solo stove(DTC) - 2021 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) For the nine months ended September 30, 2021, the company reported significant growth with net sales reaching $227.2 million, a 241.3% increase year-over-year, and net income of $44.1 million, driven by increased order volume and recent acquisitions, which also led to a rise in inventory, goodwill, and long-term debt, with negative cash flow from operations funded primarily through new debt facilities, and subsequent to the quarter, the company completed its IPO, raising $200.5 million in net proceeds used to repay a significant portion of its outstanding debt Unaudited Consolidated Balance Sheets - Total assets increased to $825.5 million as of September 30, 2021, from $542.4 million at the end of 2020, driven by significant increases in inventory (from $14.3 million to $113.6 million) and goodwill (from $289.1 million to $406.2 million) due to recent acquisitions[21] - Total liabilities grew, with long-term debt increasing from $72.9 million to $372.6 million to fund acquisitions and operations, while total members' equity rose to $404.9 million from $332.1 million[21] Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $9,529 | $32,753 | | Inventory | $113,634 | $14,348 | | Goodwill | $406,238 | $289,096 | | Total Assets | $825,502 | $542,407 | | Liabilities & Equity | | | | Long-term debt, net | $372,558 | $72,898 | | Total liabilities | $420,613 | $210,307 | | Total members' equity | $404,889 | $332,100 | | Total Liabilities & Equity | $825,502 | $542,407 | Unaudited Consolidated Statements of Operations Consolidated Statement of Operations Highlights (in thousands) | Metric | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $69,433 | $29,135 | $227,249 | $66,592 | | Gross profit | $41,021 | $20,773 | $147,185 | $45,397 | | Income from operations | $4,311 | $10,661 | $51,564 | $22,814 | | Net income | $2,120 | $10,268 | $44,082 | $21,475 | - For the nine months ended September 30, 2021, net sales grew 241.3% to $227.2 million, and net income more than doubled to $44.1 million from $21.5 million in the prior year period[23] - For the three months ended September 30, 2021, net sales grew 138.3% to $69.4 million, however, net income decreased to $2.1 million from $10.3 million in the same period last year, primarily due to higher operating expenses, including SG&A and amortization related to recent acquisitions[23] Unaudited Consolidated Statements of Cash Flows Consolidated Statement of Cash Flows Highlights (in thousands) | Cash Flow Activity | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | | Net cash from Operating Activities | $(51,664) | $25,821 | | Net cash from Investing Activities | $(138,412) | $(663) | | Net cash from Financing Activities | $166,852 | $(19,530) | | Net change in cash | $(23,224) | $5,628 | - Cash used in operating activities was $51.7 million for the first nine months of 2021, a significant shift from $25.8 million provided by operations in the prior year, largely due to a $62.3 million increase in inventory[26] - Cash used in investing activities was $138.4 million, primarily for the acquisitions of Oru, ISLE, and Chubbies[26] - Cash provided by financing activities was $166.9 million, driven by proceeds from a new revolving line of credit ($249 million) and a term loan ($100 million), which were used to fund acquisitions and pay down other debt[26] Notes to the Unaudited Consolidated Financial Statements - The company completed its IPO on October 28, 2021, after the reporting period, raising approximately $250.0 million in gross proceeds, with the financial statements not reflecting the effects of the IPO[40] - In 2021, the company made three key acquisitions to expand its brand portfolio: Oru Kayak, Inc. (May 3), International Surf Ventures, Inc. ("ISLE") (August 2), and Chubbies, Inc. (September 1), significantly increasing goodwill and intangible assets on the balance sheet[15][105][111] Net Sales by Channel (in thousands) | Channel | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | | Direct-to-consumer | $191,492 | $59,993 | | Wholesale | $35,757 | $6,599 | | Total net sales | $227,249 | $66,592 | - Subsequent to the quarter end, in November 2021, the company used IPO proceeds to repay $30.0 million in Subordinated Debt and pay down $196.8 million on its Revolving Credit Facility[173] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the company's rapid growth to its DTC platform and the expansion of its brand portfolio through the acquisitions of Oru, ISLE, and Chubbies, with net sales for the nine months ended September 30, 2021, growing 241.3% to $227.2 million, driven by a 213.4% increase in total orders, while gross margin decreased from 68.2% to 64.8% due to higher product and freight costs, and SG&A expenses increased significantly due to higher advertising spend, shipping costs, and headcount to support growth, with liquidity supported by cash from operations and new $350 million revolving credit facility and $100 million term loan, which were used to fund recent acquisitions, and a significant portion of this debt was repaid post-IPO Results of Operations Comparison of Results for the Nine Months Ended September 30 | Metric (in thousands) | 2021 | 2020 | % Change | | :--- | :--- | :--- | :--- | | Net Sales | $227,249 | $66,592 | 241.3% | | Gross Profit | $147,185 | $45,397 | 224.2% | | SG&A Expenses | $76,980 | $20,405 | 277.3% | - The 241.3% increase in net sales for the nine-month period was primarily driven by a 213.4% increase in total orders, reflecting strong brand awareness and demand for outdoor lifestyle products[231] - Gross margin for the nine-month period decreased by 340 basis points to 64.8%, primarily due to increased product and freight expenses associated with higher demand[233] - SG&A expenses for the nine-month period increased by 277.3%, driven by a $29.7 million increase in advertising, a $12.0 million increase in shipping costs, and a $5.9 million increase in employee costs due to higher headcount[234] Non-GAAP Financial Measures Reconciliation of Net Income to Adjusted EBITDA (in thousands) | Metric | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | | Net income (loss) | $44,082 | $21,475 | | Adjustments | $33,739 | $5,640 | | Adjusted EBITDA | $77,821 | $27,115 | - Adjusted EBITDA for the nine months ended September 30, 2021, grew 187.0% to $77.8 million from $27.1 million in the prior year period, with Adjusted EBITDA margin at 34.2% compared to 40.7% in the prior year[190][247] - Adjusted Net Income for the nine months ended September 30, 2021, increased 170.0% to $70.0 million from $25.9 million in the prior year period[190][245] Liquidity and Capital Resources - The company's primary cash requirements are for working capital, particularly inventory, with liquidity funded by cash from operations and borrowings under its credit facilities[248] - In 2021, the company entered into a new credit agreement providing a $350 million Revolving Credit Facility and a $100 million Term Loan to fund acquisitions and operations[249] - As of September 30, 2021, the company had $9.5 million in cash and $249 million in outstanding borrowings under the Revolving Credit Facility, with $101 million of availability[249] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk exposure is to interest rate fluctuations due to its variable-rate debt under the Revolving Credit Facility and Term Loan, where a 100 basis point increase in LIBOR would have increased annual interest expense by approximately $3.5 million based on September 30, 2021 debt levels, with other noted risks including inflation, which could impact margins if costs rise without corresponding price increases, and foreign currency risk, which is currently considered not material as international sales are primarily denominated in U.S. dollars - The company is exposed to interest rate risk from its variable-rate debt, where based on the $349.0 million of debt outstanding as of September 30, 2021, a 100 basis point increase in LIBOR would increase annual interest expense by approximately $3.5 million[274] - Subsequent to the quarter, after repaying a portion of the debt with IPO proceeds, the interest rate risk was reduced, where based on November 30, 2021 balances, a 100 bps increase in LIBOR would increase annual interest expense by approximately $1.3 million[275] - Inflation is a risk that could adversely affect operating results if the company cannot pass on increased product and overhead costs to customers through higher selling prices[276] - Foreign currency risk is considered minimal as international sales (6.7% of consolidated revenues as of Q3 2021) are primarily denominated in U.S. dollars[279] Controls and Procedures Management concluded that as of September 30, 2021, the company's disclosure controls and procedures were not effective at a reasonable assurance level, based on a previously identified material weakness in internal control over financial reporting related to the incorrect recording of transaction expenses from the 2019 and 2020 change in control events, with the company in the process of remediating this weakness by expanding its accounting team, improving general controls, and implementing a new ERP system - Management, including the CEO and CFO, concluded that as of September 30, 2021, the company's disclosure controls and procedures were not effective[281] - A material weakness was previously identified related to the failure to properly record certain transaction-related expenses from the 2019 and 2020 change in control events[283] - Remediation measures are underway, including hiring more accounting staff, improving general controls, and implementing a new ERP system[284] PART II. OTHER INFORMATION Legal Proceedings The company is subject to various legal proceedings that arise in the normal course of business but currently believes that the ultimate outcome of any pending proceeding will not have a material adverse effect on its financial position, cash flows, or results of operations - The company is not currently a party to any pending litigation that it considers material[155] - From time to time, the company may become subject to arbitration, litigation, or claims arising in the ordinary course of business[287] Risk Factors The company identifies numerous risks, with key areas including its dependence on maintaining brand strength, particularly for the Solo Stove fire pits which constituted 92% of 2020 revenue, significant operational risks stemming from reliance on a limited number of third-party manufacturers, primarily in China, making the business vulnerable to supply chain disruptions, cost fluctuations, and geopolitical tensions, exposure to risks from inaccurate demand forecasting, intense market competition, and potential product liability claims, financial risks including the complexities of its "Up-C" corporate structure, obligations under the Tax Receivable Agreement, and covenants related to its significant indebtedness, and acknowledgment of a material weakness in its internal controls over financial reporting - Business and Brand Risk: The business depends on maintaining its brand and demand for its products, with a significant portion of revenue (92% in 2020) coming from fire pits, and an inability to successfully design and develop new products could harm the business[289][292] - Operational and Supply Chain Risk: The company relies on a limited number of third-party manufacturers, with the majority of its fire pits made in China, making the business vulnerable to problems with or loss of these suppliers, and fluctuations in raw material costs and transportation could also cause delays and increase costs[326][330][335] - Forecasting and Growth Risk: Recent high growth rates may not be sustainable, and the company could be harmed if it is unable to accurately forecast demand, leading to either excess inventory or product shortages[294][298] - Financial and Structural Risk: The company has significant indebtedness which may limit its ability to invest in the business, and the "Up-C" structure and the Tax Receivable Agreement create complex tax obligations and may not benefit all shareholders equally[410][434] - Internal Control Risk: A material weakness in internal control over financial reporting was identified in connection with the preparation of 2020 financial statements, related to the improper recording of transaction expenses[417][418] Unregistered Sales of Equity Securities and Use of Proceeds There were no sales of unregistered securities during the third quarter of 2021, and the company completed its IPO on October 28, 2021, raising net proceeds of $200.5 million after underwriting discounts and commissions, with the use of these proceeds not materially changed from what was described in the IPO prospectus - No unregistered securities were sold between July 1, 2021, and September 30, 2021[506] - On October 28, 2021, the company completed its IPO, selling 12,903,225 shares of Class A Common Stock at $17.00 per share, resulting in net proceeds of $200.5 million[507] Defaults Upon Senior Securities None - There were no defaults upon senior securities during the reporting period[508] Mine Safety Disclosures None - This item is not applicable to the company[509] Other Information None - There is no other information to report for the period[510] Exhibits This section lists all exhibits filed with the Quarterly Report on Form 10-Q, including the company's amended and restated certificate of incorporation, bylaws, various agreements related to credit facilities and incentive plans, and certifications by the CEO and CFO - The report includes a list of exhibits filed, such as corporate governance documents, material contracts, and required certifications[512][513][515]