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 June 30, 2024
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from to
Commission File Number 001-40836
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | |||||||
| (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 | ||||||||||||
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 | ☐ | ||||||||
| ☒ | 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 August 5, 2024, there were 13,410,205 shares of the registrant's Class A common stock, $0.0001 par value per share, outstanding, 35,785,663 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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Table of Contents
| Page | |||||
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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: 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; risks related to an overall decline in the health of the economy and other factors impacting consumer spending, such as recessionary or inflationary conditions, governmental instability, war and fears of war, and natural disasters; our ability to cost-effectively turn existing customers into repeat customers or to acquire new customers; our rapid growth in recent years and limited operating experience at our current scale of operations; our ability to manage growth effectively; increased lead times, and supply shortages and supply changes; our expansion plans in the United States ("U.S."); our ability to compete in the fine jewelry retail industry; our ability to maintain and enhance our brand and to engage or expand our base of customers may be impaired and our business, financial condition, and results of operations may suffer; our ability to effectively develop and expand our sales and marketing capabilities and increase our customer base and achieve broader market acceptance of our e-commerce and omnichannel approach to shopping for fine jewelry; our profitability and cash flows may be negatively affected if we are not successful in managing our inventory balances and inventory shrinkage; a decline in sales of Design Your Own rings; our heavy reliance on our information technology systems, as well as those of our third-party vendors and service providers, for our business to effectively operate and to safeguard confidential information and risks related to any significant failure, inadequacy or interruption of these systems, security breaches or loss of data; the impact of environmental, social, and governance matters on our business and reputation; our ability to manage risks related to our e-commerce and omnichannel business; our ability to effectively anticipate and respond to changes in consumer preferences and shopping patterns, and introduce new products and programs that appeal to new or existing customers; our dependence on distributions from Brilliant Earth, LLC, our principal asset, to pay our taxes and expenses, including payments under the Tax Receivable Agreement (as defined herein) to Continuing Equity Owners (as defined herein) in respect to certain tax benefits; risks related to our obligations to make substantial cash payments under the Tax Receivable Agreement and risks related to our organizational structure; and the other risks, uncertainties and factors described in Part I, Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 (the "2023 Form 10-K") filed with the Securities and Exchange Commission (the "SEC") on March 28, 2024. 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 and new risks emerge from time to time. 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.
•"Continuing Equity Owners" refers collectively to holders of LLC Interests (as defined below) and our Class B common stock and Class C common stock, 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 our initial public offering ("IPO"), which occurred on September 23, 2021.
•"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.
•"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.
•"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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Item 1. Financial Statements
Brilliant Earth Group, Inc.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands except share and per share amounts)
| June 30, | December 31, | ||||||||||
| 2024 | 2023 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash | |||||||||||
| Inventories, net | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total current assets | |||||||||||
| Property and equipment, net | |||||||||||
| Deferred tax assets | |||||||||||
| Operating lease right of use assets | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
Liabilities and stockholders' equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued expenses and other current liabilities | |||||||||||
| Deferred revenue | |||||||||||
| Current portion of operating lease liabilities | |||||||||||
| Current portion of long-term debt | |||||||||||
| Total current liabilities | |||||||||||
| Long-term debt, net of debt issuance costs | |||||||||||
| Operating lease liabilities | |||||||||||
| Payable pursuant to the Tax Receivable Agreement | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies (Note 10) | |||||||||||
| Stockholders' equity | |||||||||||
Preferred stock, $ | |||||||||||
Class A common stock, $ | |||||||||||
Class B common stock, $ | |||||||||||
Class C common stock, $ | |||||||||||
Class D common stock, $ | |||||||||||
| Additional paid-in capital | |||||||||||
Treasury stock, at cost; | ( | ||||||||||
| Retained earnings | |||||||||||
| Stockholders' equity attributable to Brilliant Earth Group, Inc. | |||||||||||
| Non-controlling interests attributable to Brilliant Earth, LLC | |||||||||||
| Total stockholders' equity | |||||||||||
| Total liabilities and stockholders' equity | $ | $ | |||||||||
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 June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Net sales | $ | $ | $ | $ | |||||||||||||||||||
| Cost of sales | |||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Selling, general and administrative | |||||||||||||||||||||||
| Income from operations | |||||||||||||||||||||||
| Interest expense | ( | ( | ( | ( | |||||||||||||||||||
| Other income, net | |||||||||||||||||||||||
| Income before tax | |||||||||||||||||||||||
| Income tax benefit (expense) | ( | ( | ( | ||||||||||||||||||||
| Net income | |||||||||||||||||||||||
| Net income allocable to non-controlling interest | |||||||||||||||||||||||
| Net income allocable to Brilliant Earth Group, Inc. | $ | $ | $ | $ | |||||||||||||||||||
| Earnings per share: | |||||||||||||||||||||||
| Basic | $ | $ | $ | $ | |||||||||||||||||||
| Diluted | $ | $ | $ | $ | |||||||||||||||||||
| Weighted average shares of common stock outstanding: | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
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 STOCKHOLDERS' 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 | Treasury Stock | Retained Earnings | Stockholders' Equity | Units | Amounts | Total Stockholders' Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, January 1, 2024 | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Tax distributions to members | — | — | — | — | — | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Conversion of Class B to Class A common stock | — | ( | — | — | — | — | — | — | — | ( | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| RSU vesting during period | — | — | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchases of common stock | ( | — | — | — | — | — | — | ( | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Class B shares issued upon vesting of LLC units | — | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Change in deferred tax asset and TRA liability related to redemption of LLC Units | — | — | — | — | — | — | ( | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity-based compensation | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Rebalancing of controlling and non-controlling interest | — | — | — | — | — | — | ( | — | — | ( | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, March 31, 2024 | $ | $ | $ | $ | $ | ( | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Tax distributions to members | — | — | — | — | — | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| RSU vesting during period | — | — | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchases of common stock | ( | — | — | — | — | — | — | ( | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Class B shares issued upon vesting of LLC units | — | — | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Change in deferred tax asset and TRA liability related to redemption of LLC Units | — | — | — | — | — | — | ( | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity-based compensation | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Rebalancing of controlling and non-controlling interest | — | — | — | — | — | — | ( | — | — | ( | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, June 30, 2024 | $ | $ | $ | $ | $ | ( | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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 STOCKHOLDERS' 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 Stockholders' Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, January 1, 2023 | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Tax distributions to members | — | — | — | — | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Conversion of Class B to Class A common stock | — | ( | — | — | — | — | — | — | ( | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| RSU vesting during period | — | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Class B shares issued upon vesting of LLC units | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Change in deferred tax asset and TRA liability related to redemption of LLC Units | — | — | — | — | — | — | ( | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity-based compensation | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | — | ( | ( | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Rebalancing of controlling and non-controlling interest | — | — | — | — | — | — | ( | — | ( | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, March 31, 2023 | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Tax distributions to members | — | — | — | — | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Conversion of Class B to Class A common stock | — | ( | — | — | — | — | — | — | ( | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| RSU vesting during period | — | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Class B shares issued upon vesting of LLC units | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Change in deferred tax asset and TRA liability related to redemption of LLC Units | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Equity-based compensation | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Rebalancing of controlling and non-controlling interest | — | — | — | — | — | — | ( | — | ( | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, June 30, 2023 | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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)
| Six Months Ended June 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| Operating activities | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation | |||||||||||
| Equity-based compensation | |||||||||||
| Non-cash operating lease cost | |||||||||||
| Amortization of debt issuance costs | |||||||||||
| Deferred tax expense | |||||||||||
| Other | ( | ||||||||||
| Changes in assets and liabilities: | |||||||||||
| Inventories | ( | ( | |||||||||
| Prepaid expenses and other current assets | |||||||||||
| Other assets | ( | ( | |||||||||
| Accounts payable, accrued expenses and other current liabilities | ( | ( | |||||||||
| Deferred revenue | |||||||||||
| Operating lease liabilities | ( | ( | |||||||||
| Net cash provided by operating activities | |||||||||||
| Investing activities | |||||||||||
| Purchases of property and equipment | ( | ( | |||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Financing activities | |||||||||||
| Payments on SVB term loan | ( | ( | |||||||||
| Repurchases of common stock | ( | ||||||||||
| Payment of debt issuance costs | ( | ||||||||||
| Tax distributions and TRA payments to members | ( | ( | |||||||||
| Net cash used in financing activities | ( | ( | |||||||||
| Net decrease in cash, cash equivalents and restricted cash | ( | ( | |||||||||
| Cash, cash equivalents and restricted cash at beginning of period | |||||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | $ | |||||||||
| Reconciliation of cash, cash equivalents and restricted cash | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash | |||||||||||
| Total cash, cash equivalents, and restricted cash | $ | $ | |||||||||
| Non-cash investing and financing activities | |||||||||||
| Right-of-use assets obtained in exchange for new operating lease liabilities | $ | $ | |||||||||
| Change in deferred tax assets associated with redemption of LLC Units | ( | ||||||||||
| TRA Obligation associated with redemption of LLC Units | ( | ||||||||||
| Purchases of property and equipment included in accounts payable and accrued liabilities | |||||||||||
| Change in APIC related to redemption of LLC Units | ( | ( | |||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
9
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. generally accepted accounting principles ("U.S. GAAP" or "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, 2024, or for any other interim period or for any other future year.
The condensed consolidated balance sheet as of December 31, 2023 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, 2023 (the "2023 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, 2023, as disclosed in the 2023 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 2023 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 controlled subsidiary, Brilliant Earth, LLC. 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 by the Continuing Equity Owners. The non-controlling interest on the unaudited condensed consolidated
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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 TRA, useful lives and depreciation of long-lived assets. 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 June 30, 2024 and December 31, 2023, there were no financial instruments (assets or liabilities) measured at fair value on a recurring basis.
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Marketing Expenses
Recent Accounting Pronouncements
Accounting Pronouncements Issued but Not Yet Adopted
In November 2023, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. The new standard requires enhanced disclosures about significant segment expenses and other segment items and requires companies to provide all annual disclosures about segments in interim periods. All disclosure requirements are also required for public entities with a single reportable segment. The ASU is effective for the Company’s Annual Report on Form 10-K for the fiscal year ending December 31, 2024, and subsequent interim periods, with early adoption permitted. The Company is currently evaluating the impact of adopting this ASU on the Company's consolidated financial statements and related disclosures.
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 Class A common stock for the three and six months ended June 30, 2024 and 2023 have been computed as follows (in thousands, except share and per share amounts):
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| Numerator: | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||
| Net income attributable to Brilliant Earth Group, Inc., BASIC | $ | $ | $ | $ | |||||||||||||||||||
| Add: Net income impact from assumed redemption of all LLC Units to common stock | |||||||||||||||||||||||
| Less: Income tax expense on net income attributable to NCI | ( | ( | ( | ( | |||||||||||||||||||
| Net income attributable to Brilliant Earth Group, Inc., after adjustment for assumed conversion, DILUTED | $ | $ | $ | $ | |||||||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Weighted average shares of common stock outstanding, BASIC | |||||||||||||||||||||||
| Dilutive effects of: | |||||||||||||||||||||||
| Vested LLC Units that are exchangeable for common stock | |||||||||||||||||||||||
| Unvested LLC Units that are exchangeable for common stock | |||||||||||||||||||||||
| RSUs | |||||||||||||||||||||||
| Weighted average shares of common stock outstanding, DILUTED | |||||||||||||||||||||||
| BASIC earnings per share | $ | $ | $ | $ | |||||||||||||||||||
| DILUTED earnings per share | $ | $ | $ | $ | |||||||||||||||||||
Net income attributable to the non-controlling interest is added back to net income in the fully dilutive computation and 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 six months ended June 30, 2024 and 2023, 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 securities for the three and six months ended June 30, 2024 and 2023, that have been excluded from the computations of earnings per share because such impact would have been anti-dilutive:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| RSUs | |||||||||||||||||||||||
| Stock options | |||||||||||||||||||||||
| Unvested LLC Units | |||||||||||||||||||||||
3. REVENUE
Disaggregation of Revenue
The following table discloses total net sales by geography for the three and six months ended June 30, 2024 and 2023 (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| United States | $ | $ | $ | $ | |||||||||||||||||||
| International | |||||||||||||||||||||||
| Total net sales | $ | $ | $ | $ | |||||||||||||||||||
Contract Balances
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.
As of June 30, 2024, December 31, 2023, and December 31, 2022, total deferred revenue that includes our contract balances was $21.3 million, $19.6 million, and $18.6 million, respectively.
During the three months ended June 30, 2024 and 2023, the Company recognized $21.6 million and $18.0 million, respectively, of revenue that was deferred as of March 31, 2024 and March 31, 2023, respectively.
During the six months ended June 30, 2024 and 2023, the Company recognized $18.7 million and $17.8 million, respectively, of revenue that was deferred as of December 31, 2023 and December 31, 2022, respectively.
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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 June 30, 2024 and December 31, 2023, refund liabilities balances were $1.4 million and $2.4 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.
4. INVENTORIES, NET
Inventories, net consist of the following (in thousands):
| June 30, | December 31, | ||||||||||
| 2024 | 2023 | ||||||||||
| Loose diamonds | $ | $ | |||||||||
| Fine jewelry and other | |||||||||||
| Allowance for inventory obsolescence | ( | ( | |||||||||
| Total inventories, net | $ | $ | |||||||||
The allowance for inventory obsolescence consists of the following (in thousands):
| Six Months Ended June 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| Balance at beginning of period | $ | ( | $ | ( | |||||||
| Change in allowance for inventory obsolescence | ( | ||||||||||
| Balance at end of period | $ | ( | $ | ( | |||||||
As of June 30, 2024 and December 31, 2023, the Company had $16.5 million and $24.8 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):
| June 30, | December 31, | ||||||||||
| 2024 | 2023 | ||||||||||
| Vendor expenses | $ | $ | |||||||||
| Inventory received not billed | |||||||||||
| Accrued payroll expenses | |||||||||||
| Sales and other tax payable accrual | |||||||||||
| Provision for sales returns and allowances | |||||||||||
| Current portion of TRA | |||||||||||
| Other | |||||||||||
| Total accrued expenses and other current liabilities | $ | $ | |||||||||
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 six months ended June 30, 2024 and 2023, was as follows (in thousands):
| Six Months Ended June 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| Balance at beginning of period | $ | $ | |||||||||
| Provision | |||||||||||
| Returns and allowances | ( | ( | |||||||||
| Balance at end of period | $ | $ | |||||||||
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.
In May 2024, the Company entered into a sublet of a portion of leased office space to a third party for the remaining lease term. Sublease income is recognized on a straight-line basis over the sublease agreement.
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Total operating lease costs were as follows (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||
| Classification | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||||||||
| Operating lease costs | Selling, general and administrative expense | $ | $ | $ | $ | ||||||||||||||||||||||||
| Operating lease costs | Cost of sales | $ | |||||||||||||||||||||||||||
| Variable lease costs | Selling, general and administrative expense | ||||||||||||||||||||||||||||
| Variable lease costs | Cost of sales | ||||||||||||||||||||||||||||
| Sublease income | Selling, general and administrative expense | ( | ( | ||||||||||||||||||||||||||
| Total lease costs | $ | $ | $ | $ | |||||||||||||||||||||||||
The maturity analysis of the operating lease liabilities as of June 30, 2024 was as follows (in thousands):
| Amount | |||||
For the remainder of the year ending December 31, 2024 | $ | ||||
| Years ending December 31, | |||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| 2028 | |||||
| 2029 | |||||
| Thereafter | |||||
Total minimum lease payments(1) | |||||
| Less: imputed interest | ( | ||||
| Net present value of operating lease liabilities | |||||
| Less: current portion | ( | ||||
| Long-term portion | $ | ||||
(1) Future minimum lease payments exclude $1.6 million of future payments required under a signed lease agreement that has not yet commenced. The operating lease will commence after June 30, 2024 with a lease term of five years .
As of June 30, 2024, future minimum tenant operating receipts remaining under the third party sublease were $0.6 million with a remaining sublease term of 2.4 years.
The weighted-average remaining lease term and weighted-average discount rate on long-term leases was as follows:
| Six Months Ended June 30, | ||||||||||||||
| 2024 | 2023 | |||||||||||||
| Weighted-average remaining lease term - operating leases | ||||||||||||||
| Weighted-average discount rate - operating leases | % | % | ||||||||||||
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Cash paid for amounts included in the measurement of lease liabilities was $4.0 million and $2.9 million for the six months ended June 30, 2024 and 2023, respectively.
7. DEBT
The following table summarizes the net carrying amount of the Company's outstanding debt as of June 30, 2024 and December 31, 2023, net of debt issuance costs (in thousands):
| June 30, 2024 | December 31, 2023 | ||||||||||||||||||||||||||||||||||
| Outstanding principal | Debt issuance costs | Net carrying amount | Outstanding principal | Debt issuance costs | Net carrying amount | ||||||||||||||||||||||||||||||
| Current portion | $ | $ | — | $ | $ | $ | — | $ | |||||||||||||||||||||||||||
| Long term | ( | ( | |||||||||||||||||||||||||||||||||
| Total debt | $ | $ | ( | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||
Credit Agreement - Silicon Valley Bank
On May 24, 2022, Brilliant Earth, LLC, as borrower, and Silicon Valley Bank ("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") and a secured revolving credit facility in an amount of up to $40.0 million (the "SVB Revolving Facility," and together with the SVB Term Loan, the "SVB Credit Facilities").
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).
On February 21, 2024, we entered into the First Amendment to the SVB Credit Agreement (the "First Amendment"), pursuant to which the lenders agreed to suspend the requirement to comply with the Consolidated Fixed Charge Coverage Ratio covenant on the last day of the fiscal quarters ending December 31, 2023, March 31, 2024, and June 30, 2024. The First Amendment also requires us to maintain Balance Sheet Cash (defined as unrestricted cash and cash equivalents held in accounts with the lenders and their affiliates) in an amount greater than the sum of the aggregate principal amount outstanding under the SVB Revolving Facility (including issued letters of credit) and the aggregate principal amount of the SVB Term Loan outstanding at such time, which requirement applies at all times commencing on February 21, 2024 until the last day of the fiscal quarter ending June 30, 2024. After such time, the minimum Balance Sheet Cash covenant no longer applies.
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As of June 30, 2024, the Company was in compliance with all applicable covenants under the SVB Credit Agreement.
The Company's debt effective interest rate was 8.74 % and 8.21 % for the three months ended June 30, 2024 and 2023, respectively.
The Company's debt effective interest rate was 8.42 % and 7.96 % for the six months ended June 30, 2024 and 2023, respectively.
As of June 30, 2024, there were no amounts outstanding under the SVB Revolving Facility.
As of June 30, 2024, the aggregate future principal payments under the SVB Term Loan were as follows (in thousands):
| Principal | |||||
| For the remainder of the year ending December 31, 2024 | $ | ||||
| Years ending December 31, | |||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| Total aggregate future principal payments | $ | ||||
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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 six months ended June 30, 2024:
| Number of RSUs | Weighted average grant date fair value | ||||||||||
Balance as of December 31, 2023, unvested | $ | ||||||||||
| Granted | $ | ||||||||||
| Vested | ( | $ | |||||||||
| Forfeited | ( | $ | |||||||||
Balance as of June 30, 2024, unvested | $ | ||||||||||
Total compensation expense for RSUs was $2.2 million and $4.6 million for the three and six months ended June 30, 2024, respectively, and $2.4 million and $4.4 million for the three and six months ended June 30, 2023, respectively, and is included in selling, general and administrative expenses in the unaudited condensed consolidated statements of operations.
As of June 30, 2024, total compensation cost related to unvested RSUs not yet recognized is $19.5 million and is expected to be recognized over a weighted-average period of approximately 2.4 years.
Grants of Stock Options
The following table summarizes the activity related to the outstanding and exercisable stock options for the six months ended June 30, 2024:
| Number of options | Weighted average exercise price | Weighted average grant date fair value | Weighted average remaining contractual term (years) | ||||||||||||||||||||
Outstanding as of December 31, 2023 | $ | $ | |||||||||||||||||||||
| Forfeited | ( | $ | $ | — | |||||||||||||||||||
Outstanding as of June 30, 2024 | $ | $ | |||||||||||||||||||||
Exercisable as of June 30, 2024 | $ | $ | |||||||||||||||||||||
Unvested as of June 30, 2024 | $ | $ | |||||||||||||||||||||
Vested and expected to vest as of June 30, 2024 | $ | $ | |||||||||||||||||||||
As of June 30, 2024, 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.
Total compensation expense for stock options was approximately $0.1 million and $0.3 million, for the three and six months ended June 30, 2024, respectively, and $0.2 million and $0.4 million for the
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three and six months ended June 30, 2023, respectively, and is included in selling, general and administrative expenses in the unaudited condensed consolidated statements of operations.
As of June 30, 2024, total compensation cost related to unvested options not yet recognized is $0.4 million and is expected to be recognized over a weighted-average period of approximately 1.0 year.
9. INCOME TAXES AND TAX RECEIVABLE AGREEMENT
Overview of Income Taxes
Brilliant Earth Group, Inc. is taxed as a subchapter C corporation and is subject to federal and state income taxes. Brilliant Earth Group, Inc.'s sole material asset is its ownership interest in Brilliant Earth, LLC, which is a limited liability company that is taxed as a partnership for U.S. federal and certain state and local income tax purposes. Brilliant Earth, LLC's net taxable income or loss and related tax credits, if any, are passed through to its members on a pro-rata basis and included in the member's tax returns. The income tax burden on the earnings taxed to the non-controlling interest holders is not reported by the Company in its unaudited condensed consolidated financial statements under U.S. GAAP.
The Company files U.S. federal and certain state income tax returns. The income tax returns of the Company are subject to examination by U.S. federal and state taxing authorities for various time periods, depending on those jurisdictions' rules, generally after the income tax returns are filed.
Tax Provision and Deferred Tax Asset
At the end of each interim period, Brilliant Earth Group, Inc. 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. The Company's effective tax rate of 0.45 % for the six months ended June 30, 2024, differs from the U.S. federal statutory tax rate of 21% primarily due to income associated with the non-controlling interest, state tax expense and other permanent items.
The Company recorded net decreases in deferred tax assets of $0.4 million during the six months ended June 30, 2024, with a corresponding decrease primarily to additional paid in capital, resulting from changes in the outside basis difference on Brilliant Earth Group Inc.'s investment in Brilliant Earth, LLC. The Company has determined it is more-likely-than-not that it will be able to realize this deferred tax asset in the future.
Tax Receivable Agreement
As each of the Continuing Equity Owners elect to convert their LLC Interests into Class A common stock or Class D common stock, as applicable, Brilliant Earth Group, Inc. will succeed to their aggregate historical tax basis which will create a net tax benefit to the Company. These tax benefits are expected to be amortized over 15 years pursuant to Sections 743(b) and 197 of the Code. The Company will only recognize a deferred tax asset for financial reporting purposes when it is "more-likely-than-not" that the tax benefit will be realized.
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In addition, as part of the IPO, the Company entered into a the TRA with the Continuing Equity Owners to pay 85 % of the tax savings from the tax basis adjustment to them as such savings are realized. Amounts payable under the TRA are contingent upon, among other things, generation of sufficient future taxable income during the term of the TRA. The amounts to be recorded for both the deferred tax assets and the liability for our obligations under the TRA will be estimated at the time of any purchase or redemption as a reduction to shareholders' equity, and the effects of changes in any of our estimates after this date will be included in net income. Similarly, the effect of subsequent changes in the enacted tax rates will be included in net income.
As of June 30, 2024, related to the TRA, the Company has recorded (i) a deferred tax asset in the amount of $8.5 million, (ii) a corresponding estimated liability with a balance of $7.8 million representing 85 % of the projected tax benefits to the Continuing Equity Owners; and (iii) $0.7 million of additional paid-in capital.
10. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
In the ordinary course of business, the Company may be subject from time to time to various proceedings, lawsuits, disputes or claims. In addition, the Company is regularly audited by various tax authorities. Although the Company cannot predict with assurance the outcome of any litigation or audit, it does not believe there are currently any such actions that, if resolved unfavorably, would have a material impact on the Company's financial condition, results of operations or cash flows. The Company accrues for loss contingencies when losses become probable and are reasonably estimable. If the reasonable estimate of the loss is a range and no amount within the range is a better estimate, the minimum amount of the range is recorded as a liability. The Company does not accrue for contingent losses that, in its judgment, are considered to be reasonably possible, but not probable; however, to the extent possible, the Company discloses the range of such reasonably possible losses.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the information presented in the unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q, as well as our audited consolidated financial statements and related notes as disclosed in our 2023 Form 10-K. In addition to historical information, the following discussion contains forward-looking statements, such as statements regarding our expectation for future performance, growth, liquidity and capital resources, that involve risks, uncertainties and assumptions that could cause actual results to differ materially from our expectations. Our actual results may differ materially from those contained in or implied by any forward-looking statements. Factors that could cause such differences include those identified below and those described in "Cautionary Note Regarding Forward-Looking Statements," and "Risk Factors" in this Quarterly Report on Form 10-Q and Part I, Item 1A. "Risk Factors" in our 2023 Form 10-K. We assume no obligation to update any of these forward-looking statements.
Company Overview
Brilliant Earth is an innovative, digitally native omnichannel jewelry company, and a global leader in ethically sourced fine jewelry. We offer exclusive designs with superior craftsmanship and supply chain transparency, delivered to customers through a highly personalized omnichannel experience.
Our extensive collection of premium-quality diamond engagement and wedding rings, gemstone rings, and fine jewelry is conceptualized by our leading in-house design studio and then brought to life by expert jewelers. From our award-winning jewelry designs to our responsibly sourced materials, at Brilliant Earth we aspire to exceptional standards in everything we do.
Our mission is to create a more transparent, sustainable, compassionate, and inclusive jewelry industry, and we are proud to offer customers distinctive and thoughtfully designed products that they can truly feel good about wearing.
We were founded in 2005 as an e-commerce company with an ambitious mission and a single showroom in San Francisco. We have rapidly scaled our business while remaining focused on our mission and elevating the omnichannel customer experience. Through our intuitive digital commerce platform and personalized individual appointments in our showrooms, we cater to the shopping preferences of tech-savvy next-generation consumers. We create an educational, joyful, and approachable experience that is unique in the jewelry industry.
Throughout our history, we have invested in technology to create a seamless customer experience, inform our data-driven decision-making, improve efficiencies, and advance our mission. Our technology enables dynamic product visualization, augmented reality try-on, blockchain-verified transparency, and rapid fulfillment of our flagship Design Your Own product, a custom design process. We leverage powerful data capabilities to improve our marketing and operational efficiencies, personalize the customer experience, curate showroom inventory and merchandising, inform real estate decisions, and develop new product designs that reflect consumer preferences. We believe the Brilliant Earth digital experience drives higher satisfaction, engagement, and conversion both online and in-showroom.
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Below is a summary of our performance for the three months ended June 30, 2024:
•Net sales of $105.4 million, down 4.3% compared to $110.2 million for the three months ended June 30, 2023;
•Net income of $1.4 million, up 11.3% compared to $1.2 million for the three months ended June 30, 2023;
•Net income margin of 1.3%, compared to 1.1% for the three months ended June 30, 2023;
•Adjusted EBITDA of $5.5 million, down 29.2%, compared to $7.7 million for the three months ended June 30, 2023; and
•Adjusted EBITDA margin of 5.2%, compared to 7.0% for the three months ended June 30, 2023.
Below is a summary of our performance for the six months ended June 30, 2024:
•Net sales of $202.8 million, down 2.5% compared to $207.9 million for the six months ended June 30, 2023;
•Net income of $2.4 million, up 207.2% compared to $0.8 million for the six months ended June 30, 2023;
•Net income margin of 1.2%, compared to 0.4% for the six months ended June 30, 2023;
•Adjusted EBITDA of $10.6 million, down 20.5%, compared to $13.3 million for the six months ended June 30, 2023; and
•Adjusted EBITDA margin of 5.2%, compared to 6.4% for the six months ended June 30, 2023.
See the section below titled “Non-GAAP Financial Measures” for information regarding Adjusted EBITDA and Adjusted EBITDA Margin, including reconciliations to the most directly comparable financial measures prepared in accordance with U.S. generally accepted accounting principles (“GAAP”).
We operate in one operating and reporting segment, the retail sale of diamonds, gemstones and jewelry.
Key Factors Affecting Our Performance
Our Ability to Increase Brand Awareness
Increasing brand awareness and growing favorable brand equity have been and remain key to our growth. We have a significant opportunity to continue to grow our brand awareness, broaden our customer reach, and maximize lifetime value through brand and performance marketing. We have made and expect to continue to make significant investments to strengthen the Brilliant Earth brand through our dynamic marketing strategy, which includes brand marketing campaigns across email, digital, social media, earned media, and media placements with key influencers. In order to compete effectively and increase our share of the jewelry market, we must maintain our strong customer experience, produce compelling products, and continue our mission of creating a more transparent, sustainable, compassionate and inclusive jewelry industry. Our performance will also depend on our ability to increase the number of consumers aware of Brilliant Earth and our product assortment. We believe our brand strength will enable us to continue to expand across categories and channels, to deepen relationships with consumers, and to expand our presence in the U.S. and international markets.
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Cost-Effective Acquisition of New Customers and Retention of Existing Customers.
We have historically had attractive customer acquisition economics, including substantial first order profitability. To continue to grow our business, we must continue to acquire new customers and retain existing customers in a cost-effective manner. The success of our customer acquisition strategy depends on a number of factors, including the level and pattern of consumer spending in the product categories in which we operate, and our ability to cost-effectively drive traffic to our website and showrooms and to convert these visitors to customers. With our strong brand resonance and passionate customer base, we generate significant earned and organic traffic, impressions, and media placements. We continually evolve our dynamic marketing strategies, optimizing our messaging, creative assets, and spending across channels. We also believe our expanded fine jewelry assortment and strategic customer acquisition will continue to drive fine jewelry orders from new customers and repeat orders from existing customers.
Our Ability to Continue Successfully Growing and Managing our Omnichannel Presence
Our ability to successfully grow and manage our omnichannel presence in new markets and locations is an important factor to our success. Historically, we have been successful in new geographic markets we have entered, and we have continued to expand our premium showroom footprint nationwide. We intend to continue leveraging our marketing strategy and growing brand awareness to drive increased qualified consumer traffic to and sales from our website and premium showrooms.
We believe growing and managing our showrooms will drive accelerated growth by increasing our average order value ("AOV") compared to e-commerce orders, improving conversion in the showrooms’ metro regions compared to pre-opening conversion, and raising our brand awareness. We intend to strategically open showrooms in the future, and we believe we can achieve broad national showroom coverage with far fewer locations than many traditional retailers. We rely on this highly efficient showroom model to complement our digital strategy and to continue to drive growth and profitability.
Our Ability to Successfully Introduce New Products
Product expansion allows us significant opportunity to drive new and repeat purchases by expanding purchase occasions beyond engagement and bridal. We intend to leverage our in-house design capabilities and nimble data-driven product development to expand product assortment for special occasions and self-purchase. In addition, we will have more opportunity to enhance and leverage our customer relationship management ("CRM") and data-segmentation capabilities to increase repeat purchases and lifetime value. We have consistently invested in technology to create a seamless customer experience, including dynamic visualization, augmented reality try-on, and automated, rapid fulfillment, and we intend to continue investing in technology to enhance the digital and showroom experience and help drive conversion. Expanding affiliations and brand collaborations will also broaden our existing assortment, reinforce our brand ethos, and feature like-minded designers, which will help to drive both new and repeat purchases.
International Expansion
We are in the early stages of expanding globally, and a larger geographic footprint will help drive future growth. Our early proof-points from localizing our website for Canada, Australia, and the United
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Kingdom, and our sales to customers from over 50 countries, provide encouraging signs for future global expansion. We see strong potential in launching e-commerce in new overseas markets and new showrooms in countries where we have already established a localized digital presence. We plan to drive brand awareness through localized marketing channels and expect our data-driven technology platform to continue providing insights for product recommendations and inventory management.
Operational and Marketing Efficiency
We have a unique, asset-light operating model with attractive working capital dynamics, capital-efficient showrooms, and a vast virtual inventory of premium natural and lab-grown diamonds that allows us to offer a broad selection of diamonds while keeping our balance sheet inventory low. This has driven attractive inventory turns and allows us to operate with negative working capital, which we define as our current assets less cash minus our current liabilities. Our showroom strategy minimizes the inefficiencies of traditional, retail-first jewelers. Our showrooms are primarily appointment-driven with large catchment regions, so we are less reliant on expensive high foot traffic retail locations. Our showroom locations and formats vary from interior, upper floor locations to more recently higher traffic pedestrian and retail mall locations. In all locations, we also curate showroom inventory for scheduled visits and require limited inventory in each location. Our tech-enabled jewelry specialist team can support online customers when not in appointment, increasing workforce utilization. As we continue to scale our business, our future success is dependent on maintaining this capital efficient operating model and driving continued operational improvement as we expand to new locations both in the U.S. and internationally.
Costs of Operating as a Public Company
The costs of operating as a public company are significant as we are subject to the reporting, listing, and compliance requirements of various governing bodies and applicable securities laws and regulations. Since becoming a public company, compliance with rules and regulations has increased and may continue to increase our legal, financial, and technology compliance costs, and to make some activities more difficult, time-consuming, and costly. Remaining compliant and satisfying our obligations as a public company, while maintaining forecasted gross margins and operating results, and attracting and retaining qualified persons to serve on our board of directors, our board committees, or as our executive officers is critical to our future success.
Macroeconomic Trends
We believe we are well-positioned at the intersection of key macro-level trends impacting our industry. Consumers are increasingly becoming more conscious of the products they purchase, seeking brands that stand for sustainability, supply chain transparency, and social and environmental responsibility. This has contributed to our strong brand affinity and loyalty, and further differentiates us from our competitors. Consumers are increasingly favoring seamless omnichannel shopping experiences, and we believe our model is well-suited to satisfy these consumer preferences. The current inflationary environment and changes in macro-level consumer spending trends, due to volatile macro-economic conditions could negatively impact our operating results.
Seasonality
A larger share of our annual revenues and profits traditionally occur in the fourth quarter because it includes the November and December holiday sales period.
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Components of Results of Operations
For a description of the components of our results of operations, refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2023 Form 10-K."
Results of Operations
The results of operations data in the following table for the periods presented have been derived from the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
Comparison of Three Months Ended June 30, 2024 and 2023
The following table sets forth our statements of operations for the three months ended June 30, 2024 and 2023, including amounts and percentages of net sales for each period and the period-to-period change in dollars and percent (amounts in thousands):
| Three months ended June 30, | |||||||||||||||||||||||||||||||||||
| 2024 | 2023 | Period change | |||||||||||||||||||||||||||||||||
| Amount | Percent | Amount | Percent | Amount | Percent | ||||||||||||||||||||||||||||||
| Net sales | $ | 105,426 | 100.0 | % | $ | 110,184 | 100.0 | % | $ | (4,758) | (4.3) | % | |||||||||||||||||||||||
| Cost of sales | 41,349 | 39.2 | % | 46,695 | 42.4 | % | (5,346) | (11.4) | % | ||||||||||||||||||||||||||
| Gross profit | 64,077 | 60.8 | % | 63,489 | 57.6 | % | 588 | 0.9 | % | ||||||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||||||||||||||
| Selling, general and administrative | 62,945 | 59.7 | % | 62,129 | 56.4 | % | 816 | 1.3 | % | ||||||||||||||||||||||||||
| Income from operations | 1,132 | 1.1 | % | 1,360 | 1.2 | % | (228) | (16.8) | % | ||||||||||||||||||||||||||
| Interest expense | (1,293) | 1.2 | % | (1,280) | 1.2 | % | (13) | 1.0 | % | ||||||||||||||||||||||||||
| Other income, net | 1,474 | 1.4 | % | 1,192 | 1.1 | % | 282 | 23.7 | % | ||||||||||||||||||||||||||
| Income before tax | 1,313 | 1.2 | % | ||||||||||||||||||||||||||||||||