SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|☒||QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
For the quarterly period ended March 31, 2022
|☐||TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
For the transition period from to
Commission File Number 001-40836
Brilliant Earth Group, Inc.
(Exact name of registrant as specified in its charter)
|(State or other jurisdiction of incorporation or organization)||(I.R.S. Employer Identification Number)|
300 Grant Avenue, Third Floor
San Francisco, CA
|(Address of principal executive offices)||(Zip Code)|
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
|Title of each class||Trading Symbol(s)||Name of each exchange on which registered|
|Class A common stock, $0.0001 par value per share||BRLT||The Nasdaq Global Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|Large accelerated filer||☐||Accelerated filer||☐|
|Non-accelerated filer||☒||Smaller reporting company||☐|
|Emerging growth company||☒|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of May 9, 2022, there were 10,806,956 shares of the registrant's Class A common stock, $0.0001 par value per share, outstanding, 35,285,133 shares of the registrant’s Class B common stock, $0.0001 par value per share, outstanding, 49,119,976 shares of the registrant’s Class C common stock, $0.0001 par value per share, outstanding and no shares of the registrant’s Class D common stock, $0.0001 per share, outstanding.
Table of Contents
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q may be forward-looking statements. Statements regarding our future results of operations and financial position, business strategy, and plans and objectives of management for future operations, including, among others, statements regarding expected growth, future capital expenditures, and debt service obligations, are forward-looking statements. In some cases, you can identify forward-looking statements by terms, such as “anticipate,” “believe,” “contemplates,” “continues,” “could,” “estimate,” “evolve,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “seek,” “should,” “strategy,” “target,” “will,” or “would,” or the negative of these terms or other similar expressions. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions, and uncertainties that are difficult to predict.
We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short term and long-term business operations and objectives, and financial needs. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements. These forward-looking statements are subject to a number of risks, uncertainties, and assumptions, including, but not limited to: the Company has grown rapidly in recent years and has limited operating experience; the Company may be unable to manage growth effectively; increases in costs of diamonds, other gemstones and precious metals supply shortages; the Company’s ability to maintain a low cost of production and distribution; fluctuations in the pricing and supply of diamonds, other gemstones, and precious metals, particularly responsibly sourced natural and lab-grown diamonds and recycled precious metals such as gold, increases in labor costs for manufacturing such as wage rate increases, as well as inflation, and energy prices; the Company’s ability to cost-effectively turn existing customers into repeat customers or to acquire new customers; risks related to the Company’s expansion plans in the U.S.; an overall decline in the health of the economy and other factors impacting consumer spending, such as recessionary conditions, governmental instability, war or the threat of war, and natural disasters may affect consumer purchases; the Company has a history of losses, and may be unable to sustain profitability; competition in the fine jewelry retail industry; the Company’s ability to manage its inventory balances and inventory shrinkage; a decline in sales of Create Your Own rings would negatively affect the Company’s business, financial condition, and results of operations; the Company ability to maintain and enhance its brand; the Company’s marketing efforts to help grow its business may not be effective; environmental, social, and governance matters may impact the Company’s business and reputation; risks related to the Company’s e-commerce and omnichannel business; the Company’s ability to effectively anticipate and respond to changes in consumer preferences and shopping patterns; the Company’s results of operations and operating cash flows could fluctuate on a quarterly and annual basis, which may make it difficult to predict its future performance; the Company’s principal asset is its interest in Brilliant Earth, LLC, and, as a result, the Company depends on distributions from Brilliant Earth, LLC to pay its taxes and expenses; risks related to the Company’s obligations under its Tax Receivable Agreement and its organizational structure; and the other risks, uncertainties and the factors described in the section titled “Risk Factors” in the Company's Annual Report on Form 10-K for the year ended December 31, 2021. Other sections of this Quarterly Report on Form 10-Q include additional factors that could adversely impact our business and financial performance.
Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties, and assumptions, the future events and trends discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. This Quarterly Report on Form 10-Q and the documents that we have filed as exhibits should be read with the understanding that our actual future results, levels of activity, performance and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. These forward looking statements speak only as of the date of this Quarterly Report on Form 10-Q. Except as required by applicable law, we undertake no obligation to update or revise any forward-looking statements contained in this Quarterly Report on Form 10-Q, whether as a result of any new information, future events or otherwise.
BASIS OF PRESENTATION
As used in this Quarterly Report on Form 10-Q, unless the context otherwise requires, references to:
• “we,” “us,” “our,” the “Company,” “Brilliant Earth,” and similar references refer: (1) following the consummation of the Reorganization Transactions (as defined below), including our initial public offering (“IPO”) which occurred on September 23, 2021, to Brilliant Earth Group, Inc., and, unless otherwise stated, all of its subsidiaries, including Brilliant Earth, LLC, and (2) prior to the completion of the Reorganization Transactions, including the IPO, to Brilliant Earth, LLC.
• “Brilliant Earth LLC Agreement” refers to Brilliant Earth, LLC’s amended and restated limited liability company agreement, which became effective prior to the consummation of the IPO.
• “CAGR” refers to compound annual growth rate.
• “Continuing Equity Owners” refers collectively to holders of LLC Interests and our Class B common stock and Class C common stock immediately following consummation of the Reorganization Transactions, including our Founders (as defined below) and Mainsail (as defined below), who may, exchange at each of their respective options, in whole or in part from time to time, their LLC Interests (along with an equal number of shares of Class B common stock or Class C common stock (and such shares shall be immediately cancelled)), as applicable, for, at our election (determined solely by our independent directors (within the meaning of the Nasdaq rules) who are disinterested), cash or newly-issued shares of our Class A common stock or Class D common stock, as applicable.
• “Founders” refers to Beth Gerstein, our Co-Founder and Chief Executive Officer, Eric Grossberg, our Co-Founder and Executive Chairman, and Just Rocks (as defined below).
• “Just Rocks” refers to Just Rocks, Inc., a Delaware corporation, which is jointly owned and controlled by our Founders.
• “LLC Interests” or “LLC Units” refers to the common units of Brilliant Earth, LLC, including those that we purchased with the net proceeds from the IPO.
• “Original Equity Owners” refers to the owners of LLC Interests in Brilliant Earth, LLC prior to the consummation of the Reorganization Transactions, collectively, which include Mainsail, Just Rocks, and certain executive officers and employees.
• “Mainsail” refers to Mainsail Partners III, L.P., our sponsor and a Delaware limited partnership, and certain funds affiliated with Mainsail Partners III, L.P., including Mainsail Incentive Program, LLC, and Mainsail Co-Investors III, L.P.
• “Reorganization Transactions” refers to the organizational transactions and the IPO, and the application of the net proceeds therefrom.
• “TRA” refers to the Tax Receivable Agreement with Brilliant Earth, LLC and the Continuing Equity Owners that provides for the payment by Brilliant Earth Group, Inc. to the Continuing Equity Owners of 85% of the amount of tax benefits, if any, that Brilliant Earth Group, Inc. actually realizes (or in some circumstances is deemed to realize) related to certain tax basis adjustments and payments made under the TRA.
Item 1. Financial Statements
Brilliant Earth Group, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited and in thousands except share and per share amounts)
|March 31,||December 31,|
|Cash and cash equivalents||$||164,890 ||$||172,865 |
|Restricted cash||205 ||205 |
|Inventories, net||28,392 ||24,743 |
|Prepaid expenses and other current assets||8,560 ||8,178 |
|Total current assets||202,047 ||205,991 |
|Property and equipment, net||8,734 ||6,732 |
|Deferred tax assets||7,840 ||4,407 |
|Operating lease right of use assets||20,067 ||— |
|Other assets||943 ||601 |
|Total assets ||$||239,631 ||$||217,731 |
|Liabilities and equity|
|Accounts payable||$||11,390 ||$||14,480 |
|Accrued expenses and other current liabilities||26,429 ||28,756 |
|Current portion of deferred revenue||23,561 ||18,818 |
|Current portion of operating lease liabilities||2,779 ||— |
|Current portion of long-term debt||41,053 ||30,789 |
|Total current liabilities ||105,212 ||92,843 |
|Long-term debt, net of debt issuance costs||22,863 ||32,789 |
|Operating lease liabilities||19,882 ||— |
|Deferred rent||— ||2,507 |
|Payable pursuant to the Tax Receivable Agreement||6,604 ||3,775 |
|Other long-term liabilities||3,028 ||2,979 |
|Total liabilities||157,589 ||134,893 |
|Commitments and contingencies (Note 11)|
Preferred stock, $0.0001 par value per share, 10,000,000 shares authorized, none issued and outstanding at March 31, 2022 and December 31, 2021, respectively
|— ||— |
Class A common stock, $0.0001 par value - 1,200,000,000 shares authorized; 10,708,456 and 9,614,523 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively
|1 ||1 |
Class B common stock, $0.0001 par value - 150,000,000 shares authorized; 35,326,696 and 35,658,013 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively
|4 ||4 |
Class C common stock, $0.0001 par value - 150,000,000 shares authorized; 49,119,976 and 49,505,250 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively
|5 ||5 |
Class D common stock, $0.0001 par value - 150,000,000 shares authorized; none issued and outstanding at March 31, 2022 and December 31, 2021, respectively
|— ||— |
|Additional paid-in capital||7,339 ||6,865 |
|Retained earnings||1,884 ||1,528 |
|Equity attributable to Brilliant Earth Group, Inc.||9,233 ||8,403 |
|NCI attributable to Brilliant Earth, LLC||72,809 ||74,435 |
|Total equity||82,042 ||82,838 |
|Total liabilities and equity||$||239,631 ||$||217,731 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Brilliant Earth Group, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited and in thousands except share and per share amounts)
|Three months ended|
|Net sales||$||100,038 ||$||70,696 |
|Cost of sales||49,922 ||38,337 |
|Gross profit||50,116 ||32,359 |
|Selling, general and administrative||44,816 ||27,405 |
|Income from operations||5,300 ||4,954 |
|Other expense, net||(59)||(620)|
|Income before tax||3,465 ||2,408 |
|Income tax expense||(96)||— |
|Net income||3,369 ||$||2,408 |
|Net income allocable to non-controlling interest||3,013 |
|Net income allocable to Brilliant Earth Group, Inc.||$||356 |
|Earnings per share:|
|Weighted average shares of common stock outstanding: |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Brilliant Earth Group, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY AND
CHANGES IN REDEEMABLE CONVERTIBLE PREFERRED UNITS AND EQUITY/ MEMBERS’ (DEFICIT)
(Unaudited and in thousands except share amounts)
|Brilliant Earth, LLC |
|Class P Units||Class F||Class M||Class F Units and Class M Units|
|Total Units||Total Amounts||Total Units||Total Amounts||Total Units||Total Amounts||Total Units||Total Amounts|
Balance, January 1, 2021
|32,435,595 ||$||66,327 ||50,232,863 ||$||(85,695)||2,537,791 ||$||300 ||52,770,654 ||$||(85,395)|
|Tax distributions to members||— ||(29)||— ||(46)||— ||— ||— ||(46)|
|Vested Class M Units||— ||— ||— ||— ||325,221 ||— ||325,221 ||— |
|Equity-based compensation||— ||— ||— ||— ||— ||93 ||— ||93 |
|Net income||— ||941 ||— ||1,467 ||— ||— ||— ||1,467 |
|Adjustment of redeemable convertible preferred units to redemption value||— ||79,816 ||— ||(79,816)||— ||— ||— ||(79,816)|
Balance, March 31, 2021
|32,435,595 ||$||147,055 ||50,232,863 ||$||(164,090)||2,863,012 ||$||393 ||53,095,875 ||$||(163,697)|
|Brilliant Earth Group, Inc. Stockholders' Equity|
|Class A Common Stock||Class B Common Stock||Class C Common Stock||Non-Controlling Interest|
Balance, January 1, 2022
|9,614,523 ||$||1 ||35,658,013 ||$||4 ||49,505,250 ||$||5 ||$||6,865 ||$||1,528 ||$||8,403 ||85,163,263 ||$||74,435 ||$||82,838 |
|Tax distributions to members||— ||— ||— ||— ||— ||— ||— ||— ||— ||— ||(6,874)||(6,874)|
|Conversion of Class B and Class C to Class A common stock||1,053,914 ||— ||(668,640)||— ||(385,274)||— ||— ||— ||— ||(1,053,914)||— ||— |
|RSU vesting during period||40,019 ||— ||— ||— ||— ||— ||— ||— ||— ||— ||— ||— |
|LLC Units vesting during period||— ||— ||337,323 ||— ||— ||— ||— ||— ||— ||337,323 ||— ||— |
|Increase in deferred tax asset from step-up tax basis related to redemption of LLC Units and set-up of TRA liability||— ||— ||— ||— ||— ||— ||605 ||— ||605 ||— ||— ||605 |
|Equity-based compensation ||— ||— ||— ||— ||— ||— ||2,028 ||— ||2,028 ||— ||76 ||2,104 |
|Net income ||— ||— ||— ||— ||— ||— ||— ||356 ||356 ||— ||3,013 ||3,369 |
|Rebalancing of controlling and non-controlling interest||— ||— ||— ||— ||— ||— ||(2,159)||(2,159)||— ||2,159 ||— |
Balance, March 31, 2022
|10,708,456 ||$||1 ||35,326,696 ||$||4 ||49,119,976 ||$||5 ||$||7,339 ||$||1,884 ||$||9,233 ||84,446,672 ||$||72,809 ||$||82,042 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Brilliant Earth Group, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and in thousands)
|Three months ended March 31,|
|Net income||$||3,369 ||$||2,408 |
|Adjustments to reconcile net income to net cash provided by operating activities:|
|Depreciation||349 ||164 |
|Equity-based compensation ||2,104 ||93 |
|Non-cash operating lease cost||683 ||— |
|Change in fair value of warrants||— ||574 |
|Amortization of debt issuance costs||423 ||423 |
|Changes in assets and liabilities:|
|Prepaid expenses and other current assets||(746)||(24)|
|Accounts payable, accrued expenses and other current liabilities||(6,485)||(1,913)|
|Deferred revenue||4,706 ||7,815 |
|Operating lease liabilities||(232)||— |
|Deferred rent||— ||240 |
|Net cash provided by operating activities||182 ||6,871 |
|Purchases of property and equipment||(1,283)||(546)|
|Net cash used in investing activities||(1,283)||(546)|
|Tax distributions to members||(6,874)||(75)|
|Net cash used in financing activities||(6,874)||(75)|
|Net (decrease) increase in cash, cash equivalents and restricted cash||(7,975)||6,250 |
|Cash, cash equivalents and restricted cash at beginning of period||173,070 ||66,474 |
|Cash, cash equivalents and restricted cash at end of period||$||165,095 ||$||72,724 |
|Non-cash investing and financing activities|
|Deferred tax assets associated with redemption of LLC Units||$||3,433 ||— |
|TRA Obligation associated with redemption of LLC Units||2,829 ||— |
|Purchases of property and equipment included in accounts payable and accrued liabilities||1,068 ||18 |
|Credit to APIC related to redemption of LLC Units||605 ||— |
|Adjustment of redeemable convertible preferred units to redemption value||— ||79,816 |
|Cash paid for interest||$||1,341 ||$||1,502 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Brilliant Earth Group, Inc.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BUSINESS AND ORGANIZATION
Brilliant Earth Group, Inc. was formed as a Delaware corporation on June 2, 2021 for the purpose of facilitating an initial public offering (“IPO”) and executing other related organizational transactions to acquire and carry on the business of Brilliant Earth, LLC. Brilliant Earth, LLC was originally incorporated in Delaware on August 25, 2005, and subsequently converted to a limited liability company on November 29, 2012. Brilliant Earth Group, Inc., the sole managing member of Brilliant Earth, LLC, consolidates Brilliant Earth, LLC and both are collectively referred to herein as “the Company.”
The Company designs, procures and sells ethically-sourced diamonds, gemstones and jewelry online and through showrooms operated in San Francisco, Los Angeles, Boston, Chicago, San Diego, Washington D.C., Denver, Philadelphia, Atlanta, Seattle, Portland, Austin, Dallas, New York, and Scottsdale. Co-headquarters are located in San Francisco, California and Denver, Colorado.
The Company operates in one operating and reporting segment which is the retail sale of diamonds, gemstones and jewelry. Over 90% of sales are to customers in the United States (“U.S.”); sales to non-U.S. customers immediately settle in U.S. dollars and no cash balances are carried in foreign currencies. The Company’s chief operating decision maker (“CODM”), the Chief Executive Officer (“CEO”), reviews financial information presented on a consolidated basis for purposes of making operating decisions and assessing financial performance.
In accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) since the members of Brilliant Earth, LLC (the “Continuing Equity Owners”) prior to the IPO and merger continue to hold a controlling interest in Brilliant Earth, LLC after the merger (i.e., there was no change in control of Brilliant Earth, LLC) and since Brilliant Earth Group, Inc. was considered a “shell company” which does not meet the definition of a business, the financial statements of the combined entity represent a continuation of the financial position and results of operations of Brilliant Earth, LLC. Accordingly, the historical cost basis of assets, liabilities, and equity of Brilliant Earth, LLC are carried over to the condensed consolidated financial statements of the merged company as a common control transaction. Also, after consummation of the IPO, Brilliant Earth Group, Inc. became subject to U.S. federal, state, and local income taxes with respect to its allocable share of any taxable income of Brilliant Earth, LLC assessed at the prevailing corporate tax rates.
Initial Public Offering and purchase of LLC Interests
On September 27, 2021, the Company completed its IPO of 9,583,332 shares of Class A common stock at an offering price of $12.00 per share, (excluding the underwriting discount), including 1,249,999 shares of Class A common stock issued pursuant to the underwriters' over-allotment option. The Company received $101.6 million in proceeds after a deduction for underwriting discounts and offering costs totaling $13.4 million.
The net proceeds were used to purchase 8,333,333 newly-issued membership units (the “LLC Units” or “LLC Interests”) from Brilliant Earth, LLC and 1,249,999 LLC Units in the form of a redemption from the Continuing Equity Owners at a price per unit equal to the IPO price of $11.22 per share after deducting the underwriting discount, and represented a 10.1% economic interest as of the IPO date.
Conversion of Class F, P and M Units at time of IPO
At the time of the IPO, the existing limited liability company agreement of Brilliant Earth, LLC was amended and restated to, among other things, recapitalize all existing Class F, P and M Units in Brilliant Earth, LLC into 86,297,284 common LLC Units after applying a conversion ratio of 1.8588 with a further adjustment for a distribution threshold related to the M Units (which impacted their allocation of value so the economic effect of the exchange was a like-for-like value); the net conversion ratio was 1.8942, 1.9080 and 1.7735 for the Class F Units, P Units and M Units, respectively. The number of Class F, P and M Units presented in these financial statements for periods prior to the IPO have been retroactively adjusted to reflect the conversion ratios (as discussed in the preceding sentence) similar to the presentation of a stock-split.
Summary of the restructuring, offering and other transactions completed in connection with the IPO
In connection with the IPO, Brilliant Earth Group, Inc. and Brilliant Earth, LLC completed a series of transactions that comprise of reorganization, offering and other financing transactions.
The following summarizes the Reorganization Transactions which occurred as of the date of IPO:
•Amended and restated the existing limited liability company agreement of Brilliant Earth, LLC (the “LLC Agreement”), effective prior to the IPO, to, among other things, (1) recapitalize all existing ownership interests in Brilliant Earth, LLC into 86,297,284 LLC Units after applying a conversion ratio of 1.8588, (2) appoint Brilliant Earth Group, Inc. as the sole managing member of Brilliant Earth, LLC upon its acquisition of LLC Units in connection with the IPO, and (3) provide certain redemption rights to the Continuing Equity Owners.
•Amended and restated Brilliant Earth Group, Inc.’s certificate of incorporation to, among other things, provide for four classes of common stock defined as Class A common stock, Class B common stock, Class C common stock and Class D common stock.
•Issued 36,064,421 shares of Class B common stock (prior to the redemption of 522,386 shares pursuant to the exercise of underwriters’ overallotment options discussed below) to the Continuing Equity Owners, excluding the founders, Beth Gerstein, Co-Founder and Chief Executive Officer, Eric Grossberg, Co-Founder and Executive Chairman, and Just Rocks, a Delaware corporation which is jointly owned and controlled by the founders (collectively, the “Founders”), which is equal to the number of LLC Units held by such Continuing Equity Owners excluding the Founders, for nominal consideration.
•Issued 50,232,863 shares of Class C common stock (prior to the redemption of 727,613 shares pursuant to the exercise of underwriters’ overallotment options discussed below) to the Founders, which is equal to the number of LLC Units held by such Founders, for nominal consideration.
•Entered into a Tax Receivable Agreement (the “TRA”) with Brilliant Earth, LLC and the Continuing Equity Owners that will provide for the payment by Brilliant Earth Group, Inc. to the Continuing Equity Owners of 85% of the amount of tax benefits, if any, that Brilliant Earth Group, Inc. actually realizes (or in some circumstances is deemed to realize) related to certain tax basis adjustments and payments made under the TRA.
The organization agreements include a provision for the Continuing Equity Owners, subject to certain exceptions from time to time at each of their option, to require Brilliant Earth, LLC to redeem all or a portion of their LLC Units in exchange for, at the Company’s election, newly-issued shares of Class A common stock or Class D common stock, as applicable, on a one-for-one basis, or a cash payment equal to a volume weighted average market price of one share of Class A common stock for each LLC Interest so redeemed, in each case, in accordance with the terms of the Brilliant Earth LLC Agreement.
The following summarizes the IPO and other transactions:
•Issued 9,583,332 shares of Class A common stock, including 1,249,999 shares of Class A common stock from the exercise of the underwriters' overallotment, in exchange for net proceeds of approximately $101.6 million at $12.00 per share, less underwriting discount and offering expenses.
•Used net proceeds from the IPO to purchase 8,333,333 newly issued LLC Units for approximately $93.5 million directly from Brilliant Earth, LLC at a price per unit equal to the initial public offering price per share of Class A common stock less underwriting discount.
•Used net proceeds from the exercise of the underwriters’ overallotment to purchase an additional 1,249,999 LLC Units from each of the Continuing Equity Owners in the form of a redemption on a pro rata basis for $14.0 million in aggregate at a price per unit equal to the initial public offering price per share of Class A common stock less the underwriting discount; this purchase of LLC Interests resulted in an obligation under the TRA, including the related set-up of deferred tax assets on the TRA and on the temporary basis difference associated with this purchase.
•Corresponding cancellation of a total of 1,249,999 shares of Class B common stock and Class C common stock resulting from the purchase of 1,249,999 LLC Units from the Continuing Equity Owners.
•Exercise of warrants on convertible preferred units (“Class P Units”) with a carrying value of $6.4 million as of September 22, 2021 (after the mark-to-market adjustment as of the date of exercise) into 534,589 newly issued LLC Units on a net settlement basis, elected at the option of the holder.
Risks and Uncertainties – COVID-19
The COVID-19 pandemic remains on-going and continues to impact the global economy. The Company’s financial performance could be adversely impacted by the on-going evolution of the pandemic, including any government-imposed pandemic restrictions. The Company cannot predict the full extent of the impacts of the COVID-19 pandemic on its business, operations, or the global economy as a whole. However, the effects could have a material impact on the Company's results of operations.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The unaudited condensed consolidated financial statements for the periods prior to the Reorganization Transactions and IPO have been presented to combine the previously separate entities. These unaudited condensed consolidated financial statements have been prepared in accordance with U.S. GAAP and the
requirements of the Securities and Exchange Commission (the “SEC”) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. GAAP can be condensed or omitted. These interim results are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2022, or for any other interim period or for any other future year.
In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments consisting only of normal recurring adjustments necessary to state fairly the financial position, results of operations and cash flows for the periods presented in conformity with U.S. GAAP applicable to interim periods. The results of operations for the interim periods presented are not necessarily indicative of results for the full year or future periods. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes thereto as of and for the year ended December 31, 2021, as disclosed in the 2021 annual report on Form 10-K.
Principles of Consolidation and Non-Controlling Interest
The unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiary, Brilliant Earth, LLC, which it controls due to ownership of the voting interest or pursuant to variable interest entity (“VIE”) accounting guidance. All intercompany balances and transactions have been eliminated in consolidation.
The non-controlling interest on the unaudited condensed consolidated statement of operations represents the portion of earnings or loss attributable to the economic interest in Brilliant Earth, LLC held by the Continuing Equity Owners. The non-controlling interest on the unaudited condensed consolidated balance sheets represent the portion of net assets of the Company attributable to the Continuing Equity Owners, based on the portion of the LLC Interests owned by such unit holders. As of March 31, 2022, the non-controlling interest was 88.7%. At the end of each reporting period, equity related to Brilliant Earth, LLC that is attributable to Brilliant Earth Group, Inc. and Continuing Equity Owners is rebalanced to reflect Brilliant Earth Group, Inc.'s and Continuing Equity Owners' ownership in Brilliant Earth, LLC.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Some of the more significant estimates include the inventory valuation, allowance for sales returns, estimates of current and deferred income taxes, payable pursuant to the tax receivable agreement, useful lives and depreciation of long-lived assets, fair value of equity-based compensation, and prior to the Reorganization Transactions, the warrants and the redemption of value of the redeemable Class P Units. Actual results could differ materially from those estimates. On an ongoing basis, the Company reviews its estimates to ensure that they appropriately reflect changes in its business or new information available.
Fair Value Measurements
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. U.S. GAAP establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. U.S. GAAP prescribes three levels of inputs that may be used to measure fair value:
Level 1 Valuation based on quoted prices (unadjusted) observed in active markets for identical assets or liabilities.
Level 2 Valuation techniques based on inputs that are quoted prices of similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not in active markets; inputs other than quoted prices used in a valuation model that are observable for that instrument; and inputs that are derived from, or corroborated by, observable market data by correlation or other means.
Level 3 Valuation techniques with significant unobservable market inputs.
The Company is required to disclose its estimate of the fair value of material financial instruments, including those recorded as assets or liabilities in its financial statements, in accordance with U.S. GAAP.
At March 31, 2021, Class P Units and warrants on Class P Units were the only financial instruments (assets or liabilities) measured at fair value on a recurring basis.
Through the date of the IPO, the Class P Units and warrants on Class P Units were the only financial instruments (assets or liabilities) measured at fair value on a recurring basis. As discussed in Note 1, Business and organization, the securities converted into LLC Interests in connection with the IPO and are now classified as equity. The fair value of the Class P Units and the warrants on Class P Units as of September 22, 2021 just before conversion into common LLC Units were $389.2 million and $6.4 million, respectively; these securities are no longer subject to this fair value disclosure.
The carrying amounts of cash and cash equivalents, restricted cash, accounts payable and accrued expenses and other current liabilities approximate fair value due to their short-term maturities and were classified as Level 1. The carrying value of long-term debt, net of debt issuance costs, also approximates its fair value, which has been estimated by management based on the consideration of applicable interest rates (including certain instruments at variable or floating rates) for similar types of borrowing arrangements. Redeemable Convertible Class P Units and Class P Units underlying warrants were classified as Level 3 until the IPO at which time the securities were converted into LLC Interests.
Comprehensive income is the change in equity of a business enterprise during a period from transactions and all other events and circumstances from non-owner sources. Other comprehensive income may include unrealized gain (loss) on available for sale securities, foreign currency items, and minimum pension liability adjustments. The Company did not have components of other comprehensive income. As a result, comprehensive income is the same as net income.
Cash and Cash Equivalents, and Restricted Cash
All highly liquid investments with an original maturity of three months or less and deposits in transit from banks for payments related to third-party credit and debit card transactions are considered to be cash equivalents. Credit and debit card transactions are short-term and highly liquid in nature.
The following table provides a reconciliation of cash and cash equivalents, and restricted cash from the unaudited condensed consolidated balance sheets to the statements of cash flows for the periods ended March 31, 2022, December 31, 2021, and March 31, 2021 (in thousands):
|March 31,||December 31,||March 31,|
|Cash and cash equivalents||$||164,890 ||$||172,865 ||$||72,519 |
|Restricted cash||205 ||205 ||205|
|Total||$||165,095 ||$||173,070 ||$||72,724 |
The Company’s diamond, gemstone and jewelry inventories are primarily held for resale and valued at the lower of cost or net realizable value. Cost is primarily determined using the weighted average cost on a first-in, first-out (“FIFO”) basis for all inventories, except for unique inventory SKUs (principally independently graded diamonds), where cost is determined using specific identification. Net realizable value is defined as estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation.
Net sales primarily consist of revenue from diamond, gemstone and jewelry retail sales and payment is required in full prior to order fulfillment. Delivery is determined to be the time of pickup for orders picked up in showrooms, and for shipped orders, typically within one to two business days after shipment. Credit is not extended to customers except through third-party credit cards or financing offerings. A return policy of 30 days from when the item is picked up or ready for shipment is typically provided; one complimentary resizing for standard ring styles is offered within 60 days of when an order is available for shipment or pickup; a lifetime manufacturing warranty is provided on all jewelry, with the exception of estate and vintage jewelry and center diamonds/gemstones; and a lifetime diamond upgrade program is included on all independently graded natural diamonds. The complimentary resizing, lifetime manufacturing warranty claims and lifetime diamond upgrades have not historically been material. An in-house three-year extended service plan, which provides full inspection, cleaning and certain repairs due to
normal wear, is offered for an additional charge. An extended protection plan is also offered through a third party that has different terms ranging from 2 years to lifetime that vary based on the item purchased.
The following table discloses total net sales by geography for the three months ended March 31, 2022 and 2021 (in thousands):
|For the Three Months Ended March 31,|
|United States||$||93,766 ||$||66,000 |
|International||6,272 ||4,696 |
|Total net sales||$||100,038 ||$||70,696 |
Revenue is recognized under Financial Accounting Standards Board (“FASB”) ASC 606, Revenue from Contracts with Customers (“ASC 606”). ASC 606 requires that revenue from customers be recognized as control of the promised goods is transferred to customers, which generally occurs upon delivery if the order is shipped, or at the time the customer picks up the completed product at a showroom. Revenue arrangements generally have one performance obligation and are reported net of estimated sales returns and allowances, which are determined based on historical product return rates and current economic conditions. The Company offers an in-house three-year extended service plan, which gives rise to an additional performance obligation, when purchased by the customer, which is recognized over the course of the plan. The Company also offers an extended protection plan in the capacity of an agent on behalf of a third-party that has different terms ranging from two years to lifetime that vary based on the item purchased. The commission that the Company receives from the third-party is recognized at the time of sale less an estimate of cancellations based on historical experience. There are no additional performance obligations in relation to the third-party plan. Additionally, sales taxes are collected and remitted to taxing authorities, and the Company has elected to exclude sales taxes from revenues recognized under ASC 606.
Transactions where payment has been received from customers, but control has not transferred, are recorded as customer deposits in deferred revenue and revenue recognition is deferred until delivery has occurred. Deferred revenue also includes payments on the Company’s three-year extended service plan that customers have elected to purchase. As of March 31, 2022 and December 31, 2021, total deferred revenue was $23.7 million and $19.0 million, respectively, of which $0.2 million and $0.2 million, respectively, were included within other long-term liabilities in the unaudited condensed consolidated balance sheets. During the three months ended March 31, 2022 and 2021, respectively, the Company recognized $17.6 million and $9.9 million, respectively, of revenue that was deferred as of the last day of the respective prior quarter.
Sales Returns and Allowances
A returns asset account and a refund liabilities account are maintained to record the effects of estimated product returns and sales returns allowance. Returns asset and refund liabilities are updated at the end of each financial reporting period and the effect of such changes are accounted for in the period in which such changes occur.
The Company estimates anticipated product returns in the form of a refund liability based on historical return percentages and current period sales levels, and accrues a related returns asset for goods expected to be returned in salable condition less any expected costs to recover such goods, including return shipping costs that the Company may incur.
As of March 31, 2022 and December 31, 2021, refund liabilities balances were $1.6 million and $2.3 million, respectively, and are included as a provision for sales returns and allowances within accrued expenses and other current liabilities in the unaudited condensed consolidated balance sheets. As of March 31, 2022 and December 31, 2021, returns asset balances were $0.7 million and $1.1 million, respectively, and are included within prepaid expenses and other current assets in the unaudited condensed consolidated balance sheets. See Note 5, Accrued Expenses and Other Current Liabilities, for further discussion.
The Company generally does not bill customers separately for shipping and handling charges. Any fulfillment costs incurred by the Company when shipping to customers is reflected in cost of sales in the unaudited condensed consolidated statements of operations.
Consignment Inventory Sales
Sales of consignment inventory are presented on a gross sales basis as control of the merchandise is maintained through the point of sale. The Company also provides independent advice, guidance and after-sales service to customers. Consigned products are selected at the discretion of the Company, and the determination of the selling price as well as responsibility of the physical security of the products is maintained by the Company. The products sold from consignment inventory are similar in nature to other products that the Company sells to customers and are sold on the same terms.
Cost of Sales
The Company purchases diamonds and gemstones from suppliers and utilizes third-party manufacturing suppliers for the production and assembly of substantially all jewelry sold by the Company. Cost of sales includes merchandise costs, inbound freight charges, costs of shipping orders to customers, costs and reserves for disposal of obsolete, slow-moving or defective items and shrinkage.
Marketing, Advertising and Promotional Costs
Marketing, advertising and promotional costs are expensed as incurred and totaled approximately $20.0 and $14.4 million, for the three months ended March 31, 2022 and 2021, respectively.
Equity-based compensation is accounted for as an expense in accordance with ASC Topic 718, Compensation - Stock Compensation, with the fair value recognition and measurement provisions of U.S. GAAP which requires compensation cost for the grant-date fair value of equity-based awards to be recognized over the requisite service period. The Company uses the straight-line method to amortize all stock awards granted over the requisite service period of the award. The Company accounts for forfeitures
when they occur, and any compensation expense previously recognized on unvested equity-based awards will be reversed when forfeited.
The fair value of awards of restricted LLC Units is based on the fair value of the member unit underlying the awards as of the date of grant. The fair value of the underlying member units (referred to as Class M Units prior to conversion to common LLC Units in the IPO on a value-for-value basis) for grants prior to the Company’s IPO in September 2021 was determined by considering a number of objective, subjective and highly complex factors including independent third-party valuations of the Company’s member units, operating and financial performance, the lack of liquidity of member units and general and industry specific economic outlook among other factors.
The fair value of restricted stock units (“RSUs”) is based on the fair value of the Class A common stock at the time of grant.
The fair value of option-based awards is estimated using the Black-Scholes valuation model. The Black-Scholes model requires the use of highly subjective and complex assumptions, including the option’s expected term and the price volatility of the underlying stock. For inputs into the Black-Scholes model, the expected stock price volatility for the common stock is estimated by taking the average historic price volatility for industry peers based on daily price observations over a period equivalent to the expected term of the stock option grants. Industry peers consist of several public companies in the Company’s industry which are of similar size, complexity and stage of development. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury implied yield at the date of grant. The Company has elected to use the “simplified method” to determine the expected term, which is the midpoint between the vesting date and the end of the contractual term, because it has insufficient history upon which to base an assumption about the term; the Company believes the simplified method approximates a term if it were to be based on expected life. The expected dividend yield is nil as the Company has not paid and does not anticipate paying dividends on its common stock.
In calculating the provision for interim income taxes, in accordance with ASC 740, Income Taxes an estimated annual effective tax rate is applied to year-to-date ordinary income. At the end of each interim period, the Company estimates the effective tax rate expected to be applicable for the full fiscal year. This differs from the method utilized at the end of an annual period.
For annual periods, income taxes are accounted for using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. In assessing the realizability of deferred tax assets, management considers whether it is more-likely-than-not that the deferred tax assets will be realized. Deferred tax assets and liabilities are calculated by applying existing tax laws and the rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the year of the enacted rate change.
Uncertainty in income taxes is accounted for using a recognition and measurement threshold for tax positions taken or expected to be taken in a tax return, which are subject to examination by federal and state taxing authorities. The tax benefit from an uncertain tax position is recognized when it is more likely than not that the position will be sustained upon examination by taxing authorities based on the technical merits of the position. The amount of the tax benefit recognized is the largest amount of the benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The effective tax rate and the tax basis of assets and liabilities reflect management’s estimates of the ultimate outcome of various tax uncertainties. The Company recognizes penalties and interest related to uncertain tax positions within the provision (benefit) for income taxes line in the unaudited condensed consolidated statements of operations. As of March 31, 2022, no uncertain tax positions have been recorded. The Company will continue to monitor this position each interim period.
Recent Accounting Pronouncements
Recently adopted accounting pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02 – Leases, and also issued subsequent amendments to the initial guidance, ASC 2018-10, ASC 2018-11, ASU 2019-10, ASU 2020-02 and ASU 2020-05 (collectively, “ASC 842”). ASC 842 introduces a lessee model that brings most leases on the balance sheet and, among other changes, eliminates the requirement in current GAAP for an entity to use bright-line tests in determining lease classification. ASC 842 allows for several practical expedients which permit the following: no reassessment of lease classification or initial direct costs; use of the standard’s effective date as the date of initial application; and no separation of non-lease components from the related lease components and, instead, to account for those components as a single lease component if certain criteria are met. The Company adopted this guidance by applying the modified retrospective approach effective January 1, 2022, and no cumulative effect adjustment was required to be recorded. See Note 6, Leases, for further discussion.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which modifies ASC 740 to reduce complexity while maintaining or improving the usefulness of the information provided to users of financial statements. ASU 2019-12 is effective for the Company for interim and annual reporting periods beginning after December 15, 2021. The Company adopted this guidance on January 1, 2022 and did not have a material impact on the Company's unaudited condensed consolidated financial statements.
Accounting pronouncements recently issued but not yet adopted
Other recent accounting pronouncements not yet adopted are not expected to have a material impact on the Company's unaudited condensed consolidated financial statements.
NOTE 3. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income applicable to Brilliant Earth Group, Inc. by the weighted average shares of Class A common stock outstanding (and Class D common stock if outstanding) during the period. Diluted earnings per share is computed by adjusting the net income available to Brilliant Earth Group, Inc. and the weighted average shares outstanding to give effect to potentially dilutive securities. Shares of Class B and Class C common stock are not entitled to receive any
distributions or dividends and are therefore excluded from this presentation since they are not participating securities.
All earnings prior to September 23, 2021, the date of the IPO, were entirely allocable to the non-controlling interest and, as a result, earnings per share information is not applicable for reporting periods prior to this date. Consequently, earnings per share for net income for periods prior to September 22, 2021 are not presented.
Basic and diluted earnings per share of common stock for the three months ended March 31, 2022 have been computed as follows (in thousands, except share and per share amounts):
|Net income attributable to Brilliant Earth Group, Inc., BASIC||$||356 |
|Add: Net income impact from assumed redemption of all LLC Units to common stock||3,013 |
|Less: Income tax expense on net income attributable to NCI||(753)|
|Net income attributable to Brilliant Earth Group, Inc., after adjustment for assumed conversion, DILUTED||$||2,616 |
|Weighted average shares of common stock outstanding, BASIC||10,010,798 |
|Dilutive effects of:|
|Vested LLC Units that are exchangeable for common stock||84,858,932 |
|LLC Units, RSUs and stock options||1,657,113 |
|Weighted average shares of common stock outstanding, DILUTED||96,526,843 |
|BASIC earnings per share||$||0.04 |
|DILUTED earnings per share||$||0.03 |
Net income attributable to the non-controlling interest added back to net income in the fully dilutive computation has been adjusted for income taxes which would have been expensed had the income been recognized by Brilliant Earth Group, Inc., a taxable entity. The weighted average common shares outstanding in the diluted computation per share assumes all outstanding LLC Units are converted and the Company will elect to issue shares of common stock upon redemption rather than cash-settle.
For the three months ended March 31, 2022, the dilutive impact of LLC Units convertible into common stock were included in the computation of diluted earnings per share under the if-converted method; the dilutive impact of unvested LLC Units, RSUs and stock options were included using the treasury stock method.
NOTE 4. INVENTORIES, NET
Inventories, net consist of the following (in thousands):
|March 31,||December 31,|
|Loose diamonds||$||8,367 ||$||9,013 |
|Fine jewelry and other||20,269 ||15,990 |
|Allowance for inventory obsolescence||(244)||(260)|
|Total inventories, net||$||28,392 ||$||24,743 |
The allowance for inventory obsolescence consists of the following (in thousands):
|March 31,||March 31,|
|Balance at beginning of period||$||(260)||$||(242)|
|Change in allowance for inventory obsolescence||16 ||24 |
|Balance at end of period||$||(244)||$||(218)|
As of March 31, 2022 and December 31, 2021, the Company had $21.3 million and $16.9 million, respectively, in consigned inventory held on behalf of suppliers which is not recorded in the unaudited condensed consolidated balance sheets.
NOTE 5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following (in thousands):
|March 31,||December 31,|
|Accrued vendor expenses||$||8,608 ||$||9,563 |
|Inventory received not billed||6,500 ||4,648 |
|Accrued payroll expenses||1,901 ||4,498 |
|Sales and other tax payable accrual||2,890 ||4,229 |
|Provision for sales returns and allowances||1,583 ||2,338 |
|Other||4,947 ||3,480 |
|Total accrued expenses and other current liabilities||$||26,429 ||$||28,756 |
Included in accrued expenses and other current liabilities is a provision for sales returns and allowances. Returns are estimated based on past experience and current expectations and are recorded as an adjustment to revenue. Activity for the three months ended March 31, 2022 and 2021 was as follows (in thousands):
|March 31,||March 31,|
|Balance at beginning of period||$||2,338 ||$||2,341 |
|Provision||5,277 ||4,893 |
|Returns and allowances||(6,032)||(6,014)|
|Balance at end of period ||$||1,583 ||$||1,220 |
NOTE 6. LEASES
The Company leases its executive offices, retail showrooms, office and operational locations under operating leases. The fixed, non-cancelable terms of our real estate leases are generally 5- 10 years and typically include renewal options. Most of the real estate leases require payment of real estate taxes, insurance and certain common area maintenance costs in addition to future minimum lease payments.
The Company elected the package of practical expedients permitted under the transition guidance within ASC 842 which, among other items, allowed the Company to carry forward historical lease classifications. As such, the Company applied the modified retrospective approach as of the adoption date to those lease contracts for which it had taken possession of the property as of December 31, 2021. In addition to the aforementioned practical expedient, the Company has elected to:
•Adopt the short-term lease exception for leases with terms of twelve months or less and account for them as if they were operating leases under ASC 840; and
•Apply the practical expedient of combining lease and non-lease components.
The Company determines if an arrangement is a lease at inception. Right of use (“ROU”) assets represent the Company’s right to use an underlying asset for the lease term while lease liabilities represent the Company’s obligation to make lease payments for the lease term. All leases greater than 12 months’ result in the recognition of a ROU asset and liability at the lease commencement date based on the present value of the lease payments over the lease term. The present value of the lease payments is calculated using the applicable weighted-average discount rate. The weighted-average discount rate is based on the discount rate implicit in the lease, or if the implicit rate is not readily determinable from the lease, then the Company estimates an applicable incremental borrowing rate. The incremental borrowing rate is estimated using the currency denomination of the lease, the contractual lease term and the Company’s applicable borrowing rate. The incremental borrowing rate represents the rate that would approximate the rate to borrow funds on a collateralized (or secured) basis over a similar term and in a similar economic environment.
The Company accounts for lease components separately from non-lease components. Generally, the real estate leases have initial terms ranging from ten years and typically include a -year renewal option. Renewal options are typically not included in the lease term as it is not reasonably certain at commencement date that the Company would exercise the options to extend the lease. The exercise of the lease renewal options is at the Company’s discretion and are included in the determination of the ROU asset and lease liability when the option is reasonably certain of being exercised. to
As of March 31, 2022, no renewal option periods were included in the estimated minimum lease terms as the options were not deemed to be reasonably certain to be exercised. The Company expends cash for leasehold improvements to build out and equip for its leased premises. Generally, a portion of the leasehold improvements costs are reimbursed by the landlords as tenant improvement allowances pursuant to agreed-upon terms in the lease agreements. Tenant improvement allowances are recorded as part of the lease liability on the unaudited condensed consolidated balance sheet and are amortized on a straight-line basis over the lease term. Operating leases with fixed minimum rent payments are recognized on a straight-line basis over the lease term starting on the date the Company takes possession of the leased property.
Total operating lease ROU assets and lease liabilities were as follows (in thousands):
|Assets||Classification||As of March 31, 2022|
|Operating ROU assets at cost||Operating lease right of use assets||$||20,750 |
|Accumulated amortization||Operating lease right of use assets||(683)|
|Net book value||$||20,067 |
|Liabilities||Classification||As of March 31, 2022|
|Operating leases||Current portion of operating lease liabilities||$||2,779 |
|Operating leases||Operating lease liabilities||19,882 |
|Total lease liabilities||$||22,661 |
Total operating lease costs were as follows (in thousands):
|Classification||For the three months ended|
March 31, 2022
|Operating lease costs||Selling, general and administrative expense||$||924 |
The maturity analysis of the operating lease liabilities under long-term non-cancelable operating leases, where the Company has taken physical possession of or has control of the physical use of these leased properties, as of March 31, 2022 was as follows (in thousands):
|For the nine months ending December 31, 2022||$||2,645 |
|Years ending December 31,|
|Total minimum lease payments||26,691 |
|Less: imputed interest||(4,030)|
|Net present value of operating lease liabilities||22,661 |
|Less: current portion||(2,779)|
|Long-term portion||$||19,882 |
The following table summarizes the weighted-average remaining lease term and weighted-average discount rate on long-term leases as of March 31, 2022 (in thousands):
|Weighted-average remaining lease term - operating leases||5.8 years|
|Weighted-average discount rate - operating leases||4.2 ||%|
|ROU assets and lease obligations recognized upon adoption of ASC 842 on January 1, 2022:|
|ROU assets||$||19,173 |
|Operating lease obligations||$||(21,316)|
|Supplemental cash flow information related to operating leases as of March 31, 2022 is as follows:|
|Cash paid for amounts included in lease liabilities for the three months ended March 31, 2022:|
|Operating cash flows from operating leases||$||1,005 |
|ROU assets obtained in exchange for new operating lease liabilities||$||1,577 |
NOTE 7. LONG-TERM DEBT
The following table summarizes the net carrying amount of the Term Loan (as defined below) as of March 31, 2022 and December 31, 2021, net of debt issuance costs (in thousands):
|March 31, 2022||December 31, 2021|
|Outstanding principal||Debt issuance costs||Net carrying amount||Outstanding principal||Debt issuance costs||Net carrying amount|
|Term loan||$||65,000 ||$||(1,084)||$||63,916 ||$||65,000 ||$||(1,422)||$||63,578 |
|Total debt||$||65,000 ||$||(1,084)||$||63,916 ||$||65,000 ||$||(1,422)||$||63,578 |
|Current portion||$||41,053 ||$||— ||$||41,053 ||$||30,789 ||$||— ||$||30,789 |
|Long term||23,947 ||(1,084)||22,863 ||34,211 ||(1,422)||32,789 |
|Total debt||$||65,000 ||$||(1,084)||$||63,916 ||$||65,000 ||$||(1,422)||$||63,578 |
The Company entered into a Loan and Security Agreement (the “Term Loan Agreement”) on September 30, 2019 with Runway Growth Credit Fund Inc. (the “Lender”) for a $40.0 million term loan, of which $35.0 million was defined as the First Tranche Term Loan and $5.0 million was the Second Tranche Term Loan. The $35.0 million First Tranche Term Loan was drawn on September 30, 2019. Payments were interest only through October 15, 2021 (first scheduled amortization payment) after which equal monthly payments of principal were due through April 15, 2023 (maturity date). Interest was at a variable rate equal to LIBOR (floor of 2.15%) plus 8.25%.
The Term Loan (the “Term Loan”) under the Term Loan Agreement is secured by substantially all assets of the Company, and the Company is required to comply with certain covenants, including a covenant that requires the Company to reach certain minimum liquidity requirements of cash and cash equivalents as defined in the Term Loan Agreement. The Company was in compliance with all covenants as of March 31, 2022. Prepayment fees of 3.00% declining to 0.00% were provided based on the anniversary date of payment.
Debt issuance costs of $2.6 million were capitalized and are being amortized to interest expense as an adjustment to yield using the effective interest method. Included in the debt issuance costs is the present value of a $1.6 million final payment due on April 15, 2023 (the “Final Payment”), which is being accreted to full value over the term and is recorded in other long-term liabilities in the unaudited condensed consolidated balance sheets.
In connection with the origination of the Term Loan Agreement, a warrant for 333,333 Class P Units was issued. The fair value of the warrant was $0.1 million at the time of issuance which was accounted for as a debt origination cost (contra-liability). The warrants had a carrying value of $6.4 million as of September 22, 2021 (after the mark-to-market adjustment as of the date of exercise) and were converted upon exercise into 534,589 newly issued LLC Units on a net settlement basis, elected at the option of the holder.
On December 17, 2020, the Company entered into a First Amendment to the Term Loan Agreement with the Lender (the “First Amendment”) to expand the Second Tranche Term Loan from $5.0 million to $30.0 million for a total commitment of $65.0 million. Up to $30.0 million of the proceeds from the Second Tranche Term Loan could be distributed to the holders of the equity interests within 90 days of closing. Other modifications in the First Amendment include:
•Closing fee of $0.3 million related to this new facility;
•Reduction in the LIBOR Floor on the entire facility from 2.15% to 1.00% (effective interest rate reduced from 10.40% to 9.25% based on LIBOR);
•Extension of the maturity to October 15, 2023;
•Extension of the interest-only period by six months (first scheduled amortization payment on April 15, 2022);
•Allowance of quarterly tax distributions to members;
•Extension of the prepayment term trigger dates by six months;
•Modification of the Final Payment, as defined, to include the present value of an additional $1.4 million, which represents the incremental increase in the Final Payment due to the increase in the Term Loan principal, and an additional $0.2 million, which are included in the debt issuance costs, and are being accreted to full value as an adjustment to the interest rate in other long-term liabilities in the unaudited condensed consolidated balance sheets; and
•Issuance of 25,000 new warrants to the Lender with an exercise price of $10.00 per Unit with a term of ten years. These warrants were accounted for using a similar methodology to the valuation of the original warrants discussed above, and the fair value was determined to be less than $0.1 million. The warrants were converted into LLC Units at the time of the IPO.
The accreted Final Payments recorded in other long-term liabilities were $2.9 million and $2.8 million as of March 31, 2022 and December 31, 2021, respectively.
On August 6, 2021, a second amendment was executed primarily to allow for contributions to the Brilliant Earth Foundation. On August 29, 2021, a third amendment was executed to among other matters, permit the Reorganization Transactions that were consummated by the Company in connection with the Up-C structure of the IPO transaction and reduce the variable interest rate from 8.25% to 7.75%; and the LIBOR Floor from 1.00% to 0.50%. The amendments were treated as debt modifications for accounting purposes.
The effective interest rate was 11.08% and 12.02% for the three months ended March 31, 2022 and 2021, respectively. Interest expense was $1.4 million, and $1.5 million; and the amortization of deferred
issuance costs was $0.4 million and $0.4 million for the three months ended March 31, 2022 and 2021, respectively.
As of March 31, 2022, the aggregate future principal payments under the Term Loan, including the Final Payment payable to the lender, are as follows (in thousands):
|Years ending December 31,|
|2022||$||41,053 ||$||— ||$||41,053 |
|2023||23,947 ||3,151 ||27,098 |
|Total aggregate future principal payments||$||65,000 ||$||3,151 ||$||68,151 |
NOTE 8. STOCKHOLDERS' AND MEMBERS' EQUITY
The following summarizes the capitalization and voting rights of the Company’s classes of equity as of March 31, 2022 and December 31, 2021:
|March 31,||December 31,|
|Common stock reserved for issuances:|
|Conversion of LLC Units||84,446,672||85,163,263|
|Unvested LLC Units||1,074,874||1,901,977|
|Common LLC Units||84,446,672||85,163,263||No||Yes|
The Board of Directors is authorized to direct the Company to issue shares of preferred stock in one or more series and the discretion to determine the number and designation of such series and the powers, rights, preferences, privileges and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences, of each series of preferred stock. Through March 31, 2022, no series of preferred stock have been issued.
Shares of Class B and Class C common stock are not entitled to receive any distributions or dividends other than in connection with a liquidation and have no rights to convert into Class A common stock or
Class D common stock, separate from an exchange or redemption of the LLC Interests corresponding to such shares of Class B common stock or Class C common stock, as applicable, as discussed below under Brilliant Earth, LLC. When a common unit is redeemed for cash or Class A or D common stock by a Continuing Equity Owner who holds shares of Class B common stock or Class C common stock, such Continuing Equity Owner will be required to surrender a share of Class B common stock or Class C common stock, as applicable, which will be cancelled for no consideration.
The Company must, at all times, maintain (i) a one-to-one ratio between the number of shares of Class A common stock issued to Brilliant Earth Group, Inc. and the number of LLC Interests owned by Brilliant Earth Group, Inc., and (ii) maintain a one-to-one ratio between the number of shares of Class B and Class C common stock owned by the Continuing Equity Owners and the number of LLC Interests owned by them.
The different classes of common stock as of March 31, 2022, are held as follows:
•10,708,456 shares of Class A common stock were issued in the IPO, and through subsequent conversion of LLC Units and vesting of RSUs;
•35,326,696 shares of Class B common stock are held by the Continuing Equity Owners excluding the Founders; and
•49,119,976 shares of Class C common stock are held by the Founders.
Class C and D common stock may only be held by the Founders and their respective permitted transferees. No shares of Class D common stock are outstanding, but may be issued in connection with an exchange by the Founders of their LLC Interests (along with an equal number of shares of Class C common stock and such shares shall be immediately cancelled).
Brilliant Earth, LLC
As of March 31, 2022, Brilliant Earth Group, Inc. holds a 11.3% economic interest in Brilliant Earth, LLC through its ownership of 10,708,456 LLC Units, but consolidates Brilliant Earth, LLC as sole managing member. The remaining 84,446,672 LLC Units representing an 88.7% interest are held by the Continuing Equity Owners and presented in the condensed consolidated financial statements as a non-controlling interest.
The organization agreements include a provision for the Continuing Equity Owners, subject to certain exceptions from time to time at each of their option, to require Brilliant Earth, LLC to redeem all or a portion of their LLC Units in exchange for, at the Company’s election, newly-issued shares of Class A common stock or Class D common stock, as applicable, on a one-for-one basis or, at the Company's election, a cash payment equal to a volume weighted average market price of one share of Class A common stock for each LLC Interest so redeemed, in each case, in accordance with the terms of the Brilliant Earth LLC Agreement. The redemption feature is not bifurcated from the underlying LLC Unit.
Issuance of Additional LLC Units
Under the LLC Agreement, the Company is required to cause Brilliant Earth, LLC to issue additional LLC Interests to the Company when the Company issues additional shares of Class A common stock. Other than as it relates to the issuance of Class A common stock in connection with an equity incentive
program, the Company must contribute to Brilliant Earth, LLC net proceeds and property, if any, received by the Company with respect to the issuance of such additional shares of Class A common stock. The Company must cause Brilliant Earth, LLC to issue a number of LLC Interests equal to the number of shares of Class A common stock issued such that, at all times, the number of LLC Interests held by the Company equals the number of outstanding shares of Class A common stock.
For the three months ended March 31, 2022, the Company caused Brilliant Earth, LLC to issue to the Company a vested total of 40,019 LLC Units for RSUs. The Company also caused Brilliant Earth Group, Inc. to issue 337,323 shares of Class B common stock to the Continuing Equity Owners associated with LLC units which vested during the period. There were 668,640 shares of Class B and 385,274 shares of Class C common stock converted to Class A common stock related to the Continuing Equity Owners. No stock options were exercised during the period.
Distributions to Members Related to Their Income Tax Liabilities
As a limited liability company treated as a partnership for income tax purposes, Brilliant Earth, LLC does not incur significant federal, state or local income taxes, as these taxes are primarily the obligations of its members. Under the LLC Agreement, Brilliant Earth, LLC is required to distribute cash, to the extent that Brilliant Earth, LLC has cash available, on a pro rata basis to its members to the extent necessary to cover the members’ tax liabilities, if any, with respect to each member’s share of Brilliant Earth, LLC taxable earnings. Brilliant Earth, LLC makes such tax distributions to its members quarterly, based on an estimated tax rate and projected year-to-date taxable income, with a final accounting once actual taxable income or loss has been determined. Such distributions totaled approximately $6.9 million and $0.1 million respectively, for the three months ended March 31, 2022 and March 31, 2021.
NOTE 9. EQUITY-BASED COMPENSATION
At the time of the IPO on September 23, 2021, the 2021 Incentive Award Plan and the 2021 Employee Stock Purchase Plan (the “2021 Plans”) were adopted to attract, retain, and motivate selected employees, consultants, and directors through the granting of equity-based compensation awards and cash-based performance bonus awards. The compensation committee or its approved designees, as defined, administer the 2021 Plans. Subject to the terms and conditions of the 2021 Plans, the administrator has the authority to select the persons to whom awards are to be made, to determine the number of shares to be subject to awards and the terms and conditions of awards, and to make all other determinations and to take all other actions necessary or advisable for the administration of the 2021 Plans.
Under the 2021 Incentive Award Plan, 10,923,912 shares of common stock were reserved for issuance pursuant to a variety of equity-based compensation awards, including stock options, stock appreciation rights, or SARs, restricted stock awards, restricted stock unit awards, and other equity-based awards. In addition, 1,638,586 shares of Class A common stock were reserved for issuance under our Employee Stock Purchase Plan. The number of shares initially reserved for issuance or transfer pursuant to awards under the 2021 Incentive Award Plan will be increased by an annual increase on the first day of each fiscal year beginning in 2022 and ending in 2031, equal to the lesser of (A) 5% of the shares of common stock outstanding (on an as converted basis) on the last day of the immediately preceding fiscal year and (B) such smaller number of shares of stock as determined by the board of directors; provided, however, that no more than 81,929,342 shares of stock may be issued upon the exercise of incentive stock options. As of March 31, 2022, 9,391,642 shares of common stock are available for future grant under the 2021
Incentive Award Plan. All of the shares of Class A common stock reserved for issuance remain available. Vesting is subject to certain change in control provisions as provided in the award agreements.
Prior to the IPO, Class M Units were granted to certain employees at the Company’s discretion in consideration of services provided by employees. The agreements generally provide for 25% vesting on the first anniversary from the date of grant (or a shorter period at the Company's board of directors' discretion), with the remainder vesting monthly over the subsequent three years. Compensation cost related to these Class M Units was measured as of the grant date based on the fair value of the award and is being expensed ratably over the service period. Class M Units were issued and outstanding as of the date of grant. As discussed in Note 1, Business and organization, under Conversion of Class F, P and M units at time of IPO, at the time of the IPO, the LLC Agreement was amended and restated to recapitalize all 2,006,212 unvested Class M Units into 2,046,008 unvested LLC Units after applying a conversion ratio of 1.8588 with a further adjustment for a distribution threshold (which impacted their allocation of value) so the economic effect of the exchange was a like-for-like value. The unamortized compensation and remaining vesting period for these awards prior to the IPO has been carried forward after the IPO without adjustment. The number of unvested Class M Units presented in these financial statements for periods prior to the IPO have been retroactively adjusted to reflect the conversion ratio similar to the presentation of a stock-split.
Grants of Restricted Stock Units
RSUs have a time-based vesting requirement (based on continuous employment). Upon vesting, the RSUs convert into Class A common stock; unvested RSUs are not considered outstanding shares of Class A common stock. The agreements generally provide for 25% vesting at the first anniversary of the date of the grant (or a shorter period at the Company's board of director's discretion), with the remainder vesting quarterly over the following three years.
The following table summarizes the activity related to the Company’s RSUs for the three months ended March 31, 2022:
|Number of Restricted Stock Units||Weighted Average Grant Date Fair Value|
|Balance as of December 31, 2021, unvested||1,377,728 ||$||13.15 |
|Granted||1,192,805 ||$||11.08 |
|Balance as of March 31, 2022, unvested||2,462,868 ||$||12.16 |
The fair value of the RSUs was based on the fair value of a Class A share of common stock at the time of grant. Total compensation expense for RSUs was approximately $1.4 million for the three months ended March 31, 2022, and is included in selling, general and administrative expenses in the unaudited condensed consolidated statements of operations. No tax benefit was associated with the equity-based compensation expense for RSUs.
The unamortized compensation cost related to RSUs of $28.0 million as of March 31, 2022 is expected to be recognized over a weighted-average period of approximately 3.7 years.
Grants of Stock Options
On September 22, 2021, options to purchase 1,618,064 shares of Class A common stock with a strike price of $12.00 (per share underlying the option) were granted to certain executives, employees and members of the Board with the number of shares underlying the options determined based on the number of Class M Units reduced in the conversion of LLC Units. The awards have a time-based vesting requirement (based on continuous employment). Upon vesting, the stock options are exercisable into Class A common stock. Vesting is generally over four years from the date of grant of the related Class M Units and options may be exercised up to 10.0 years from the date of issuance.
The following table summarizes the activity related to the outstanding and exercisable stock options:
|Number of options||Weighted Average Grant Date Fair Value|
|Outstanding as of December 31, 2021||1,612,133||$||4.28 |
|Outstanding as of March 31, 2022||1,143,944 ||$||4.29 |
|Vested and exercisable as of March 31, 2022||458,008||$||4.26 |
|Unvested as of March 31, 2022||685,936||$||4.29 |
|Vested and expected to vest as of March 31, 2022||1,143,944 ||$||4.28 |
As of March 31, 2022, the vested stock options did not have an aggregated intrinsic value as the exercise price exceeded the estimated fair market value of the stock options. The stock option awards have weighted average remaining contractual terms of 9.5 years.
Since options represent equity awards, such awards are fair valued as of the grant date for the purposes of measurement and recognition under U.S. GAAP. To measure the fair value of an option, the Black Scholes valuation model was utilized. The value of the common stock underlying the award is based on the fair value of a share of Class A common stock. The valuation model requires the input of other highly subjective assumptions. Inputs to model for awards granted on September 22, 2021 are as follows:
|Expected volatility||35.0 ||%|
|Expected dividend yield||Nil|
|Expected term (in years)|
5.0 to 6.3 Years
|Risk free interest rate||0.9 ||%|
Total compensation expense for stock options was approximately $0.6 million for the three months ended March 31, 2022, and is included in selling, general and administrative expenses in the unaudited condensed consolidated statements of operations.
As of March 31, 2022, total compensation cost related to unvested option awards not yet recognized was $