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EX-31.1 - EX-31.1 - Revolve Group, Inc.rvlv-ex311_6.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended June 30, 2020

OR

 

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

 

For the transition period from                     to                     .

Commission file number: 001-38927

 

REVOLVE GROUP, INC.

(Exact name of Registrant as Specified in its Charter)

 

 

Delaware

46-1640160

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

12889 Moore Street

Cerritos, California 90703

(Address of principal executive offices) (Zip code)

(562) 677-9480

(Registrant’s telephone number, including area code)

 

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

 

Title of each class:

 

Trading Symbol(s):

 

Name of each exchange on which registered:

Class A Common Stock, par value $0.001 per share

 

RVLV

 

New York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes     No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

  

Accelerated filer

Non-accelerated filer

  

Smaller reporting company

Emerging growth company

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

As of August 6, 2020, 15,930,974 shares of the registrant’s Class A common stock and 53,568,912 shares of the registrant’s Class B common stock were outstanding.

 

 

1


REVOLVE GROUP, INC. AND SUBSIDIARIES

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

 

 

 

Item 1. Financial Statements

 

3

 

 

 

Condensed Consolidated Balance Sheets

 

3

 

 

 

Condensed Consolidated Statements of Income

 

4

 

 

 

Condensed Consolidated Statements of Comprehensive Income

 

5

 

 

 

Condensed Consolidated Statements of Cash Flows

 

6

 

 

 

Notes to the Condensed Consolidated Financial Statements

 

7

 

 

 

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

 

19

 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

39

 

 

 

Item 4. Controls and Procedures

 

40

 

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

Item 1. Legal Proceedings

 

41

 

 

 

Item 1A. Risk Factors

 

41

 

 

 

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

 

76

 

 

 

Item 3. Defaults Upon Senior Securities

 

76

 

 

 

Item 4. Mine Safety Disclosures  

 

76

 

 

 

Item 5. Other Information

 

76

 

 

 

Item 6. Exhibits

 

77

 

 

 

Signatures

 

79

 

 

 

 


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

REVOLVE GROUP, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share and per share data)

 

 

 

June 30,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

150,772

 

 

$

65,418

 

Accounts receivable, net

 

 

4,849

 

 

 

4,751

 

Inventory

 

 

64,510

 

 

 

104,257

 

Income taxes receivable

 

 

 

 

 

761

 

Prepaid expenses and other current assets

 

 

19,585

 

 

 

24,155

 

Total current assets

 

 

239,716

 

 

 

199,342

 

Property and equipment, net

 

 

12,673

 

 

 

13,517

 

Intangible assets, net

 

 

1,287

 

 

 

1,457

 

Goodwill

 

 

2,042

 

 

 

2,042

 

Other assets

 

 

592

 

 

 

642

 

Deferred income taxes

 

 

15,924

 

 

 

15,290

 

Total assets

 

$

272,234

 

 

$

232,290

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

25,893

 

 

$

29,813

 

Line of credit

 

 

24,000

 

 

 

 

Income taxes payable

 

 

4,448

 

 

 

470

 

Accrued expenses

 

 

20,720

 

 

 

19,399

 

Returns reserve

 

 

28,336

 

 

 

35,104

 

Other current liabilities

 

 

17,400

 

 

 

16,740

 

Total current liabilities

 

 

120,797

 

 

 

101,526

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Class A common stock, $0.001 par value; 1,000,000,000 shares

   authorized as of June 30, 2020 and December 31, 2019;

   15,930,974 and 14,009,859 shares issued and outstanding as of June 30, 2020

   and December 31, 2019 respectively.

 

 

16

 

 

 

14

 

Class B common stock, $0.001 par value; 125,000,000 shares authorized

   as of June 30, 2020 and December 31, 2019; 53,568,912 and

   55,069,124 shares issued and outstanding as of June 30, 2020 and December 31,

   2019, respectively.

 

 

54

 

 

 

55

 

Additional paid-in capital

 

 

76,765

 

 

 

74,018

 

Retained earnings

 

 

74,602

 

 

 

56,677

 

Total stockholders' equity

 

 

151,437

 

 

 

130,764

 

Total liabilities and stockholders’ equity

 

$

272,234

 

 

$

232,290

 

 

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

3


REVOLVE GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except per share data)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Net sales

 

$

142,784

 

 

$

161,897

 

 

$

288,859

 

 

$

299,240

 

Cost of sales

 

 

70,713

 

 

 

71,479

 

 

 

145,838

 

 

 

138,068

 

Gross profit

 

 

72,071

 

 

 

90,418

 

 

 

143,021

 

 

 

161,172

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fulfillment

 

 

3,799

 

 

 

5,301

 

 

 

8,292

 

 

 

9,796

 

Selling and distribution

 

 

19,054

 

 

 

23,639

 

 

 

40,833

 

 

 

44,230

 

Marketing

 

 

14,638

 

 

 

24,914

 

 

 

36,588

 

 

 

44,412

 

General and administrative

 

 

15,776

 

 

 

18,836

 

 

 

34,650

 

 

 

38,105

 

Total operating expenses

 

 

53,267

 

 

 

72,690

 

 

 

120,363

 

 

 

136,543

 

Income from operations

 

 

18,804

 

 

 

17,728

 

 

 

22,658

 

 

 

24,629

 

Other expense, net

 

 

174

 

 

 

444

 

 

 

47

 

 

 

660

 

Income before income taxes

 

 

18,630

 

 

 

17,284

 

 

 

22,611

 

 

 

23,969

 

Provision for income taxes

 

 

4,394

 

 

 

4,543

 

 

 

4,219

 

 

 

6,266

 

Net income

 

 

14,236

 

 

 

12,741

 

 

 

18,392

 

 

 

17,703

 

Less: Repurchase of Class B common stock upon

   corporate conversion

 

 

 

 

 

(40,816

)

 

 

 

 

 

(40,816

)

Net income (loss) attributable to common

   stockholders

 

$

14,236

 

 

$

(28,075

)

 

$

18,392

 

 

$

(23,113

)

Earnings (net loss) per share of Class A and Class B

   common stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.21

 

 

$

(0.57

)

 

$

0.27

 

 

$

(0.51

)

Diluted

 

$

0.20

 

 

$

(0.57

)

 

$

0.26

 

 

$

(0.51

)

Weighted average Class A and Class B common shares

   outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

69,415

 

 

 

49,025

 

 

 

69,367

 

 

 

45,481

 

Diluted

 

 

71,659

 

 

 

49,025

 

 

 

71,781

 

 

 

45,481

 

 

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

4


REVOLVE GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Net income

 

$

14,236

 

 

$

12,741

 

 

$

18,392

 

 

$

17,703

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative translation adjustment

 

 

(123

)

 

 

(130

)

 

 

(467

)

 

 

13

 

Total other comprehensive (loss) income

 

 

(123

)

 

 

(130

)

 

 

(467

)

 

 

13

 

Total comprehensive income

 

$

14,113

 

 

$

12,611

 

 

$

17,925

 

 

$

17,716

 

 

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

5


REVOLVE GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

Operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

18,392

 

 

$

17,703

 

Adjustments to reconcile net income to net cash provided by operating

   activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

2,396

 

 

 

1,584

 

Equity-based compensation

 

 

1,432

 

 

 

1,032

 

Deferred income taxes

 

 

(634

)

 

 

(2,241

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(98

)

 

 

(3,036

)

Inventories

 

 

39,747

 

 

 

(13,184

)

Income taxes receivable

 

 

761

 

 

 

(1,142

)

Prepaid expenses and other current assets

 

 

4,570

 

 

 

(271

)

Other assets

 

 

50

 

 

 

36

 

Accounts payable

 

 

(3,920

)

 

 

9,468

 

Income taxes payable

 

 

3,978

 

 

 

(36

)

Accrued expenses

 

 

1,321

 

 

 

3,137

 

Returns reserve

 

 

(6,768

)

 

 

7,171

 

Other current liabilities

 

 

660

 

 

 

2,462

 

Net cash provided by operating activities

 

 

61,887

 

 

 

22,683

 

Investing activities:

 

 

 

 

 

 

 

 

Purchases of property, equipment and other

 

 

(1,381

)

 

 

(9,755

)

Net cash used in investing activities

 

 

(1,381

)

 

 

(9,755

)

Financing activities:

 

 

 

 

 

 

 

 

Proceeds from initial public offering, net of underwriting discounts

   paid

 

 

 

 

 

57,077

 

Repurchase of Class B common stock upon corporate conversion

 

 

 

 

 

(40,816

)

Proceeds from borrowings on line of credit

 

 

30,000

 

 

 

 

Repayment of borrowings on line of credit

 

 

(6,000

)

 

 

 

 

Payment of deferred offering costs

 

 

(41

)

 

 

(726

)

Proceeds from the exercise of stock options, net

 

 

1,356

 

 

 

 

Net cash provided by financing activities

 

 

25,315

 

 

 

15,535

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(467

)

 

 

13

 

Net increase in cash and cash equivalents

 

 

85,354

 

 

 

28,476

 

Cash and cash equivalents, beginning of period

 

 

65,418

 

 

 

16,369

 

Cash and cash equivalents, end of period

 

$

150,772

 

 

$

44,845

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Interest

 

$

190

 

 

$

 

Income taxes, net of refund

 

$

102

 

 

$

9,674

 

Supplemental disclosure of non-cash activities:

 

 

 

 

 

 

 

 

Deferred offering costs accrued, unpaid

 

$

 

 

$

603

 

 

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

 

 

6


 

REVOLVE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Description of Business

Revolve Group, Inc., or REVOLVE, is an online fashion retailer for Millennial and Generation Z consumers. Through our websites and mobile apps we deliver an aspirational customer experience from a vast, yet curated offering. Our dynamic platform connects a deeply engaged community of consumers, global fashion influencers, and emerging, established and owned brands. We are headquartered in Los Angeles County, California.  

Note 2. Significant Accounting Policies

Basis of Presentation

Our unaudited condensed consolidated interim financial information has been prepared in accordance with Article 10 of the Securities and Exchange Commission’s, or the SEC, Regulation S-X. As permitted under those rules, certain footnotes or other financial information that are normally required by generally accepted accounting principles in the United States, or GAAP, can be condensed or omitted. These financial statements have been prepared on the same basis as our annual financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for the fair statement of our financial information. These interim results are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2020 or for any other interim period or for any other future year. All intercompany transactions and balances have been eliminated in consolidation. Certain prior period amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported results of operations. Our fiscal year ends on December 31 of each year.

The accompanying unaudited condensed consolidated financial statements and related financial information should be read in conjunction with the audited consolidated financial statements and the related notes thereto for the fiscal year ended December 31, 2019 contained in our Annual Report on Form 10-K filed with the SEC on February 26, 2020.

Impact of COVID-19 on Our Business

The COVID-19 pandemic had a material adverse impact on our business operations and operating results for the three and six months ended June 30, 2020. While the length and severity of the reduction and shift in consumer demand related to COVID-19 remains uncertain, we expect that our business operations and results of operations, including our net sales, will be materially impacted through the remainder of 2020.

In April 2020 we took aggressive actions to mitigate the effect of COVID-19 on our business by reducing non-payroll related operating costs and reducing payroll costs through a combination of pay cuts, employee furloughs and, to a lesser extent, layoffs. We also eliminated or deferred non-essential capital expenditures, significantly reduced planned inventory receipts by canceling or delaying orders, in addition to extending payment terms for both merchandise and non-merchandise vendor invoices. As our business operations and operating results improved throughout the second quarter of 2020, in part due to the easing of stay-at-home orders and other state-imposed restrictions on businesses, we began the process of bringing back certain furloughed employees and returned the majority of our corporate employees, except for executives and senior management, to their pre-COVID-19 salaries and wages. In addition, we accrued for discretionary bonuses related to second quarter performance with payment subject to full year performance. We also began to sequentially increase our inventory purchases and incur certain operating expenses to support the improving trends in consumer demand. Through our aggressive cost control and purchase commitment reductions, we were able to increase the balance of our cash and cash equivalents during the three months ended June 30, 2020.  We believe that our existing cash and cash equivalents and cash flows from operations will be sufficient to meet our anticipated cash needs for at least the next 12 months, including the repayment of outstanding borrowings upon the expiration of our line of credit. However, our liquidity assumptions may prove to be incorrect given the uncertainty of the COVID-19 pandemic, and we could exhaust our available financial resources sooner than we currently expect.

 

7


 

Reverse Split

On May 24, 2019, we effected a one-for-22.31 reverse split of all of our issued and outstanding Class T units and Class A units. All figures have been presented on the basis of the reverse split wherever applicable for all the periods presented in these condensed consolidated financial statements.

Corporate Conversion

Prior to our initial public offering, or IPO, we operated as a Delaware limited liability company under the name Revolve Group, LLC. In connection with the IPO, Revolve Group, LLC converted into a Delaware corporation and changed its name to Revolve Group, Inc. so that the top-tier entity in our corporate structure was a corporation rather than a limited liability company, which we refer to as the Corporate Conversion. In conjunction with the Corporate Conversion, all of the outstanding Class T and Class A units of Revolve Group, LLC were converted into an aggregate of 67,889,013 shares of our Class B common stock. The holders of Class T units received an aggregate of 2,400,960 shares, representing the total preference amount for the Class T units.  The remaining 65,488,053 shares of our Class B common stock were allocated on a pro rata basis to the Class T and Class A unitholders based on the number of units held by each holder. In connection with the Corporate Conversion, Revolve Group, Inc. holds all property and assets of Revolve Group, LLC and assumed all of the debts and obligations of Revolve Group, LLC.  The members of the board of managers and the officers of Revolve Group, LLC became the members of the board of directors and the officers of Revolve Group, Inc.

Initial Public Offering

On June 7, 2019, we completed an IPO, in which we issued and sold 2,941,176 shares of our Class A common stock at a public offering price of $18.00 per share. We received approximately $45.8 million in net proceeds after deducting $3.3 million of underwriting discounts and approximately $3.8 million in offering costs. Upon the closing of the IPO, we used $40.8 million of the net proceeds from the offering to repurchase an aggregate of 2,400,960 shares of Class B common stock held by TSG6 L.P. and certain of its affiliates, or TSG, and Capretto, LLC.

In June 2019, we issued and sold an additional 441,176 shares of Class A common stock at a price of $18.00 per share following the underwriters’ exercise of their option to purchase additional shares and received proceeds of $7.5 million, net of underwriting discounts and commissions of $0.5 million.

In connection with the IPO, 10,147,059 Class B shares were converted into Class A shares by the selling stockholders.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include: the allowance for sales returns, the valuation of deferred tax assets, inventory, equity‑based compensation, and goodwill, reserves for income tax uncertainties and other contingencies, and breakage of store credit and gift cards.

Net Sales

Revenue is primarily derived from the sale of apparel merchandise through our sites and, when applicable, shipping revenue. We recognize revenue through the following steps: (1) identification of the contract, or contracts, with the customer; (2) identification of the performance obligations in the contract; (3) determination of the transaction price; (4) allocation of the transaction price to the performance obligations in the contract; and (5) recognition of revenue when, or as, we satisfy a performance obligation. A contract is created with our customer at the time the order is placed by the customer, which creates a single performance obligation to deliver the product to the customer. We recognize revenue for our single performance obligation at the time control of the merchandise

8


 

passes to the customer, which is at the time of shipment. In addition, we have elected to treat shipping and handling as fulfillment activities and not a separate performance obligation.

In March 2020 we launched the REVOLVE Loyalty Club within the REVOLVE segment.  Eligible customers who enroll in the program will generally earn points for every dollar spent and will automatically receive a $20 REVOLVE Reward once they earn 2,000 points. We defer revenue based on an allocation of the price of the customer purchase and the standalone selling price of the points earned. Revenue is recognized once the reward is redeemed or expires or once unconverted points expire. REVOLVE Rewards generally expire three months after they are issued and unconverted points generally expire if a customer is inactive for a period of 12 months.    

In accordance with our policy on returns and exchanges, merchandise returns are accepted for full refund if returned within 30 days of the original purchase date and may be exchanged up to 60 days from the original purchase date. We modify our policy during the holiday season to extend the return and exchange period. In addition, to provide our customers with more flexibility to return or exchange during this time of increased social distancing as a result of the COVID-19 pandemic, merchandise returns for purchases made starting in March 2020 will be accepted for full refund if returned within 60 days of the original purchase date and may be exchanged up to 90 days from the original purchase date. At the time of sale, we establish a reserve for merchandise returns, based on historical experience and expected future returns, which is recorded as a reduction of sales and cost of sales.

The following table presents a rollforward of our sales return reserve for the three and six months ended June 30, 2020 and 2019 (in thousands):

 

 

 

Three months ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Beginning balance

 

$

20,975

 

 

$

37,153

 

 

$

35,104

 

 

$

29,184

 

Returns

 

 

(85,652

)

 

 

(196,180

)

 

 

(259,174

)

 

 

(343,798

)

Provisions

 

 

93,013

 

 

 

195,382

 

 

 

252,406

 

 

 

350,969

 

Ending balance

 

$

28,336

 

 

$

36,355

 

 

$

28,336

 

 

$

36,355

 

 

We may also issue store credit in lieu of cash refunds and sell gift cards without expiration dates to our customers. Store credits issued and proceeds from the issuance of gift cards are recorded as deferred revenue and recognized as revenue when the store credit or gift cards are redeemed or upon inclusion in our store credit and gift card breakage estimates. Revenue recognized in net sales on breakage on store credit and gift cards for the three and six months ended June 30, 2020 was $0.2 million and $1.0 million, respectively and $0.2 million and $0.4 million for the three and six months ended June 30, 2019, respectively.

 

Sales taxes and duties collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from net sales. We currently collect sales taxes in all states that have adopted laws imposing sales tax collection obligations on out-of-state retailers and are subject to audits by state governments of sales tax collection obligations on out-of-state retailers in jurisdictions where we do not currently collect sales taxes, whether for prior years or prospectively. No significant interest or penalties related to sales taxes are recognized in the accompanying condensed consolidated financial statements.

We have exposure to losses from fraudulent credit card charges. We record losses when incurred related to these fraudulent charges as amounts have historically been insignificant.

See Note 9, Segment Information, for disaggregation of revenue by reportable segment and by geographic area.

9


 

Accounting Pronouncements Not Yet Effective

Under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, we meet the definition of an emerging growth company. We have elected to use this extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act and as a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates. We will remain an emerging growth company until the earliest of (1) the end of the fiscal year in which the market value of our common stock that is held by non-affiliates is at least $700 million as of the last business day of our most recently completed second fiscal quarter, (2) the end of the fiscal year in which we have total annual gross revenues of $1.07 billion or more during such fiscal year, (3) the date on which we issue more than $1.0 billion in non-convertible debt in a three-year period, or (4) the end of the fiscal year in which the fifth anniversary of our IPO occurs.

In December 2019, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects related to the accounting for income taxes. ASU 2019-12 is effective for us for annual periods beginning after December 15, 2021 and interim periods within fiscal years beginning after December 15, 2022, with early adoption permitted. We are currently in the process of evaluating the effects of this pronouncement on our consolidated financial statements and related disclosures.

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

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). Under this ASU, a lessee is generally required to recognize the lessee’s rights and obligations resulting from leases on the balance sheet by recording a right-of-use asset and a lease liability. The new standard requires lessees to classify leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. In November 2019, the FASB issued ASU No. 2019-10 extending the effective date of this new lease standard by one year. In June 2020, the FASB issued ASU No. 2020-05, further extending the effective date by one year making it effective for us for annual periods beginning after December 15, 2021 and interim periods within fiscal years beginning after December 15, 2022, with early adoption permitted. The standard requires recognizing and measuring leases using a modified retrospective approach or allowing for application of the guidance at the beginning of the period in which it is adopted by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption rather than at the beginning of the earliest comparative period presented. We plan to elect the package of practical expedients permitted under the transition guidance within the new standard, which among other things, will allow us to carry forward the historical lease classification of our existing leases. However, we are still evaluating the potential impact of this ASU on our consolidated financial statements and related disclosures.

10


 

Note 3. Line of Credit

On March 23, 2016, we entered into a line of credit agreement with Bank of America, N.A, with an expiration date of March 23, 2021. The line of credit provides us with up to $75.0 million aggregate principal in revolver borrowings, based on eligible inventory and accounts receivable less reserves. Borrowings under the credit agreement accrue interest, at our option, at (1) a base rate equal to the highest of (a) the federal funds rate plus 0.50%, (b) the prime rate and (c) the LIBOR rate plus 1.00%, in each case plus a margin ranging from 0.25% to 0.75%, or (2) an adjusted LIBOR rate plus a margin ranging from 1.25% to 1.75%. As of June 30, 2020, we had $24.0 million outstanding on the line of credit.  The weighted-average interest rate of debt outstanding at June 30, 2020 was 2.2 %.  No borrowings were outstanding as of December 31, 2019.  

We are also obligated to pay other customary fees for a credit facility of this size and type, including an unused commitment fee. The credit agreement also permits us, in certain circumstances, to request an increase in the facility by an additional amount of up to $25.0 million (in an initial minimum amount of $10 million and in increments of $5 million thereafter) at the same maturity, pricing and other terms. Our obligations under the credit agreement are secured by substantially all of our assets. The credit agreement also contains customary covenants restricting our activities, including limitations on our ability to sell assets, engage in mergers and acquisitions, enter in transactions involving related parties, obtain letters of credit, incur indebtedness or grant liens or negative pledges on our assets, make loans or make other investments. Under the covenants, we are prohibited from paying cash dividends with respect to our capital stock. We were in compliance with all covenants as of June 30, 2020 and December 31, 2019.

Note 4. Equity-based Compensation

In 2013, Twist Holdings, LLC and Advance Holdings, LLC adopted equity incentive plans, which we refer to collectively as the 2013 Plan, pursuant to which the board of managers could grant options to purchase Class A units to officers and employees. Options could be granted with an exercise price equal to or greater than the unit’s fair value at the date of grant. All issued awards have 10-year terms and generally vest and become fully exercisable annually over five years of service from the date of grant. Awards will become fully vested upon the sale of the company.  In March 2018, the 2013 Plan was amended to increase the maximum number of Class A units to 6,207,978.

Upon the effectiveness of the Corporate Conversion on June 6, 2019, as discussed in Note 2, Significant Accounting Policies, the options to purchase Class A units of Revolve Group, LLC were converted into options to purchase Class B common stock of Revolve Group, Inc. on a 1:1 basis and in a manner that did not result in an increase to the intrinsic value of the converted option.

In September 2018, the board of directors adopted the 2019 Equity Incentive Plan, or the 2019 Plan, which became effective in June 2019.  Under the 2019 Plan, a total of 4,500,000 shares of our Class A common stock are reserved for issuance as options, stock appreciation rights, restricted stock, restricted stock units, or RSUs, performance units or performance shares. Upon the completion of our IPO, the 2019 Plan replaced the 2013 Plan, however, the 2013 Plan will continue to govern the terms and conditions of the outstanding awards previously granted under that plan. The number of shares that will be available for issuance under our 2019 Plan also will increase annually on the first day of each year beginning in 2020, in an amount equal to the least of: (a) 6,900,000 shares, (b) 5% of the outstanding shares of all classes of our common stock as of the last day of the immediately preceding year and (c) such other amount as our board of directors may determine. All future grants going forward will be issued under the 2019 Plan. As of June 30, 2020, approximately 2.9 million common shares remain available for future issuance under the 2019 Plan.

All historical data presented in the tables within this footnote have been recast to retroactively reflect all share and per share data of options as if they had been issued by Revolve Group, Inc. and that both the reverse split and Corporate Conversion had occurred. See Note 2, Significant Accounting Policies, for further information regarding the reverse split and Corporate Conversion.

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Option activity for the six months ended June 30, 2020 under the 2013 and 2019 Plans is as follows:

 

 

 

Number of

Shares

 

 

Weighted

Average

Exercise Price

 

 

Weighted

Average

Remaining

Contractual

Term

 

 

Aggregate

Intrinsic

Value (000's)

 

Balance at January 1, 2020

 

 

4,916,074

 

 

$

6.30

 

 

 

5.6

 

 

$

59,368

 

Granted

 

 

1,613,980

 

 

 

9.69

 

 

 

9.7

 

 

 

 

 

Exercised

 

 

(420,903

)

 

 

3.22

 

 

 

 

 

 

 

 

Forfeited

 

 

(34,864

)

 

 

14.54

 

 

 

 

 

 

 

 

Expired

 

 

(3,680

)

 

 

15.62

 

 

 

 

 

 

 

 

Balance at June 30, 2020

 

 

6,070,607

 

 

 

7.36

 

 

 

6.3

 

 

 

46,131

 

Exercisable at June 30, 2020

 

 

3,301,090

 

 

 

4.72

 

 

 

4.4

 

 

 

33,679

 

Vested and expected to vest

 

 

5,960,056

 

 

 

7.38

 

 

 

6.4

 

 

 

45,151

 

 

RSU award activity for the six months ended June 30, 2020 under the 2019 Plan is as follows:

 

 

 

Class A

Common

Stock

 

 

Weighted

Average

Grant Date

Fair Value

 

 

Weighted

Average

Remaining

Contractual

Term

 

 

Aggregate

Intrinsic

Value (000's)

 

Unvested at January 1, 2020

 

 

13,130

 

 

$

19.04

 

 

 

3.6

 

 

$

242

 

Granted

 

 

6,618

 

 

 

15.11

 

 

 

1.0

 

 

 

 

 

Released

 

 

(3,883

)

 

 

25.75

 

 

 

 

 

 

 

 

Forfeited

 

 

 

 

 

 

 

 

 

 

 

 

 

Unvested at June 30, 2020

 

 

15,865

 

 

 

15.76

 

 

 

1.8

 

 

 

236

 

 

There were 990,700 options and 6,618 RSUs granted during the three months ended June 30, 2020 and 1,613,980 options and 6,618 RSUs granted during the six months ended June 30, 2020. The weighted average grant-date fair value of options granted during the three and six months ended June 30, 2020 was $4.18 per share and $5.29 per share, respectively.

As of June 30, 2020, there was $12.8 million of total unrecognized compensation cost related to unvested options and RSUs granted under the 2013 Plan and 2019 Plan, which is expected to be recognized over a weighted average service period of 4.0 years.

Equity‑based compensation cost that has been included in general and administrative expense in the accompanying condensed consolidated statements of income amounted to $0.9 million and $0.5 million for the three months ended June 30, 2020 and 2019, respectively, and $1.4 million and $1.0 million for the six months ended June 30, 2020 and 2019, respectively. There was an excess income tax benefit of $0.5 million and $0 recognized in the condensed consolidated statements of income for equity‑based compensation arrangements for the three months ended June 30, 2020 and 2019, respectively, and $1.7 million and $0 for the six months ended June 30, 2020 and 2019, respectively.

Note 5. Commitments and Contingencies

Contingencies

We record a loss contingency when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. We also disclose material contingencies when we believe a loss is not probable but reasonably possible. Accounting for contingencies requires us to use judgment related to both the likelihood of a loss and the estimate of the amount or range of loss. Although we cannot predict with assurance the outcome of any litigation or tax matters, we do not believe there are currently any such actions that, if resolved unfavorably, would have a material impact on our operating results, financial position and cash flows.

12


 

Indemnifications

In the ordinary course of business, we may provide indemnifications of varying scope and terms to vendors, directors, officers and other parties with respect to certain matters. We have not incurred any material costs as a result of such indemnifications and have not accrued any liabilities related to such obligations in our condensed consolidated financial statements.

Tax Contingencies

We are subject to income taxes in the United States and U.K. Significant judgment is required in evaluating our tax positions and determining our provision for income taxes. During the ordinary course of business, there are transactions and calculations for which the ultimate tax determination is uncertain. We establish reserves for tax-related uncertainties based on estimates or whether, and the extent to which, additional taxes will be due. These reserves are established when we believe that certain positions might be challenged despite our belief that our tax return positions are fully supportable. We adjust these reserves in light of changing facts and circumstances, such as the outcome of tax audits. Our provision for income taxes does not include any reserve provision because we believe that all of our tax positions are highly certain.

Legal Proceedings

We are a defendant in a purported class action lawsuit filed in the Superior Court of California, Los Angeles County, which was filed in May 2019, arising from employee wage-and-hour claims under California law for alleged meal period, rest period, payment of wages at separation, wage statement violations, and unfair business practices.  On January 6, 2020, we and the individual defendant in the case entered into a binding memorandum of understanding to settle the case which will need to be submitted for court approval prior to becoming final.  Due to court closures and logistical complications related to the COVID-19 pandemic, resolution of this matter has not moved forward. In December 2019, we accrued approximately $1.0 million to general and administrative expenses which as of June 30, 2020, still remained accrued within accrued expenses on the accompanying condensed consolidated balance sheet.

Note 6. Income Taxes

The following table summarizes our effective tax rate for the periods presented (in thousands):

 

 

 

Three months ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Income before income taxes

 

$

18,630

 

 

$

17,284

 

 

$

22,611

 

 

$

23,969

 

Provision for income taxes

 

 

4,394

 

 

 

4,543

 

 

 

4,219

 

 

 

6,266

 

Effective tax rate

 

 

23.6

%

 

 

26.3

%

 

 

18.7

%

 

 

26.1

%

 

The decrease in the effective tax rate for the three and six months ended June 30, 2020, as compared to the same period in 2019, was primarily due to an excess tax benefit related to the exercise of non-qualified stock options during the first and second quarters of 2020.

 

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, was enacted and signed into law. The CARES Act includes a number of corporate tax related provisions including increasing the amount of tax deductible interest, allowing companies an extended carry-back period for certain net operating losses, or NOLs, and increasing the amount of NOLs that corporations can use to offset taxable income.

 

The CARES Act did not materially affect our income tax provision, deferred tax assets and liabilities, and related taxes payable for three and six months ended June 30, 2020. Although we currently do not expect the impact to be material, we will continue to assess the future implications of these provisions within the CARES Act on our condensed consolidated financial statements.

 

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Note 7. Members’/Stockholders’ Equity

Changes in members’/stockholders’ equity for the three and six months ended June 30, 2020 and 2019 were as follows:

 

 

 

Three Months Ended June 30, 2020

 

 

 

Common Stock

 

 

Additional

Paid-in

 

 

Retained

 

 

Total

Stockholders'

 

 

 

Number

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Equity

 

 

 

(in thousands, except share data)

 

Beginning balance

 

 

69,381,475

 

 

$

70

 

 

$

75,556

 

 

$

60,489

 

 

$

136,115

 

Issuance of Class A

   common stock from exercise of stock options

 

 

118,411

 

 

 

 

 

 

382

 

 

 

 

 

 

382

 

Equity-based

   compensation

 

 

 

 

 

 

 

 

868

 

 

 

 

 

 

868

 

Cumulative translation

   adjustment

 

 

 

 

 

 

 

 

 

 

 

(123

)

 

 

(123

)

Other

 

 

 

 

 

 

 

 

(41

)

 

 

 

 

 

(41

)

Net income

 

 

 

 

 

 

 

 

 

 

 

14,236

 

 

 

14,236

 

Ending balance

 

 

69,499,886

 

 

$

70

 

 

$

76,765

 

 

$

74,602

 

 

$

151,437

 

 

 

 

Three Months Ended June 30, 2019

 

 

 

Class T Preferred Units

 

 

Class A Common Units

 

 

Common Stock

 

 

Additional

Paid-in

 

 

Accumulated

Members' Equity/

 

 

Total

Members'/

Stockholders'

 

 

 

Number

 

 

Amount

 

 

Number

 

 

Amount

 

 

Number

 

 

Amount

 

 

Capital

 

 

Retained Earnings

 

 

Equity

 

 

 

(in thousands, except unit and share data)

 

Beginning balance

 

 

23,551,834

 

 

$

15,000

 

 

 

41,936,219

 

 

$

4,059

 

 

 

 

 

$

 

 

$

 

 

$

66,661

 

 

$

85,720

 

Corporate conversion

 

 

(23,551,834

)

 

 

(15,000

)

 

 

(41,936,219

)

 

 

(4,059

)

 

 

67,889,013

 

 

 

68

 

 

 

18,991

 

 

 

 

 

 

 

Repurchase of Class B common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,400,960

)

 

 

(2

)

 

 

 

 

 

(40,814

)

 

 

(40,816

)

Issuance of Class A

   common stock upon

   initial public

   offering, net of

   offering costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,382,352

 

 

 

3

 

 

 

53,224

 

 

 

 

 

 

53,227

 

Equity-based

   compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

521

 

 

 

 

 

 

521

 

Cumulative translation

   adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(130

)

 

 

(130

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12,741

 

 

 

12,741

 

Ending balance

 

 

 

 

$

 

 

 

 

 

$

 

 

 

68,870,405

 

 

$

69

 

 

$

72,736

 

 

$

38,458

 

 

$

111,263

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2020

 

 

 

Common Stock

 

 

Additional

Paid-in

 

 

Retained

 

 

Total

Stockholders'

 

 

 

Number

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Equity

 

 

 

(in thousands, except share data)

 

Beginning balance

 

 

69,078,983

 

 

$

69

 

 

$

74,018

 

 

$

56,677

 

 

$

130,764

 

Issuance of Class A

   common stock from exercise of stock options

 

 

420,903

 

 

 

1

 

 

 

1,356

 

 

 

 

 

 

1,357

 

Equity-based

   compensation

 

 

 

 

 

 

 

 

1,432

 

 

 

 

 

 

1,432

 

Cumulative translation

   adjustment

 

 

 

 

 

 

 

 

 

 

 

(467

)

 

 

(467

)

Other

 

 

 

 

 

 

 

 

(41

)

 

 

 

 

 

(41