Brilliant Earth Group, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. The company designs, sources and sells fine jewelry online and through showrooms; it reported one operating segment. It completed its IPO on September 27, 2021, so the quarter includes only a short period of public-company results. Historical results largely reflect Brilliant Earth, LLC, the operating business.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $95.2 million | $71.4 million | $258.3 million | $163.2 million |
| Gross profit / margin | $48.0 million / 50.4% | $30.8 million / 43.2% | $125.1 million / 48.4% | $70.6 million / 43.3% |
| Operating income / margin | $9.9 million / 10.4% | $9.3 million / 13.0% | $27.2 million / 10.5% | $11.9 million / 7.3% |
| Net income / margin | $4.0 million / 4.2% | $8.0 million / 11.3% | $14.8 million / 5.7% | $8.2 million / 5.0% |
| Adjusted EBITDA / margin (non-GAAP) | $13.6 million / 14.2% | $9.5 million / 13.3% | $34.6 million / 13.4% | $12.5 million / 7.7% |
- Q3 sales increased 33.3%; orders rose 29.6% to 28,855 and average order value increased 2.8% to $3,301. Nine-month sales grew 58.3%, with orders up 51.4% and average order value up 4.5%.
- Q3 gross margin expanded 720 basis points, which management attributed to premium positioning, pricing-engine improvements and procurement efficiencies, partly offset by higher platinum prices. Nine-month gross margin rose 517 basis points.
- Q3 SG&A increased 77.2% to $38.1 million, outpacing sales growth; showroom openings, marketing, staffing, public-company costs and a foundation contribution contributed. Q3 GAAP net income fell 50.7%, principally reflecting higher SG&A, interest expense and a $3.9 million increase in warrant fair-value expense. The warrant-related expense was added back in Adjusted EBITDA.
- Nine-month operating cash flow was $33.8 million, capital expenditures were $4.4 million, and financing cash flow was $65.4 million. Cash and cash equivalents were $161.1 million at September 30, versus $66.3 million at December 31, 2020.
- Term-loan principal was $65.0 million ($63.2 million net carrying value); the loan is secured by substantially all company assets and bears a variable rate of LIBOR, subject to a 0.5% floor, plus 7.75%. Principal payments of $30.8 million are scheduled in 2022 and $34.2 million in 2023, plus a $3.2 million final payment. The company reported covenant compliance.
- Current assets were $189.0 million and current liabilities $78.6 million. Management reported working capital excluding cash of negative $50.7 million and said available cash and operating cash flow were expected to cover projected needs for at least 12 months.
Material changes, outlook and risks
- The IPO issued 9.58 million Class A shares at $12.00 per share and generated approximately $101.9 million net proceeds. Proceeds funded purchases of LLC units; at quarter-end, the public parent held a 10.1% economic interest in Brilliant Earth, LLC, with 89.9% held by continuing owners as non-controlling interest.
- The Tax Receivable Agreement requires payment to continuing owners of 85% of specified realized or deemed tax benefits. The filing estimates approximately $296.9 million of payments over 20 years under stated assumptions, and cautions actual amount and timing will vary. A $3.9 million TRA liability was recorded for the IPO-related unit redemption.
- Management cited continued showroom expansion, product and international growth, marketing, and omnichannel investment as strategic priorities. It provided no specific numerical revenue or earnings guidance. It expects higher public-company costs and equity compensation; it also anticipated a significant increase in balance-sheet assets and liabilities upon adoption of lease accounting in 2022.
- Key risks include COVID-related supply-chain disruption and fulfillment delays, constrained sourcing of responsibly sourced stones and recycled metals, commodity and labor-cost inflation, customer-acquisition effectiveness, inventory management, competition, showroom execution, and seasonality. Historically, Q4 represented about 30% of annual sales, though pandemic effects may alter patterns.
- A putative California class action alleges customer calls were recorded without consent under state privacy law. The company disputes the claims, intends to defend the case, and recorded no accrual; outcome is uncertain.
- The filing identifies a controlled-company, multi-class structure: continuing owners hold approximately 98.2% of voting power and the company intends to use certain Nasdaq governance exemptions. Management concluded disclosure controls were effective as of September 30, 2021.
Important facts for investors to verify
- Whether order growth and gross-margin gains persist after the unusually strong comparative periods and changing precious-metal, freight and sourcing costs.
- How much of reported operating cash flow reflects growth in deferred revenue and other working-capital timing, and whether cash generation supports debt amortization, expansion and member tax distributions.
- The loan’s variable-rate exposure, liquidity covenant, 2022–2023 repayment schedule and final payment.
- The assumptions, realization timing and potential acceleration of Tax Receivable Agreement payments, including how future LLC-unit exchanges affect cash available to Class A shareholders.
- The economic and voting implications of the Up-C and multi-class structure, potential dilution from equity awards, and the effect of planned showroom expansion and higher public-company costs.
- Developments in the privacy lawsuit, COVID-related supplier and fulfillment conditions, and the effect of Q4 seasonality on results.