable future.
Removed
We raised net proceeds to us 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. All shares sold were registered pursuant to a registration statement on Form S-1 (File No. 333- 260194), as amended (the “Registration Statement”), declared effective by the SEC on November 10, 2021.
Removed
Goldman Sachs & Co. LLC, BofA Securities, Inc. and Jefferies LLC acted as representatives of the underwriters for the offering. The offering terminated after the sale of all securities registered pursuant to the Registration Statement.
Removed
No payments for such expenses were made directly or indirectly to (i) any of our officers or directors or their associates, (ii) any persons owning 10% or more of any class of our equity securities or (iii) any of our affiliates.
Removed
The net proceeds from our IPO, together with our existing cash, cash equivalents and borrowings under our New Revolving Facility were used to redeem all Series B and Series B-1 Redeemable Preferred Stock and to repay in full all outstanding amounts under our previous credit facility (the “Credit Facility”) that was comprised of a term loan (the “Term Loan”) and revolving credit facility (the “Revolving Facility”).
Removed
As of the date of this Annual Report on Form 10-K, we have used all of the net proceeds from the IPO. Purchases of Equity Securities by the Issuer and Affiliated Purchasers ​ None. ​ 50 Table of Contents Item 6. [Reserved] ​

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeOur 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, ​ ​ 2022 ​ 2021 ​ 2019 ​ ​ (in thousands) Net revenue $ 375,625 ​ $ 248,656 $ 369,622 Cost of revenue ​ 198,893 ​ 138,364 ​ 208,418 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Gross profit ​ 176,732 ​ 110,292 ​ 161,204 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Selling and marketing expenses ​ 66,684 ​ 47,812 ​ 72,875 General and administrative expenses ​ 87,710 ​ 67,155 ​ 73,386 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Income (loss) from operations ​ 22,338 ​ (4,675) ​ 14,943 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other income (expense), net: ​ ​ ​ Interest expense ​ (12,774) ​ (16,037) ​ (15,206) Loss on extinguishment of debt ​ ​ (1,392) ​ ​ — ​ ​ — Other income, net ​ 85 ​ 137 ​ 239 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total other expense, net ​ (14,081) ​ (15,900) ​ (14,967) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Income (loss) before income taxes ​ 8,257 ​ (20,575) ​ (24) Income tax (provision) benefit ​ (6,212) ​ 1,271 ​ (445) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net income (loss) ​ $ 2,045 ​ $ (19,304) ​ $ (469) ​ ​ 58 Table of Contents ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended ​ ​ ​ ​ January 2, ​ ​ January 3, ​ ​ December 29, ​ ​ ​ ​ 2022 ​ ​ 2021 ​ ​ 2019 ​ ​ ​ ​ (in thousands, except percentages) ​ Net revenue ​ 100 % ​ 100 % ​ 100 % 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) % ​ — % ​ Comparisons for the Fiscal Years Ended January 2, 2022 and January 3, 2021 Net Revenue ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended Change ​ ​ January 2, ​ January 3, ​ ​ ​ ​ ​ ​ ​ ​ 2022 2021 ​ Amount % ​ ​ ​ (in thousands, except percentages) ​ Net revenue ​ $ 375,625 ​ $ 248,656 ​ $ 126,969 ​ 51.1 % ​ Net revenue increased in 2021 by $127.0 million, or 51.1%, compared to 2020.
Biggest changeOur Results of Operations The following tables set forth our consolidated results of operations for the years presented and as a percentage of net revenue: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Percentage Change ​ ​ ​ ​ ​ 2022 ​ 2021 ​ 2022 VS 2021 ​ 2020 ​ ​ (in thousands) Net revenue $ 439,652 ​ $ 375,625 17 % ​ $ 248,656 Cost of revenue ​ 248,206 ​ 198,893 ​ 25 ​ 138,364 Gross profit ​ 191,446 ​ 176,732 ​ 8 ​ 110,292 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Selling and marketing expenses ​ 83,559 ​ 66,684 ​ 25 ​ 47,812 General and administrative expenses ​ 99,148 ​ 87,710 ​ 13 ​ 67,155 Income (loss) from operations ​ 8,739 ​ 22,338 ​ (61) ​ (4,675) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other income (expense), net: ​ ​ ​ ​ ​ ​ Interest expense ​ (1,103) ​ (12,774) ​ (91) ​ (16,037) Loss on extinguishment of debt ​ ​ — ​ ​ (1,392) ​ (100) ​ ​ ​ — Other income, net ​ 136 ​ 85 ​ 60 ​ 137 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total other expense, net ​ (967) ​ (14,081) ​ (93) ​ (15,900) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Income (loss) before income taxes ​ 7,772 ​ 8,257 ​ (6) ​ (20,575) Income tax (provision) benefit ​ (4,047) ​ (6,212) ​ (35) ​ 1,271 Net income (loss) ​ $ 3,725 ​ $ 2,045 ​ 82 % ​ $ (19,304) ​ ​ 61 Table of Contents ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 2022 ​ 2021 ​ 2020 ​ Net revenue ​ 100 % ​ 100 % ​ 100 % Cost of revenue ​ 56 ​ ​ 53 ​ 56 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Gross profit ​ 44 ​ ​ 47 ​ 44 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Selling and marketing expenses ​ 19 ​ ​ 18 ​ 19 ​ General and administrative expenses ​ 23 ​ ​ 23 ​ 27 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Income (loss) from operations ​ 2 ​ ​ 6 ​ (2) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other income (expense), net: ​ ​ ​ ​ ​ ​ ​ ​ Interest expense ​ — ​ ​ (3) ​ (6) ​ Loss on extinguishment of debt ​ ​ — ​ ​ — ​ — ​ Other income, net ​ — ​ ​ — ​ — ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total other expense, net ​ — ​ ​ (3) ​ (6) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Income (loss) before income taxes ​ 2 ​ ​ 3 ​ (8) ​ Income tax (provision) benefit ​ (1) ​ ​ (2) ​ — ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net income (loss) ​ ​ 1 % ​ 1 % ​ (8) % ​ Comparisons for the Fiscal Years Ended January 1, 2023 and January 2, 2022 Net Revenue Net revenue increased in 2022 by $64.0 million, or 17%, compared to 2021.
All outstanding management fees were settled and the management agreement was terminated at the time of the Company’s IPO. (2) Represents the write-off of offering costs deferred during 2019 upon abandonment of a prior offering in 2020.
All outstanding management fees were settled and the management agreement was terminated at the time of the Company’s IPO in 2021. (2) Represents the write-off of offering costs deferred during 2019 upon abandonment of a prior offering in 2020.
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.
Due to these limitations, Adjusted EBITDA, Adjusted EBITDA margin, and Net Debt 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.
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”).
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”, “Adjusted EBITDA Margin” and “Net Debt” which are non-GAAP financial measures (collectively referred to as “Adjusted EBITDA”).
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.
For information on our New Revolving Facility, see Note 5, Debt , and for information on our contractual obligations for operating leases, see Note 6, Leases , of the accompanying notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
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.
We do this by using data coupled with human insight to deliver a curated and continuously evolving broad assortment of on-trend, affordable luxury fashion for many of life’s moments. Our customer obsession sets the tone for everything we do, from our personalized online shopping experience to our exceptional customer service.
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 that compliance with the Sarbanes-Oxley Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as 60 Table of Contents 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 consider 56 Table of Contents 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 consider 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 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.
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. Determining the grant date fair value of options using the Black-Scholes option pricing model requires us to make assumptions and judgments.
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 57 Table of Contents legislation, state and local income taxes, the impact of permanent tax adjustments, tax audit settlements, and the interaction of various tax strategies.
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 legislation, state and local income taxes, the impact of permanent tax adjustments, and the interaction of various tax strategies.
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, ​ ​ 2022 ​ 2021 ​ 2019 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Gross Margin ​ 47.1 % ​ 44.4 % 43.6 % Net income (loss) ​ $ 2,045 ​ $ (19,304) ​ $ (469) ​ Adjusted EBITDA (1) ​ $ 41,406 ​ $ 18,911 ​ $ 21,021 ​ Adjusted EBITDA Margin (1) ​ 11.0 % 7.6 % 5.7 % Active Customers (2) ​ 2,760 ​ 2,000 ​ 2,880 ​ Average Order Value ​ $ 120 ​ $ 106 ​ $ 110 ​ (1) For a reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measure and why we consider them useful, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures.” (2) Active Customers count is based on de-duplication logic using customer account and guest checkout name, address, and email information.
The following table sets forth our key performance indicators for the periods presented (in thousands, except for percentages and Average Order Value). ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 2022 2021 2020 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Gross Margin 43.5 % ​ 47.1 % ​ 44.4 % Net income (loss) ​ $ 3,725 ​ $ 2,045 ​ $ (19,304) ​ Adjusted EBITDA (1) ​ $ 29,096 ​ $ 41,406 ​ $ 18,911 ​ Adjusted EBITDA Margin (1) ​ 6.6 % 11.0 % 7.6 % Active Customers (2) ​ ​ 3,223 ​ ​ 2,760 ​ ​ 2,000 Average Order Value ​ $ 131 ​ $ 120 ​ $ 106 ​ (1) For a reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measure and why we consider them useful, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures.” (2) Active Customers count is based on de-duplication logic using customer account and guest checkout name, address, and email information.
Some of these limitations include: ​ ● Adjusted EBITDA does not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments; ● Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; ● Adjusted EBITDA does not reflect the interest expense, or the cash requirements necessary to service interest or principal payments on our debt; ● Adjusted EBITDA does not reflect our tax expense or the cash requirements to pay our taxes; ● although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future and such measures do not reflect any cash requirements for such replacements; and ● other companies in our industry may calculate such measures differently than we do, limiting their usefulness as comparative measures.
Some of these limitations include: ​ ● Adjusted EBITDA does not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments; ● Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; ● Adjusted EBITDA does not reflect the interest expense, or the cash requirements necessary to service interest or principal payments on our debt; ● Adjusted EBITDA does not reflect our tax expense or the cash requirements to pay our taxes; ● although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future and such measures do not reflect any cash requirements for such replacements; ● Net Debt subtracts cash and cash equivalents and therefore may imply that there is less Company debt than the most comparable GAAP measure indicates; and ● other companies in our industry may calculate such measures differently than we do, limiting their usefulness as comparative measures.
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.
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, AOV, product assortment and availability, and marketing and promotional activities.
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.
During the trailing twelve months ended January 1, 2023, we served 3.2 million Active Customers compared to 2.8 million for the trailing 12 months ended January 2, 2022. Inventory Management We utilize a data-driven strategy that leverages our proprietary reorder algorithm to manage inventory as efficiently as possible.
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.
General and administrative expenses are primarily driven by increases in headcount required to support business growth and meeting our obligations as a public company. Since our IPO, we have incurred significant legal, accounting, and other expenses that we did not incur as a private company.
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.
For stock option awards, we apply the Black-Scholes option pricing model to determine the fair value. 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.
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.
Financing Activities Financing activities consist primarily of borrowings and repayments related to our New Revolving Facility and Credit Facility, and issuance of common and preferred stock. In 2022, net cash used in financing activities was $2.8 million, which was a decrease of $24.9 million from $27.7 million of net cash used in financing activities in 2021.
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.
Our corporate banking relationship is with Bank of America. 63 Table of Contents 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.
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.
Each of the normal recurring adjustments and other adjustments described in this paragraph and in the following reconciliation table 57 Table of Contents help management with a measure of our core operating performance over time by removing items that are not related to day-to-day operations.
A reconciliation of non-GAAP Net Debt as of January 2, 2022 and January 3, 2021 is as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ As of ​ January 2, 2022 January 3, 2021 ​ ​ (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) Cash and cash equivalents ​ ​ 11,402 ​ ​ 15,554 Net Debt ​ $ (13,598) ​ $ (100,007) ​ 55 Table of Contents 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.
A reconciliation of non-GAAP Net Debt as of January 1, 2023 and January 2, 2022 is as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ As of ​ January 1, 2023 ​ ​ January 2, 2022 ​ ​ (in thousands) Revolving line of credit, long term ​ $ (25,000) ​ $ (25,000) Cash and cash equivalents ​ ​ 10,219 ​ ​ 11,402 Net Debt ​ $ (14,781) ​ $ (13,598) ​ 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.
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.
As of January 1, 2023, we had $25.0 million outstanding under the New Revolving Facility and had utilized $0.3 million under the Letter of Credit. As of January 1, 2023 , we had $24.7 million available for borrowing under the New Revolving Facility and $7.2 million available to issue letters of credit.
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. ​ 53 Table of Contents The following table provides a reconciliation for Adjusted EBITDA and Adjusted EBITDA margin: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended ​ ​ January 2, ​ January 3, ​ December 29, ​ ​ 2022 ​ 2021 ​ 2019 ​ ​ (in thousands) Net income (loss) $ 2,045 $ (19,304) $ (469) ​ Depreciation and amortization ​ 2,828 ​ 3,216 ​ 3,041 ​ Interest expense ​ 12,774 ​ 16,037 ​ 15,206 ​ Loss on extinguishment of debt ​ ​ 1,392 ​ ​ — ​ ​ — ​ Income tax provision (benefit) ​ 6,212 ​ (1,271) ​ 445 ​ Management fees (1) ​ 534 ​ 626 ​ 758 ​ Write-off of previously capitalized transaction fees (2) ​ ​ — ​ ​ 1,950 ​ ​ — ​ Transaction fees (3) ​ ​ 476 ​ ​ — ​ ​ — ​ Equity-based compensation expense (4) ​ 13,664 ​ 9,086 ​ 2,040 ​ Equity-based compensation expense related to redeemable preferred stock issuance (5) ​ ​ 1,481 ​ ​ 8,571 ​ ​ — ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Adjusted EBITDA ​ $ 41,406 ​ $ 18,911 ​ $ 21,021 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Adjusted EBITDA margin ​ 11.0 % 7.6 % 5.7 % (1) Represents management fees and expenses paid pursuant to the professional services agreement with H.I.G. and IVP for consulting and other services.
The following table provides a reconciliation for Adjusted EBITDA and Adjusted EBITDA margin: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 2022 ​ 2021 ​ 2020 ​ ​ (in thousands) Net income (loss) ​ $ 3,725 ​ $ 2,045 ​ $ (19,304) ​ Depreciation and amortization ​ 4,134 ​ ​ 2,828 ​ ​ 3,216 ​ Interest expense ​ 1,103 ​ ​ 12,774 ​ ​ 16,037 ​ Loss on extinguishment of debt ​ ​ — ​ ​ ​ 1,392 ​ ​ ​ — ​ Income tax provision (benefit) ​ 4,047 ​ ​ 6,212 ​ ​ (1,271) ​ Management fees (1) ​ — ​ ​ 534 ​ ​ 626 ​ Write-off of previously capitalized transaction fees (2) ​ ​ — ​ ​ ​ — ​ ​ ​ 1,950 ​ Transaction fees (3) ​ ​ — ​ ​ ​ 476 ​ ​ ​ — ​ Equity-based compensation expense (4) ​ 16,087 ​ ​ 13,664 ​ ​ 9,086 ​ Equity-based compensation expense related to redeemable preferred stock issuance (5) ​ ​ — ​ ​ ​ 1,481 ​ ​ ​ 8,571 ​ Adjusted EBITDA ​ $ 29,096 ​ ​ $ 41,406 ​ ​ $ 18,911 ​ Adjusted EBITDA Margin ​ 6.6 % ​ 11.0 % ​ 7.6 % (1) Represents management fees and expenses paid pursuant to the professional services agreement with H.I.G. and IVP for consulting and other services.
(3) Represents costs related primarily to marketing and presentations for the investment community, as well as travel and other miscellaneous costs incurred as a result of the Company’s IPO. (4) Represents equity-based compensation expense related to modifications and vesting of Class P unit awards.
(3) Represents costs related primarily to marketing and presentations for the investment community, as well as travel and other miscellaneous costs incurred as a result of the Company’s IPO.
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.
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.
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.
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.
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. 52 Table of Contents Non-GAAP Financial Measures We report our financial results in accordance with generally accepted accounting principles in the U.S. (“GAAP”).
As a result, the reporting of our gross profit and Gross Margin may not be comparable to other companies. Non-GAAP Financial Measures We report our financial results in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
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.
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 59 Table of Contents bar for approval of any capital spending initiative.
Cash Flow Analysis The following table summarizes our cash flows for the periods indicated: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended ​ ​ January 2, ​ January 3, ​ ​ December 29, ​ ​ 2022 2021 ​ ​ 2019 ​ ​ (in thousands) ​ ​ ​ Net cash (used in) provided by: ​ ​ ​ ​ ​ ​ ​ ​ ​ Operating activities ​ $ 26,896 ​ $ 4,856 ​ $ 11,874 Investing activities ​ ​ (3,394) ​ ​ (1,913) ​ ​ (4,042) Financing activities ​ ​ (27,653) ​ ​ 6,755 ​ ​ (9,721) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net increase (decrease) in cash and cash equivalents ​ $ (4,151) ​ $ 9,698 ​ $ (1,889) ​ 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.
Cash Flow Analysis The following table summarizes our cash flows for the periods indicated: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 2022 2021 2020 ​ ​ ​ ​ ​ (in thousands) Net cash provided by (used in): ​ ​ ​ ​ ​ ​ ​ ​ ​ Operating activities ​ $ 6,199 ​ $ 26,896 ​ $ 4,856 Investing activities ​ ​ (5,123) ​ ​ (3,394) ​ ​ (1,913) Financing activities ​ ​ (2,765) ​ ​ (27,653) ​ ​ 6,755 Net (decrease) increase in cash, cash equivalents and restricted cash ​ $ (1,689) ​ $ (4,151) ​ $ 9,698 ​ Operating Activities During 2022, net cash provided by operating activities was $6.2 million after net income of $3.7 million was adjusted for certain non-cash items, including depreciation and amortization, non-cash lease expense, amortization of debt discount and debt issuance costs, equity-based compensation, deferred taxes and the effect of changes in working capital and other activities.
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.
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.
The year ended January 2, 2022 also includes equity-based compensation expense for stock options and special compensation awards granted during the year. (5) Represents the excess of fair value over the consideration paid for Series B Preferred Stock that was issued to an employee, H.I.G., and IVP in June 2020.
(5) Represents the excess of fair value over the consideration paid for Series B Preferred Stock that was issued to an employee, H.I.G., and IVP in June 2020.
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 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.
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.
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.
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.
In addition, the Credit Agreement may be used to issue letters of credit up to $7.5 million (the “Letter of Credit”). During 2022, we borrowed $30 .0 million under the New Revolving Facility and repaid $ 30.0 million of the outstanding balance.
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.
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.
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.
In addition, merchant processing fees increased by $2.7 million in 2022 compared to the same period of the prior year largely due to the increase in net revenue coupled with higher merchant fee rates. General and Administrative Expenses General and administrative expenses increased by $11.4 million in 2022, or 13%, compared to 2021.
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.
Equity-based compensation expense is recognized on a straight-line basis over the period the employee or non-employee is required to provide service in exchange for the award, which is generally the vesting period. We recognize forfeitures as they occur. Under an employment agreement entered into with Mr.
The effective rate differs from the statutory rate primarily due to non-deductible equity-based compensation expenses and state taxes.
Other Income (Expense), Net Other income (expense), net consists primarily of interest expense and other miscellaneous income. (Provision) Benefit for Income Taxes The (provision) benefit 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.
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.
As we continue to optimize our distribution capabilities and gain more negotiation leverage with suppliers as we scale, 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.
In addition, represents the excess of fair value over the consideration paid for Series B-1 Preferred Stock that was issued to certain employees in March 2021.
In addition, represents the excess of fair value over the consideration paid for Series B-1 Preferred Stock that was issued to certain employees in March 2021. 58 Table of Contents Net Debt ​ We define Net Debt as total debt, which includes short-term borrowings and long-term obligations, less cash and cash equivalents.
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.
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.
In 2021, net cash provided by operating activities increased $22.0 million from $4.9 million in 2020 to $26.9 million in 2021.
In 2022, net cash provided by operating activities decreased $20.7 million from $26.9 million in 2021 to $6.2 million in 2022.
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 increase in revenue was primarily due to 17% increase in Active Customers, 16% increase in Total Orders Placed and 9% increase in Average Order Value. The higher revenue was partially offset by higher sales returns, markdowns and promotional discounts compared to 2021.
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.
The changes in cash provided was primarily driven by an increase of $1.7 million due to an increase in net income from $2.0 million in 2021 to net income of $3.7 million in 2022, a decrease of $29.5 million related to changes in our operating assets and liabilities and an increase of $7.1 million of non-cash items .
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.
Overview Lulus is a customer-driven, digitally-native fashion brand primarily serving a large, diverse community of Millennial and Gen Z women, who typically meet us in their 20s and stay with us through their 30s and beyond. We focus relentlessly on giving our customers what they want.
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.” 51 Table of Contents Key Operating and Financial Metrics We collect and analyze operating and financial data to assess the performance of our business and optimize resource allocation.
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.” ​ ​ ​ 55 Table of Contents 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.
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.
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. 65 Table of Contents 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.
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 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.
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.
This was primarily driven by $3.8 million less payments in interest capitalized to principal of long term debt and revolving line of credit, $3.4 million increase in deferred income taxes, $3.3 million increase in non-cash lease expense as a result of the adoption of Financial Accounting Standards Board Accounting Standards Codification 842, Leases (“ASC 842”) in 2022, $1.3 million increase in depreciation and amortization and an increase of $0.9 million in non-cash equity-based compensation expenses due to increase in non-cash equity-based compensation expense including employee and Executive Chairman equity-based compensation grants, which were partially offset by reductions in equity-based compensation expense related to CEO special compensation awards and redeemable preferred stock issuance.
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.
The increase was primarily due to a $3.3 million increase in variable labor costs, which increased by 15% from 2021 to 2022 and was in line with our increase in net revenue. Additionally, fixed labor costs increased by $2.0 million primarily due to higher base wages and health insurance which were partially offset by lower bonus expenses.
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.
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. ​ Leases On January 3, 2022, we adopted ASC 842.
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.
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.
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.
We consider Total Orders Placed as a key performance metric on the 56 Table of Contents 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.
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.
This decrease was attributable primarily to a reduction of $110.1 million in repayments of long-term debt and debt issuance cost and a reduction of $16.5 million related to the net of redemption and issuance of redeemable preferred stock .
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 related to the opening of our new distribution facility in Ontario, California, the relocation and opening of our new studio facility in Los Angeles, California, as well as equipment for our general operations, software and hardware purchases, and internally developed software .
Cost of Revenue ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended Change ​ ​ January 2, ​ January 3, ​ ​ ​ ​ ​ ​ ​ ​ 2022 2021 ​ Amount % ​ ​ ​ (in thousands, except percentages) ​ Cost of revenue ​ $ 198,893 ​ $ 138,364 ​ $ 60,529 ​ 43.7 % ​ Cost of revenue increased in 2021 by $60.5 million, or 43.7%, compared to 2020, consistent with the increase in our net revenue.
Cost of Revenue Cost of revenue increased in 2022 by $49.3 million, or 25%, compared to 2021, primarily due to the increase in our net revenue.
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.
Availability and Use of Cash As of January 1, 2023, we had cash and cash equivalents of $10.2 million and no restricted cash.
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.
In 2022, net cash used in investing activities was $5.1 million, which was a $1.7 million increase from $3.4 million in 2021.
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.
Selling and Marketing Expenses Selling and marketing expenses increased in 2022 by $16.9 million, or 25% compared to 2021. There was a $14.2 million increase in online marketing expenses to acquire new customers and retain existing customers compared to 2021.
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.
In fiscal year 2021, our business rebounded from the initial impact of the pandemic on consumer behavior, and we grew our net revenue by 51% compared to 2020. Our sales growth slowed in fiscal year 2022 due to heightened macro-economic pressures, resulting in a 17% growth in net revenue compared to 2021.
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.
Refer to Note 6, Leases , of the accompanying notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. ​ Equity-Based Compensation Equity-based compensation is measured at the grant date or modification date (“measurement date”) for all equity-based awards made to employees and nonemployees based on the estimated fair value of the awards.
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. ​ 60 Table of Contents Comparisons for the Fiscal Years Ended January 3, 2021 and December 29, 2019 Net Revenue ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended Change ​ ​ January 3, ​ December 29, ​ ​ ​ ​ ​ ​ ​ ​ 2021 2019 ​ Amount % ​ ​ ​ (in thousands, except percentages) ​ Net revenue ​ $ 248,656 ​ $ 369,622 ​ $ (120,966) ​ (32.7) % Net revenue decreased in 2020 by $121.0 million, or 33%, compared to 2019.
Income Tax Provision Our income tax provision in 2022 decreased by $2.2 million, or 35%, to $4.0 million, from $6.2 million in 2021. The decrease in the income tax provision was primarily due to an increase in non-deductible equity-based compensation expenses and non-deductible officer compensation.
Removed
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.
Added
Risk Factors” and other factors set forth in other parts of this Annual Report on Form 10-K.
Removed
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.
Added
Discussion of the year-to-year comparisons between 2021 and 2020 can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended January 2, 2022.
Removed
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.
Added
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.
Removed
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.
Added
However, we are still susceptible to broader COVID-19 risks globally, especially in relation to our supply chain.
Removed
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. ​ 54 Table of Contents 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 ​ January 2, 2022 January 3, 2021 ​ December 29, 2019 Net loss per share attributable to common stockholders – diluted $ (6.08) ​ $ (1.13) ​ $ (0.03) 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 ​ ​ — ​ ​ — Deemed contribution from redemption of redeemable preferred stock (4) ​ (0.07) ​ ​ — ​ ​ — Equity-based compensation expense related to award modifications (5) ​ — ​ ​ 0.48 ​ ​ — Equity-based compensation expense related to redeemable preferred stock issuance (6) ​ 0.07 ​ ​ 0.49 ​ ​ — Adjusted Diluted Earnings (Net Loss) per Share (7) $ 0.57 ​ $ (0.13) ​ $ (0.03) (1) Removes the impact of a one-time $123.0 million deemed dividend that was recorded at the time of our IPO related to the conversion of convertible preferred stock in 2021 and a $0.5 million deemed dividend in 2020.
Added
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.
Removed
The dilution associated with this transaction only impacted stockholders and management who held units in the LP prior to the IPO. (2) Removes the impact of a $3.5 million one-time stock dividend issued to the LP at the time of our IPO in 2021.
Added
We have modified our business practices in response to the COVID-19 pandemic and plan to continue to take proactive measures. ​ We expect ongoing volatility in these trends as the continued impact from COVID-19 remains uncertain.
Removed
(3) Removes the impact of $8.0 million of non-recurring stock compensation expenses triggered by our IPO in 2021. (4) Removes the impact of a $1.4 million deemed contribution resulting from the redemption of our redeemable preferred stock at the time of our IPO in 2021.
Added
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. Historically, our business model has resulted in strong growth.
Removed
(5) Removes the impact of $8.4 million of equity-based compensation expense related to modifications of Class P unit awards in 2020. (6) Removes the per share impact in 2020 of the excess of fair value over the consideration paid for Series B Preferred Stock that was issued to an employee, H.I.G., and IVP in June 2020.
Added
Key Operating and Financial Metrics We collect and analyze operating and financial data to assess the performance of our business and optimize resource allocation.
Removed
Removes the per share impact in 2021 of the excess of fair value over the consideration paid for Series B-1 Preferred Stock that was issued to certain employees in March 2021.
Added
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.
Removed
(7) These adjustments did not impact the weighted-average shares used to compute Adjusted Diluted Earnings (Net Loss) per Share as the impact from potentially dilutive securities would have been anti-dilutive. ​ Net Debt We define Net Debt as total debt, which includes short-term borrowings and long-term obligations, less cash and cash equivalents.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

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Biggest changeInflation 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.
Biggest changeWe 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.
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. ​ 67 Table of Contents 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.
Interest on any borrowings incurred pursuant to our New Revolving Facility accrue at a floating rate based on a 67 Table of Contents 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.
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. ​ 68 Table of Contents
Our inability or failure to do so could harm our business, financial condition and results of operations. ​ 68 Table of Contents
Added
Foreign Currency Risk All of our sales and operating expenses are denominated in U.S. dollars, and therefore, our net revenue is not currently subject to foreign currency risk. Inflation We have experienced inflationary pressures in our supply chain and in our operating costs, as well as impacts related to our customers’ spending levels, which fluctuate with inflation.

Other LVLU 10-K year-over-year comparisons