10-Q 1 rvlv-20230930.htm 10-Q 10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

(Mark One)

 

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

 

For the quarterly period ended September 30, 2023

or

 

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

 

For the transition period from to .

Commission File Number: 001-38927

 

REVOLVE GROUP, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

46-1640160

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

12889 Moore Street

Cerritos, California 90703

(Address of principal executive offices) (Zip code)

(562) 677-9480

(Registrant’s telephone number, including area code)

 

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

 

Title of each class:

 

Trading Symbol(s):

 

Name of each exchange on which registered:

Class A Common Stock, par value $0.001 per share

 

RVLV

 

New York Stock Exchange

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

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

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

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

 

 

 

Emerging growth company

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

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

As of October 25, 2023, 39,556,715 shares of the registrant’s Class A common stock and 32,597,119 shares of the registrant’s Class B common stock were outstanding.

 

 


REVOLVE GROUP, INC. AND SUBSIDIARIES

 

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION

 

 

 

Item 1. Financial Statements (Unaudited)

 

7

 

 

 

Condensed Consolidated Balance Sheets

 

7

 

 

 

Condensed Consolidated Statements of Income

 

8

 

 

 

Condensed Consolidated Statements of Comprehensive Income

 

9

 

 

 

Condensed Consolidated Statements of Cash Flows

 

10

 

 

 

Notes to the Condensed Consolidated Financial Statements

 

11

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

21

 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

38

 

 

 

Item 4. Controls and Procedures

 

39

 

 

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

Item 1. Legal Proceedings

 

40

 

 

 

Item 1A. Risk Factors

 

40

 

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

75

 

 

 

Item 3. Defaults Upon Senior Securities

 

76

 

 

 

Item 4. Mine Safety Disclosures

 

76

 

 

 

Item 5. Other Information

 

76

 

 

 

Item 6. Exhibits

 

77

 

 

 

Signatures

 

78

 

 


 

SUMMARY RISK FACTORS

Our business is subject to numerous risks and uncertainties, including those highlighted in the section of this report titled “Risk Factors.” The following is a summary of the principal risks we face:

Economic downturns and other macroeconomic conditions or trends may adversely affect consumer discretionary spending and our business, operating results and financial condition.
If we fail to effectively manage our growth, our business, financial condition and operating results could be harmed.
We purchase inventory in anticipation of sales, and if we are unable to manage our inventory effectively, our operating results could be adversely affected.
Merchandise returns could harm our business.
If we are unable to anticipate and respond to changing customer preferences and shifts in fashion and industry trends in a timely and cost-effective manner, our business, financial condition and operating results could be harmed.
Our business depends on our ability to maintain a strong community of brands, engaged customers and influencers. We may not be able to maintain and enhance our existing brand community if we receive customer or influencer complaints, negative publicity or otherwise fail to live up to consumers’ expectations, which could materially adversely affect our business, operating results and growth prospects.
Use of social media and influencers may materially and adversely affect our reputation or subject us to regulatory and tax obligations, fines or other penalties.
If we fail to acquire new customers, or fail to do so in a cost-effective manner, our financial results may be materially adversely impacted.
If we fail to retain existing customers, or fail to maintain average order value levels, we may not be able to maintain our revenue base and margins, which would have a material adverse effect on our business and operating results.
Our business, including our costs and supply chain, is subject to risks associated with sourcing, manufacturing and warehousing.
We rely on third-party suppliers, manufacturers, distributors and other vendors 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.
Shipping is a critical part of our business and any changes in our shipping arrangements or any interruptions in shipping could adversely affect our operating results.
Our industry is highly competitive and if we do not compete effectively, our operating results could be adversely affected.
Our quarterly operating results may fluctuate, which could cause our stock price to decline.
We may be unable to accurately forecast net sales and appropriately plan our expenses in the future.
Our past growth rates are not indicative of expected results in the near term.
If we do not successfully optimize, operate and manage the expansion of capacity of our fulfillment centers, our business, financial condition and operating results could be harmed.
Our failure to adequately and effectively staff our fulfillment centers, through third parties or with our own employees, could adversely affect our customer experience and operating results.
Increases in labor costs, including wages, could adversely affect our business, financial condition and results of operations.

5


 

The COVID-19 pandemic materially adversely affected, and may in the future adversely affect, our business, financial position, results of operations and growth prospects.
Failure to comply with federal, state and international laws and regulations and our contractual obligations relating to privacy, data protection and consumer protection, or the expansion of current or the enactment of new laws or regulations relating to privacy, data protection and consumer protection, could harm our reputation or adversely affect our business and our financial condition.
We have operations and do business in China, which exposes us to risks inherent in doing business there.
We are exposed to fluctuations in currency exchange rates, which could negatively affect our operating results.
Our use of artificial intelligence and machine learning could adversely affect our business and operating results.
If we cannot successfully protect our intellectual property, our business would suffer.
We have in the past and may in the future be accused of infringing intellectual property or other proprietary rights of third parties.
The dual class structure of our common stock concentrates voting control with our executive officers, directors and their affiliates, which may depress the trading price of our Class A common stock.

Our risk factors are not guarantees that no such conditions exist as of the date of this report and should not be interpreted as an affirmative statement that such risks or conditions have not materialized, in whole or in part.

6


 

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

REVOLVE GROUP, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share and per share data)

 

 

 

September 30,

 

 

December 31,

 

 

 

2023

 

 

2022

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

266,899

 

 

$

234,724

 

Accounts receivable, net

 

 

12,614

 

 

 

5,421

 

Inventory

 

 

202,877

 

 

 

215,224

 

Income taxes receivable

 

 

7,555

 

 

 

2,974

 

Prepaid expenses and other current assets

 

 

63,578

 

 

 

59,874

 

Total current assets

 

 

553,523

 

 

 

518,217

 

Property and equipment (net of accumulated depreciation of $16,697 and $13,081 as of
   September 30, 2023 and December 31, 2022, respectively)

 

 

8,062

 

 

 

8,934

 

Right-of-use lease assets

 

 

38,041

 

 

 

22,964

 

Intangible assets, net

 

 

1,834

 

 

 

1,600

 

Goodwill

 

 

2,042

 

 

 

2,042

 

Other assets

 

 

1,241

 

 

 

807

 

Deferred income taxes

 

 

24,754

 

 

 

24,754

 

Total assets

 

$

629,497

 

 

$

579,318

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

44,479

 

 

$

50,789

 

Income taxes payable

 

 

1,435

 

 

 

229

 

Accrued expenses

 

 

42,639

 

 

 

38,266

 

Returns reserve

 

 

72,137

 

 

 

63,381

 

Current lease liabilities

 

 

6,249

 

 

 

5,844

 

Other current liabilities

 

 

30,465

 

 

 

22,577

 

Total current liabilities

 

 

197,404

 

 

 

181,086

 

Non-current lease liabilities

 

 

35,567

 

 

 

18,659

 

Total liabilities

 

 

232,971

 

 

 

199,745

 

Stockholders’ equity:

 

 

 

 

 

 

Class A common stock, $0.001 par value; 1,000,000,000 shares authorized as of
   September 30, 2023 and December 31, 2022;
39,979,289 and 40,766,510 shares
   issued and outstanding as of September 30, 2023 and December 31, 2022,
   respectively

 

 

40

 

 

 

41

 

Class B common stock, $0.001 par value; 125,000,000 shares authorized as of
   September 30, 2023 and December 31, 2022;
32,597,119 and 32,597,119 shares
   issued and outstanding as of September 30, 2023 and December 31, 2022,
   respectively

 

 

33

 

 

 

33

 

Additional paid-in capital

 

 

115,053

 

 

 

110,338

 

Retained earnings

 

 

281,400

 

 

 

269,161

 

Total stockholders’ equity

 

 

396,526

 

 

 

379,573

 

Total liabilities and stockholders’ equity

 

$

629,497

 

 

$

579,318

 

 

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

7


 

REVOLVE GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except per share data)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Net sales

 

$

257,603

 

 

$

268,711

 

 

$

810,941

 

 

$

842,263

 

Cost of sales

 

 

124,371

 

 

 

126,329

 

 

 

390,791

 

 

 

383,228

 

Gross profit

 

 

133,232

 

 

 

142,382

 

 

 

420,150

 

 

 

459,035

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Fulfillment

 

 

9,185

 

 

 

8,072

 

 

 

27,657

 

 

 

23,272

 

Selling and distribution

 

 

48,925

 

 

 

46,477

 

 

 

151,276

 

 

 

145,030

 

Marketing

 

 

39,581

 

 

 

44,584

 

 

 

129,421

 

 

 

141,755

 

General and administrative

 

 

35,217

 

 

 

28,498

 

 

 

91,861

 

 

 

86,497

 

Total operating expenses

 

 

132,908

 

 

 

127,631

 

 

 

400,215

 

 

 

396,554

 

Income from operations

 

 

324

 

 

 

14,751

 

 

 

19,935

 

 

 

62,481

 

Other income, net

 

 

(3,984

)

 

 

(1,440

)

 

 

(12,950

)

 

 

(3,769

)

Income before income taxes

 

 

4,308

 

 

 

16,191

 

 

 

32,885

 

 

 

66,250

 

Provision for income taxes

 

 

1,130

 

 

 

4,203

 

 

 

8,232

 

 

 

15,421

 

Net income

 

$

3,178

 

 

$

11,988

 

 

$

24,653

 

 

$

50,829

 

Earnings per share of Class A and Class B
   common stock:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.04

 

 

$

0.16

 

 

$

0.34

 

 

$

0.69

 

Diluted

 

$

0.04

 

 

$

0.16

 

 

$

0.33

 

 

$

0.68

 

Weighted average number of shares of Class A and
   Class B common stock outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

73,262

 

 

 

73,328

 

 

 

73,358

 

 

 

73,302

 

Diluted

 

 

73,716

 

 

 

74,354

 

 

 

74,058

 

 

 

74,598

 

 

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

8


 

REVOLVE GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Net income

 

$

3,178

 

 

$

11,988

 

 

$

24,653

 

 

$

50,829

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative translation adjustment

 

 

(1,414

)

 

 

(2,556

)

 

 

169

 

 

 

(5,452

)

Total other comprehensive (loss) income

 

 

(1,414

)

 

 

(2,556

)

 

 

169

 

 

 

(5,452

)

Total comprehensive income

 

$

1,764

 

 

$

9,432

 

 

$

24,822

 

 

$

45,377

 

 

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

9


 

REVOLVE GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

 

Nine Months Ended September 30,

 

 

 

2023

 

 

2022

 

Operating activities:

 

 

 

 

 

 

Net income

 

$

24,653

 

 

$

50,829

 

Adjustments to reconcile net income to net cash provided by operating
   activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

3,752

 

 

 

3,519

 

Equity-based compensation

 

 

4,229

 

 

 

4,410

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

(7,193

)

 

 

(2,081

)

Inventories

 

 

12,347

 

 

 

(42,069

)

Income taxes receivable

 

 

(4,581

)

 

 

(758

)

Prepaid expenses and other current assets

 

 

(3,704

)

 

 

(16,989

)

Other assets

 

 

(434

)

 

 

(349

)

Accounts payable

 

 

(6,310

)

 

 

(1,156

)

Income taxes payable

 

 

1,206

 

 

 

439

 

Accrued expenses

 

 

4,373

 

 

 

10,592

 

Returns reserve

 

 

8,756

 

 

 

23,015

 

Right-of-use lease assets and current and non-current lease liabilities

 

 

2,236

 

 

 

825

 

Other current liabilities

 

 

7,888

 

 

 

4,224

 

Net cash provided by operating activities

 

 

47,218

 

 

 

34,451

 

Investing activities:

 

 

 

 

 

 

Purchases of property and equipment

 

 

(3,114

)

 

 

(3,904

)

Net cash used in investing activities

 

 

(3,114

)

 

 

(3,904

)

Financing activities:

 

 

 

 

 

 

Proceeds from the exercise of stock options, net

 

 

486

 

 

 

496

 

Repurchases of Class A common stock

 

 

(12,584

)

 

 

 

Net cash (used in) provided by financing activities

 

 

(12,098

)

 

 

496

 

Effect of exchange rate changes on cash and cash equivalents

 

 

169

 

 

 

(5,452

)

Net increase in cash and cash equivalents

 

 

32,175

 

 

 

25,591

 

Cash and cash equivalents, beginning of period

 

 

234,724

 

 

 

218,455

 

Cash and cash equivalents, end of period

 

$

266,899

 

 

$

244,046

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

Income taxes, net of refund

 

$

11,580

 

 

$

15,909

 

Operating leases

 

$

5,649

 

 

$

4,033

 

Supplemental disclosure of non-cash activities:

 

 

 

 

 

 

Lease assets obtained in exchange for new operating lease liabilities

 

$

20,452

 

 

$

21,938

 

 

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

10


 

REVOLVE GROUP, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1. Description of Business

Revolve Group, Inc., or REVOLVE, is an online retailer and fashion brand. Through our websites and mobile applications, we deliver an aspirational customer experience with a vast, yet curated, merchandise offering. Our dynamic platform connects a deeply engaged community of consumers, global fashion influencers, and emerging, established and owned brands. We are headquartered in Los Angeles County, California.

Note 2. Significant Accounting Policies

Basis of Presentation

Our unaudited condensed consolidated interim financial information has been prepared in accordance with Article 10 of Regulation S-X. As permitted under those rules, certain footnotes or other financial information that are normally required by generally accepted accounting principles, or GAAP, in the United States can be condensed or omitted. These financial statements have been prepared on the same basis as our annual audited financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for the fair statement of our financial information. These interim results are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2023 or for any other interim period or for any other future year. All intercompany transactions and balances have been eliminated in consolidation. Our fiscal year ends on December 31 of each year.

The accompanying unaudited condensed consolidated financial statements and related notes thereto should be read in conjunction with the audited consolidated financial statements and the related notes thereto for the fiscal year ended December 31, 2022 contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission, or the SEC, on February 23, 2023.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of net sales and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include: the allowance for sales returns, the valuation of deferred tax assets, inventory, equity‑based compensation, goodwill, and breakage of store credit and gift cards.

Net Sales

Revenue is primarily derived from the sale of apparel merchandise through our sites and, when applicable, shipping revenue. We recognize revenue through the following steps: (1) identification of the contract, or contracts, with the customer; (2) identification of the performance obligations in the contract; (3) determination of the transaction price; (4) allocation of the transaction price to the performance obligations in the contract; and (5) recognition of revenue when, or as, we satisfy a performance obligation. A contract is created with our customer at the time the order is placed by the customer, which creates a performance obligation to deliver the product to the customer. We recognize revenue for the performance obligation at the time control of the merchandise passes to the customer, which is at the time of shipment. In addition, we have elected to treat shipping and handling as fulfillment activities and not a separate performance obligation.

We have a Loyalty Club program within the REVOLVE and FWRD segments. Eligible customers who enroll in the program will generally earn points for every dollar spent and will automatically receive a $20 reward once they earn 2,000 points. We defer revenue based on an allocation of the price of the customer purchase and the estimated standalone selling price of the points earned. Revenue is recognized once the reward is redeemed or expires or once unconverted points expire. Rewards generally expire 90 days after they are issued and unconverted points generally

11


 

expire if a customer fails to engage in any activity that generates points for a period of one year or if their participation in the program is otherwise terminated.

In accordance with our policy on returns and exchanges, merchandise returns are generally accepted for full refund if returned within 60 days of the original purchase date and merchandise may be exchanged up to 90 days from the original purchase date. At the time of sale, we establish a reserve for merchandise returns, based on historical experience, merchandise mix and expected future returns, which is recorded as a reduction of sales. Accordingly, cost of sales is also reduced and an offsetting asset is recorded within prepaid expenses and other current assets for expected merchandise to be returned.

The following table presents a roll-forward of our sales return reserve for the three and nine months ended September 30, 2023 and 2022 (in thousands):

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Beginning balance

 

$

66,350

 

 

$

69,793

 

 

$

63,381

 

 

$

49,296

 

Returns

 

 

(369,241

)

 

 

(349,597

)

 

 

(1,149,770

)

 

 

(1,055,567

)

Provisions

 

 

375,028

 

 

 

352,115

 

 

 

1,158,526

 

 

 

1,078,582

 

Ending balance

 

$

72,137

 

 

$

72,311

 

 

$

72,137

 

 

$

72,311

 

 

We may also issue store credit in lieu of cash refunds and sell gift cards without expiration dates to our customers. Store credits issued and proceeds from the issuance of gift cards are recorded as deferred revenue and recognized as revenue when the store credit or gift cards are redeemed or upon inclusion in our store credit and gift card breakage estimates. Revenue recognized in net sales on breakage on store credit and gift cards was $0.8 million and $0.3 million for the three months ended September 30, 2023 and 2022, respectively, and $1.9 million and $1.2 million for the nine months ended September 30, 2023 and 2022, respectively.

Sales taxes and duties collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from net sales. We currently collect sales taxes in all states that have adopted laws imposing sales tax collection obligations on out-of-state retailers and are subject to audits by state governments of sales tax collection obligations on out-of-state retailers in jurisdictions where we do not currently collect sales taxes, whether for prior years or prospectively. No significant interest or penalties related to sales taxes are recognized in the accompanying condensed consolidated financial statements.

We have exposure to losses from fraudulent credit card charges. We record losses when incurred related to these fraudulent charges as amounts have historically been insignificant.

See Note 9, Segment Information, for disaggregation of net sales by reportable segment, by geographic area and by major product category.

Accounting Pronouncements Not Yet Effective

There have been no new accounting pronouncements not yet effective that have significance, or potential significance, to our consolidated financial statements.

Note 3. Line of Credit

On March 23, 2021, we amended and restated our existing credit agreement to, among other things, extend the expiration date from March 23, 2021 to March 23, 2026. On May 11, 2023, we amended the credit agreement to replace the LIBO reference rate with a term SOFR reference rate and made conforming changes throughout the credit agreement. The line of credit provides us with up to $75.0 million aggregate principal in revolver borrowings, based on eligible inventory and accounts receivable less reserves. Borrowings under the credit agreement accrue interest, at our option, at (1) a base rate equal to the highest of (a) the federal funds rate, plus 0.50%, (b) the prime rate and (c) an adjusted term SOFR rate determined on the basis of a one-month interest period, plus 1.00%, or (2) an adjusted term SOFR rate, subject to a floor of 0.00%, in each case, plus a margin ranging from 0.25% to 0.75% per year in the case

12


 

of base rate loans, and 1.25% to 1.75% per year in the case of term SOFR rate loans. No borrowings were outstanding as of September 30, 2023 and December 31, 2022.

We are also obligated to pay other customary fees for a credit facility of this size and type, including an unused commitment fee. The credit agreement also permits us, in certain circumstances, to request an increase in the facility by an additional amount of up to $25.0 million (in an initial minimum amount of $10.0 million and in increments of $5.0 million thereafter) at the same maturity, pricing and other terms. Our obligations under the credit agreement are secured by substantially all of our assets. The credit agreement also contains customary covenants restricting certain of our activities and we are prohibited from paying cash dividends with respect to our capital stock. We were in compliance with all financial covenants as of September 30, 2023 and December 31, 2022.

Note 4. Equity-based Compensation

In 2013, Twist Holdings, LLC, or Twist, and Advance Holdings, LLC, or Advance, which became Revolve Group, Inc., adopted equity incentive plans, which we refer to collectively as the 2013 Plan, pursuant to which the board of managers could grant options to purchase Class A units to officers and employees. Options could be granted with an exercise price equal to or greater than the unit’s fair value at the date of grant. All issued awards have 10-year terms and generally vest and become fully exercisable annually over five years of service from the date of grant. Awards will become fully vested upon the sale of the Company. In March 2018, the 2013 Plan was amended to increase the maximum number of Class A units to 6,207,978.

In September 2018, our board of directors adopted the 2019 Equity Incentive Plan, or the 2019 Plan, which became effective in June 2019. Under the 2019 Plan, a total of 4,500,000 shares of our Class A common stock were reserved for issuance as options, stock appreciation rights, restricted stock, restricted stock units, or RSUs, performance units or performance shares. Upon the completion of our initial public offering, or IPO, the 2019 Plan replaced the 2013 Plan; however, the 2013 Plan will continue to govern the terms and conditions of the outstanding awards previously granted under that plan. The number of shares that will be available for issuance under our 2019 Plan also will increase annually on the first day of each year beginning in 2020, in an amount equal to the least of: (a) 6,900,000 shares, (b) 5% of the outstanding shares of all classes of our common stock as of the last day of the immediately preceding year and (c) such other amount as our board of directors may determine. All future grants going forward will be issued under the 2019 Plan. On January 1, 2021, 2022 and 2023, the number of shares available under the 2019 Plan was increased by 2.0 million shares, 3.7 million shares and 3.7 million shares, respectively. As of September 30, 2023, approximately 9.3 million shares of Class A common stock remain available for future issuance under the 2019 Plan.

Option activity for the nine months ended September 30, 2023 under the 2013 Plan and 2019 Plan is as follows:

 

 

 

Number of
Shares

 

 

Weighted
Average
Exercise Price

 

 

Weighted
Average
Remaining
Contractual
Term
(years)

 

 

Aggregate
Intrinsic
Value
(thousands)

 

Balance at January 1, 2023

 

 

2,596,718

 

 

$

17.60

 

 

 

7.0

 

 

$

23,408

 

Granted

 

 

2,644,196

 

 

 

13.95

 

 

 

9.8

 

 

 

 

Exercised

 

 

(98,383

)

 

 

7.08

 

 

 

 

 

 

 

Forfeited

 

 

(65,894

)

 

 

28.48

 

 

 

 

 

 

 

Expired

 

 

(12,516

)

 

 

28.23

 

 

 

 

 

 

 

Balance at September 30, 2023

 

 

5,064,121

 

 

 

15.73

 

 

 

8.2

 

 

 

7,210

 

Exercisable at September 30, 2023

 

 

1,387,093

 

 

 

14.01

 

 

 

5.6

 

 

 

3,704

 

Vested and expected to vest

 

 

3,537,836

 

 

 

16.89

 

 

 

7.4

 

 

 

6,355

 

 

13


 

RSU award activity for the nine months ended September 30, 2023 under the 2019 Plan is as follows:

 

 

 

Class A
Common
Stock

 

 

Weighted
Average
Grant Date
Fair Value

 

 

Weighted
Average
Remaining
Contractual
Term
(years)

 

 

Aggregate
Intrinsic
Value
(thousands)

 

Unvested at January 1, 2023

 

 

28,374

 

 

$

37.26

 

 

 

0.4

 

 

$

632

 

Granted (1)

 

 

134,206

 

 

 

25.48

 

 

 

0.4

 

 

 

 

Released

 

 

(30,125

)

 

 

33.47

 

 

 

 

 

 

 

Forfeited (2)

 

 

(88,985

)

 

 

28.68

 

 

 

 

 

 

 

Unvested at September 30, 2023

 

 

43,470

 

 

 

21.10

 

 

 

0.6

 

 

 

592

 

(1)
Includes an adjustment of 5,100 shares underlying performance-based RSU awards made during the nine months ended September 30, 2023. The vesting of such RSUs is based upon the Company’s current performance against predefined financial targets.
(2)
Includes an adjustment of (85,089) shares underlying performance-based RSU awards made during the nine months ended September 30, 2023. The vesting of such RSUs is based upon the Company’s current performance against predefined financial targets.

There were 2,108,795 options and no RSUs granted during the three months ended September 30, 2023 and 2,644,196 options and 129,106 RSUs granted during the nine months ended September 30, 2023. The weighted average grant-date fair value of options granted during the three and nine months ended September 30, 2023 was $6.82 and $7.26, respectively. The weighted average grant-date fair value of RSUs granted during the nine months ended September 30, 2023 was $16.52 per share.

As of September 30, 2023, there was $17.9 million of total unrecognized compensation cost related to unvested RSUs and time-based options granted under the 2013 Plan and 2019 Plan, which is expected to be recognized over a weighted average service period of 3.5 years.

2023 Performance Option Awards

On September 15, 2023, the Company granted an aggregate of 1,701,479 performance-based options to certain members of management with an exercise price of $13.05 and a grant-date fair value of $6.79, which we refer to as the 2023 Performance Option Awards. The 2023 Performance Option Awards are subject to multiple vesting tranches that vest upon achievement of certain predefined financial milestones. As of September 30, 2023, we had $1.2 million of total unrecognized stock-based compensation expense for the financial milestones that were considered probable of achievement, which will be recognized over a weighted-average period of 2.7 years. As of September 30, 2023, we had unrecognized stock-based compensation expense of $10.4 million for the operational milestones that were considered not probable of achievement. During the three and nine months ended September 30, 2023, we recorded stock-based compensation expense of $0.02 million related to the 2023 Performance Option Awards.

Equity‑based compensation cost included in general and administrative expense in the accompanying condensed consolidated statements of income amounted to $1.2 million and $1.5 million for the three months ended September 30, 2023 and 2022, respectively, and $4.2 million and $4.4 million for the nine months ended September 30, 2023 and 2022, respectively. There was no excess income tax benefit recognized during the three months ended September 30, 2023 and 2022. There was an excess income tax benefit of $0.2 million and $0.6 million recognized in the condensed consolidated statements of income for equity-based compensation arrangements for the nine months ended September 30, 2023 and 2022, respectively.

Note 5. Commitments and Contingencies

Contingencies

We record a loss contingency when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. We also disclose material contingencies when we believe a loss is not probable but reasonably possible. Accounting for contingencies requires us to use judgment related to both the likelihood of a loss and the estimate of the amount or range of loss. Although we cannot predict with assurance the outcome of any litigation or tax matters, we do not believe there are currently any such actions that, if resolved unfavorably, would have a material impact on our operating results, financial position and cash flows.

14


 

Indemnifications

In the ordinary course of business, we may provide indemnifications of varying scope and terms to vendors, directors, officers and other parties with respect to certain matters. We have not incurred any material costs as a result of such indemnifications and have not accrued any liabilities related to such obligations in our condensed consolidated financial statements.

Tax Contingencies

We are subject to income taxes in the United States and the U.K. Significant judgment is required in evaluating our tax positions and determining our provision for income taxes. During the ordinary course of business, there are transactions and calculations for which the ultimate tax determination is uncertain. We establish reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. These reserves are established when we believe that certain positions might be challenged despite our belief that our tax return positions are fully supportable. We adjust these reserves in light of changing facts and circumstances, such as the outcome of tax audits. Our provision for income taxes does not include any reserve provision because we believe that all of our tax positions are highly certain.

Legal Proceedings

In March 2022, we received a cease-and-desist letter alleging copyright infringement and related claims. During the year ended December 31, 2022, we accrued $6.3 million to general and administrative expenses for estimated losses and legal fees that we expected to incur in connection with these claims and during the three months ended March 31, 2023, we accrued an additional $0.3 million for estimated legal fees. On February 3, 2023, we entered into a final settlement agreement with the claimant and paid approximately $1.5 million in settlement costs and legal fees related to this matter, net of insurance proceeds. The related insurance proceeds of $5.1 million were recorded within other income, net in the accompanying statements of income.

In March 2023, we received a separate cease-and-desist letter alleging copyright infringement and related claims. This matter has not proceeded to litigation as of the date of this report. During the three and nine months ended September 30, 2023, we accrued $6.6 million and $6.7 million, respectively, to general and administrative expenses for estimated losses, legal fees and other costs that we expect to incur in connection with these claims. The accrual for estimated losses is based on currently available information and may change as new information becomes available or circumstances change.

Note 6. Income Taxes

The following table summarizes our effective tax rate for the periods presented (in thousands):

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Income before income taxes

 

$

4,308

 

 

$

16,191

 

 

$

32,885

 

 

$

66,250

 

Provision for income taxes

 

 

1,130

 

 

 

4,203

 

 

 

8,232

 

 

 

15,421

 

Effective tax rate

 

 

26.2

%

 

 

26.0

%

 

 

25.0

%

 

 

23.3

%

 

The effective tax rate was relatively flat during the three months ended September 30, 2023, as compared to the same period in 2022. The increase in the effective tax rate for the nine months ended September 30, 2023, as compared to the same period in 2022, was primarily due to a decrease in excess tax benefits related to the exercise of non-qualified stock options and FDII deduction benefits.

 

15


 

Note 7. Stockholders’ Equity and Stock Repurchase Program

Changes in stockholders’ equity for the three and nine months ended September 30, 2023 and 2022 were as follows:

 

 

 

Three Months Ended September 30, 2023

 

 

 

Common Stock

 

 

Additional
Paid-in

 

 

Retained

 

 

Total
Stockholders’

 

 

 

Number

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Equity

 

 

 

(in thousands, except share data)

 

Beginning balance

 

 

73,478,017

 

 

$

74

 

 

$

113,749

 

 

$

292,219

 

 

$

406,042

 

Issuance of Class A common stock from exercise of
   stock options and vesting of restricted stock units

 

 

5,610

 

 

 

 

 

 

76

 

 

 

 

 

 

76

 

Repurchases of Class A common stock

 

 

(907,219

)

 

 

(1

)

 

 

 

 

 

(12,583

)

 

 

(12,584

)

Equity-based
   compensation

 

 

 

 

 

 

 

 

1,228

 

 

 

 

 

 

1,228

 

Cumulative translation
   adjustment

 

 

 

 

 

 

 

 

 

 

 

(1,414

)

 

 

(1,414

)

Net income

 

 

 

 

 

 

 

 

 

 

 

3,178

 

 

 

3,178

 

Ending balance

 

 

72,576,408

 

 

$

73

 

 

$

115,053

 

 

$

281,400

 

 

$

396,526

 

 

 

 

Three Months Ended September 30, 2022

 

 

 

Common Stock

 

 

Additional
Paid-in

 

 

Retained

 

 

Total
Stockholders’

 

 

 

Number

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Equity

 

 

 

(in thousands, except share data)

 

Beginning balance