Brilliant Earth (BRLT) - 2024 Q3 - Quarterly Report

Financial Performance - Net sales for the three months ended September 30, 2024 decreased by $14.3 million, or 12.5$1.1 million, a 153.8% decline compared to net income of $2.0 million in the same period in 2023[93] - Adjusted EBITDA for the three months ended September 30, 2024 was$3.6 million, down 52.3% compared to $7.6 million in the same period in 2023[93] - Net sales for the nine months ended September 30, 2024 decreased by$19.4 million, or 6.0%, compared to the same period in 2023[94] - Net income for the nine months ended September 30, 2024 was $1.4 million, down 51.1$2.8 million in the same period in 2023[94] - Adjusted EBITDA for the nine months ended September 30, 2024 was $14.2 million, down 32.1$20.9 million in the same period in 2023[94] - Gross profit for Q3 2024 decreased by $6.1 million, or 9.1$3.0 million, or 4.6%, driven by a $4.0 million reduction in marketing expenses[114] - Net sales for the nine months ended September 30, 2024 decreased by$19.4 million, or 6.0%, due to a 10.5% decline in AOV, partially offset by a 5.0% increase in order volumes[120] - Gross profit for the nine months ended September 30, 2024 decreased by $0.8 million, or 0.5$1.5 million, or 0.8%, primarily due to a $6.7 million rise in employment expenses[123] - Total orders for the nine months ended September 30, 2024 increased by 6,032, or 5.0$277, or 10.5%, due to a higher mix of lower price point products[129] - Other income, net for the nine months ended September 30, 2024 increased by $1.0 million, primarily due to higher interest income[125] - Income tax expense for the nine months ended September 30, 2024 increased by$0.1 million compared to the same period in 2023[127] - Adjusted EBITDA and Adjusted EBITDA margin are used by management to assess financial performance, excluding certain non-operating expenses and income[134] - Net loss for the three months ended September 30, 2024 was $1.075 million, compared to a net income of$1.998 million for the same period in 2023[136] - Adjusted EBITDA for the nine months ended September 30, 2024 was $14.202 million, down from$20.908 million in the same period in 2023[136] - Adjusted EBITDA margin for the nine months ended September 30, 2024 was 4.7%, compared to 6.5% in the same period in 2023[136] Cash Flow and Financial Position - As of September 30, 2024, the company had a cash balance of $152.7 million and negative working capital of ($22.3) million[137] - The SVB Term Loan had an outstanding principal balance of $58.5 million as of September 30, 2024, with$52.0 million classified as long-term[138] - Net cash provided by operating activities for the nine months ended September 30, 2024 was $3.504 million, a decrease of$12.0 million compared to the same period in 2023[143] - Net cash used in investing activities for the nine months ended September 30, 2024 was $2.730 million, a decrease of$8.0 million compared to the same period in 2023[147] - Net cash used in financing activities for the nine months ended September 30, 2024 was $3.926 million, a decrease of$8.4 million compared to the same period in 2023[148] Business Strategy and Expansion - The company plans to expand its omnichannel presence by strategically opening showrooms in new markets, leveraging its marketing strategy and growing brand awareness[100][101] - The company is in the early stages of international expansion, with localized websites in Canada, Australia, and the UK, and sales to customers from over 50 countries[104] - The company aims to introduce new products by leveraging in-house design capabilities and data-driven product development to expand its assortment for special occasions and self-purchase[102] - The company operates with an asset-light model, featuring capital-efficient showrooms and a vast virtual inventory of premium natural and lab-grown diamonds, enabling negative working capital[105] Internal Controls and Compliance - The company identified a material weakness in internal control related to ineffective IT general controls (ITGCs), impacting areas such as change management, user access, and segregation of duties for IT systems supporting financial reporting[167] - The material weakness did not result in misstatements in the financial statements but created a reasonable possibility of material misstatements not being prevented or detected on time, leading to ineffective internal control over financial reporting[168] - The company has implemented a remediation plan, including enhancing privileged access reviews, strengthening change management procedures, hiring a director of ITGC, and developing company-wide training on internal controls[169] - The material weakness will not be considered remediated until controls operate effectively for a sufficient period, and the company cannot guarantee that future actions will prevent similar weaknesses[170] - No other changes in internal control over financial reporting occurred during the quarter ended September 30, 2024, aside from ongoing remediation efforts[172] Legal Proceedings - The company is involved in a legal proceeding with a former employee alleging violations of the California Labor Code, with the company appealing a court decision to compel arbitration[175] Emerging Growth Company Status - The company qualifies as an "emerging growth company" under the JOBS Act, allowing it to delay the adoption of new or revised accounting standards, which may result in financial statements that are not comparable to those of non-emerging growth companies[162] - The company will remain an emerging growth company until the earliest of: (a) December 31, 2026, (b) achieving total annual gross revenue of at least $1.235 billion, or (c) being deemed a large accelerated filer with a market value of common stock held by non-affiliates exceeding$700.0 million[163] Technology and Contracts - The company entered into three technology service agreements in August and September 2024, with total minimum contractual payments of approximately $2.9 million[159]