Revolve(RVLV) - 2019 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements The company's financial statements show significant asset growth post-IPO, increased sales, and a net loss to common stockholders due to a one-time stock repurchase Condensed Consolidated Balance Sheets The balance sheet reflects substantial growth in assets and equity following the company's IPO - Total assets increased from $162.1 million to $215.6 million, driven by a cash increase to $44.8 million post-IPO[10] - Total liabilities grew from $82.3 million to $104.3 million, reflecting business expansion[10] - Stockholders' equity increased from $79.8 million to $111.3 million following the IPO and corporate conversion[10] Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2018 | June 30, 2019 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $16,369 | $44,845 | | Inventory | $102,220 | $102,533 | | Total current assets | $139,153 | $182,267 | | Total assets | $162,074 | $215,564 | | Liabilities & Equity | | | | Total current liabilities | $82,256 | $104,301 | | Total members'/stockholders' equity | $79,818 | $111,263 | | Total liabilities and members'/stockholders' equity | $162,074 | $215,564 | Condensed Consolidated Statements of Income The income statement shows higher net sales and operating income but a net loss for common stockholders due to a large stock repurchase - Net income increased to $12.7 million for Q2 2019 from $10.5 million in Q2 2018; however, a $40.8 million stock repurchase led to a net loss attributable to common stockholders of $28.1 million[12] Key Income Statement Data (in thousands, except per share data) | Metric | Q2 2018 | Q2 2019 | H1 2018 | H1 2019 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $131,802 | $161,897 | $245,107 | $299,240 | | Gross profit | $73,332 | $90,418 | $129,765 | $161,172 | | Income from operations | $14,094 | $17,728 | $21,599 | $24,629 | | Net income | $10,467 | $12,741 | $15,799 | $17,703 | | Net income (loss) attributable to common stockholders | $10,467 | $(28,075) | $15,846 | $(23,113) | | Diluted EPS | $0.15 | $(0.57) | $0.23 | $(0.51) | Condensed Consolidated Statements of Cash Flows Cash flows reflect strong operating performance, increased investment in assets, and significant financing activity from the IPO and stock repurchase - Net cash from operating activities was $22.7 million for H1 2019, a slight decrease from the prior year due to working capital changes[18] - Net cash used in investing activities increased significantly to $9.8 million from $1.1 million, driven by property and equipment purchases[18] - Net cash from financing activities was $15.5 million, primarily from $57.1 million in IPO proceeds offset by a $40.8 million stock repurchase[18] Notes to the Condensed Consolidated Financial Statements The notes detail the company's IPO, corporate conversion, adoption of ASC 606, and segment performance - The company completed its IPO in June 2019, raising approximately $53.3 million in net proceeds after costs and a share repurchase[32][33] - $40.8 million of IPO proceeds were used to repurchase 2,400,960 shares of Class B common stock[32] - The adoption of revenue standard ASC 606 on January 1, 2019, resulted in a net increase of $0.3 million to beginning retained earnings[40] Segment Net Sales (in thousands) | Segment | Q2 2018 | Q2 2019 | H1 2018 | H1 2019 | | :--- | :--- | :--- | :--- | :--- | | REVOLVE | $116,102 | $143,944 | $213,115 | $266,595 | | FORWARD | $15,700 | $17,953 | $31,992 | $32,645 | | Total | $131,802 | $161,897 | $245,107 | $299,240 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes sales growth to customer and order increases, while noting improved gross margins and higher operating expenses from expansion - The increase in net sales was primarily driven by a 36.2% increase in active customers and a 30.8% increase in orders placed[138] - Fulfillment expenses increased 62.5% year-over-year for the quarter, attributed to higher unit volume and fulfillment center expansion[141] - The company's liquidity was strong with $44.8 million in cash and no debt outstanding on its $75.0 million line of credit as of June 30, 2019[156][160] Key Operating Metrics | Metric | Q2 2018 | Q2 2019 | | :--- | :--- | :--- | | Active customers (thousands) | 998 | 1,359 | | Total orders placed (thousands) | 989 | 1,294 | | Average order value | $281 | $275 | Q2 2019 vs Q2 2018 Performance (in thousands) | Metric | Q2 2018 | Q2 2019 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $131,802 | $161,897 | $30,095 | 22.8% | | Gross Profit | $73,332 | $90,418 | $17,086 | 23.3% | | Income from Operations | $14,094 | $17,728 | $3,634 | 25.8% | Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from foreign currency, interest rates, and inflation, though current impact is not material - The company's primary market risks include foreign currency fluctuations, interest rate changes, and inflation[178] - Foreign currency risk is limited as most sales are in U.S. dollars, but some operating expenses are subject to exchange rate fluctuations[180] - Interest rate risk is considered low due to short-term cash equivalents and no outstanding floating-rate debt[179] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of the end of the quarter - Management concluded that as of June 30, 2019, the company's disclosure controls and procedures were effective[183] - No material changes in internal control over financial reporting occurred during the quarter[184] PART II. OTHER INFORMATION Legal Proceedings The company is not currently a party to any material legal proceedings but may be involved in ordinary course matters in the future - The company is not currently party to any material legal proceedings[187] - The company may become involved in various legal proceedings arising from the ordinary course of business in the future[187] Risk Factors The company faces significant risks related to business growth, competition, supply chain dependencies, cybersecurity, and its dual-class stock structure - Key business risks include managing growth, anticipating fashion trends, and maintaining its community of brands, customers, and influencers[189][192][193] - The company is vulnerable to cybersecurity attacks and must comply with complex data privacy regulations like GDPR and CCPA[251][256] - A significant portion of manufacturing in China exposes the company to risks from trade tariffs, rising labor costs, and political instability[303][307] - The dual-class stock structure concentrates approximately 98% of voting power with pre-IPO stockholders, limiting the influence of Class A stockholders[326] Unregistered Sales of Equity Securities and Use of Proceeds This section details Q2 stock option grants and the use of IPO proceeds for a significant Class B common stock repurchase - In Q2 2019, the company granted stock options to purchase 67,232 shares of Class B common stock to employees[350] - The IPO generated net proceeds of approximately $53.3 million after expenses[351] - The company used $40.8 million of the net IPO proceeds to repurchase 2,400,960 shares of Class B common stock[351] Other Information The board granted Restricted Stock Units to a non-employee director in lieu of a 2019 annual meeting award - The board granted RSUs valued at $100,000 to non-employee director Marc Stolzman on August 13, 2019[356] - This grant was made in place of a typical annual meeting grant, as no annual meeting will be held in 2019 following the IPO[356] Exhibits This section provides an index of exhibits filed with the Form 10-Q, including key corporate and governance documents - The Exhibit Index lists key corporate documents, including the Certificate of Incorporation, Bylaws, and forms of various agreements and plans[359] - Certifications by the Principal Executive Officer and Principal Financial Officer pursuant to the Sarbanes-Oxley Act are included as exhibits[359]