10-Q 1 rvlv-20210930.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, 2021

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 28, 2021, 39,482,536 shares of the registrant’s Class A common stock and 33,417,280 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

 

5

 

 

 

Condensed Consolidated Balance Sheets

 

5

 

 

 

Condensed Consolidated Statements of Income

 

6

 

 

 

Condensed Consolidated Statements of Comprehensive Income

 

7

 

 

 

Condensed Consolidated Statements of Cash Flows

 

8

 

 

 

Notes to the Condensed Consolidated Financial Statements

 

9

 

 

 

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

 

20

 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

40

 

 

 

Item 4. Controls and Procedures

 

41

 

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

Item 1. Legal Proceedings

 

42

 

 

 

Item 1A. Risk Factors

 

42

 

 

 

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

 

78

 

 

 

Item 3. Defaults Upon Senior Securities

 

78

 

 

 

Item 4. Mine Safety Disclosures

 

78

 

 

 

Item 5. Other Information

 

78

 

 

 

Item 6. Exhibits

 

79

 

 

 

Signatures

 

80

 

 

 


SUMMARY RISK FACTORS

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

If we fail to effectively manage our growth, our business, financial condition and operating results could be harmed.
The COVID-19 pandemic has materially adversely affected, and may continue to adversely affect, our business, financial position, results of operations and growth prospects.
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 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 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.
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.
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.
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.
We rely on consumer discretionary spending, which may be adversely affected by economic downturns and other macroeconomic conditions or trends.
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 center, our business, financial condition and operating results could be harmed.
Our failure to adequately and effectively staff our fulfillment center, 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.
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.
The dual class structure of our common stock concentrates voting control with our executive officers, directors and their affiliates, and it may depress the trading price of our Class A common stock.

 


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,

 

 

 

2021

 

 

2020

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

221,605

 

 

$

146,013

 

Accounts receivable, net

 

 

6,715

 

 

 

4,621

 

Inventory

 

 

141,768

 

 

 

95,272

 

Income taxes receivable

 

 

10,443

 

 

 

10,689

 

Prepaid expenses and other current assets

 

 

39,315

 

 

 

20,330

 

Total current assets

 

 

419,846

 

 

 

276,925

 

Property and equipment (net of accumulated depreciation of $17,925 and $14,652
   as of September 30, 2021 and December 31, 2020, respectively)

 

 

9,631

 

 

 

11,211

 

Intangible assets, net

 

 

1,218

 

 

 

1,260

 

Goodwill

 

 

2,042

 

 

 

2,042

 

Other assets

 

 

2,760

 

 

 

500

 

Deferred income taxes

 

 

13,814

 

 

 

13,814

 

Total assets

 

$

449,311

 

 

$

305,752

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

54,913

 

 

$

39,337

 

Income taxes payable

 

 

995

 

 

 

195

 

Accrued expenses

 

 

37,738

 

 

 

24,733

 

Returns reserve

 

 

50,842

 

 

 

25,602

 

Other current liabilities

 

 

21,688

 

 

 

15,821

 

Total current liabilities

 

 

166,176

 

 

 

105,688

 

Stockholders' equity:

 

 

 

 

 

 

Class A common stock, $0.001 par value; 1,000,000,000 shares
   authorized as of September 30, 2021 and December 31, 2020;
   
39,132,852 and 32,856,611 shares issued and outstanding as of September 30, 2021
   and December 31, 2020, respectively

 

 

39

 

 

 

33

 

Class B common stock, $0.001 par value; 125,000,000 shares authorized
   as of September 30, 2021 and December 31, 2020;
33,724,657 and
   
38,540,095 shares issued and outstanding as of September 30, 2021 and December 31,
   2020, respectively

 

 

34

 

 

 

38

 

Additional paid-in capital

 

 

99,150

 

 

 

86,040

 

Retained earnings

 

 

183,912

 

 

 

113,953

 

Total stockholders' equity

 

 

283,135

 

 

 

200,064

 

Total liabilities and stockholders’ equity

 

$

449,311

 

 

$

305,752

 

 

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

5


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,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Net sales

 

$

244,064

 

 

$

151,036

 

 

$

651,585

 

 

$

439,895

 

Cost of sales

 

 

109,588

 

 

 

67,569

 

 

 

293,226

 

 

 

213,407

 

Gross profit

 

 

134,476

 

 

 

83,467

 

 

 

358,359

 

 

 

226,488

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Fulfillment

 

 

5,776

 

 

 

4,158

 

 

 

15,452

 

 

 

12,450

 

Selling and distribution

 

 

38,354

 

 

 

20,870

 

 

 

95,470

 

 

 

61,703

 

Marketing

 

 

46,955

 

 

 

18,903

 

 

 

108,054

 

 

 

55,491

 

General and administrative

 

 

24,180

 

 

 

17,741

 

 

 

66,028

 

 

 

52,391

 

Total operating expenses

 

 

115,265

 

 

 

61,672

 

 

 

285,004

 

 

 

182,035

 

Income from operations

 

 

19,211

 

 

 

21,795

 

 

 

73,355

 

 

 

44,453

 

Other (income) expense, net

 

 

(158

)

 

 

253

 

 

 

339

 

 

 

300

 

Income before income taxes

 

 

19,369

 

 

 

21,542

 

 

 

73,016

 

 

 

44,153

 

Provision for income taxes

 

 

2,701

 

 

 

2,104

 

 

 

2,558

 

 

 

6,323

 

Net income

 

$

16,668

 

 

$

19,438

 

 

$

70,458

 

 

$

37,830

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.23

 

 

$

0.28

 

 

$

0.97

 

 

$

0.54

 

Diluted

 

$

0.22

 

 

$

0.27

 

 

$

0.95

 

 

$

0.52

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

72,810

 

 

 

69,872

 

 

 

72,330

 

 

 

69,537

 

Diluted

 

 

74,881

 

 

 

72,281

 

 

 

74,449

 

 

 

73,155

 

 

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

6


REVOLVE GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Net income

 

$

16,668

 

 

$

19,438

 

 

$

70,458

 

 

$

37,830

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative translation adjustment

 

 

(548

)

 

 

343

 

 

 

(499

)

 

 

(124

)

Total other comprehensive (loss) income

 

 

(548

)

 

 

343

 

 

 

(499

)

 

 

(124

)

Total comprehensive income

 

$

16,120

 

 

$

19,781

 

 

$

69,959

 

 

$

37,706

 

 

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

7


REVOLVE GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

 

Nine Months Ended September 30,

 

 

 

2021

 

 

2020

 

Operating activities:

 

 

 

 

 

 

Net income

 

$

70,458

 

 

$

37,830

 

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

 

 

 

 

 

 

Depreciation and amortization

 

 

3,390

 

 

 

3,646

 

Equity-based compensation

 

 

3,664

 

 

 

2,412

 

Deferred income taxes

 

 

 

 

 

(842

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

(2,094

)

 

 

38

 

Inventories

 

 

(46,496

)

 

 

30,670

 

Income taxes receivable

 

 

246

 

 

 

(1,703

)

Prepaid expenses and other current assets

 

 

(18,985

)

 

 

4,246

 

Other assets

 

 

(2,260

)

 

 

28

 

Accounts payable

 

 

15,576

 

 

 

8,967

 

Income taxes payable

 

 

800

 

 

 

350

 

Accrued expenses

 

 

13,005

 

 

 

2,297

 

Returns reserve

 

 

25,240

 

 

 

(11,743

)

Other current liabilities

 

 

5,867

 

 

 

31

 

Net cash provided by operating activities

 

 

68,411

 

 

 

76,227

 

Investing activities:

 

 

 

 

 

 

Purchases of property and equipment

 

 

(1,768

)

 

 

(1,844

)

Net cash used in investing activities

 

 

(1,768

)

 

 

(1,844

)

Financing activities:

 

 

 

 

 

 

Proceeds from borrowings on line of credit

 

 

 

 

 

30,000

 

Repayment of borrowings on line of credit

 

 

 

 

 

(15,000

)

Payment of deferred offering costs

 

 

 

 

 

(41

)

Proceeds from the exercise of stock options, net

 

 

9,448

 

 

 

4,065

 

Net cash provided by financing activities

 

 

9,448

 

 

 

19,024

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(499

)

 

 

(124

)

Net increase in cash and cash equivalents

 

 

75,592

 

 

 

93,283

 

Cash and cash equivalents, beginning of period

 

 

146,013

 

 

 

65,418

 

Cash and cash equivalents, end of period

 

$

221,605

 

 

$

158,701

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

Interest

 

$

 

 

$

295

 

Income taxes, net of refund

 

$

1,511

 

 

$

8,500

 

 

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

8


 

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 fashion retailer for Millennial and Generation Z consumers. Through our websites and mobile apps we deliver an aspirational customer experience from 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 the Securities and Exchange Commission’s, or the SEC, Regulation S-X. As permitted under those rules, certain footnotes or other financial information that are normally required by generally accepted accounting principles in the United States, or GAAP, 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, 2021 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 financial information should be read in conjunction with the audited consolidated financial statements and the related notes thereto for the fiscal year ended December 31, 2020 contained in our Annual Report on Form 10-K filed with the SEC on February 25, 2021.

Impact of COVID-19 on Our Business

The COVID-19 pandemic had a material adverse impact on our business operations and operating results for 2020. In particular, as a result of social distancing and stay at home orders around the world that commenced in March 2020, demand for our largest product categories that are focused on social occasions had been significantly negatively impacted. Furthermore, during 2020 we were unable to host large-scale, in-person events that are key to driving awareness, traffic and new customers. As our net sales, business operations and operating results improved in mid-2020, we began to sequentially increase our inventory purchases and incur certain operating expenses to support the improving trends in consumer demand.

Our net sales, business operations and operating results continued to improve throughout 2021 due to increased demand as a result of the easing of stay-at-home orders and other restrictions in certain states and countries, U.S. government stimulus payments and the accelerating rollout of vaccinations in the United States and some of our other key markets. With the improving trends, we continued to invest in inventory to support the consumer demand, increased our investment in headcount and cautiously increased the frequency and scale of in-person marketing activations. While demand for our products improved, the extent of this increased demand in the future remains uncertain. In particular, the recent rise of cases primarily as a result of COVID-19 variants, especially within unvaccinated populations, has resulted in restrictions being reinstated in certain cities and states within in the United States as well as certain key markets around the world.

We believe that our existing cash and cash equivalents and cash flows from operations will be sufficient to meet our anticipated cash needs for at least the next 12 months. However, our liquidity assumptions may prove to be incorrect given the continued uncertainty of the COVID-19 pandemic, and we could exhaust our available financial resources sooner than we currently expect.

9


 

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 revenues 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, reserves for income tax uncertainties and other contingencies, 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.

In March 2020 we launched the REVOLVE Loyalty Club within the REVOLVE segment and in April 2021 we expanded the program to include the FORWARD (FWRD) segment. Eligible customers who enroll in the program will generally earn points for every dollar spent. Points earned will automatically convert into a $20 reward once the Loyalty Club member earns 2,000 points. We defer revenue based on an allocation of the price of the customer purchase and the 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 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 30 days of the original purchase date and may be exchanged up to 60 days from the original purchase date. We modify our policy during the holiday season to extend the return and exchange period. In addition, to provide our customers with more flexibility to return or exchange during this time of increased social distancing as a result of the COVID-19 pandemic, merchandise returns for purchases made starting in March 2020 may be accepted for full refund if returned within 60 days of the original purchase date and 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 and expected future returns, which is recorded as a reduction of sales and cost of sales.

The following table presents a rollforward of our sales return reserve for the three and nine months ended September 30, 2021 and 2020 (in thousands):

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Beginning balance

 

$

44,024

 

 

$

28,336

 

 

$

25,602

 

 

$

35,104

 

Returns

 

 

(254,974

)

 

 

(124,142

)

 

 

(602,232

)

 

 

(383,316

)

Provisions

 

 

261,792

 

 

 

119,167

 

 

 

627,472

 

 

 

371,573

 

Ending balance

 

$

50,842

 

 

$

23,361

 

 

$

50,842

 

 

$

23,361

 

 

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 for the three and

10


 

nine months ended September 30, 2021 was $0.3 million and $0.8 million, respectively, and $0.2 million and $1.2 million for the three and nine months ended September 30, 2020, 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 revenue by reportable segment, by geographic area and by major product category.

Accounting Pronouncements Not Yet Effective

Under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, we meet the definition of an emerging growth company. We have elected to use this extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act and as a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates. We will lose our emerging growth company status as of December 31, 2021, when we become a “large accelerated filer” as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended.

In December 2019, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects related to the accounting for income taxes. ASU 2019-12 is currently effective for us for annual periods beginning after December 15, 2021 and interim periods within fiscal years beginning after December 15, 2022, with early adoption permitted. As we expect to lose our emerging growth company status at the end of fiscal year ending December 31, 2021, we will reflect the adoption of ASU 2019-12 as of January 1, 2021 in our Annual Report on Form 10-K for the year ending December 31, 2021. We do not expect that this ASU will have a significant impact on our consolidated financial statements and related disclosures.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which simplifies the accounting for goodwill impairment by removing step two from the goodwill impairment test. Under this new guidance, if the carrying amount of a reporting unit exceeds its estimated fair value, an impairment charge shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. The update also eliminates the requirement for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment. This guidance is currently effective for us for annual or interim goodwill impairment tests in fiscal years beginning December 15, 2021 with early adoption permitted. As we expect to lose our emerging growth company status at the end of fiscal year ending December 31, 2021, we will reflect the adoption of ASU 2017-04 as of January 1, 2021 in our Annual Report on Form 10-K for the year ending December 31, 2021. We do not expect that this ASU will have a significant impact on our consolidated financial statements and related disclosures.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). Under this ASU, a lessee is generally required to recognize the lessee’s rights and obligations resulting from leases on the balance sheet by recording a right-of-use asset and a lease liability. The new standard requires lessees to classify leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. In November 2019, the FASB issued ASU No. 2019-10 extending the effective date of this new lease standard by one year. In June 2020, the FASB issued ASU No. 2020-05, further extending the effective date by one year making it currently effective for us for annual periods beginning after December 15, 2021 and interim periods within fiscal years beginning after December 15, 2022, with early adoption permitted. As we expect to lose our emerging growth company status at the end of fiscal year ending December 31, 2021, we will reflect

11


 

the adoption of ASC 842 as of January 1, 2021 in our Annual Report on Form 10-K for the year ending December 31, 2021. The standard requires recognizing and measuring leases using a modified retrospective approach or allowing for application of the guidance at the beginning of the period in which it is adopted by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption rather than at the beginning of the earliest comparative period presented. We plan to elect the package of practical expedients permitted under the transition guidance within the new standard, which among other things, will allow us to carry forward the historical lease classification of our existing leases. Upon adoption, we expect to recognize a right-of-use asset of approximately $10 million adjusted for $1.3 million previously recorded as deferred rent and $0.4 million previously recorded as prepaid rent and record approximately $5 million in current operating lease liabilities and $6 million in operating lease liabilities, net of current portion.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The standard requires entities to utilize a new impairment model, known as the current expected credit loss model which includes historical experience, current conditions, and reasonable and supportable forecasts. Under the new guidance, an entity recognizes an allowance for estimated credit losses upon recognition of the financial instrument. The new guidance also changes the impairment model for available-for-sale debt securities, requiring the use of an allowance to record estimated credit losses and subsequent recoveries. ASU 2016-13 is currently effective for us for annual periods beginning after December 15, 2022, including interim periods within those fiscal years. As we expect to lose our emerging growth company status at the end of fiscal year ending December 31, 2021, we will reflect the adoption of ASU 2016-13 as of January 1, 2021 in our Annual Report on Form 10-K for the year ending December 31, 2021. We do not expect that this ASU will have a significant impact on our consolidated financial statements and related disclosures. 

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. 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 LIBO rate determined on the basis of a one-month interest period, plus 1.00%, or (2) an adjusted LIBO 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 of base rate loans, and 1.25% to 1.75% per year in the case of LIBO rate loans. No borrowings were outstanding as of September 30, 2021 and December 31, 2020.

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 million and in increments of $5 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 our activities, including limitations on our ability to sell assets, engage in mergers and acquisitions, enter into transactions involving related parties, obtain letters of credit, incur indebtedness or grant liens or negative pledges on our assets, make loans or make other investments. Under the covenants, we are prohibited from paying cash dividends with respect to our capital stock. We were in compliance with all covenants as of September 30, 2021 and December 31, 2020.

12


 

Note 4. Equity-based Compensation

In 2013, Twist Holdings, LLC and Advance Holdings, LLC 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, the 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 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, the number of shares available under the 2019 Plan was increased by 2.0 million shares. As of September 30, 2021, approximately 4.9 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, 2021 under the 2013 and 2019 Plans is as follows:

 

 

 

Number of
Shares

 

 

Weighted
Average
Exercise Price

 

 

Weighted
Average
Remaining
Contractual
Term

 

 

Aggregate
Intrinsic
Value (000's)

 

Balance at January 1, 2021

 

 

4,121,225

 

 

$

9.20

 

 

 

7.0

 

 

$

87,842

 

Granted

 

 

140,569

 

 

 

51.16

 

 

 

9.5

 

 

 

 

Exercised

 

 

(1,448,061

)

 

 

6.53

 

 

 

 

 

 

 

Forfeited

 

 

(42,878

)

 

 

15.69

 

 

 

 

 

 

 

Expired

 

 

(2,816

)

 

 

15.62

 

 

 

 

 

 

 

Balance at September 30, 2021

 

 

2,768,039

 

 

 

12.62

 

 

 

7.5

 

 

 

136,212

 

Exercisable at September 30, 2021

 

 

813,278

 

 

 

10.00

 

 

 

6.0

 

 

 

42,105

 

Vested and expected to vest

 

 

2,768,039

 

 

 

12.62

 

 

 

7.5

 

 

 

136,212

 

 

RSU award activity for the nine months ended September 30, 2021 under the 2019 Plan is as follows:

 

 

 

Class A
Common
Stock

 

 

Weighted
Average
Grant Date
Fair Value

 

 

Weighted
Average
Remaining
Contractual
Term

 

 

Aggregate
Intrinsic
Value (000's)

 

Unvested at January 1, 2021

 

 

20,140

 

 

$

15.89

 

 

 

1.2

 

 

$

628

 

Granted (1)

 

 

28,224

 

 

 

48.16

 

 

 

0.5

 

 

 

 

Released

 

 

(12,742

)

 

 

15.70

 

 

 

 

 

 

 

Forfeited

 

 

 

 

 

 

 

 

 

 

 

 

Unvested at September 30, 2021

 

 

35,622

 

 

 

41.53

 

 

 

0.7

 

 

 

2,200

 

(1)
Includes an adjustment of 11,763 shares underlying performance-based RSU awards made during the nine months ended September 30, 2021. The vesting of such RSUs is based upon the Company’s current performance against predefined financial targets.

There were 28,250 options and no RSUs granted during the three months ended September 30, 2021 and 140,569 options and 28,224 RSUs granted during the nine months ended September 30, 2021. The weighted average grant-date fair value of options granted during the three and nine months ended September 30, 2021 was $29.13 per share and $21.15 per share, respectively. The weighted average grant-date fair value of RSUs granted during the nine months ended September 30, 2021 was $48.16 per share.

13


 

As of September 30, 2021, there was $11.9 million of total unrecognized compensation cost related to unvested options and RSUs granted under the 2013 Plan and 2019 Plan, which is expected to be recognized over a weighted average service period of 3.2 years.

Equity‑based compensation cost that has been included in general and administrative expense in the accompanying condensed consolidated statements of income amounted to $1.4 million and $1.0 million for the three months ended September 30, 2021 and 2020, respectively, and $3.7 million and $2.4 million for the nine months ended September 30, 2021 and 2020, respectively. There was an excess income tax benefit of $2.2 million and $3.4 million recognized in the condensed consolidated statements of income for equity‑based compensation arrangements for the three months ended September 30, 2021 and 2020, respectively, and $15.7 million and $5.1 million for the nine months ended September 30, 2021 and 2020, 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.

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

We were a defendant in a purported class action lawsuit filed in the Superior Court of California, Los Angeles County, which was filed in May 2019, arising from employee wage-and-hour claims under California law for alleged meal period, rest period, payment of wages at separation, wage statement violations, and unfair business practices. On January 6, 2020, we and the individual defendant in the case entered into a binding memorandum of understanding to settle the case. In December 2019, we accrued approximately $1.0 million to general and administrative expenses. On January 5, 2021, the court granted approval of the settlement, which was subsequently paid by the Company during the first quarter of 2021.

14


 

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,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Income before income taxes

 

$

19,369

 

 

$

21,542

 

 

$

73,016

 

 

$

44,153

 

Provision for income taxes

 

 

2,701

 

 

 

2,104

 

 

 

2,558

 

 

 

6,323

 

Effective tax rate

 

 

13.9

%

 

 

9.8

%

 

 

3.5

%

 

 

14.3

%

 

The increase in the effective tax rate for the three months ended September 30, 2021, as compared to the same period in 2020, was primarily due to a decrease in excess tax benefits related to the exercise of non-qualified stock options. The decrease in the effective tax rate for the nine months ended September 30, 2021, as compared to the same period in 2020, was primarily due to an increase in excess tax benefits related to the exercise of non-qualified stock options.

 

Note 7. Stockholders’ Equity

Changes in stockholders’ equity for the three and nine months ended September 30, 2021 and 2020 were as follows:

 

 

 

Three Months Ended September 30, 2021

 

 

 

Common Stock

 

 

Additional
Paid-in

 

 



Retained

 

 

Total
Stockholders'

 

 

 

Number

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Equity

 

 

 

(in thousands, except share data)

 

Beginning balance

 

 

72,738,344

 

 

$

73

 

 

$

96,583

 

 

$

167,792

 

 

$

264,448

 

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

 

 

119,165

 

 

 

 

 

 

1,231

 

 

 

 

 

 

1,231

 

Equity-based
   compensation

 

 

 

 

 

 

 

 

1,336

 

 

 

 

 

 

1,336

 

Cumulative translation
   adjustment

 

 

 

 

 

 

 

 

 

 

 

(548

)

 

 

(548

)

Net income

 

 

 

 

 

 

 

 

 

 

 

16,668

 

 

 

16,668

 

Ending balance

 

 

72,857,509

 

 

$

73

 

 

$

99,150