SEC Filing | Brilliant Earth Group, Inc.

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brlt-20230930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended September 30, 2023


☐			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)


Delaware						87-1015499
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification Number)
300 Grant Avenue, Third Floor San Francisco, CA						94108
(Address of principal executive offices)						(Zip Code)

(800) 691-0952

(Registrant's telephone number, including area code)

N/A

(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 November 6, 2023, there were 12,269,690 shares of the registrant's Class A common stock, $0.0001 par value per share, outstanding, 35,697,266 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.

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			Page
Part I - Financial Information
Item 1. Financial Statements.			5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.			26
Item 3. Quantitative and Qualitative Disclosures About Market Risk.			42
Item 4. Controls and Procedures.			42
Part II - Other Information
Item 1. Legal Proceedings.			43
Item 1A. Risk Factors.			43
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities.			43
Item 3. Defaults Upon Senior Securities.			43
Item 4. Mine Safety Disclosures.			43
Item 5. Other Information.			43
Item 6. Exhibits.			44
Signatures			45

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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, plans and objectives of management for future operations, including, among others, statements regarding expected growth, introduction of new products, 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," "contemplate," "continue," "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 risks related to: our rapid growth in recent years and limited operating experience; our ability to manage growth effectively; risks related to increases in costs of diamonds, other gemstones and precious metals; lead times, and supply shortages and supply changes; our 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; our ability to cost-effectively turn existing customers into repeat customers or to acquire new customers; our expansion plans in the U.S.; risks related to 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; our history of losses, and our ability to sustain profitability; our ability to compete in the fine jewelry retail industry; our ability to manage our inventory balances and inventory shrinkage; a decline in sales of Create Your Own rings; our ability to maintain and enhance our brand; the effectiveness of our marketing efforts; the impact of environmental, social, and governance matters on our business and reputation; our e-commerce and omnichannel business; our ability to effectively anticipate and respond to changes in consumer preferences and shopping patterns; our ability to predict future performance due to quarterly and annual fluctuations of our results of operations and operating cash flow; our dependence on distributions from Brilliant Earth, LLC to pay our taxes and expenses; risks related to our obligations under the Tax Receivable Agreement (as defined below) and our organizational structure; and the other risks, uncertainties and the factors described in Part I, Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (the "2022 Form 10-K") filed with the Securities and Exchange Commission (the "SEC") on March 21, 2023. 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.

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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 to Brilliant Earth Group, Inc., and, unless otherwise stated, all of its subsidiaries, including 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.

•"Continuing Equity Owners" refers collectively to holders of LLC Interests (as defined below) 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, 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.

•"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.

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Part I - Financial Information

Item 1. Financial Statements

Brilliant Earth Group, Inc.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands except share and per share amounts)


	September 30,		December 31,
	2023		2022
Assets
Current assets:
Cash and cash equivalents	$	147,131	$	154,649
Restricted cash	209		205
Inventories, net	37,256		39,331
Prepaid expenses and other current assets	11,271		11,764
Total current assets	195,867		205,949
Property and equipment, net	22,402		16,554
Deferred tax assets	9,272		8,948
Operating lease right of use assets	35,459		27,812
Other assets	2,693		3,311
Total assets	$	265,693	$	262,574

Liabilities and equity
Current liabilities:
Accounts payable	$	4,108	$	11,032
Accrued expenses and other current liabilities	35,073		37,833
Current portion of deferred revenue	23,051		18,505
Current portion of operating lease liabilities	4,866		3,873
Current portion of long-term debt	3,656		3,250
Total current liabilities	70,754		74,493

Long-term debt, net of debt issuance costs	56,749		59,462
Operating lease liabilities	37,066		28,537
Payable pursuant to the Tax Receivable Agreement	7,675		6,893
Other long-term liabilities	4		48
Total liabilities	172,248		169,433

Commitments and contingencies (Note 10)

Equity
Preferred stock, $0.0001 par value, 10,000,000 shares authorized, none issued and outstanding at September 30, 2023 and December 31, 2022, respectively	—		—
Class A common stock, $0.0001 par value, 1,200,000,000 shares authorized; 12,260,942 and 11,246,694 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively	1		1
Class B common stock, $0.0001 par value, 150,000,000 shares authorized; 35,669,224 and 35,482,534 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively	4		4
Class C common stock, $0.0001 par value, 150,000,000 shares authorized; 49,119,976 and 49,119,976 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively	5		5
Class D common stock, $0.0001 par value, 150,000,000 shares authorized; none issued and outstanding at September 30, 2023 and December 31, 2022, respectively	—		—
Additional paid-in capital	7,791		7,256
Retained earnings	4,004		3,663
Equity attributable to Brilliant Earth Group, Inc.	11,805		10,929
NCI attributable to Brilliant Earth, LLC	81,640		82,212
Total equity	93,445		93,141
Total liabilities and equity	$	265,693	$	262,574

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

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Brilliant Earth Group, Inc.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands except share and per share amounts)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Net sales	$	114,154	$	111,405	$	322,036	$	320,252
Cost of sales	47,327		50,487		138,044		151,397
Gross profit	66,827		60,918		183,992		168,855
Operating expenses:
Selling, general and administrative	64,813		54,615		180,708		151,576
Income from operations	2,014		6,303		3,284		17,279
Interest expense	(1,322)		(778)		(3,808)		(3,700)
Other income, net	1,401		374		3,436		266
Loss on extinguishment of debt	—		—		—		(617)
Income before tax	2,093		5,899		2,912		13,228
Income tax expense	(95)		(180)		(119)		(389)
Net income	1,998		5,719		2,793		$	12,839
Net income allocable to non-controlling interest	1,753		5,073		2,452		11,413
Net income allocable to Brilliant Earth Group, Inc.	$	245	$	646	$	341	$	1,426

Earnings per share:
Basic	$	0.02	$	0.06	$	0.03	$	0.13
Diluted	$	0.02	$	0.05	$	0.02	$	0.10
Weighted average shares of common stock outstanding:
Basic	12,149,770		10,884,306		11,780,905		10,571,777
Diluted	97,194,920		96,574,462		96,918,465		96,488,889

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

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Brilliant Earth Group, Inc.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(in thousands except share amounts)


	Brilliant Earth Group, Inc. Stockholders' Equity
	Class A Common Stock			Class B Common Stock			Class C Common Stock									Non-Controlling Interest
	Shares	Amount		Shares	Amount		Shares	Amount		Additional Paid-In Capital		Retained Earnings		Stockholders' Equity		Units	Amounts		Total Equity
Balance, January 1, 2023	11,246,694	$	1	35,482,534	$	4	49,119,976	$	5	$	7,256	$	3,663	$	10,929	84,602,510	$	82,212	$	93,141
Tax distributions to members	—	—		—	—		—	—		—		—		—		—	(1,468)		(1,468)
Conversion of Class B to Class A common stock	71,886	—		(71,886)	—		—	—		—		—		—		(71,886)	—		—
RSU vesting during period	252,941	—		—	—		—	—				—		—		—	—		—
Class B shares issued upon vesting of LLC units	—	—		115,437	—		—	—				—		—		115,437	—		—
Change in deferred tax asset and TRA liability related to redemption of LLC Units	—	—		—	—		—	—		(65)		—		(65)		—	—		(65)
Equity-based compensation	—	—		—	—		—	—		2,204		—		2,204		—	54		2,258
Net loss	—	—		—	—		—	—		—		(52)		(52)		—	(388)		(440)
Rebalancing of controlling and non-controlling interest	—	—		—	—		—	—		(1,780)		—		(1,780)		—	1,780		—
Balance, March 31, 2023	11,571,521	$	1	35,526,085	$	4	49,119,976	$	5	$	7,615	$	3,611	$	11,236	84,646,061	$	82,190	$	93,426
Tax distributions to members	—	—		—	—		—	—		—		—		—		—	(3,660)		(3,660)
Conversion of Class B to Class A common stock	54,600	—		(54,600)	—		—	—		—		—		—		(54,600)	—		—
RSU vesting during period	411,444	—		—	—		—	—		—		—		—		—	—		—
Class B shares issued upon vesting of LLC units	—	—		112,115	—		—	—		—		—		—		112,115	—		—
Change in deferred tax asset and TRA liability related to redemption of LLC Units	—	—		—	—		—	—		6		—		6		—	—		6
Equity-based compensation	—	—		—	—		—	—		2,574		—		2,574		—	53		2,627
Net income	—	—		—	—		—	—		—		148		148		—	1,087		1,235
Rebalancing of controlling and non-controlling interest	—	—		—	—		—	—		(2,313)		—		(2,313)		—	2,313		—
Balance, June 30, 2023	12,037,565	$	1	35,583,600	$	4	49,119,976	$	5	$	7,882	$	3,759	$	11,651	84,703,576	$	81,983	$	93,634
Tax distributions to members	—	—		—	—		—	—		—		—		—		—	(4,733)		(4,733)
Conversion of Class B to Class A common stock	19,865	—		(19,865)	—		—	—		—		—		—		(19,865)	—		—
RSU vesting during period	203,512	—		—	—		—	—		—		—		—		—	—		—
Class B shares issued upon vesting of LLC units	—	—		105,489	—		—	—		—		—		—		105,489	—		—
Change in deferred tax asset and TRA liability related to redemption of LLC Units	—	—		—	—		—	—		(23)		—		(23)		—	—		(23)
Equity-based compensation	—	—		—	—		—	—		2,518		—		2,518		—	51		2,569
Net income	—	—		—	—		—	—		—		245		245		—	1,753		1,998
Rebalancing of controlling and non-controlling interest	—	—		—	—		—	—		(2,586)		—		(2586)		—	2,586		—
Balance, September 30, 2023	12,260,942	$	1	35,669,224	$	4	49,119,976	$	5	$	7,791	$	4,004	$	11,805	84,789,200	$	81,640	$	93,445

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

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Brilliant Earth Group, Inc.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(in thousands except share amounts)


	Brilliant Earth Group, Inc. Stockholders' Equity
	Class A Common Stock			Class B Common Stock			Class C Common Stock									Non-Controlling Interest
	Shares	Amount		Shares	Amount		Shares	Amount		Additional Paid-In Capital		Retained Earnings		Stockholders' Equity		Units	Amounts		Total Equity
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	—		—	—		—	—		—		—		—		—	—		—
Class B shares issued upon vesting of LLC units	—	—		337,323	—		—	—		—		—		—		337,323	—		—
Change in deferred tax asset and TRA liability related to redemption of LLC Units	—	—		—	—		—	—		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
Tax distributions to members	—	—		—	—		—	—		—		—		—		—	(8,100)		(8,100)
Conversion of Class B to Class A common stock	110,000	—		(110,000)	—		—	—		—		—		—		(110,000)	—		—
RSU vesting during period	16,938	—		—	—		—	—		—		—		—		—	—		—
Class B shares issued upon vesting of LLC units	—	—		140,897	—		—	—		—		—		—		140,897	—		—
Change in deferred tax asset and TRA liability related to redemption of LLC Units	—	—		—	—		—	—		(87)		—		(87)		—	—		(87)
Equity-based compensation	—	—		—	—		—	—		2,079		—		2,079		—	69		2,148
Net income	—	—		—	—		—	—		—		424		424		—	3,327		3,751
Rebalancing of controlling and non-controlling interest	—	—		—	—		—	—		(2,582)		—		(2,582)		—	2,582		—
Balance, June 30, 2022	10,835,394	$	1	35,357,593	$	4	49,119,976	$	5	$	6,749	$	2,308	$	9,067	84,477,569	$	70,687	$	79,754
Tax distributions to members	—	—		—	—		—	—		—		—		—		—	(3,322)		(3,322)
Conversion of Class B to Class A common stock	85,708	—		(85,708)	—		—	—		—		—		—		(85,708)	—		—
RSU vesting during period	19,270	—		—	—		—	—		—		—		—		—	—		—
Class B shares issued upon vesting of LLC units	—	—		123,853	—		—	—				—		—		123,853	—		—
Change in deferred tax asset and TRA liability related to redemption of LLC Units	—	—		—	—		—	—		130		—		130		—	—		130
Equity-based compensation	—	—		—	—		—	—		2,243				2,243		—	68		2,311
Net income	—	—		—	—		—	—		—		646		646		—	5,073		5,719
Rebalancing of controlling and non-controlling interest	—	—		—	—		—	—		(2,391)		—		(2,391)		—	2,391		—
Balance, September 30, 2022	10,940,372	$	1	35,395,738	$	4	49,119,976	$	5	$	6,731	$	2,954	$	9,695	84,515,714	$	74,897	$	84,592

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

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Brilliant Earth Group, Inc.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)


	Nine Months Ended September 30,
	2023		2022
Operating activities
Net income	$	2,793	$	12,839
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	2,996		1,248
Equity-based compensation	7,454		6,563
Non-cash operating lease cost	3,487		2,272

Amortization of debt issuance costs	202		522
Loss on extinguishment of debt	—		617
Deferred tax expense	118		—
Other	63		20
Changes in assets and liabilities:
Inventories	2,025		(15,610)
Prepaid expenses and other current assets	1,808		(1,965)
Other assets	547		(2,034)
Accounts payable, accrued expenses and other current liabilities	(7,554)		1,577
Deferred revenue	4,502		3,762
Operating lease liabilities	(2,927)		(792)


Net cash provided by operating activities	15,514		9,019
Investing activities
Purchases of property and equipment	(10,729)		(6,566)
Net cash used in investing activities	(10,729)		(6,566)
Financing activities

Payments on SVB term loan facility	(2,438)		(813)
Proceeds received from SVB term loan facility	—		65,000
Repayment of Runway term loan	—		(58,158)
Principal payments on Runway term loan	—		(6,842)
Final payment and prepayment penalty on Runway term loan	—		(2,408)
Payments of debt issuance costs	—		(870)
Tax distributions to members	(9,861)		(18,296)

Net cash used in financing activities	(12,299)		(22,387)
Net decrease in cash, cash equivalents and restricted cash	(7,514)		(19,934)
Cash, cash equivalents and restricted cash at beginning of period	154,854		173,070
Cash, cash equivalents and restricted cash at end of period	$	147,340	$	153,136


Reconciliation of cash, cash equivalents and restricted cash
Cash and cash equivalents	$	147,131	$	152,931
Restricted cash	209		205
Total cash, cash equivalents, and restricted cash	$	147,340	$	153,136

Non-cash investing and financing activities
Right-of-use assets obtained in exchange for new operating lease liabilities	$	12,449	$	5,963
Deferred tax assets associated with redemption of LLC Units	442		4,229
TRA Obligation associated with redemption of LLC Units	524		3,581



Purchases of property and equipment included in accounts payable and accrued liabilities	964		2,513
Change in APIC related to redemption of LLC Units	(82)		648
Debt issuance costs included in accounts payable and accrued liabilities	—		380
Debt issuance costs capitalized to principal of long-term debt	—		86

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

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Brilliant Earth Group, Inc.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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 operating within the United States ("U.S."). Co-headquarters are located in San Francisco, California and Denver, Colorado.

Basis of Presentation

The 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, 2023, or for any other interim period or for any other future year.

The condensed consolidated balance sheet as of December 31, 2022 has been derived from the audited consolidated financial statements of the Company, which are included in the Company's Annual Report on Form 10-K for the year ended December 31, 2022 (the "2022 Form 10-K"). 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. 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, 2022, as disclosed in the 2022 Form 10-K.

There have been no material changes or updates to the Company's significant accounting policies from those described in the audited consolidated financial statements included in the 2022 Form 10-K except for the updates noted below.

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 statements of operations represents the portion of earnings or loss attributable to the economic interest in Brilliant Earth, LLC held

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by the Continuing Equity Owners. The non-controlling interest on the unaudited condensed consolidated balance sheets represents 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 September 30, 2023, the non-controlling interest was 87.4%. 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 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, and fair value of equity-based compensation. 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 September 30, 2023 and December 31, 2022, there were no financial instruments (assets or liabilities) measured at fair value on a recurring basis.

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

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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 and were classified as Level 2.

Marketing Expenses

Marketing, advertising and promotional costs are generally expensed as incurred, except for certain production costs that are expensed the first time the advertising takes place.

Recent Accounting Pronouncements

The Company has considered all recent accounting pronouncements issued, but not yet effective, and does not expect any to have a material effect on the Company’s condensed consolidated financial statements.

2. 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.

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Basic and diluted earnings per share of common stock for the three and nine months ended September 30, 2023 and 2022 have been computed as follows (in thousands, except share and per share amounts):


	Three Months Ended September 30,				Nine Months Ended September 30,
Numerator:	2023		2022		2023		2022
Net income attributable to Brilliant Earth Group, Inc., BASIC	$	245	$	646	$	341	$	1,426
Add: Net income impact from assumed redemption of all LLC Units to common stock	1,753		5,073		2,452		11,413
Less: Income tax expense on net income attributable to NCI	(454)		(1,350)		(634)		(2,953)
Net income attributable to Brilliant Earth Group, Inc., after adjustment for assumed conversion, DILUTED	$	1,544	$	4,369	$	2,159	$	9,886

Denominator:
Weighted average shares of common stock outstanding, BASIC	12,149,770		10,884,306		11,780,905		10,571,777
Dilutive effects of:
Vested LLC Units that are exchangeable for common stock	84,727,903		84,478,855		84,661,708		84,579,316
Unvested LLC Units that are exchangeable for common stock	265,750		919,067		380,006		1,154,306
RSUs	51,497		292,234		95,846		183,490
Weighted average shares of common stock outstanding, DILUTED	97,194,920		96,574,462		96,918,465		96,488,889

BASIC earnings per share	$	0.02	$	0.06	$	0.03	$	0.13
DILUTED earnings per share	$	0.02	$	0.05	$	0.02	$	0.10

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 and nine months ended September 30, 2023 and 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 and RSUs were included using the treasury stock method.

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The following table presents the shares underlying RSUs and stock options for the three and nine months ended September 30, 2023 and 2022 that have been excluded from the computation of earnings per share because such impact is anti-dilutive:


	Three Months Ended September 30,		Nine Months Ended September 30,
	2023	2022	2023	2022
RSUs	3,226,891	2,250,505	3,075,461	2,039,301
Stock options	788,020	955,961	806,339	1,182,592

3. REVENUE

Disaggregation of Revenue

The following table discloses total net sales by geography for the three and nine months ended September 30, 2023 and 2022 (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
United States	$	108,413	$	104,176	$	305,882	$	300,174
International	5,741		7,229		16,154		20,078
Total net sales	$	114,154	$	111,405	$	322,036	$	320,252

Deferred Revenue

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 September 30, 2023, December 31, 2022, and December 31, 2021, total deferred revenue that includes our contract balances was $23.1 million, $18.6 million, and $19.0 million, respectively, of which less than $0.1 million, less than $0.1 million, and $0.2 million, respectively, were included within other long-term liabilities.

During the three months ended September 30, 2023 and 2022, the Company recognized $20.2 million and $21.4 million, respectively, that was deferred as of June 30, 2023 and June 30, 2022, respectively.

During the nine months ended September 30, 2023 and 2022, the Company recognized $18.0 million and $18.2 million of revenue, respectively, that was deferred as of December 31, 2022 and December 31, 2021, respectively.

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

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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 September 30, 2023 and December 31, 2022, refund liabilities balances were $1.5 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 September 30, 2023 and December 31, 2022, returns asset balances were $0.6 million and $0.9 million, respectively, and are included within prepaid expenses and other current assets in the unaudited condensed consolidated balance sheets.

4. INVENTORIES, NET

Inventories, net consist of the following (in thousands):


	September 30,		December 31,
	2023		2022
Loose diamonds	$	8,986	$	11,894
Fine jewelry and other	28,626		27,744
Allowance for inventory obsolescence	(356)		(307)
Total inventories, net	$	37,256	$	39,331

The allowance for inventory obsolescence consists of the following (in thousands):


	September 30,		September 30,
	2023		2022
Balance at beginning of period	$	(307)	$	(260)
Change in allowance for inventory obsolescence	(49)		(19)
Balance at end of period	$	(356)	$	(279)

As of September 30, 2023 and December 31, 2022, the Company had $27.7 million and $27.6 million, respectively, in consigned inventory held on behalf of suppliers which is not recorded in the unaudited condensed consolidated balance sheets.

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5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities consist of the following (in thousands):


	September 30,		December 31,
	2023		2022
Vendor expenses	$	12,565	$	14,769
Inventory received not billed	9,827		7,973
Payroll expenses	4,254		5,301
Sales and other tax payable	2,764		4,137
Provision for sales returns and allowances	1,541		2,332
Current portion of TRA	245		502
Other	3,877		2,819
Total accrued expenses and other current liabilities	$	35,073	$	37,833

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 nine months ended September 30, 2023 and 2022 was as follows (in thousands):


	September 30,		September 30,
	2023		2022
Balance at beginning of period	$	2,332	$	2,338
Provision	16,136		18,801
Returns and allowances	(16,927)		(19,530)
Balance at end of period	$	1,541	$	1,609

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. Certain lease agreements include options to renew or terminate the lease, which are not reasonably certain to be exercised and therefore are not factored into the determination of lease payments. 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.

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Total operating lease ROU assets and lease liabilities were as follows (in thousands):


Assets	Classification	As of September 30, 2023		As of September 30, 2022
Operating ROU assets at cost	Operating lease right of use assets	$	42,175	$	25,136
Accumulated amortization	Operating lease right of use assets	(6,716)		(2,272)
Net book value		$	35,459	$	22,864

Liabilities	Classification	As of September 30, 2023		As of September 30, 2022
Current:
Operating leases	Current portion of operating lease liabilities	$	4,866	$	3,321
Noncurrent:
Operating leases	Operating lease liabilities	37,066		23,166
Total lease liabilities		$	41,932	$	26,487

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Total operating lease costs were as follows (in thousands):


	Classification	Three months ended September 30, 2023		Three months ended September 30, 2022		Nine months ended September 30, 2023		Nine months ended September 30, 2022
Operating lease costs	Selling, general and administrative expense	$	1,789	$	1,089	$	5,141	$	3,067
Variable lease costs	Selling, general and administrative expense	343		—		936		—
Total lease costs		$	2,132	$	1,089	$	6,077	$	3,067

The maturity analysis of the operating lease liabilities as of September 30, 2023 was as follows (in thousands):


	Amount
For the remainder of the year ending December 31, 2023	$	1,319
Years ending December 31,
2024	7,720
2025	7,769
2026	7,525
2027	6,147
2028	5,127
Thereafter	16,126
Total minimum lease payments	51,733
Less: imputed interest	(9,801)
Net present value of operating lease liabilities	41,932
Less: current portion	(4,866)
Long-term portion	$	37,066

The table summarizes the weighted-average remaining lease term and weighted-average discount rate on long-term leases as follows (in thousands):


	September 30, 2023			September 30, 2022
Weighted-average remaining lease term - operating leases	7.3 years			5.9 years
Weighted-average discount rate - operating leases	5.5		%	4.3		%

Supplemental cash flow information related to operating leases is as follows:
Cash paid for amounts included in the measurement of lease liabilities	$	2,927		$	3,393
ROU assets obtained in exchange for new operating lease liabilities	$	12,449		$	5,963

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7. DEBT

The following table summarizes the net carrying amount of the Company's outstanding debt as of September 30, 2023 and December 31, 2022, net of debt issuance costs (in thousands):


	September 30, 2023						December 31, 2022
	Outstanding principal		Debt issuance costs		Net carrying amount		Outstanding principal		Debt issuance costs		Net carrying amount




Current portion	$	3,656	$	—	$	3,656	$	3,250	$	—	$	3,250
Long term	57,281		(532)		56,749		60,125		(663)		59,462
Total debt	$	60,937	$	(532)	$	60,405	$	63,375	$	(663)	$	62,712

Runway Term Loan Agreement - Runway Growth Credit Finance Corp.

On September 30, 2019, the Company entered into a Loan and Security Agreement with Runway Growth Finance Corp. (f/k/a Runway Growth Credit Fund Inc.) ("Runway") which, as subsequently amended, provided for up to $65.0 million of borrowings (as subsequently amended, the "Runway Term Loan"). The Runway Term Loan bore interest at a variable rate equal to LIBOR (at a floor of 0.50%) plus 7.75%. The Runway Term Loan was secured by substantially all of the assets of the Company and required us to comply with various affirmative and negative debt covenants.

In connection with the origination of the Runway Term Loan, 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 Company was required to make interest-only payments on the Runway Term Loan through April 15, 2022, at which time the Runway Term Loan began amortizing, with equal monthly payments of principal, which would have fully amortized the principal amount of the Runway Term Loan by October 15, 2023, plus interest being paid by the Company to Runway in consecutive monthly installments until October 15, 2023. The Runway Term Loan carried a prepayment fee of 3.00% declining to 0.00% based on the anniversary date of payment, and a final payment fee equal to 4.5% of the principal amount repaid upon prepayment, plus $0.2 million.

On May 24, 2022, concurrently with entry into the Silicon Valley Bank ("SVB") Credit Agreement (as defined below), the Company repaid all outstanding amounts under the Runway Term Loan, totaling $58.2 million with proceeds from the SVB Credit Agreement. In connection with the repayment and termination of the Runway Term Loan, the Company was required to pay a 1.00% prepayment fee, plus a final payment fee. The Runway Term Loan was scheduled to mature on October 15, 2023. As a result of the extinguishment of the Runway Term Loan, the Company recognized a loss on debt extinguishment of $0.6 million associated with the prepayment fee and the write-off of unamortized debt issuance costs.

Credit Agreement - Silicon Valley Bank

On May 24, 2022 (the "Closing Date"), Brilliant Earth, LLC, as borrower, and SVB, as administrative agent and collateral agent for the lenders, entered into a credit agreement (the "SVB Credit Agreement") which provides for a secured term loan credit facility of $65.0 million (the "SVB Term Loan

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Facility") and a secured revolving credit facility in an amount of up to $40.0 million (the "SVB Revolving Credit Facility," and together with the SVB Term Loan Facility, the "SVB Credit Facilities").

The SVB Credit Facilities were used to refinance existing indebtedness, pay related fees and expenses, and will be used from and after the Closing Date for working capital and general corporate purposes. The Credit Facilities mature on May 24, 2027 (the "SVB Maturity Date").

The SVB Credit Facilities are secured by substantially all assets of Brilliant Earth, LLC and any of its future material subsidiaries, subject to customary exceptions. Brilliant Earth, LLC's future material subsidiaries (subject to certain customary exceptions) will guarantee repayment of the SVB Credit Facilities.

Borrowings under the SVB Credit Facilities bear interest at either (a) a secured overnight financing rate plus an annual adjustment of 0.125%, plus an applicable margin of 2.25% to 2.75%, depending on the Consolidated Total Leverage Ratio (defined below), or an alternate base rate plus an applicable margin of 1.25% to 1.75%, depending on the Consolidated Total Leverage Ratio, each subject to a 0.00% floor. In addition, Brilliant Earth, LLC has agreed to pay a commitment fee on the first day of each quarter on the unused amount of the SVB Revolving Credit Facility, equal to 0.25% to 0.35% per annum depending on the Consolidated Total Leverage Ratio. The Consolidated Total Leverage Ratio is defined as the ratio, as of the last day of any four fiscal quarter period, of (a) Consolidated Total Indebtedness of the Company and its subsidiaries to (b) the Consolidated EBITDA for such period (each term as further defined in the Credit Agreement).

The SVB Term Loan Facility is required to be repaid on the last day of each calendar quarter (commencing on September 30, 2022), in an amount equal to 1.25% per quarter through June 30, 2024, 1.875% per quarter from September 30, 2024 through June 30, 2025, and 2.50% per quarter thereafter, with the balance payable on the SVB Maturity Date. The SVB Term Loan Facility is also subject to certain mandatory prepayment requirements in connection with asset sales, casualty events and debt incurrence, subject to customary exceptions.

The SVB Credit Facilities are subject to customary affirmative covenants and negative covenants as well as financial maintenance covenants. The financial covenants are tested at the end of each fiscal quarter, and require that (a) the Company and its subsidiaries not have a Consolidated Fixed Charge Coverage Ratio (defined as the ratio of (i) Consolidated EBITDA, less cash taxes (including tax distributions), less certain capital expenditures, less cash dividends and other cash restricted payments, to (ii) the sum of cash interest expense and scheduled principal payments on outstanding debt (in each case, as further defined in the SVB Credit Agreement)) of less than 1.25 to 1.00, (b) the Company and its subsidiaries not have a Consolidated Total Leverage Ratio of more than 4.00 to 1.00, and (c) Brilliant Earth, LLC and its subsidiaries not have a Consolidated Borrower Leverage Ratio (defined substantially similar as Consolidated Total Leverage Ratio, but limited to Brilliant Earth, LLC and its subsidiaries) in excess of 3.00 to 1.00 (which level is subject to temporary increases to 4.00 to 1.00 in connection with certain acquisitions). As of September 30, 2023, the Company was in compliance with such covenants.

At September 30, 2023, deferred issuance costs included in other assets totaled $0.3 million, net of accumulated amortization of $0.1 million. At September 30, 2023, deferred issuance costs included in long-term debt totaled $0.5 million, net of accumulated amortization of $0.2 million. These costs are being amortized to interest expense over the term of the loan.

The Company's debt effective interest rate was 8.49% and 4.74% for the three months ended September 30, 2023 and 2022, respectively. Interest expense was $1.3 million, and $0.7 million for the three months ended September 30, 2023 and 2022, respectively; and the amortization of deferred issuance

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costs was $0.1 million and $0.1 million for the three months ended September 30, 2023 and 2022, respectively.

The Company's debt effective interest rate was 8.14% and 7.58% for the nine months ended September 30, 2023 and 2022, respectively. Interest expense was $3.6 million and $3.2 million for the nine months ended September 30, 2023 and 2022, respectively; and the amortization of deferred issuance costs was $0.2 million and $0.5 million for the nine months ended September 30, 2023 and 2022, respectively.

On March 10, 2023, SVB was closed by the California Department of Financial Protection and Innovation, and the Federal Deposit Insurance Corporation ("FDIC") was appointed as receiver. On March 14, 2023, the FDIC announced the establishment of Silicon Valley Bridge Bank, N.A., which assumed the deposits and obligations of SVB. On March 26, 2023, the FDIC announced that it had entered into a purchase and assumption agreement with First-Citizens Bank & Trust Company, Raleigh, North Carolina ("First Citizens") under which all deposits and loans of SVB were assumed by First Citizens.

As of September 30, 2023, there were no amounts outstanding under the SVB Revolving Credit Facility.

As of September 30, 2023, the aggregate future principal payments under the SVB Term Loan Facility were as follows (in thousands):


	Principal
For the remainder of the year ending December 31, 2023	$	813
Years ending December 31,
2024	4,062
2025	5,688
2026	6,500
2027	43,874
Total aggregate future principal payments	$	60,937

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8. EQUITY-BASED COMPENSATION

Grants of Restricted Stock Units

The following table summarizes the activity related to the Company's restricted stock units ("RSUs") for the nine months ended September 30, 2023:


	Number of RSUs	Weighted average grant date fair value
Balance as of December 31, 2022, unvested	3,158,686	$	9.01
Granted	2,420,081	$	4.42
Vested	(867,897)	$	9.09
Forfeited	(666,078)	$	7.98
Balance as of September 30, 2023, unvested	4,044,792	$	6.42

Total compensation expense for RSUs was approximately $2.3 million and $6.7 million for the three and nine months ended September 30, 2023, respectively, and $2.0 million and $5.2 million for the three and nine months ended September 30, 2022, respectively, and is included in selling, general and administrative expenses in the unaudited condensed consolidated statements of operations.

As of September 30, 2023, total compensation cost related to unvested RSUs not yet recognized is $23.4 million and is expected to be recognized over a weighted-average period of approximately 2.7 years.

Grants of Stock Options

The following table summarizes the activity related to the outstanding and exercisable stock options for the nine months ended September 30, 2023:


	Number of options	Weighted average exercise price		Weighted average grant date fair value		Weighted average remaining contractual term (years)
Outstanding as of December 31, 2022	857,615	$	12.00	$	4.27	8.7

Forfeited	(88,128)	$	12.00	$	4.29	—
Outstanding as of September 30, 2023	769,487	$	12.00	$	4.27	8.0

Exercisable as of September 30, 2023	538,030	$	12.00	$	4.26	8.0
Unvested as of September 30, 2023	231,457	$	12.00	$	4.29	8.0
Vested and expected to vest as of September 30, 2023	769,487	$	12.00	$	4.27	8.0

As of September 30, 2023, 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.

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Total compensation expense for stock options was approximately $0.2 million and $0.6 million, for the three and nine months ended September 30, 2023, respectively, and $0.2 million and $1.2 million for the three and nine months ended September 30, 2022, respectively, and is included in selling, general and administrative expenses in the unaudited condensed consolidated statements of operations.

As of September 30, 2023, total compensation cost rel