e.l.f. Beauty, Inc. - FORM 10-K/A

e.l.f. Beauty, Inc. - FORM 10-K/A - May 29, 2020

Attached files

Attached files

e.l.f. Beauty, Inc. Reports

file	filename
EX-31.2 - EXHIBIT 31.2 - e.l.f. Beauty, Inc.	q420exhibit3121.htm
EX-32.1 - EXHIBIT 32.1 - e.l.f. Beauty, Inc.	q420exhibit3211.htm
EX-31.1 - EXHIBIT 31.1 - e.l.f. Beauty, Inc.	q420exhibit3111.htm
EX-21.1 - EXHIBIT 21.1 - e.l.f. Beauty, Inc.	q420exhibit2111.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

___________________________________________________

FORM 10-K/A

(Amendment No.1)

___________________________________________________



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

For the fiscal year ended March 31, 2020



☐	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 001-37873

___________________________________________________

e.l.f. Beauty, Inc.

(Exact name of registrant as specified in its charter)

___________________________________________________



Delaware	46-4464131
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

570 10th Street

Oakland, CA 94607

(510) 778-7787

(Address of registrant’s principal executive offices, including zip code,

and telephone number, including area code)

___________________________________________________

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



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value	ELF	New York Stock Exchange

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

None

___________________________________________________

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ¨ NO x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YES ¨ NO x

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 x 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 x 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	x
Non-accelerated filer	¨	Smaller reporting company	¨
		Emerging growth company	x

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. x

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x

As of September 30, 2019, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant was $635.0 million.

The number of shares of registrant’s common stock outstanding as of May 15, 2020 was 50,009,051.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Definitive Proxy Statement relating to the registrant’s 2020 annual meeting of stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K. Such Definitive Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the registrant's fiscal year ended March 31, 2020.

EXPLANATORY NOTE

This Amendment No. 1 on Form 10-K/A (this “Amendment”) amends the Annual Report on Form 10-K of e.l.f. Beauty, Inc. (the “Company”) for the fiscal year ended March 31, 2020, as filed with the Securities and Exchange Commission (“SEC”) on May 28, 2020 (the “Form 10-K”). In the Form 10-K, the Company inadvertently omitted “/s/ DELOITTE & TOUCHE LLP” on the signature line in the documents titled “Report of Independent Registered Public Accounting Firm” (the “Audit Report”). The Audit Report was signed by DELOITTE & TOUCHE LLP and delivered to the Company prior to the original filing of the Form 10-K, but the conformed signature line was inadvertently omitted from the version of the Audit Report included in the filing.

This Form 10-K/A is being filed solely to include the inadvertently omitted conformed signature of DELOITTE & TOUCHE LLP in the Audit Report relating to the Company’s consolidated financial statements. No other changes were made to the Audit Report or to the Form 10-K. The consolidated financial statements and notes to consolidated financial statements have remained the same as that previously filed in the Form 10-K.

This Amendment reflects information as of the filing date of the Form 10-K, does not reflect events occurring after that date and does not modify or update in any way disclosures made in the Form 10-K, except as specifically noted above.

In accordance with Rule 12b-15 of the Securities Exchange Act of 1934, as amended, this Amendment includes new certifications required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002, as amended, dated as of the filing date of this Amendment.

Item 8. Financial statements and supplementary data.

e.l.f. Beauty, Inc. and subsidiaries

Index to consolidated financial statements



	Page
Report of independent registered public accounting firm	4
Consolidated balance sheets as of March 31, 2020, March 31, 2019 and December 31, 2018	5
Consolidated statements of operations and comprehensive income for the years ended March 31, 2020, December 31, 2018, December 31, 2017, and the transition period for the three months ended March 31, 2019	6
Consolidated statements of stockholders’ equity for the years ended March 31, 2020, December 31, 2018, December 31, 2017, and the transition period for the three months ended March 31, 2019	7
Consolidated statements of cash flows for the years ended March 31, 2020, December 31, 2018, December 31, 2017, and the transition period for the three months ended March 31, 2019	8
Notes to consolidated financial statements	10

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the stockholders and the Board of Directors of e.l.f. Beauty, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of e.l.f. Beauty, Inc. and subsidiaries (the "Company") as of March 31, 2020, March 31, 2019, and December 31, 2018, the related consolidated statements of operations and comprehensive income, stockholders’ equity, and cash flows, for the year ended March 31, 2020, for the three months ended March 31, 2019, and for the years ended December 31, 2018 and December 31, 2017 and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2020, March 31, 2019, and December 31, 2018, and the results of its operations and its cash flows for the year ended March 31, 2020, for the three months ended March 31, 2019, and for the years ended December 31, 2018 and December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.

Change in Accounting Principle

As discussed in Note 2 to the financial statements, the Company has changed its method of accounting for Leases effective January 1, 2019 due to the adoption of FASB ASC Topic 842, Leases (“ASC 842”), using the modified retrospective approach.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ DELOITTE & TOUCHE LLP

San Francisco, California

May 28, 2020

We have served as the Company's auditor since 2014.

e.l.f. Beauty, Inc. and subsidiaries

Consolidated balance sheets

(in thousands, except share and per share data)



	March 31, 2020			March 31, 2019			December 31, 2018
Assets
Current assets:
Cash and cash equivalents	$	46,167		$	53,874		$	51,205
Accounts receivable, net	29,721			32,275			36,724
Inventory, net	46,209			43,779			46,341
Prepaid expenses and other current assets	10,263			7,340			7,473
Total current assets	132,360			137,268			141,743
Property and equipment, net	17,171			16,006			21,804
Intangible assets, net	102,410			97,053			98,773
Goodwill	171,321			157,264			157,264
Investments	2,875			2,875			2,875
Other assets	26,967			21,222			13,397
Total assets	$	453,104		$	431,688		$	435,856

Liabilities and stockholders' equity
Current liabilities:
Current portion of long-term debt and finance lease obligations	$	12,568		$	10,259		$	9,861
Accounts payable	12,390			16,280			20,483
Accrued expenses and other current liabilities	26,165			18,590			12,671
Total current liabilities	51,123			45,129			43,015
Long-term debt and finance lease obligations	126,088			138,025			140,523
Deferred tax liabilities	21,892			16,753			20,217
Long-term operating lease obligations	11,239			15,898			—
Other long-term liabilities	591			668			2,770
Total liabilities	210,933			216,473			206,525

Commitments and contingencies (Note 11)

Stockholders' equity:
Common stock, par value of $0.01 per share; 250,000,000 shares authorized as of March 31, 2020, March 31, 2019 and December 31, 2018; 50,003,531, 49,645,450 and 48,715,276 shares issued and outstanding as of March 31, 2020, March 31, 2019 and December 31, 2018, respectively	489			483			478
Additional paid-in capital	753,213			744,147			740,354
Accumulated deficit	(511,531		)	(529,415		)	(511,501		)
Total stockholders' equity	242,171			215,215			229,331
Total liabilities and stockholders' equity	$	453,104		$	431,688		$	435,856

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

e.l.f. Beauty, Inc. and subsidiaries

Consolidated statements of operations and comprehensive income

(in thousands, except share and per share data)



	Year ended March 31,			Three months ended March 31, (transition period)			Year ended December 31,
	2020			2019			2018			2017
Net sales	$	282,851		$	66,141		$	267,435		$	269,888
Cost of sales	101,728			25,650			104,694			105,163
Gross profit	181,123			40,491			162,741			164,725
Selling, general, and administrative expenses	157,155			37,324			136,579			131,446
Restructuring (income) expense	(5,982		)	22,176			—			—
Operating income (loss)	29,950			(19,009		)	26,162			33,279
Other income (expense), net	426			(315		)	(390		)	(2,035		)
Interest expense, net	(6,307		)	(1,849		)	(7,816		)	(8,775		)
Income (loss) before provision for income taxes	24,069			(21,173		)	17,956			22,469
Income tax (provision) benefit	(6,185		)	3,259			(2,431		)	11,006
Net income (loss)	$	17,884		$	(17,914	)	$	15,525		$	33,475
Comprehensive income (loss)	$	17,884		$	(17,914	)	$	15,525		$	33,475
Net income (loss) per share:
Basic	$	0.37		$	(0.37	)	$	0.33		$	0.74
Diluted	$	0.35		$	(0.37	)	$	0.32		$	0.68
Weighted average shares outstanding:
Basic	48,498,813			48,022,926			46,828,798			45,358,452
Diluted	50,817,143			48,022,926			49,268,616			49,374,758

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

e.l.f. Beauty, Inc. and subsidiaries

Consolidated statements of stockholders’ equity

(in thousands, except share data)



	Common stock					Additional paid-in capital			Accumulated deficit			Total stockholders' equity
	Shares		Amount			Additional paid-in capital			Accumulated deficit			Total stockholders' equity
Balance as of December 31, 2016	43,753,311		$	438		$	700,871		$	(560,447	)	$	140,862
Net income	—		—			—			33,475			33,475
Stock-based compensation	—		—			13,474			—			13,474
Vesting of early exercised stock options	1,522,826		15			4,059			—			4,074
Exercise of stock options (and vesting of restricted stock)	1,039,493		10			1,968			—			1,978
Balance as of December 31, 2017	46,315,630		463			720,372			(526,972		)	193,863
Net income	—		—			—			15,525			15,525
Stock-based compensation	—		—			16,821			—			16,821
Exercise of stock options (and vesting of restricted stock)	1,514,126		15			3,161			—			3,176
Adoption of new accounting standard	—		—			—			(54		)	(54		)
Balance as of December 31, 2018	47,829,756		478			740,354			(511,501		)	229,331
Net loss	—		—			—			(17,914		)	(17,914		)
Stock-based compensation	—		—			3,683			—			3,683
Exercise of stock options (and vesting of restricted stock)	458,964		5			110			—			115
Balance as of March 31, 2019	48,288,720		483			744,147			(529,415		)	215,215
Net income	—		—			—			17,884			17,884
Stock-based compensation	—		—			15,488			—			15,488
Exercise of stock options (and vesting of restricted stock)	1,150,490		12			1,476			—			1,488
Repurchase of common stock	(564,468	)	(6		)	(7,898		)	—			(7,904		)
Balance as of March 31, 2020	48,874,742		$	489		$	753,213		$	(511,531	)	$	242,171

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

e.l.f. Beauty, Inc. and subsidiaries

Consolidated statements of cash flows

(in thousands)



	Year ended March 31,			Three months ended March 31, (transition period)		Year ended December 31,
	2020			2019		2018			2017
Cash flows from operating activities:
Net income (loss)	$	17,884		(17,914	)	15,525			33,475
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	22,843			7,544		17,861			14,521
Restructuring (income) loss	(5,982		)	22,176		—			—
Stock-based compensation expense	15,488			3,683		16,821			13,474
Amortization of debt issuance costs and discount on debt	747			190		792			810
Deferred income taxes	2,443			(3,433	)	(939		)	(13,434		)
Other, net	873			242		476			1,728
Changes in operating assets and liabilities:
Accounts receivable	2,504			4,215		7,649			(8,001		)
Inventories	(435		)	2,561		16,338			6,718
Prepaid expenses and other assets	(6,500		)	(1,732	)	(8,484		)	(11,200		)
Accounts payable and accrued expenses	5,962			(6,021	)	(10,251		)	(25,483		)
Other liabilities	(11,514		)	(3,295	)	(206		)	(230		)
Net cash provided by operating activities	44,313			8,216		55,582			12,378

Cash flows from investing activities:
Acquisition, net of cash acquired	(25,923		)	—		—			—
Purchase of property and equipment	(9,422		)	(3,400	)	(8,872		)	(7,544		)
Investment in equity securities	—			—		—			(2,875		)
Net cash used in investing activities	(35,345		)	(3,400	)	(8,872		)	(10,419		)

Cash flows from financing activities:
Proceeds from revolving line of credit	—			—		2,000			25,900
Repayment of revolving line of credit	—			—		(2,000		)	(25,900		)
Repayment of long-term debt	(9,488		)	(2,063	)	(8,250		)	(8,250		)
Debt issuance costs paid	—			—		—			(519		)
Repurchase of common stock	(7,904		)	—		—			—
Cash received from issuance of common stock	1,488			115		3,176			1,978
Other, net	(771		)	(199	)	(490		)	(404		)
Net cash used in financing activities	(16,675		)	(2,147	)	(5,564		)	(7,195		)

Net (decrease) increase in cash and cash equivalents	(7,707		)	2,669		41,146			(5,236		)
Cash and cash equivalents - beginning of period	53,874			51,205		10,059			15,295
Cash and cash equivalents - end of period	$	46,167		53,874		$	51,205		$	10,059



	Year ended March 31,		Three months ended March 31, (transition period)		Year ended December 31,
	2020		2019		2018		2017
Supplemental disclosure of cash flow information:
Cash paid for interest	$	6,302	$	1,783	$	7,124	$	8,162
Cash paid for income taxes, net of refunds	5,604		6		4,085		5,673
Cash paid for interest on finance leases	179		50		—		—
Supplemental disclosure of noncash investing and financing activities:
Property and equipment acquired under finance leases	—		—		2,098		10
Property and equipment purchases included in accounts payable and accrued expenses	1,132		3,080		1,838		1,143
Vesting of shares related to early exercise of common stock options	—		—		—		4,074

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

e.l.f. Beauty, Inc. and subsidiaries

Notes to consolidated financial statements

Note 1—Nature of operations

e.l.f. Beauty, Inc. (“e.l.f. Beauty” and together with its subsidiaries, the “Company” or “we”) was formed as a Delaware corporation on December 20, 2013. e.l.f. Beauty is organized as a holding company and operates through its subsidiaries, e.l.f. Cosmetics, Inc., which conducts business under the name “e.l.f. Cosmetics” or “e.l.f.” and W3LL People, Inc., which conducts business under the name “W3LL PEOPLE”.

Note 2—Summary of significant accounting policies

Basis of presentation and fiscal year end change

During December 2018, the board of directors approved a change in fiscal year end from December 31st to March 31st. Accordingly, this document reflects the Company's annual fiscal year ending March 31, 2020, covering the period April 1, 2019 through March 31, 2020. Accordingly, all references to the period ended March 2019 relate to the three-month transition period ended March 31, 2019.

All references to the periods ended March 31, 2020, December 31, 2018 and December 31, 2017 relate to the years ended March 31, 2020, December 31, 2018 and December 31, 2017, respectively.

The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and all intercompany balances and transactions have been eliminated in consolidation. Certain prior year amounts in the consolidated financial statements have been reclassified to conform to the current year presentation.

Use of estimates

The preparation of financial statements in conformity with U.S. GAAP requires management make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

Cash and cash equivalents

Cash and cash equivalents include all cash balances and highly liquid investments purchased with maturities of three months or less.

Accounts receivable

Trade receivables consist of uncollateralized, non-interest bearing customer obligations from transactions with retail customers, reduced by an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make payments. The allowance is based on the evaluation and aging of past due balances, specific exposures, historical trends and economic conditions. The Company writes off accounts receivable against the allowance when a balance is determined to be uncollectible. Recoveries of receivables previously written off are recorded when received. The Company recorded an allowance for doubtful accounts of $1.0 million, $0.3 million and $0.3 million as of March 31, 2020, March 31, 2019 and December 31, 2018, respectively. The Company recorded a reserve for sales adjustments of $7.6 million, $6.5 million and $7.8 million as of March 31, 2020, March 31, 2019, and December 31, 2018, respectively, which is also presented as a reduction to accounts receivable. The Company grants credit terms in the normal course of business to its customers. Trade credit is extended based upon an evaluation of each customer’s ability to perform its payment obligations.

Concentrations of credit risk

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash and cash equivalents including money market funds. Although the Company deposits its cash with creditworthy financial institutions, its deposits, at times, may exceed federally insured limits. To date, the Company has not experienced any losses on its cash deposits. The Company performs credit evaluations of its customers, and the risk with respect to trade receivables is further mitigated by the short duration of customer payment terms and the pedigree of the customer base.

e.l.f. Beauty, Inc. and subsidiaries

Notes to consolidated financial statements

During the years ended March 31, 2020, December 31, 2018 and 2017, and the three month transition period ended March 31, 2019, two customers individually accounted for greater than 10% of the Company’s net sales as disclosed below:



	Year ended March 31,		Three months ended March 31, (transition period)		Year ended December 31,
	2020		2019		2018		2017
Walmart	31	%	36	%	30	%	29	%
Target	22	%	17	%	21	%	25	%

Customers that individually accounted for greater than 10% of the Company’s accounts receivable at the end of the periods are as presented:



	March 31, 2020		March 31, 2019		December 31, 2018
Target	22	%	19	%	27	%
Walmart	20	%	27	%	20	%

Inventory

Inventory, consisting principally of finished goods, is stated at the lower of cost or market. Cost is principally determined by the first-in, first-out method. The Company also records a reserve for excess and obsolete inventory, which represents the excess of the cost of the inventory over its estimated market value. This reserve is based upon an assessment of historical trends, current market conditions and forecasted product demand. The Company recorded an adjustment for excess and obsolete inventory, which is presented as a reduction to inventory of $1.4 million, $1.7 million, and $2.3 million as of March 31, 2020, March 31, 2019 and December 31, 2018, respectively.

Property and equipment and other assets

Property and equipment is stated at cost and is depreciated on a straight-line basis over the estimated useful lives of the assets. Leasehold improvements are amortized on a straight-line basis over the shorter of the lease term or the useful lives of the assets. Repairs and maintenance expenditures are expensed as incurred.

Useful lives by major asset class are as follows:



		Estimated useful lives
Machinery, equipment and software		3-5 years
Leasehold improvements		5 years
Furniture and fixtures		2-5 years
Store fixtures		2-3 years

As of March 31, 2020, March 31, 2019 and December 31, 2018, included in other assets are retail product displays, net, of $10.1 million, $12.1 million and $10.9 million, respectively, that are generally amortized over a period of three years. Amortization expense for retail product displays was $6.0 million, $3.1 million, $0.6 million and $1.5 million for the years ended March 31, 2020, December 31, 2018 and 2017, and the transition period for the three months ended March 31, 2019, respectively.

The Company evaluates events and changes in circumstances that could indicate carrying amounts of long-lived assets, including property and equipment, may not be recoverable. When such events or changes in circumstances occur, the Company assesses the recoverability of long-lived assets by determining whether or not the carrying value of such assets will be recovered through undiscounted future cash flows derived from their use and eventual disposition. For purposes of this assessment, long-lived assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows

e.l.f. Beauty, Inc. and subsidiaries

Notes to consolidated financial statements

are largely independent of the cash flows of other assets and liabilities. The Company’s long-lived assets are grouped on an entity-wide basis. This is due, in part, to the integrated nature of the Company’s various distribution channels and the extent of shared costs across those channels. If the sum of the undiscounted future cash flows is less than the carrying amount of an asset, the Company records an impairment loss for the amount by which the carrying amount of the assets exceeds its fair value. The Company recorded an impairment charge of $0.2 million in the year ended December 31, 2017 related to specific assets that were disposed. There were no impairment charges recorded on long-lived assets during the transition period for the three months ended March 31, 2019, the years ended March 31, 2020 or December 31, 2018.

Goodwill and intangible assets

Goodwill represents the excess of the purchase price for an acquisition over the fair value of the net assets acquired. In addition, the Company has acquired finite-lived intangible assets and an indefinite-lived intangible asset.

Goodwill is not amortized but rather is reviewed annually for impairment, at the reporting unit level, or when there is evidence that events or changes in circumstances indicate that the Company’s carrying amount may not be recovered. When testing goodwill for impairment, the Company first performs an assessment of qualitative factors. If qualitative factors indicate that it is more likely than not that the fair value of the relevant reporting unit is less than its carrying amount, the Company tests goodwill for impairment at the reporting unit level using a two-step approach. In step one, the Company determines if the fair value of the reporting unit exceeds the unit’s carrying value. If step one indicates that the fair value of the reporting unit is less than its carrying value, the Company performs step two, determining the fair value of goodwill and, if the carrying value of goodwill exceeds its implied fair value, an impairment charge is recorded. The Company has identified a single reporting unit for purposes of impairment testing due, in part, to the integrated nature of the Company’s various distribution channels and the extent of shared costs across those channels.

Indefinite-lived intangible assets are not amortized but rather are tested for impairment annually, and impairment is recognized if the carrying amount exceeds the fair value of the intangible asset. The Company evaluates its indefinite-lived intangible asset to determine whether current events and circumstances continue to support an indefinite useful life. Amortization of intangible assets with finite useful lives is computed on a straight-line basis over periods of 3 years to 10 years. The determination of the estimated period of benefit is dependent upon the use and underlying characteristics of the intangible asset. The Company evaluates the recoverability of its intangible assets subject to amortization when facts and circumstances indicate that the carrying value of the asset may not be recoverable. If the carrying value of an intangible asset is not recoverable, impairment loss is measured as the amount by which the carrying value exceeds its estimated fair value.

Business Combinations

The purchase price of a business acquisition is allocated to the assets acquired and liabilities assumed based upon their estimated fair values at the business combination date. The excess of purchase price over the fair value of assets acquired and liabilities assumed is recorded as goodwill. Determining fair value of identifiable assets, particularly intangibles, and liabilities acquired also requires the Company to make estimates, which are based on all available information and in some cases assumptions with respect to the timing and amount of future revenues and expenses associated with an asset. Unanticipated events or circumstances may occur that could affect the accuracy of our fair value estimates, and under different assumptions, the resulting valuations could be materially different.

Costs that are incurred to complete the business combination such as legal and other professional fees are not considered as a part of consideration transferred, and are charged to selling, general and administrative expense as they are incurred.

Debt issuance costs

Debt issuance costs and lender fees were incurred for arranging the credit facilities from various financial institutions. For credit facilities consisting of both term and revolving debt, such costs are allocated to each sub-facility based upon the total borrowing capacity. For term debt, issuance costs are presented within the related long-term debt liability on the consolidated balance sheet and lender fees are presented as a direct deduction from the carrying amount. Both debt issuance costs and lender fees are amortized over the term of the related debt using the effective interest rate method. For revolving debt, issuance costs and lender fees are presented as a noncurrent asset and amortized over the term of the related debt on a straight-line basis.

e.l.f. Beauty, Inc. and subsidiaries

Notes to consolidated financial statements

Fair value of financial instruments

The carrying amounts of cash and cash equivalents, accounts receivable, and accounts payable and accrued expenses approximate their fair values due to the short-term nature of these items. The carrying amounts of bank debt approximate their fair values as the stated interest rates approximate market rates currently available to the Company for loans with similar terms. See Note 9—Fair value of financial instruments.

Segment reporting

Operating segments are components of an enterprise for which separate financial information is available that is evaluated by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Utilizing these criteria, the Company manages its business on the basis of one operating segment and one reportable segment. It is impracticable for the Company to provide revenue by product line.

During the years ended March 31, 2020, December 31, 2018 and 2017, and the transition period for the three months ended March 31, 2019, net sales in the United States and outside of the United States were as follows (in thousands):



	Year ended March 31,		Three months ended March 31, (transition period)		Year ended December 31,
	2020		2019		2018		2017
U.S.	$	255,284	$	59,797	$	241,159	$	243,299
International	27,567		6,344		26,276		26,589
Total net sales	$	282,851	$	66,141	$	267,435	$	269,888

As of March 31, 2020, March 31, 2019, and December 31, 2018, the Company had property and equipment in the United States and outside of the United States as follows (in thousands):



	March 31, 2020		March 31, 2019		December 31, 2018
U.S.	$	16,845	$	15,491	$	21,236
International	326		515		568
Total property and equipment, net	$	17,171	$	16,006	$	21,804

Revenue recognition

The Company adopted Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”), on January 1, 2018 on a modified retrospective basis and recognized a net reduction of $0.1 million to the opening balance of retained earnings, net of tax, for the cumulative effect of applying the new standard. The results for periods beginning after January 1, 2018 are presented under ASC 606, while comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The adoption of the new standard impacted net sales and accounts receivable. Net sales would have been $0.3 million higher under the previous standard in the year ended December 31, 2018. Accounts receivable would have been $0.4 million higher under the previous standard as of December 31, 2018.

Revenue is recognized when control of promised goods or services is transferred to a customer in an amount that reflects the consideration that the Company expects to receive in exchange for those goods or services.

For the Company's retail customer transactions, a contract exists when a written purchase order is received, and control transfers at the time of shipment or the time of delivery, depending upon the specific terms of the customer arrangement. For the Company's direct-to-consumer transactions, a contract exists when an order is placed online, and control transfers at the time of delivery of merchandise to the customer. Nearly all of the Company’s transactions with its customers include a single performance obligation delivered at a point in time.

The transaction price can include both fixed and variable consideration. In most cases, it is entirely comprised of variable consideration with the variability driven by expected sales discounts, markdown support, and other incentives and allowances offered to customers. These incentives may be explicit or implied by the Company's historical business practices.

e.l.f. Beauty, Inc. and subsidiaries

Notes to consolidated financial statements

Generally, these commitments represent cash consideration paid to a customer and do not constitute a promised good or service.

The amount of variable consideration is estimated at the time of sale based on either the expected amount or the most likely amount, depending on the nature of the variability. The Company regularly reviews and revises, when deemed necessary, its estimates of variable consideration, based on both customer-specific expectations as well as historical rates of realization. A provision for customer incentives and allowances is included on the consolidated balance sheet, net against accounts receivable.

Disaggregated revenue

The Company distributes product both through national and international retailers as well as direct-to-consumers through its e-commerce and e.l.f. stores channels (prior to February 2019). The marketing and consumer engagement benefits that the direct channels provide are integral to the Company’s brand and product development strategy and drive sales across channels. As such, the Company views its two primary distribution channels as components of one integrated business, as opposed to discrete revenue streams.

The Company sells a variety of beauty products but does not consider them to be meaningfully different revenue streams given similarities in the nature of the products, the target consumer, and the innovation and distribution processes. See Segment Reporting section above for the table providing disaggregated revenue from contracts with customers by geographical market, as the nature, amount, timing and uncertainty of revenue and cash flows can differ between domestic and international customers.

Contract assets and liabilities

The Company extends credit to retail customers based upon an evaluation of their credit quality. The majority of retail customers obtain payment terms between 30-60 days, and a contract asset is recognized for the related accounts receivable. Additionally, shipping terms can vary, giving rise to contract liabilities for contracts where payment has been received in advance of delivery. The contract liability balance can vary significantly depending on the timing of when an order is placed and when shipment or delivery occurs.

As of March 31, 2020, other than accounts receivable, the Company had no material contract assets, contract liabilities or deferred contract costs recorded on its consolidated balance sheet.

Practical expedients

The Company elected to record revenue net of taxes collected from customers and exclude the amounts from the transaction price. The Company includes in revenue any taxes assessed on the Company's total gross receipts for which it has the primary responsibility to pay the tax.

The Company elected not to disclose revenues related to remaining performance obligations for partially completed or unfulfilled contracts that are expected to be fulfilled within one year as such amounts were insignificant.

e.l.f. Beauty, Inc. and subsidiaries

Notes to consolidated financial statements

A reconciliation of the beginning and ending amounts of the reserve for sales adjustments for the years ended March 31, 2020, December 31, 2018 and 2017, and the transition period for the three months ended March 31, 2019 is as follows (in thousands):



Balance as of December 31, 2016	11,927
Charges	25,680
Deductions	(29,149		)
Balance as of December 31, 2017	$	8,458
Charges	26,971
Deductions	(27,655		)
Balance as of December 31, 2018	7,774
Charges	6,787
Deductions	(8,016		)
Balance as of March 31, 2019	6,545
Charges	29,576
Deductions	(28,508		)
Balance as of March 31, 2020	$	7,613

In the years ended March 31, 2020, December 31, 2018 and 2017, and the transition period for the three months ended March 31, 2019, the Company recorded $0.7 million, $0.5 million, $0.7 million and $0.2 million, respectively, of reimbursed shipping expenses from customers within revenues. The shipping and handling costs associated with product distribution were $19.8 million, $20.9 million, $21.2 million and $4.9 million, in the years ended March 31, 2020, December 31, 2018 and 2017, and the transition period for the three months ended March 31, 2019, respectively, and are included in selling, general and administrative expenses in the consolidated statements of operations.

Income taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized.

Future income tax benefits are recognized to the extent that realization of such benefits is more likely than not. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in its income tax provision.

Leases

The Company has entered into operating lease agreements for office space, warehouse and a retail store location, equipment and software. Lease assets and liabilities are recognized at the present value of the minimum rental payments (excluding executory costs) and expected payment under any residual value guarantee at the lease commencement date. The Company uses its incremental borrowing rate to determine the present value of lease payments.

Non-lease components primarily include payments for maintenance and utilities. The Company accounts for the non-lease components in a contract (e.g., common area maintenance) as part of the lease component by electing practical expedient for all leases of commercial office and warehouse space, as the non-lease components are not a significant portion of the total consideration in those agreements. The Company's lease terms include periods under options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.

Operating lease assets and liabilities are included on the Company's Consolidated Balance Sheet beginning January 1, 2019. The current portion of the Company's operating lease liabilities is included in accrued expenses and other current liabilities, and the long-term portion is included in long-term operating lease liabilities. Finance lease assets are included in other

e.l.f. Beauty, Inc. and subsidiaries

Notes to consolidated financial statements

assets. Finance lease liabilities are included in long-term debt and finance lease obligations. Operating lease expense is recognized on a straight-line basis over the lease term.

Foreign currency

The functional currency of the Company’s foreign subsidiaries is the U.S. dollar. Transactions denominated in currencies other than the functional currency are recorded at exchange rates in effect on the date of the transaction. At the end of each reporting period, monetary assets and liabilities are remeasured to the functional currency using exchange rates in effect at the balance sheet date. Non-monetary assets and liabilities are remeasured at historical exchange rates. Transaction gains or losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in other income (expense), net in the consolidated statements of operations.

Stock-based compensation

Stock-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized on a straight-line basis over the requisite service period, which is generally the award’s vesting period. The Company estimates the fair value of employee stock-based payment awards subject to only a service condition on the date of grant using the Black-Scholes valuation model. The Black-Scholes model requires the use of highly subjective and complex assumptions, including the option’s expected term and the price volatility of the underlying stock.

The Company estimates the fair value of employee stock-based payment awards subject to market conditions using a Monte Carlo simulation model. Compensation expense for employee stock-based awards whose vesting is subject to the fulfillment of both a market condition and the occurrence of a performance condition is recognized on a graded-vesting basis at the time the achievement of the performance condition becomes probable.

Forfeitures are recognized and accounted for as they occur.

Advertising costs

Advertising costs, including promotions and print, are expensed as incurred or distributed. Advertising costs are included in selling, general, and administrative expenses in the accompanying consolidated statements of operations and amounted to approximately $26.0 million, $10.2 million, $8.1 million and $2.6 million in the years ended March 31, 2020, December 31, 2018 and 2017, and the transition period for the three months ended March 31, 2019, respectively.

Net income (loss) per share

Basic net income (loss) per share is computed using net income (loss) available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share reflects the dilutive effects of stock options and restricted stock outstanding during the period, to the extent such securities would not be anti-dilutive and is determined using the treasury stock method.

e.l.f. Beauty, Inc. and subsidiaries

Notes to consolidated financial statements

Recent accounting pronouncements

The following table provides a brief description of recent accounting pronouncements that could have a material effect on the Company’s financial statements:



Recently adopted accounting standards
Standard	Description	Date of expected adoption/adoption	Effect on the financial statements or other significant matters
ASU 2018-07, Nonemployee share-based payment accounting improvements	The standard modifies the accounting for share-based payment awards issued to nonemployees to largely align it with the accounting for share-based payment awards issued to employees. ASU 2018-07 is effective for annual periods beginning after December 15, 2018.	January 1, 2019	The Company adopted ASU 2018-07 on January 1, 2019. The adoption did not have a material impact to the Company's consolidated financial statements.
ASU 2016-02, Leases (Topic 842)	The standard requires lessees to recognize a right-of-use asset and a lease liability for virtually all of their leases (other than leases that meet the definition of a short-term lease). The liability is equal to the present value of lease payments. The asset is based on the liability, subject to adjustment, such as for initial direct costs. Lessor accounting is similar to the current model, but updated to align with certain changes to the lessee model (e.g., certain definitions, such as initial direct costs, have been updated) and the new revenue recognition standard. It requires a modified retrospective approach for all leases existing at, or entered into after, the date of initial application.	January 1, 2019	The Company adopted ASC 842 on a modified retrospective basis on January 1, 2019. The results for periods beginning after January 1, 2019 are presented under ASC 842, while comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The adoption of the new standard resulted in the recognition of the right of use (“ROU”) assets and lease liabilities for operating leases of approximately $21.2 million and $23.5 million, respectively, as of January 1, 2019, with corresponding adjustments to prepaid and deferred rent. As discussed in Note 15, “Restructuring and other related costs,” these assets and liabilities were subsequently adjusted as a result of the closure of all 22 e.l.f. retail stores in February 2019. The adoption of the standard did not impact the Company's beginning retained earnings, its consolidated statements of operations or cash flows.

e.l.f. Beauty, Inc. and subsidiaries

Notes to consolidated financial statements



Standards that are not yet adopted
Standard	Description	Date of expected adoption/adoption	Effect on the financial statements or other significant matters
ASU 2018-15, Intangibles-Goodwill and Other- Internal-Use Software (Subtopic 350-40)	The standard will require customers in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in ASC 350-40 to determine which implementation costs to capitalize as assets or expense as incurred. Certain implementation costs incurred during the application development stage would be deferred and capitalized (e.g., costs of integration with on-premises software, coding, configuration, customization). Other costs incurred during the preliminary project and post-implementation stages would be expensed (e.g., planning the project, training, maintenance after implementation, data conversion). The amendments in the ASU can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption.	April 1, 2020	The Company plans to adopt ASU 2018-15 prospectively, and the adoption of the standard is not expected to have a material impact on the Company’s consolidated financial statements.

e.l.f. Beauty, Inc. and subsidiaries

Notes to consolidated financial statements

Note 3—Transition Period

The Company is presenting its consolidated financial statements for the three month period ended March 31, 2019. The following tables provide certain unaudited comparative financial information for the same period of the prior year.

Consolidated Statements of Income

(in thousands, except share and per share data)



	Three months ended March 31,
				(unaudited)
	2019			2018
Net sales	$	66,141		$	65,920
Cost of sales	25,650			25,712
Gross profit	40,491			40,208
Selling, general and administrative expenses	37,324			36,234
Restructuring expenses	22,176			—
Operating income (loss)	(19,009		)	3,974
Other expense, net	(315		)	(888		)
Interest expense, net	(1,849		)	(1,963		)
Income (loss) before provision for income taxes	(21,173		)	1,123
Income tax benefit (provision)	3,259			(433		)
Net income (loss)	$	(17,914	)	$	690
Comprehensive income (loss)	$	(17,914	)	$	690
Net income (loss) per share:
Basic	$	(0.37	)	$	0.01
Diluted	$	(0.37	)	$	0.01
Weighted average shares outstanding:
Basic	48,022,926			46,435,560
Diluted	48,022,926			49,302,771

e.l.f. Beauty, Inc. and subsidiaries

Notes to consolidated financial statements

Consolidated Statements of Cash Flows

(in thousands)



	Three months ended March 31,
				(unaudited)
	2019			2018
Cash flows from operating activities:
Net income (loss)	$	(17,914	)	$	690
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	7,544			4,288
Restructuring loss	22,176			—
Stock-based compensation expense	3,683			3,640
Amortization of debt issuance costs and discount on debt	190			199
Deferred income taxes	(3,433		)	735
Other, net	242			142
Changes in operating assets and liabilities:
Accounts receivable	4,215			12,771
Inventories	2,561			951
Prepaid expenses and other assets	(1,732		)	(1,498		)
Accounts payable and accrued expenses	(6,021		)	(16,891		)
Other liabilities	(3,295		)	3
Net cash provided by operating activities	8,216			5,030

Cash flows from investing activities:
Purchase of property and equipment	(3,400		)	(2,667		)
Net cash used in investing activities	(3,400		)	(2,667		)

Cash flows from financing activities:
Proceeds from revolving line of credit	—			2,000
Repayment of revolving line of credit	—			(2,000		)
Repayment of long-term debt	(2,063		)	(2,063		)
Cash received from issuance of common stock	115			212
Other, net	(199		)	(97		)
Net cash used in financing activities	(2,147		)	(1,948		)

Net increase in cash and cash equivalents	2,669			415
Cash and cash equivalents - beginning of period	51,205			10,059
Cash and cash equivalents - end of period	$	53,874		$	10,474

Note 4 —Acquisitions

On February 24, 2020, the Company, through its wholly owned subsidiary, e.l.f. Cosmetics, Inc., completed its acquisition of W3LL People, a Santa Fe, New Mexico-based privately held, clean beauty company with a mission to create premium quality cosmetics without using the potentially harmful artificial chemicals found in most conventional makeup. The purchase price of $25.9 million was in all cash and the total consideration in connection with the acquisition is subject to

e.l.f. Beauty, Inc. and subsidiaries

Notes to consolidated financial statements

adjustment based on (i) purchase price adjustment provisions and (ii) indemnification obligations of W3LL People’s stockholders after the closing of the acquisition.

The acquisition has been accounted for as a business combination under the acquisition method and, accordingly, the total purchase price is allocated to the tangible and intangible assets acquired and the liabilities assumed based on their respective fair values on the acquisition date. The final purchase price allocation is pending the finalization of deferred tax calculations and residual goodwill. W3LL People's results of operations have been included in the Company's consolidated financial statements from the date of acquisition.

The following table presents the purchase price allocation recorded in the Company's consolidated balance sheets on the acquisition date (in thousands):



	March 31, 2020
Net tangible assets	$	2,239
Goodwill ⁽¹⁾	14,057
Intangible assets	12,340
Net deferred tax liability	(2,713		)
Total purchase price consideration	$	25,923




⁽¹⁾	The goodwill represents the excess value over both tangible and intangible assets acquired and liabilities assumed. The goodwill recognized in this transaction is primarily attributable to expected operational synergies. None of the goodwill is expected to be deductible for tax purposes.

Intangible Assets



	Fair Value		Estimated Useful Life
	(in thousands)		(in years)
Customer relationships - retailers	$	8,800	10
Customer relationships - e-commerce	40		3
Trademarks	3,500		10
Total identified intangible assets	$	12,340

Note 5—Investment in equity securities

On April 14, 2017, the Company invested $2.9 million in a social media analytics company, which is included in investments on its consolidated balance sheets. The Company has elected the measurement alternative for equity investments that do not have readily determinable fair values. The Company did not record an impairment charge on its investment during the years ended March 31, 2020, December 31, 2018 or 2017, or the transition period for the three months ended March 31, 2019, as any identified events or changes in circumstances did not result in an indicator for impairment. Further, there were no observable price changes in orderly transactions for the identical or a similar investment of the same issuer during the years ended March 31, 2020, December 31, 2018 or 2017, or the transition period for the three months ended March 31, 2019.

e.l.f. Beauty, Inc. and subsidiaries

Notes to consolidated financial statements

Note 6—Goodwill and other intangible assets

Information regarding the Company’s goodwill and intangible assets as of March 31, 2020 is as follows (in thousands):



	Estimated useful life	Gross carrying amount		Accumulated amortization			Net carrying amount
Customer relationships – retailers	10 years	$	77,600	$	(42,500	)	$	35,100
Customer relationships – e-commerce	3 years	3,940		(3,901		)	39
Trademarks	10 years	3,500		(29		)	3,471
Total finite-lived intangibles		85,040		(46,430		)	38,610
Trademarks	Indefinite	63,800		—			63,800
Goodwill		171,321		—			171,321
Total goodwill and other intangibles		$	320,161	$	(46,430	)	$	273,731

Information regarding the Company’s goodwill and intangible assets as of March 31, 2019 is as follows (in thousands):



	Estimated useful life	Gross carrying amount		Accumulated amortization			Net carrying amount
Customer relationships – retailers	10 years	$	68,800	$	(35,547	)	$	33,253
Customer relationships – e-commerce	3 years	3,900		(3,900		)	—
Total finite-lived intangibles		72,700		(39,447		)	33,253
Trademarks	Indefinite	63,800		—			63,800
Goodwill		157,264		—			157,264
Total goodwill and other intangibles		$	293,764	$	(39,447	)	$	254,317

Information regarding the Company’s goodwill and intangible assets as of December 31, 2018 is as follows (in thousands):



	Estimated useful life	Gross carrying amount		Accumulated amortization			Net carrying amount
Customer relationships – retailers	10 years	$	68,800	$	(33,827	)	$	34,973
Customer relationships – e-commerce	3 years	3,900		(3,900		)	—
Total finite-lived intangibles		72,700		(37,727		)	34,973
Trademarks	Indefinite	63,800		—			63,800
Goodwill		157,264		—			157,264
Total goodwill and other intangibles		$	293,764	$	(37,727	)	$	256,037

The Company has not recognized any impairment charges on its goodwill or intangible assets, as the anticipated future cash flows generated by each of these assets remain substantially in excess of their carrying values. Amortization expense on the finite-lived intangible assets was $7.0 million, $7.1 million, $7.1 million and $1.7 million for the year ended March 31, 2020, the years ended December 31, 2018, and 2017 and the transition period for the three months ended March 31, 2019, respectively.

e.l.f. Beauty, Inc. and subsidiaries

Notes to consolidated financial statements

The estimated future amortization expense related to the finite-lived intangible assets, assuming no impairment as of March 31, 2020, is as follows (in thousands):



Year ending March 31,
2021	$	8,123
2022	8,123
2023	8,122
2024	6,963
2025	1,230
Thereafter	6,049
Total	$	38,610

Note 7—Property and equipment

Property and equipment as of March 31, 2020, March 31, 2019 and December 31, 2018 consists of the following (in thousands):



	March 31, 2020			March 31, 2019			December 31, 2018
Machinery, equipment and software	$	15,327		$	9,407		$	13,007
Leasehold improvements	3,459			2,157			9,549
Furniture and fixtures	708			684			3,027
Store fixtures	10,302			11,879			13,481
Property and equipment, gross	29,796			24,127			39,064
Less: Accumulated depreciation and amortization	(12,625		)	(8,121		)	(17,260		)
Property and equipment, net	$	17,171		$	16,006		$	21,804

Depreciation and amortization expense on property and equipment was $6.3 million, $7.6 million, and $6.8 million and $1.7 million during the years ended March 31, 2020, the year ended December 31, 2018 and 2017 and the transition period for the three months ended March 31, 2019, respectively.

Note 8—Accrued expenses and other current liabilities

Accrued expenses and other current liabilities as of March 31, 2020, March 31, 2019 and December 31, 2018 consists of the following (in thousands):



	March 31, 2020		March 31, 2019		December 31, 2018
Accrued expenses	$	12,518	$	9,594	$	8,783
Current portion of operating lease liabilities	3,083		4,172		—
Accrued compensation	9,542		3,200		1,983
Other current liabilities	1,022		1,624		1,905
Accrued expenses and other current liabilities	$	26,165	$	18,590	$	12,671

Note 9—Fair value of financial instruments

The fair value of financial instruments are categorized based upon the level of judgment associated with the inputs used to measure their fair values. Fair value is measured using inputs from the three levels of the fair value hierarchy, which are described as follows:

Level 1—Quoted prices in active markets for identical assets or liabilities

e.l.f. Beauty, Inc. and subsidiaries

Notes to consolidated financial statements

Level 2—Quoted prices for similar assets and liabilities in active markets or inputs that are observable

Level 3—Inputs that are unobservable (for example, cash flow modeling inputs based on management’s assumptions)

The assets’ or liabilities’ fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The following table sets forth the fair value of the Company’s financial liabilities by level within the fair value hierarchy as of March 31, 2020 (in thousands):



			Fair value measurements using
	Fair value		Level 1		Level 2		Level 3
Financial liabilities:
Long-term debt, including current portion ⁽¹⁾	$	138,865	$	—	$	138,865	$	—
Total financial liabilities	$	138,865	$	—	$	138,865	$	—

__________________________

⁽¹⁾ Of this amount, $12,568 is classified as current. The gross carrying amounts of the Company’s bank debt, before reduction of the debt issuance costs, approximate their fair values as the stated rates approximate market rates for loans with similar terms.

The following table sets forth the fair value of the Company’s financial liabilities by level within the fair value hierarchy as of March 31, 2019 (in thousands):



			Fair value measurements using
	Fair value		Level 1		Level 2		Level 3
Financial liabilities:
Long-term debt, including current portion ⁽¹⁾	$	148,593	$	—	$	148,593	$	—
Total financial liabilities	$	148,593	$	—	$	148,593	$	—

__________________________

⁽¹⁾ Of this amount, $10,259 is classified as current. The gross carrying amounts of the Company’s bank debt, before reduction of the debt issuance costs, approximate their fair values as the stated rates approximate market rates for loans with similar terms.

The following table sets forth the fair value of the Company’s financial liabilities by level within the fair value hierarchy as of December 31, 2018 (in thousands):



			Fair value measurements using
	Fair value		Level 1		Level 2		Level 3
Financial liabilities:
Long-term debt, including current portion ⁽¹⁾	$	150,719	$	—	$	150,719	$	—
Total financial liabilities	$	150,719	$	—	$	150,719	$	—

__________________________

⁽¹⁾ Of this amount, $9,861 is classified as current. The gross carrying amounts of the Company’s bank debt, before reduction of the debt issuance costs, approximate their fair values as the stated rates approximate market rates for loans with similar terms.

The Company classifies its cash equivalents, primarily, its money market funds within Level 1 based on quoted market prices in active markets for identical assets. The Company did not transfer any assets measured at fair value on a recurring basis to or from Level 1 or Level 2 for any of the periods presented.

e.l.f. Beauty, Inc. and subsidiaries

Notes to consolidated financial statements

Note 10—Debt

The following summarizes the recent significant transactions impacting the Company’s indebtedness:


•	On January 31, 2014, the Company entered into a senior secured credit facility (the “2014 Senior Secured Credit Facility”), which consisted of a $20.0 million revolving line of credit and a $105.0 million term loan. Also, on January 31, 2014, the Company entered into a $40.0 million second lien term loan (the “Second Lien Term Loan”).


•	On June 7, 2016, the Company incurred an incremental $64.0 million in term loan borrowings under the 2014 Senior Secured Credit Facility to fund, in part, a $72.0 million special dividend to stockholders, and increased the total availability under the revolving credit facility to $25.0 million.


•	On September 27, 2016, the Company used a portion of the proceeds from the initial public offering to repay the entire outstanding balance of $40.0 million from the Second Lien Term Loan.


•	On December 23, 2016, the Company refinanced its outstanding obligations under the 2014 Senior Secured Credit Facility, entering into a new 5-year, $200.0 million senior secured credit agreement, as further described below.


•	On August 25, 2017, the Company amended its senior secured credit agreement to increase the total availability under the revolving line of credit to $50.0 million and to lower the interest rates and extend the maturity date to August 25, 2022.


•	On April 8, 2020, the Company amended its senior secured credit agreement to modify the Company’s quarterly maintenance covenants, and to add interest rates with respect to borrowings associated with the added increased maximum permitted total net leverage ratios.

The Company’s outstanding debt as of March 31, 2020, March 31, 2019 and December 31, 2018 consists of the following (in thousands):



	March 31, 2020			March 31, 2019			December 31, 2018
Debt:
Term loan	$	135,853		$	144,810		$	146,737
Finance lease obligations	3,012			3,783			3,982
Total debt	138,865			148,593			150,719
Less: debt issuance costs	(209		)	(309		)	(335		)
Total debt, net of issuance costs	138,656			148,284			150,384
Less: current portion	(12,568		)	(10,259		)	(9,861		)
Long-term portion of debt	$	126,088		$	138,025		$	140,523

Senior secured credit agreement, as amended

On December 23, 2016, the Company entered into a five-year, $200.0 million Senior Secured Credit Agreement (as amended, the "Credit Agreement") with a syndicate consisting of several large financial institutions. The Credit Agreement was first amended on August 25, 2017 (the "First Amendment"), increasing the aggregate commitments to $215.0 million. The Credit Agreement, as amended, consists of a $50.0 million revolving line of credit (the “Revolving Credit Facility”) and a $165.0 million term loan (the “Term Loan Facility”). The Credit Agreement was amended again on December 7, 2018 to reflect the change in the Company's fiscal year-end from December 31 to March 31, and amended again on April 8, 2020 (the "Third Amendment") to (i) increase the maximum permitted total net leverage ratio for certain fiscal quarters, (ii) reduce the minimum fixed charge coverage ratio for certain fiscal quarters, (iii) add additional interest rates to correspond to the increased maximum permitted total net leverage ratios, (iv) increase the amount of cash netted in the calculation of the consolidated total net leverage ratio, and (v) amend the language around the level of add backs to the adjusted consolidated EBITDA definition.

All amounts under the Revolving Credit Facility are available for draw until the maturity date on August 25, 2022. The Revolving Credit Facility is collateralized by substantially all of the Company’s assets and requires payment of an unused fee ranging from 0.35% to 0.25% (based on the Company’s consolidated total net leverage ratio) times the average daily

e.l.f. Beauty, Inc. and subsidiaries

Notes to consolidated financial statements

amount of unutilized commitments under the Revolving Credit Facility. The Revolving Credit Facility also provides for sub-facilities in the form of a $7.0 million letter of credit and a $5.0 million swing line loan; however, all amounts under the Revolving Credit Facility cannot exceed $50.0 million. The unused balance of the Revolving Credit Facility as of March 31, 2020 was $49.8 million.

The Term Loan Facility maturity date is also August 25, 2022 and is collateralized by substantially all of the Company’s assets. Amortization installment payments on the Term Loan Facility are required to be made in quarterly installments of (i) $2,475,000 for fiscal quarters ending September 30, 2019 through June 30, 2020, (ii) $3,093,750 for fiscal quarters ending September 30, 2020 through June 30, 2021 and (iii) $4,125,000 for fiscal quarters ending September 30, 2021 through June 30, 2022. The remaining Term Loan Facility balance is due upon the maturity date. The Term Loan Facility can be prepaid at any time without penalty and is subject to mandatory prepayments when there is (i) excess cash flow, which is defined as EBITDA less certain customary deductions, (ii) non-ordinary course asset dispositions that result in net proceeds in excess of $2.5 million during a year, unless reinvested within twelve months, or (iii) issuance of additional debt.

Both the Revolving Credit Facility and the Term Loan Facility bear interest, at the Company’s option, at either a rate per annum equal to either (i) a rate per annum equal to an adjusted LIBOR rate determined by reference to the cost of funds for U.S. dollar deposits for the applicable interest period (subject to a minimum floor of 0%) plus an applicable margin ranging from 1.50% to 3.25% (amended from 1.50% to 2.75% as previously set forth in the Credit Agreement) based on the Company’s consolidated total net leverage ratio or (ii) a floating base rate plus an applicable margin ranging from 0.50% to 2.25% (amended from 0.50% to 1.75%) based on the Company’s consolidated total net leverage ratio. The interest rate for the Term Loan Facility as of March 31, 2020 was approximately 3.2%.

The Credit Agreement contains a number of covenants that, among other things, restrict the Company's ability to (subject to certain exceptions) pay dividends and distributions or repurchase the Company's capital stock, incur additional indebtedness, create liens on assets, engage in mergers or consolidations and sell or otherwise dispose of assets. The Credit Agreement also includes reporting, financial and maintenance covenants that require the Company to, among other things, comply with certain consolidated total net leverage ratios and consolidated fixed charge coverage ratios. As of March 31, 2020, March 31, 2019 and December 31, 2018, the Company was in compliance with all financial covenants.

Aggregate future minimum principal payments are as follows (in thousands):



Year ending March 31,	Term Loan
2021	$	11,756
2022	15,469
2023	109,725
Total	$	136,950

Interest expense

The components of interest expense, net are as follows (in thousands):



	Year ended March 31,			Three months ended March 31, (transition period)			Year ended December 31,
	2020			2019			2018			2017
Interest on term loan debt	$	6,096		$	1,774		$	6,774		$	7,271
Amortization of debt issuance costs	747			190			792			810
Interest on revolving line of credit	149			40			132			526
Interest on finance leases	179			50			155			168
Interest income	(863		)	(205		)	(37		)	—
Interest expense, net	$	6,308		$	1,849		$	7,816		$	8,775

Note 11—Contingencies

Legal Contingencies

e.l.f. Beauty, Inc. and subsidiaries

Notes to consolidated financial statements

From time to time, the Company is presently involved in legal proceedings, claims, and litigation arising in the ordinary course of business. The Company is not currently a party to any matters that management expects will have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

Note 12—Income taxes

On March 27, 2020, the CARES Act was signed into law making several changes to the Internal Revenue Code. The changes include but are not limited to: increasing the limitation on the amount of deductible interest expense, allowing companies to carryback certain net operating losses and increasing the amount of net operating loss carryforwards that corporations can use to offset taxable income. The tax law changes in the CARES Act did not have a material impact on the Company’s income tax provision.

The components of income (loss) before provision for income taxes are as follows (in thousands):



	Year ended March 31,			Three months ended March 31, (transition period)			Year ended December 31,
	2020			2019			2018		2017
Domestic	$	24,479		$	(21,673	)	$	17,405	$	22,409
Foreign	(410		)	500			551		60
Total	$	24,069		$	(21,173	)	$	17,956	$	22,469

The components of the benefit (provision) for income taxes are as follows (in thousands):



	Year ended March 31,			Three months ended March 31, (transition period)			Year ended December 31,
	2020			2019			2018			2017
Current:
U.S. federal	$	(2,681	)	$	(13	)	$	(2,414	)	$	(2,058	)
State	(1,066		)	(139		)	(948		)	(369		)
Foreign	5			(22		)	(8		)	—
Total current	(3,742		)	(174		)	(3,370		)	(2,427		)
Deferred:
U.S. federal	(2,532		)	3,096			1,005			13,246
State	99			368			101			(21		)
Foreign	(10		)	(31		)	(167		)	208
Total deferred	(2,443		)	3,433			939			13,433
Total (provision) benefit for income taxes	$	(6,185	)	$	3,259		$	(2,431	)	$	11,006

e.l.f. Beauty, Inc. and subsidiaries

Notes to consolidated financial statements

Effective January 1, 2018, the federal statutory rate decreased from 35% to 21% as a result of the enactment of the 2017 Tax Act. The following table presents a reconciliation of the federal statutory rate to the Company’s effective tax rate:



	Year ended March 31,		Three months ended March 31, (transition period)		Year ended December 31,
	2020		2019		2018		2017
Federal statutory rate	21.0	%	21.0	%	21.0	%	35.0	%
Federal tax deferred rate change	—	%	—	%	—	%	(53.8	)%
State tax, net of federal benefit	3.7	%	1.2	%	2.6	%	0.6	%
State tax deferred rate change, net of federal benefit	0.1	%	—	%	0.9	%	0.9	%
Nondeductible business expenses	0.8	%	(0.1	)%	1.4	%	—	%
Provision-to-return adjustment	—	%	—	%	(3.9	)%	—	%
Uncertain tax positions	(0.2	)%	(0.1	)%	(1.3	)%	(1.7	)%
Stock based compensation	(0.4	)%	(6.1	)%	(8.6	)%	(28.1	)%
Others	0.7	%	(0.5	)%	1.4	%	(1.9	)%
Effective tax rate	25.7	%	15.4	%	13.5	%	(49.0	)%

The components of net deferred taxes arising from temporary differences are as follows (in thousands):



	March 31, 2020		March 31, 2019		December 31, 2018
Deferred tax assets:
Compensation	$	760	$	895	$	928
Inventories and receivables	3,472		2,915		3,008
Accrued expenses	1,996		667		424
Stock compensation	3,706		3,627		5,175
Net operating losses	92		236		43
Right of use liability	3,443		4,643		—
Other	558		736		898
Deferred tax assets	14,027		13,719		10,476
Deferred tax liabilities:
Goodwill	3,468		2,857		2,618
Fixed assets	3,294		1,734		2,405
Intangible assets	25,287		24,077		24,591
Right of use asset	3,292		887		—
Other	563		892		1,023
Deferred tax liabilities	35,904		30,447		30,637
Net deferred tax liabilities	$	21,877	$	16,728	$	20,161

The deferred tax assets and liabilities are reported in the accompanying balance sheets as follows (in thousands):



	March 31, 2020		March 31, 2019		December 31, 2018
Deferred tax assets	$	15	$	25	$	56
Deferred tax liabilities	21,892		16,753		20,217
Net deferred tax liabilities	$	21,877	$	16,728	$	20,161

e.l.f. Beauty, Inc. and subsidiaries

Notes to consolidated financial statements

At March 31, 2020, the Company had gross federal and state net operating loss carryforwards of $0.4 million and $0.3 million, respectively. The federal net operating loss carryforwards can either be carried forward 20 years or indefinitely. The state net operating loss carryforwards have a carryforward period of 5-20 years. The net operating loss carryforwards will begin to expire in 2037.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):



	Year ended March 31,			Three months ended March 31, (transition period)		Year ended December 31,
	2020			2019		2018			2017
Balance at beginning of year	$	581		$	571	$	764		$	1,208
Increases for prior year tax positions	32			—		—			63
Increases for current year tax positions	90			10		173			68
Decreases for prior year tax positions	—			—		(8		)	(1		)
Decreases due to settlements	(29		)	—		—			(32		)
Decreases due to statutes lapsing	(197		)	—		(358		)	(542		)
Balance at end of year	$	477		$	581	$	571		$	764

If all of the Company’s unrecognized tax benefits as of March 31, 2020, March 31, 2019 and December 31, 2018 were recognized, $0.5 million, $0.4 million and $0.4 million of unrecognized tax benefits, respectively, would impact the effective tax rate. The Company believes it is reasonably possible that $0.1 million of unrecognized tax benefits may reverse in the next twelve months.

The Company recognizes interest and penalties accrued related to unrecognized tax benefits in the provision for income taxes. The Company had $0.1 million of accrued gross interest and penalties as of March 31, 2020, March 31, 2019 and December 31, 2018. The Company recognized net interest and penalties expense of $23,000, $(40,000) and $17,000 and $3,000 for the year ended March 31, 2020, the year ended December 31, 2018, 2017 and the transition period for the three months ended March 31, 2019, respectively.

The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. As of March 31, 2020, with few exceptions, the Company or its subsidiaries are no longer subject to examination prior to tax year ended December 31, 2016. Certain state returns are currently under audit by the state tax authorities. The Company does not expect the results of these audits to have a material impact on the consolidated financial statements.

Note 13—Preferred stock

The Company has authorized 30,000,000 shares of preferred stock for issuance with a par value of $0.01 per share. There were no shares of preferred stock outstanding as of March 31, 2020, March 31, 2019 or December 31, 2018.

Note 14—Stock-based compensation

Stock plans

The Company grants stock-based awards under its 2016 Equity Incentive Award Plan (the “2016 Plan”), which replaced its 2014 Equity Incentive Plan (the “2014 Plan”) and became effective immediately prior to the effectiveness of the Company’s registration statement on Form S-1 in September 2016. No grants have made under the 2014 Plan since the Company’s initial public offering and no further awards will be granted thereunder. Any awards outstanding under the 2014 Plan that are forfeited or lapse unexercised will be added to the shares reserved and available for grant under the 2016 Plan. The 2016 Plan permits the grant of incentive stock options, non-statutory stock options, restricted stock and other stock- or cash-based awards to employees, officers, directors, advisors and consultants. The 2016 Plan allows for option grants of the Company’s common stock based on service, performance and market conditions.

As of March 31, 2020, a total of 13,457,391 shares have been authorized for issuance under the 2016 Plan, and 7,643,774 remain available for grant. As of March 31, 2020, there were 1,471,032 options and awards outstanding under the 2014 Plan that, if forfeited, would increase the number of shares authorized for grant under the 2016 Plan.

e.l.f. Beauty, Inc. and subsidiaries

Notes to consolidated financial statements

Service-based vesting stock options

The following table summarizes the activity for options that vest solely based upon the satisfaction of a service condition as follows:



	Options outstanding		Weighted-average exercise price		Weighted-average remaining contractual life (in years)	Aggregate intrinsic values (in thousands) ⁽¹⁾
Balance as of December 31, 2018	2,746,670		$	12.91
Granted	115,100		7.95
Canceled or forfeited	(286,191	)	16.98
Balance as of March 31, 2019	2,575,579		12.24		6.9	$	6,958
Granted	202,560		14.18
Exercised	(334,572	)	4.08
Canceled or forfeited	(444,014	)	15.07
Balance as of March 31, 2020	1,999,553		$	13.17	6.8	$	3,773

Exercisable, March 31, 2020	1,291,647		$	12.06	6.1	$	3,469


(1)	The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the Company's closing stock price of $9.84, as reported on the New York Stock Exchange on March 31, 2020.

Additional information relating to service-based options is as follows (in thousands, except per share data):



	Year ended March 31,		Three months ended March 31, (transition period)		Year ended December 31,
	2020		2019		2018		2017
Stock-based compensation expense	$	2,308	$	590	$	3,219	$	2,435
Intrinsic value of options exercised	3,580		—		2,890		12,841
Weighted-average grant date fair value of options granted (per share)	$	5.55	$	3.12	$	6.81	$	9.51

As of March 31, 2020, there was $3.3 million of total unrecognized compensation cost related to service-based stock options, which is expected to be recognized over the remaining weighted-average vesting period of 2.2 years.

The fair value of service-based stock options granted were calculated using the following weighted-average assumptions:



	Year ended March 31,		Three months ended March 31, (transition period)		Year ended December 31,
	2020		2019		2018		2017
Expected term (in years)	6.5		6.3		6.3		6.2
Expected volatility	35.57	%	35.13	%	32.02	%	32.42	%
Risk-free interest rate	2.07	%	2.55	%	2.68	%	2.14	%
Expected dividend yield	—	%	—	%	—	%	—	%

e.l.f. Beauty, Inc. and subsidiaries

Notes to consolidated financial statements

The determination of the fair value of stock options on the date of grant using a Black-Scholes option-pricing model is affected by the fair value of the underlying common stock, as well as assumptions regarding a number of variables that are complex, subjective and generally require significant judgment. The assumptions used in the Black-Scholes option-pricing model to calculate the fair value of stock options were:

Fair value of common stock

Prior to the initial public offering, the fair value of shares of common stock underlying stock options was the responsibility of, and determined by, the Company’s board of directors, with input from management. There was no public market for the Company’s common stock and the board of directors determined the fair value of common stock at the time of grant of the option by considering a number of objective and subjective factors including independent third-party valuations of the Company’s common stock, operating and financial performance, the lack of liquidity of capital stock and general and industry specific economic outlook, among other factors. After the initial public offering, the fair value of shares of common stock underlying stock options is based on the closing stock price as quoted on the NYSE on the date of grant.

Expected term

The expected term of the options represents the period of time that the options are expected to be outstanding. Options granted have a maximum contractual life of 10 years. Prior to the initial public offering, the Company estimated the expected term of the option based on the estimated timing of potential liquidity events. For grants upon or after the initial public offering, the Company estimated the expected term based upon the simplified method described in Staff Accounting Bulletin No. 107, as the Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term due to the limited period of time its equity shares have been publicly traded.

Expected volatility

As the Company does not have sufficient trading history for its common stock, the expected stock price volatility for the common stock was estimated by taking the average historic price volatility for industry peers based on daily price observations over a period equivalent to the expected term of the stock option grants. Industry peers consist of several public companies within the same industry, which are of similar size, complexity and stage of development. The Company intends to continue to consistently apply this process using the same or similar public companies until a sufficient amount of historical information regarding the volatility of its own share price becomes available, or unless circumstances change such that the identified companies are no longer similar to the Company, in which case, more suitable companies whose share prices are publicly available would be used in the calculation.

Risk-free interest rate

The risk-free interest rate was based on the U.S. Treasury rate, with maturities similar to the expected term of the options.

Expected dividend yield

The Company does not anticipate paying any dividends in the foreseeable future. As such, the Company uses an expected dividend yield of zero.

e.l.f. Beauty, Inc. and subsidiaries

Notes to consolidated financial statements

Performance-based and market-based vesting stock options

The following table summarizes the activity for options that vest based upon the satisfaction of performance or market conditions as follows:



	Options outstanding		Weighted-average exercise price		Weighted-average remaining contractual life (in years)	Aggregate intrinsic values (in thousands) ⁽¹⁾
Balance as of December 31, 2018	1,482,782		$	8.94
Exercised	(62,450	)	1.84
Canceled or forfeited	(96,900	)	26.84
Balance as of March 31, 2019	1,323,432		7.96		6.0	$	8,646
Exercised	(53,100	)	2.40
Canceled or forfeited	(17,400	)	26.84
Balance as of March 31, 2020	1,252,932		$	7.97	5.0	$	7,487

Exercisable, March 31, 2020	952,932		$	1.98	4.4	$	7,487

(1)The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the Company's closing stock price of $9.84, as reported on the New York Stock Exchange on March 31, 2020.

As of March 31, 2020, there was no further unrecognized compensation cost related to performance-based and market-based vesting stock options.

Additional information relating to options that vest based upon the satisfaction of performance or market conditions is as follows (in thousands, except per share data):



	Year ended March 31,		Three months ended March 31, (transition period)		Year ended December 31,
	2020		2019		2018		2017
Stock-based compensation expense	$	—	$	—	$	1,168	$	3,489
Intrinsic value of options exercised	609		419		8,669		42,874
Weighted-average grant date fair value of options granted (per share)	$	—	$	—	$	—	$	10.65

Prior to the initial public offering, the Company granted options that vested based upon the achievement of both a performance and market condition. The performance condition was based on the occurrence of a liquidity event and was satisfied in connection with the initial public offering in September 2016. The market condition was based upon the achievement of a minimum rate of return from the liquidity event and was satisfied in March 2017. Accordingly, all such outstanding options vested in March 2017.

In February 2017, the Company granted options that vest based upon the achievement of specified stock prices. The fair values and derived service periods were determined using a Monte Carlo simulation model. If the awards vest prior to the end of the derived service period, the remaining unamortized compensation cost will be recognized in the period of vesting.

e.l.f. Beauty, Inc. and subsidiaries

Notes to consolidated financial statements

Restricted stock

The following table summarizes the activities for restricted stock awards (“RSAs”) and restricted stock units (“RSUs”) as follows:



	Shares of restricted stock outstanding		Weighted-average grant date fair value
Balance as of December 31, 2018	2,036,124		$	20.01
Granted ⁽¹⁾	1,464,710		7.64
Vested	(396,514	)	21.79
Canceled or forfeited	(317,922	)	20.06
Balance as of March 31, 2019	2,786,398		13.26
Granted	673,461		14.26
Vested	(762,818	)	15.97
Canceled or forfeited	(385,273	)	12.66
Balance as of March 31, 2020	2,311,768		$	12.86

⁽¹⁾ Includes restricted stock awards granted in the period ending March 31, 2019 that vest based upon the achievement of a specified stock price and satisfaction of a service condition. The fair values and derived service periods were determined using a Monte Carlo simulation model.

As of March 31, 2020, there were 1,128,789 unvested shares subject to RSAs outstanding. Additional information relating to RSAs and RSUs is as follows (in thousands):



	Year ended March 31,		Three months ended March 31, (transition period)		Year ended December 31,
	2020		2019		2018		2017
Stock-based compensation expense	$	13,181	$	3,093	$	12,434	$	7,550
Intrinsic value of RSUs released	$	12,448	$	3,387	$	6,280	$	3,398

As of March 31, 2020, there was $25.0 million of total unrecognized compensation cost related to unvested RSAs and RSUs, which is expected to be recognized over the remaining weighted-average vesting period of 2.4 years.

Note 15—Restructuring and other related costs

In February 2019, during the transition period for the three months ended March 31, 2020, a Restructuring Plan was approved to close all 22 e.l.f. retail stores and implement a workforce reduction of employees that operated and managed the e.l.f. retail stores. The Restructuring Plan resulted in the termination of the employment of 170 retail store employees and 5 corporate employees who managed and operated the e.l.f. retail stores. The purpose of the Restructuring Plan was to enable a reallocation of investment against the e.l.f. brand and prioritization of the Company's national retailer and digital channels.

e.l.f. Beauty, Inc. and subsidiaries

Notes to consolidated financial statements

In connection with the Restructuring Plan, the following table presents the restructuring (income) expense incurred in the transition period for the three months ended March 31, 2019 and the fiscal year ended March 31, 2020, respectively (in thousands):



	March 31, 2020			Three months ended March 31, 2019 (transition period)
	2020
Acceleration of rent expense	$	—		$	16,106
Acceleration of depreciation expense	—			5,377
Gain from extinguishment of lease liabilities	(7,733		)	(1,866		)
Employee severance and related expenses	—			600
Other costs, including other asset write-offs	1,751			1,959
Total	$	(5,982	)	$	22,176

The acceleration of rent expense is net of a $1.9 million gain related to operating lease liabilities that were extinguished as of March 31, 2019. This gain represents the difference between the aggregate operating lease liability established upon adoption of ASC 842 and the aggregate cash charge incurred to extinguish the aggregate liability. The gross accelerated rent expense of $16.1 million is included in depreciation and amortization in the statement of cash flows for the transition period for the three months ended March 31, 2019. The majority of the other costs incurred during transition period for the three months ended March 31, 2019 and the year ended March 31, 2020 are legal fees related to this extinguishment. As of March 31, 2020, the Company has settled all outstanding lease liabilities related to its e.l.f. retail store closures and does not expect to incur additional costs associated with the Restructuring Plan.

Liabilities related to the Restructuring Plan are reported within accrued expenses and other current liabilities in the accompanying consolidated balance sheets. The following table presents a roll-forward of the Company's restructuring liability for the transition period for the three months ended March 31, 2019 and the year ended March 31, 2020, respectively (in thousands):



	Employee severance and related expenses			Other costs			Total
December 31, 2018	$	—		$	—		$	—
Costs incurred	600			1,118			1,718
Cash disbursements	(504		)	(443		)	(947		)
March 31, 2019	$	96		$	675		$	771
Costs incurred and other adjustments	(22		)	1,634			1,612
Cash disbursements	(74		)	(2,309		)	(2,383		)
March 31, 2020	$	—		$	—		$	—

Outstanding lease liabilities are not included in the table above, as those liabilities were established upon adoption of ASC 842, not in connection with the Restructuring Plan.

Note 16—Repurchase of common stock

On May 8, 2019, the Company's board of directors authorized a share repurchase program to acquire up to $25.0 million of the Company’s common stock (the “Share Repurchase Program”). Purchases under the Share Repurchase Program may be made from time to time through a variety of methods, which may include open market purchases, privately negotiated transactions, block trades, accelerated share repurchase transactions, or by any combination of such methods. The timing and amount of any repurchases pursuant to the Share Repurchase Program will be determined based on market conditions, share price and other factors. The Share Repurchase Program does not require the Company to repurchase any specific number of shares of its common stock, and may be modified, suspended or terminated at any time without notice. There is no guarantee that any shares will be purchased under the Share Repurchase Program and such shares are intended to be retired after purchase.

e.l.f. Beauty, Inc. and subsidiaries

Notes to consolidated financial statements

During the year ended March 31, 2020, the Company repurchased a total of 564,468 shares for $7.9 million at an average price of $14.03 under the Share Repurchase Program. A total of $17.1 million remains available for purchase under the Share Repurchase Program.

Note 17—Employee benefit plan

The Company maintains a defined contribution 401(k) profit-sharing plan (the “401(k) Plan”) for eligible employees. Participants may make voluntary contributions up to the maximum amount allowable by law. The Company may make contributions to the 401(k) Plan on a discretionary basis which vest to the participants 100%. The Company made matching contributions of $0.3 million, $0.2 million, $0.2 million and $0.1 million to the 401(k) Plan during the years ended March 31, 2020, December 31, 2018, 2017, and the transition period for the three months ended March 31, 2019, respectively.

Note 18—Net income (loss) per share

The following is a reconciliation of the numerator and denominator in the basic and diluted net income (loss) per common share computations (in thousands, except share and per share data):



	Year ended March 31,		Three months ended March 31, (transition period)			Year ended December 31,
	2020		2019			2018		2017
Numerator:
Net income (loss)	$	17,884	$	(17,914	)	$	15,525	$	33,475

Denominator:
Weighted average common shares outstanding - basic	48,498,813		48,022,926			46,828,798		45,358,452
Dilutive common equivalent shares from equity awards	2,318,330		—			2,439,818		4,016,306
Weighted average common shares outstanding - diluted	50,817,143		48,022,926			49,268,616		49,374,758

Net income (loss) per share:
Basic	$	0.37	$	(0.37	)	$	0.33	$	0.74
Diluted	$	0.35	$	(0.37	)	$	0.32	$	0.68

Weighted average anti-dilutive shares from outstanding equity awards excluded from diluted earnings per share	2,143,672		6,588,523			3,373,529		1,176,787

Note 19—Leases

The Company leases warehouses, distribution centers, office space, retail space and equipment. Prior to the Restructuring Plan, the Company also leased retail store locations. The majority of the Company's leases include one or more options to renew, with renewal terms that can extend the lease term for up to five years. The exercise of lease renewal options is at the Company's sole discretion and such renewal options are included in the lease term if they are reasonably certain to be exercised. Certain leases also include options to purchase the leased asset. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants. Most of the Company's equipment leases are finance leases of assets used to operate its distribution centers in Ontario, California and Columbus, Ohio.

Significant judgment is required to determine whether commercial contracts contain a lease for purposes of ASC 842. The discount rate used in measuring lease liabilities is generally based on the interest rate on the Company’s revolving line of credit, assuming sufficient unused capacity exists at the time the lease liability is measured.

e.l.f. Beauty, Inc. and subsidiaries

Notes to consolidated financial statements

A reconciliation of the balance sheet line items that were impacted or created as a result of the Company’s adoption of ASC 842 as of March 31, 2020 and March 31, 2019 is as follows (in thousands):



	Classification	March 31, 2020		March 31, 2019
Assets
Operating lease assets ^(a)	Other assets	$	13,668	$	4,445
Finance lease assets ^(b)	Other assets	2,094		3,089
Total leased assets		$	15,762	$	7,534
Liabilities
Current
Operating ^(a)	Accrued expenses and other current liabilities	$	3,083	$	4,172
Finance	Current portion of long-term debt and finance lease obligations	812		771
Noncurrent
Operating ^(a)	Long-term operating lease obligations	11,239		15,898
Finance	Long-term debt and finance lease obligations	2,200		3,012
Total lease liabilities		$	17,334	$	23,853

___________________

^(a) In accordance with ASC 842, $15.7 million of ROU assets related to operating leases were derecognized in the transition period for the three months ended March 31, 2019 in connection with the Restructuring Plan. Pursuant to ASC 842, each related lease liability is derecognized only after the Company is released from that liability. The Company recognized a gain of $1.9 million in restructuring expenses related to the derecognition of lease liabilities in connection with the Restructuring Plan in the transition period for the three months ended March 31, 2019. See Note 15, “Restructuring and other related costs” for further details on the Restructuring Plan and the gain recorded on lease liabilities derecognized in the year ended March 31, 2020 and the transition period for the three months ended March 31, 2019, respectively.

^(b) Finance leases are recorded net of accumulated amortization of $2.9 million and $1.9 million as of March 31, 2020 and March 31, 2019, respectively.

For the year ended March 31, 2020 and the transition period for the three months ended March 31, 2019, the components of operating and finance lease costs were as follows (in thousands):



	Classification	Twelve months ended March 31, 2020			Three months ended March 31, 2019 (transition period)
Operating lease cost	Selling, general and administrative (“SG&A”) expenses	$	2,950		$	1,195
Gain from extinguishment of lease liabilities	Restructuring expense (income)	(7,733		)	(1,866		)
Acceleration of rent expense	Restructuring expenses	—			16,106
Finance lease cost
Amortization of leased assets	SG&A expenses	996			254
Interest on lease liabilities	Interest expense, net	179			50
Total lease (gain) cost		$	(3,608	)	$	15,739

e.l.f. Beauty, Inc. and subsidiaries

Notes to consolidated financial statements

As of March 31, 2020, the aggregate future minimum lease payments under non-cancellable leases presented in accordance with ASC 842 are as follows (in thousands):



	Operating leases		Finance leases		Total
2021	3,540		950		4,490
2022	2,350		907		3,257
2023	1,924		1,208		3,132
2024	1,962		235		2,197
2025	1,547		—		1,547
Thereafter	4,748		—		4,748
Total lease payments	16,071		3,300		19,371
Less: Interest	1,749		288
Present value of lease liabilities	$	14,322	$	3,012

As of December 31, 2018 the aggregate future minimum lease payments under non-cancellable leases presented in accordance with ASC 840 were as follows (in thousands):



Year ending December 31,
2019	$	5,375
2020	5,210
2021	3,876
2022	2,832
2023	2,858
2024 and thereafter	7,167
Total	$	27,318

For leases commencing prior to January 1, 2019, minimum lease payments exclude payments to landlords for real estate taxes and common area maintenance. These payments can be either fixed or variable, depending on the lease.

As of March 31, 2020 and March 31, 2019, the weighted average remaining lease term (in years) and discount rate were as follows:



	March 31, 2020		March 31, 2019
Weighted-average remaining lease term
Operating leases	6.8 years		5.9 years
Finance leases	3.3 years		4.3 years
Weighted-average discount rate
Operating leases	3.7	%	4.8	%
Finance leases	5.2	%	5.2	%

Operating cash outflows from operating leases for the year ended March 31, 2020 and the transition period for the three months ended March 31, 2019 were $10.4 million and $1.8 million, respectively.

e.l.f. Beauty, Inc. and subsidiaries

Notes to consolidated financial statements

Note 20—Quarterly financial summary

Unaudited quarterly results for the years ended March 31, 2020, December 31, 2018, and the transition period for the three months ended March 31, 2019 were as follows (in thousands, except per share data):



	March 31, 2018		June 30, 2018		September 30, 2018		December 31, 2018		March 31, 2019 (transition period)			June 30, 2019		September 30, 2019		December 31, 2019		March 31, 2020
	(unaudited)											(unaudited)
Net sales	$	65,920	$	59,055	$	63,889	$	78,571	$	66,141		$	59,764	$	67,615	$	80,760	$	74,712
Gross profit	$	40,208	$	36,645	$	38,969	$	46,919	$	40,491		$	37,191	$	43,348	$	52,520	$	48,064
Net income (loss)	$	690	$	1,248	$	3,915	$	9,672	$	(17,914	)	$	3,706	$	6,517	$	8,002	$	(341	)
Net income (loss) per share:
Basic	$	0.01	$	0.03	$	0.08	$	0.20	$	(0.37	)	$	0.08	$	0.13	$	0.16	$	(0.01	)
Diluted	$	0.01	$	0.03	$	0.08	$	0.20	$	(0.37	)	$	0.07	$	0.13	$	0.16	$	(0.01	)

Note 21—Subsequent events

On April 8, 2020, the Company amended its senior secured credit agreement to modify the Company’s quarterly maintenance covenants, and to add interest rates with respect to borrowings associated with the added increased maximum permitted total net leverage ratios. Refer to Note 10 Debt for additional information.

Item 15. Exhibits, financial statement schedules.

(a) The following documents are filed as part of this Annual Report:

1. Consolidated financial statements:

Reference is made to the Index to Consolidated Financial Statements on page 3 hereof, which is incorporated by reference herein.

2. Financial statement schedules:

All schedules are omitted because the required information is either not present, not present in material amounts or presented within our consolidated financial statements and notes thereto beginning on page 5 hereof and are incorporated herein by reference.

3. Exhibits



			Incorporated by Reference
Exhibit Number	Exhibit Description	Provided Herewith	Form	Exhibit Number	File Number	Filing Date

3.1	Amended and Restated Certificate of Incorporation of e.l.f. Beauty, Inc.		8-K	3.1	001-37873	9/27/2016

3.2	Amended and Restated Bylaws of e.l.f. Beauty, Inc.		8-K	3.2	001-37873	9/27/2016

4.1	Reference is made to Exhibits 3.1 and 3.2.

4.2	Registration Rights Agreement, dated January 31, 2014, by and among e.l.f. Beauty, Inc. and certain stockholders party thereto.		S-1	4.2	333-213333	8/26/2016

4.3	Form of Common Stock Certificate.		S-1/A	4.4	333-213333	9/12/2016



			Incorporated by Reference
Exhibit Number	Exhibit Description	Provided Herewith	Form	Exhibit Number	File Number	Filing Date
10.1	Standard Multi-Tenant Office Lease, dated as of March 31, 2014, by and between 1007 Clay Street Properties LLC and e.l.f. Cosmetics, Inc. (formerly known as J.A. Cosmetics US, Inc.).		S-1	10.1	333-213333	8/26/2016

10.2	Addendum to Standard Multi-Tenant Office Lease, dated as of March 31, 2014, by and between 1007 Clay Street Properties LLC and e.l.f. Cosmetics, Inc. (formerly known as J.A. Cosmetics US, Inc.).		S-1	10.2	333-213333	8/26/2016

10.3	Standard Multi-Tenant Office Lease, dated as of October 5, 2015, by and between 1007 Clay Street Properties LLC and e.l.f. Cosmetics, Inc. (formerly known as J.A. Cosmetics US, Inc.).		S-1	10.3	333-213333	8/26/2016

10.4	Addendum to Standard Multi-Tenant Office Lease, dated as of October 22, 2015, by and between 1007 Clay Street Properties LLC and e.l.f. Cosmetics, Inc. (formerly known as J.A. Cosmetics US, Inc.).		S-1	10.4	333-213333	8/26/2016

10.5	Amended and Restated Lease Agreement, dated June 19, 2019, by and between e.l.f. Cosmetics, Inc. and Redwood Property Investors III, LLC (as successor to 1007 Clay Street Properties)		10-Q	10.1	001-37873	8/8/2019

10.6	Standard Industrial/Commercial Multi-Tenant Lease, dated as of December 9, 2015, by and between Jurupa Gateway LLC and e.l.f. Cosmetics, Inc. (formerly known as J.A. Cosmetics US, Inc.).		S-1	10.5	333-213333	8/26/2016

10.7	Senior Secured Credit Agreement, dated as of December 23, 2016, by and among e.l.f. Beauty, Inc., as parent guarantor, e.l.f. Cosmetics, Inc., J.A. 139 Fulton Street Corp., J.A. 741 Retail Corp., J.A. Cosmetics Retail, Inc., J.A. RF, LLC and J.A. Cherry Hill, LLC, each as a borrower, and Bank of Montreal, as the administrative agent, swingline lender and l/c issuer.		8-K	10.1	001-37873	12/28/2016

10.8(a)	First Amendment to Credit Agreement, dated as of August 25, 2017, by and among e.l.f. Beauty, Inc., as parent guarantor, e.l.f. Cosmetics, Inc., J.A. 139 Fulton Street Corp., J.A. 741 Retail Corp., J.A. Cosmetics Retail, Inc., J.A. RF, LLC and J.A. Cherry Hill, LLC, each as a borrower, Bank of Montreal, as the administrative agent, swingline lender and l/c issuer, and the lenders from time to time party thereto.		8-K	10.1	001-37873	8/28/2017

10.8(b)	Second Amendment to Credit Agreement, dated as of December 7, 2018, by and among e.l.f. Beauty, Inc., as parent guarantor, e.l.f. Cosmetics, Inc., J.A. 139 Fulton Street Corp., J.A. 741 Retail Corp., J.A. Cosmetics Retail, Inc., J.A. RF, LLC and J.A. Cherry Hill, LLC, each as a borrower, Bank of Montreal, as the administrative agent, swingline lender and l/c issuer, and the lenders from time to time party thereto		10-K	10.8(b)	001-37873	5/28/2020

10.8(c)	Third Amendment to Credit Agreement, dated as of April 8, 2020, by and among e.l.f. Beauty, Inc., as parent guarantor, e.l.f. Cosmetics, Inc., W3ll People, Inc., J.A. RF, LLC, each as a borrower, Bank of Montreal, as the administrative agent, swingline lender and l/c issuer, and the lenders from time to time party thereto.		8-K	10.1	001-37873	4/9/2020

10.9(a)#	2014 Equity Incentive Plan of e.l.f. Beauty, Inc.		S-1	10.12	333-213333	8/26/2016



			Incorporated by Reference
Exhibit Number	Exhibit Description	Provided Herewith	Form	Exhibit Number	File Number	Filing Date
10.9(b)#	Amendment to 2014 Equity Incentive Plan of e.l.f. Beauty, Inc., dated as of March 15, 2017.		10-K	10.7(b)	001-37873	3/15/2017

10.9(c)#	Forms of stock option award agreements used under the 2014 Equity Incentive Plan of e.l.f. Beauty, Inc.		S-1	10.13	333-213333	8/26/2016

10.10(a)#	2016 Equity Incentive Award Plan of e.l.f. Beauty, Inc.		S-1/A	10.16	333-213333	9/12/2016

10.10(b)#	Form of Stock Option Grant Notice under the 2016 Equity Incentive Award Plan of e.l.f. Beauty, Inc.		S-1/A	10.17	333-213333	9/12/2016

10.10(c)#	Form of Restricted Stock Unit Award Grant Notice under the 2016 Equity Incentive Award Plan of e.l.f. Beauty, Inc.		S-1/A	10.27	333-213333	9/12/2016

10.10(d)#	Form of Restricted Stock Award Grant Notice under the 2016 Equity Incentive Award Plan of e.l.f. Beauty, Inc. (Executives).		10-K	10.12(d)	001-37873	3/15/2017

10.10(d)#	Form of Restricted Stock Award Grant Notice under the 2016 Equity Incentive Award Plan of e.l.f. Beauty, Inc. (Executives).		10-K	10.12(d)	001-37873	3/15/2017

10.10(e)#	Form of Restricted Stock Award Grant Notice under the 2016 Equity Incentive Award Plan of e.l.f. Beauty, Inc. (Chief Executive Officer).		10-K	10.12(e)	001-37873	3/15/2017

10.11#	2016 Employee Stock Purchase Plan of e.l.f. Beauty, Inc.		S-1/A	10.18	333-213333	9/12/2016

10.12#	Amended and Restated Employment Agreement, dated as of February 26, 2019, between Tarang Amin, e.l.f. Cosmetics, Inc. and e.l.f. Beauty, Inc.		10-K	10.16	001-37873	2/28/2019

10.13#	Amended and Restated Employment Agreement, dated as of February 26, 2019, between Scott Milsten, e.l.f. Cosmetics, Inc. and e.l.f. Beauty, Inc.		10-K	10.17	001-37873	2/28/2019

10.14#	Amended and Restated Employment Agreement, dated as of February 26, 2019, between Richard Baruch, Jr., e.l.f. Cosmetics, Inc. and e.l.f. Beauty, Inc.		10-K	10.18	001-37873	2/28/2019

10.15#	Amended and Restated Employment Agreement, dated as of February 26, 2019, between Jonathan T. Fieldman, e.l.f. Cosmetics, Inc. and e.l.f. Beauty, Inc.		10-K	10.19	001-37873	2/28/2019

10.16#	Employment Agreement, dated as of February 1, 2019, between Kory Marchisotto, e.l.f. Cosmetics, Inc. and e.l.f. Beauty, Inc.		10-Q	10.1	001-37873	5/9/2019

10.17#	Employment Agreement, dated as of March 15, 2019, between Mandy Fields, e.l.f. Cosmetics, Inc. and e.l.f. Beauty, Inc.		8-K	10.1	001-37873	3/21/2019

10.18#	Employment Agreement, dated as of November 25, 2019, between Josh Franks, e.l.f. Cosmetics, Inc. and e.l.f. Beauty, Inc.		10-Q	10.1	001-37873	2/6/2020

10.19#	Form of Indemnification Agreement for directors and officers of e.l.f. Beauty, Inc.		S-1	10.25	333-213333	8/26/2016

10.20#	Amended and Restated Non-Employee Director Compensation Program of e.l.f. Beauty, Inc.		10-Q	10.1	001-37873	11/7/2019

21.1	List of Significant Subsidiaries of e.l.f. Beauty, Inc.		10-K	21.1	001-37873	5/28/2020



			Incorporated by Reference
Exhibit Number	Exhibit Description	Provided Herewith	Form	Exhibit Number	File Number	Filing Date

23.1	Consent of Independent Registered Public Accounting Firm.		10-K	23.1	001-37873	5/28/2020

24.1	Power of Attorney.		10-K	24.1	001-37873	5/28/2020

31.1	Certification of the Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act.		10-K	31.1	001-37873	5/28/2020

31.2	Certification of the Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act.	X

31.3	Certification of the Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act.		10-K	31.2	001-37873	5/28/2020

31.4	Certification of the Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act.	X

32.1*	Certification of the Chief Executive Officer and Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act.		10-K	32.1	001-37873	5/28/2020

32.2*	Certification of the Chief Executive Officer and Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act	X


#	Indicates management contract or compensatory plan.

This certification is deemed furnished, and not filed, with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of e.l.f. Beauty, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Annual Report on Form 10-K, irrespective of any general incorporation language contained in such filing.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.



	e.l.f. Beauty, Inc.

May 29, 2020	By:	/s/ Tarang P. Amin
Date		Tarang P. Amin Chief Executive Officer (Principal Executive Officer)

May 29, 2020	By:	/s/ Mandy Fields
Date		Mandy Fields Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer )

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