ACQUISITION

6 Months Ended

Aug. 02, 2020

On July 7, 2020, the Company acquired all of the outstanding shares of MIRROR, an in-home fitness company with an interactive workout platform that features live and on-demand classes. The results of operations, financial position, and cash flows of MIRROR have been included in the Company's consolidated financial statements since the date of acquisition.

The following table summarizes the fair value of the consideration transferred at the date of acquisition, as well as the calculation of goodwill based on the excess of consideration over the provisional fair value of net assets acquired. As part of the transaction, the Company assumed $30.1 million of MIRROR's outstanding debt. This included $15.1 million of external debt that was settled as part of the transaction and $15.0 million of debt previously owed by MIRROR to the Company, which

represents the effective settlement of a preexisting relationship. The debt was determined to be at market terms and was recognized as a component of the consideration transferred, and no gain or loss was recorded on settlement.


	July 7, 2020
	(in thousands)
Fair value of consideration transferred:
Cash paid to shareholders	$	428,261
Employee options attributed to pre-combination vesting	4,569
Acquired debt settled on acquisition	30,122
Fair value of existing lululemon investment	1,782
	464,734
Less cash and cash equivalents acquired	(12,153)
Fair value of consideration transferred, net of cash and cash equivalents acquired	$	452,581
Less net assets acquired:
Assets acquired:
Inventories	$	16,734
Prepaid expenses and other current assets	3,492
Intangible assets	85,000
Other non-current assets	5,648
	$	110,874
Liabilities assumed:
Current liabilities	$	(13,465)
Current and non-current lease liabilities	(3,246)
Net deferred income tax liability	(4,074)
	$	(20,785)
Net assets acquired	$	90,089
Goodwill	$	362,492

The purchase price allocation remains provisional as the Company is still obtaining all information necessary to finalize the fair value of acquired intangibles, deferred taxes, certain contingencies, and resulting amount of goodwill as of the date of acquisition.

Goodwill relates to benefits expected as a result of the acquisition to MIRROR's business and has been allocated to the MIRROR reporting unit within the Company's other channels. None of the goodwill is expected to be deductible for income tax purposes.

The Company assigned a fair value to and estimated useful lives for the intangible assets acquired as part of the MIRROR business combination. The fair value of the separately identifiable intangible assets, and their estimated useful lives as of the acquisition date were as follows:

Estimated Fair Value

Estimated Useful Life

(In thousands)

Intangible assets:

Brand

26,500

20.0 years

Customer relationships

28,000

10.0 years

Technology

25,500

7.5 years

Content

5,000

5.0 years

85,000

Accounting for business combinations requires significant estimates and assumptions to derive the fair value of acquired assets and liabilities, and in the case of MIRROR, this is with specific reference to acquired intangible assets. The fair value of intangible assets was based upon widely-accepted valuation techniques, including discounted cash flows and relief from royalty and replacement cost methods, depending on the nature of the assets acquired or liabilities assumed. Inherent in each valuation technique are critical assumptions, including future revenue growth rates, gross margin, royalty rates, discount rates, and terminal value assumptions. The recognition of deferred tax assets in relation to the historic net operating losses of MIRROR relied on assumptions and estimates of the future profitability of the Company's US operations.

The Company has not disclosed pro forma information of the combined business as the transaction is not material to revenue or net earnings.

Acquisition-related expenses

In connection with the acquisition, the Company recognized certain acquisition-related expenses which are expensed as incurred. These expenses are recognized within acquisition-related expenses in the consolidated statements of operations include the following amounts:

•transaction and integration costs, including fees for advisory and professional services incurred as part of the acquisition and integration costs subsequent to the acquisition;

•acquisition-related compensation, including the partial acceleration of vesting of certain stock options, and amounts due to selling shareholders that are contingent upon continuing employment; and

•gain recognized on the Company's existing investment in the acquiree as of the acquisition date.

The following table summarizes the acquisition-related expenses recognized during fiscal 2020:


	Quarter Ended August 2, 2020		Two Quarters Ended August 2, 2020
	(in thousands)
Acquisition-related expenses:
Transaction and integration costs	$	7,201	$	9,246
Gain on existing investment	(782)		(782)
Acquisition-related compensation	5,045		5,045
	$	11,464	$	13,509

Income tax effects of acquisition-related expenses	$	(1,967)	$	(1,967)

In the first two quarters of fiscal 2020, the Company recognized an expense of $2.9 million for the partial acceleration of vesting of certain stock options held by MIRROR employees, and recognized $2.1 million related to deferred consideration.

The Company will recognize a total expense of $57.1 million for deferred consideration which is due to certain continuing MIRROR employees, subject to the continued employment of those individuals through various vesting dates up to three years from the acquisition date. This acquisition-related compensation is expensed over the vesting periods as service is provided, and consists of cash payments, which are included within accrued compensation and related expenses until payments are made, and stock-based compensation awards that have been granted under the Company's 2014 Equity Incentive Plan to replace certain unvested options as of the acquisition date.