S-1/A 1 d64351ds1a.htm AMENDMENT NO. 1 TO FORM S-1 Amendment No. 1 to Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on September 14, 2021

Registration No. 333- 259164

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Amendment No. 1

to

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

BRILLIANT EARTH GROUP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   5944   87-1015499

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

 

 

300 Grant Avenue, Third Floor

San Francisco, California 94108

Telephone: (800) 691-0952

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Incorporating Services, Ltd.

3500 South DuPont Highway

Dover, Delaware 19901

Telephone: (800) 346-4646

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

Tad J. Freese

Haim Zaltzman

Kristen Grannis

Benjamin J. Cohen

Latham & Watkins LLP

1271 Avenue of the Americas

New York, New York 10022

Telephone: (212) 906-1200

Fax: (212) 751-4864

 

Alex K. Grab

General Counsel

300 Grant Avenue, Third Floor

San Francisco, California 94108

Telephone: (800) 691-0952

 

Shane Tintle

Roshni Banker Cariello

Davis Polk & Wardwell LLP

450 Lexington Avenue

New York, New York 10017

Telephone: (212) 450-4000

Fax: (212) 701-5526

 

 

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT IS DECLARED EFFECTIVE.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box.  

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  

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 7(a)(2)(B) of the Securities Act.  

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

 

Amount

to be
registered(1)(2)

 

Proposed

maximum

offering price

per share(1)

 

Proposed

Maximum

Aggregate

Offering Price(1)(2)

 

Amount of

Registration Fee(3)

Class A common stock, $0.0001 par value per share

  19,166,667   $16.00   $306,666,672.00   $33,457.33

 

 

(1)

Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(a) under the Securities Act of 1933, as amended.

(2)

Includes the shares of Class A common stock that may be sold if the option to purchase additional shares of Class A common stock granted by the Registrant to the underwriters is executed.

(3)

Of this amount, Registrant previously paid $10,910 of the total registration fee in connection with the previous filing of the Registration Statement.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


Table of Contents

The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to completion, September 14, 2021.

16,666,667 Shares

 

LOGO

Brilliant Earth Group, Inc.

Class A Common Stock

 

 

This is an initial public offering of shares of Class A common stock of Brilliant Earth Group, Inc. We are selling 16,666,667 shares of Class A common stock.

Prior to this offering, there has been no public market for the Class A common stock. It is currently estimated that the initial public offering price per share of Class A common stock will be between $14.00 and $16.00. We have applied to list our Class A common stock on The Nasdaq Global Select Market under the symbol “BRLT.”

We will have four classes of common stock authorized after this offering: Class A common stock, Class B common stock, Class C common stock, and Class D common stock. Each share of our Class A common stock and our Class B common stock entitles its holder to one vote per share and each share of our Class C common stock and our Class D common stock entitles its holder to 10 votes per share on all matters presented to our stockholders generally. Immediately following the consummation of this offering, all of the outstanding shares of our (i) Class B common stock will be held by the Continuing Equity Owners (as defined below) (excluding our Founders (as defined below)), which will represent in the aggregate approximately 6.5% of the voting power of our outstanding common stock after this offering (or approximately 6.4% if the underwriters exercise in full their option to purchase additional shares) and (ii) Class C common stock will be held by our Founders, which will represent in the aggregate approximately 90.2% of the voting power of our outstanding common stock after this offering (or approximately 89.6% if the underwriters exercise in full their option to purchase additional shares). No shares of our Class D common stock will be outstanding immediately following the consummation of this offering.

We will be a holding company, and upon consummation of this offering and the application of proceeds therefrom, our principal asset will consist of LLC Interests (as defined below) we acquire directly from Brilliant Earth, LLC and from each Continuing Equity Owner, collectively representing an aggregate 17.7% economic interest in Brilliant Earth, LLC. Of the remaining 82.3% economic interest in Brilliant Earth, LLC, 3.5% will be owned by the Continuing Equity Owners (excluding Mainsail (as defined below) and our Founders) through their ownership of LLC Interests, 30.9% will be owned by Mainsail through their ownership of LLC Interests and 47.9% will be owned by our Founders through their ownership of LLC Interests.

Brilliant Earth Group, Inc. will be the sole managing member of Brilliant Earth, LLC. We will operate and control all of the business and affairs of Brilliant Earth, LLC and, through Brilliant Earth, LLC, conduct our business.

Following this offering, we will be a “controlled company” within the meaning of the corporate governance rules of Nasdaq. See “Our Organizational Structure” and “Management—Controlled Company Exception.”

We are an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933, as amended, or the Securities Act, and will be subject to reduced disclosure and public reporting requirements. This prospectus complies with the requirements that apply to an issuer that is an emerging growth company.

See “Risk Factors” beginning on page 31 to read about factors you should consider before buying shares of our Class A common stock.

 

 

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

     Per
Share
     Total  

Initial public offering price

   $                        $                    

Underwriting discount(1)

   $        $    

Proceeds, before expenses, to Brilliant Earth Group, Inc.

   $        $    

 

(1)

We have agreed to reimburse the underwriters for certain expenses in connection with this offering. See “Underwriting.”

At our request, the underwriters have reserved for sale at the initial public offering price per share up to 5.0% of the shares of Class A common stock offered by this prospectus for sale at the initial public offering price through a directed share program to certain individuals identified by management. See the section titled “Underwriting—Directed Share Program.”

The underwriters have the option to purchase up to an additional 2,500,000 shares of Class A common stock from us at the initial price to public less the underwriting discount within 30 days of the date of this prospectus.

The underwriters expect to deliver the shares of Class A common stock against payment in New York, New York on                 , 2021.

 

 

J.P. Morgan   Credit Suisse   Jefferies   Cowen

 

 

KeyBanc Capital Markets

  Piper Sandler   William Blair   Telsey Advisory Group

Co-Managers

 

Cabrera Capital Markets LLC

  Loop Capital Markets   Siebert Williams Shank

Prospectus dated                 , 2021.


Table of Contents

LOGO

BRILLIANT EARTH


Table of Contents

LOGO

OUR MISSION To create a more transparent, sustainable and compassionate jewelry industry.


Table of Contents

LOGO


Table of Contents

LOGO

FINANCIAL HIGHLIGHTS Brilliant Earth at a Glance All figures represent fiscal 2020 unless otherwise noted. Free Cash Flow Conversion and Adjusted EDBITA Margin are non-GAAP financial measures. For additional information, including reconciliations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures.” 1 Net sales for the twelve-month period ended June 30, 2021 2 Year-over-year net revenue growth rate for the twelve-month period ended June 30, 2021 3 Free Cash Flow Conversion = (net cash provided by operating activities less net cash used in investing activities) / net income 4 Operating Cash Flow Conversion = net cash provided by operating activities / net income 5 Average Order Value (AOV) = net sales in a given period / total orders in that period. AOV varies depending on the product type and number of items per order 6 2019 market size per Euromonitor International, Fine Jewellery, May 2021 $252mm 2020 NET SALES 45% GROSS MARGIN 124% FREE CASH FLOW CONVERSION 2 11% ADJUSTED EBITDA MARGIN $3,152 AVERAGE ORDER VALUE 4 39% NET SALES CAGR1 >10x INVENTORY TURNS 121% OPERATING CASH FLOW CONVERSION 3 9% NET INCOME MARGIN $300bn GLOBAL MARKET 5


Table of Contents

LOGO

@smittyyy35 @itsbbybritt @kaylaaa_bou @jo.el.wo @thekathyjay @the.nurse.sarah


Table of Contents

LETTER FROM BETH GERSTEIN AND ERIC GROSSBERG, CO-FOUNDERS

We founded Brilliant Earth because we believe passionately in creating a more transparent, sustainable, and compassionate jewelry industry. From the beginning, this mission has been at the heart of everything we do.

The Brilliant Earth journey began over sixteen years ago. When I (Beth) was shopping for an engagement ring, I knew it would be a once-in-a-lifetime purchase, and I wanted a ring that I could truly feel good about wearing. And yet, when I went into different jewelers and asked, “Where do your diamonds and jewelry come from?” I could never get a straight answer. Meanwhile, Eric was researching the jewelry industry in business school and hearing from friends who were disenchanted with their own jewelry shopping experiences. They felt unwelcome in luxury stores that seemed out of touch, or ignored in mall jewelers sandwiched next to fast food chains. They said the experience was like stepping back in time thirty years compared with how they shopped for other major purchases.

As we shared stories, we knew there had to be a better way. To serve a new generation of jewelry consumers who share our values of transparency, sustainability, inclusivity, and giving back. To offer thoughtfully designed, unique, and beautiful jewelry. To use data and technology to create an innovative omnichannel business and modernize industry practices. And, above all, to create exceptional, educational, and joyful experiences for our customers.

We founded Brilliant Earth from my apartment, with Eric as our first salesperson and me fulfilling every order. As newcomers in this insular industry, it was challenging at first to form relationships, but that same newness provided us with a fresh perspective that was critical to creating change. And we were very fortunate to be surrounded by a growing team of exceptionally talented individuals who cared as deeply about our mission, our vision, and our customers as we did.

Since those early days, our team has continued to be the engine of Brilliant Earth’s success. We are humbled to work alongside such dedicated, collaborative, customer-first, and mission-driven colleagues. Their commitment and creativity inspire us every day. We are so grateful for their contributions. Brilliant Earth is the company it is today because of them.

Together, we share a vision for a company that gives back and has a positive impact on the world, and a passion for providing products and experiences that spark joy at special moments in our customers’ lives. We are honored to be part of our customers’ lives and stories, and we celebrate those stories by reading them aloud at each of our company meetings to underscore their importance to what we do and why we do it.

A few years ago, I had the chance to visit Sierra Leone to see firsthand the conditions at some artisanal diamond mines. Despite the vast wealth from diamonds in Sierra Leone, many towns do not have accessible schools, roads, or hospitals. And across the world, there are millions of artisanal and small-scale diamond miners, who often face worker exploitation and violence.

My visit fueled the urgency we feel in our work every day. Our customers care where their jewelry comes from, and we are passionate about improving supply chain transparency, sustainable mining practices, fair wages, and safe working conditions. From helping fund a primary school in a rural diamond mining community in the Democratic Republic of Congo to supporting efforts to train artisanal gold miners in Peru on mercury-free mining practices, we care deeply about helping to build a brighter future in mining communities, in the communities we operate, and beyond. Giving back will always be fundamental to our mission and values, which is why we created the Brilliant Earth Foundation—to establish meaningful, long-term support for causes we champion.

We believe our diverse team and commitment to inclusion stand alongside our mission, our products, and our innovative business model as integral to our success. We are proud to be joined by a women-


Table of Contents

majority leadership team, board of directors, and employee base. We are energized every day by the opportunity to make an impact, and we know we are only at the beginning.

From our first order shipped from my apartment, to over 370,000 customers across all U.S. states and over 50 countries, it’s been an honor to be a part of unforgettable moments in our customers’ lives. We are excited for the next chapter and are grateful to our community, our partners, and our employees—and to you, our investors—for joining us on this journey.

 

LOGO      LOGO

Beth Gerstein and Eric Grossberg, Co-Founders


Table of Contents

TABLE OF CONTENTS

 

BASIS OF PRESENTATION

     i  

TRADEMARKS

     iii  

MARKET AND INDUSTRY DATA

     iii  

PROSPECTUS SUMMARY

     1  

RISK FACTORS

     31  

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

     80  

OUR ORGANIZATIONAL STRUCTURE

     82  

USE OF PROCEEDS

     87  

CAPITALIZATION

     88  

DIVIDEND POLICY

     90  

DILUTION

     91  

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

     94  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     107  

BUSINESS

     131  

MANAGEMENT

     152  

EXECUTIVE COMPENSATION

     159  

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     171  

PRINCIPAL STOCKHOLDERS

     184  

DESCRIPTION OF CAPITAL STOCK

     187  

SHARES ELIGIBLE FOR FUTURE SALE

     196  

MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS TO NON-U.S. HOLDERS OF CLASS A COMMON STOCK

     199  

UNDERWRITING

     203  

LEGAL MATTERS

     214  

EXPERTS

     214  

WHERE YOU CAN FIND MORE INFORMATION

     214  

INDEX TO FINANCIAL STATEMENTS

     F-1  

We and the underwriters have not authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any related free writing prospectuses. We and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered by this prospectus, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date regardless of the time of delivery of this prospectus or of any sale of our Class A common stock. Our business, financial condition, results of operations, and prospects may have changed since that date.

Through and including                , 2021 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

For investors outside the U.S.: We have not, and the underwriters have not, done anything that would permit this offering or the possession or distribution of this prospectus or any free writing prospectus we may provide to you in connection with this offering in any jurisdiction where action for purpose is required, other than in the United States. Persons outside the U.S. who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of Class A common stock and the distribution of this prospectus outside the U.S. See “Underwriting.”


Table of Contents

BASIS OF PRESENTATION

Organizational Structure

In connection with the closing of this offering, we will undertake certain organizational transactions to reorganize our corporate structure. Unless otherwise stated or the context otherwise requires, all information in this prospectus reflects the consummation of the organizational transactions described in the section titled “Our Organizational Structure” and this offering, and the application of the proceeds therefrom, which we refer to collectively as the “Transactions.”

See “Our Organizational Structure” for a diagram depicting our organizational structure after giving effect to the Transactions, including this offering.

Certain Definitions

As used in this prospectus, unless the context otherwise requires, references to:

 

   

“we,” “us,” “our,” the “Company,” “Brilliant Earth,” and similar references refer: (1) following the consummation of the Transactions, including this offering, to Brilliant Earth Group, Inc., and, unless otherwise stated, all of its direct and indirect subsidiaries, including Brilliant Earth, LLC, and (2) prior to the completion of the Transactions, including this offering, to Brilliant Earth, LLC.

 

   

“Brilliant Earth LLC Agreement” refers to Brilliant Earth, LLC’s amended and restated limited liability company agreement, which will become effective prior to the consummation of this offering.

 

   

CAGR” refers to compound annual growth rate.

 

   

“Continuing Equity Owners” refers collectively to holders of LLC Interests and our Class B common stock and Class C common stock immediately following consummation of the Transactions, including our Founders and Mainsail, who may, following the consummation of this offering, exchange at each of their respective options, in whole or in part from time to time, their LLC Interests (along with an equal number of shares of Class B common stock or Class C common stock (and such shares shall be immediately cancelled)), as applicable, for, at our election (determined solely by our independent directors (within the meaning of the Nasdaq rules) who are disinterested), cash or newly-issued shares of our Class A common stock or Class D common stock, as applicable, as described in “Certain Relationships and Related Party Transactions—Brilliant Earth LLC Agreement—Agreement in Effect Upon Consummation of the Transactions.”

 

   

Founders” refers to Beth Gerstein, our Co-Founder and Chief Executive Officer, Eric Grossberg, our Co-Founder and Executive Chairman, and Just Rocks (as defined below).

 

   

Just Rocks” refers to Just Rocks, Inc., a Delaware corporation, which is jointly owned and controlled by our Founders.

 

   

“LLC Interests” refers to the common units of Brilliant Earth, LLC, including those that we purchase with the net proceeds from this offering.

 

   

“Original Equity Owners” refers to the owners of LLC Interests in Brilliant Earth, LLC prior to the consummation of the Transactions, collectively, which include Mainsail, Just Rocks, and certain executive officers and employees.

 

   

“Mainsail” refers to Mainsail Partners III, L.P., our sponsor and a Delaware limited partnership, and certain funds affiliated with Mainsail Partners III, L.P., including Mainsail Incentive Program, LLC, and Mainsail Co-Investors III, L.P.

 

i


Table of Contents
   

Transactions” refers to the organizational transactions and this offering, and the application of the net proceeds therefrom.

Brilliant Earth Group, Inc. will be a holding company and the sole managing member of Brilliant Earth, LLC, and upon consummation of the Transactions, its principal asset will consist of LLC Interests.

Presentation of Financial Information

Brilliant Earth, LLC is the accounting predecessor of Brilliant Earth Group, Inc. for financial reporting purposes. Brilliant Earth Group, Inc. will be the audited financial reporting entity following this offering. Accordingly, this prospectus contains the following historical financial statements:

 

   

Brilliant Earth Group, Inc. Other than the inception balance sheets, dated as of June 3, 2021 and June 30, 2021, the historical financial information of Brilliant Earth Group, Inc. has not been included in this prospectus as it is a newly incorporated entity, has had no business transactions or activities to date, besides the initial capitalization of the company.

 

   

Brilliant Earth, LLC. Because Brilliant Earth Group, Inc. will have no interest in any operations other than those of Brilliant Earth, LLC, the historical financial information included in this prospectus is that of Brilliant Earth, LLC.

Certain monetary amounts, percentages, and other figures included in this prospectus have been subject to rounding adjustments. Percentage amounts included in this prospectus have not in all cases been calculated on the basis of such rounded figures, but on the basis of such amounts prior to rounding. For this reason, percentage amounts in this prospectus may vary from those obtained by performing the same calculations using the figures in our consolidated financial statements included elsewhere in this prospectus. Certain other amounts that appear in this prospectus may not sum due to rounding.

Key Terms and Performance Indicators Used in this Prospectus; Non-GAAP Financial Measures

Throughout this prospectus, we use a number of key terms and provide a number of key performance indicators and non-GAAP financial measures used by management. For definitions and further information about how we calculate key performance indicators and non-GAAP financial measures, including a reconciliation of Adjusted EBITDA, Adjusted EBITDA margin, Free cash flow, and Free cash flow conversion to their most directly comparable GAAP financial measure, net income (loss), net income (loss) margin (which we define as net income (loss) as a percentage of net sales), net cash provided by operating activities and operating cash flow conversion (which is defined as net cash provided by operating activities as a percentage of net income (loss)), and why we consider Adjusted EBITDA, Adjusted EBITDA margin, Free cash flow, and Free cash flow conversion useful, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Metrics and non-GAAP Financial Measures.”

We use non-GAAP financial measures, such as Adjusted EBITDA, Adjusted EBITDA margin, Free cash flow, and Free cash flow conversion, to supplement financial information presented in accordance with generally accepted accounting principles in the U.S. (“GAAP”). We believe that excluding certain items from our GAAP results allows management to better understand our consolidated financial performance, in the case of Adjusted EBITDA and Adjusted EBITDA margin, and liquidity, in the case of Free cash flow and Free cash flow conversion, from period to period and better project our future consolidated financial performance and liquidity needs, as applicable, as forecasts are developed at a level of detail different from that used to prepare GAAP-based financial measures. Moreover, we believe these non-GAAP financial measures provide our stakeholders with useful information to help them evaluate our operating results and liquidity, as applicable, make more meaningful period to period

 

ii


Table of Contents

comparisons. There are limitations to the use of the non-GAAP financial measures presented in this prospectus. For example, our non-GAAP financial measures may not be comparable to similarly titled measures of other companies. Other companies, including companies in our industry, may calculate non-GAAP financial measures differently than we do, limiting the usefulness of those measures for comparative purposes. See “Prospectus Summary—Summary Historical Financial and Other Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

TRADEMARKS

This prospectus includes our trademarks and trade names which are protected under applicable intellectual property laws and are our property. This prospectus also contains trademarks, trade names, and service marks of other companies, which are the property of their respective owners. Solely for convenience, trademarks, trade names, and service marks referred to in this prospectus may appear without the ®, or SM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent permitted under applicable law, our rights or the right of the applicable licensor to these trademarks, trade names, and service marks. We do not intend our use or display of other parties’ trademarks, trade names, or service marks to imply, and such use or display should not be construed to imply, a relationship with, or endorsement or sponsorship of us by, these other parties.

MARKET AND INDUSTRY DATA

Unless otherwise indicated, information contained in this prospectus concerning our industry, competitive position, and the markets in which we operate is based on information from independent industry and research organizations, other third-party sources, and management estimates. Management estimates are derived from publicly available information released by independent industry analysts and other third-party sources, as well as data from our internal research, and are based on assumptions made by us upon reviewing such data, and our experience in, and knowledge of, such industry and markets, which we believe to be reasonable. In addition, projections, assumptions and estimates of the future performance of the industry in which we operate and our future performance are necessarily subject to uncertainty and risk due to a variety of factors, including those described in “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements.” These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

The sources of certain statistical data, estimates, and forecasts contained in this prospectus are in the following independent industry and company generated reports:

 

   

5W Public Relations, 5WPR 2020 Consumer Culture Report, April 2020 (the “5WPR Report”).

 

   

Bain & Company, The Global Diamond Industry 2020-21, February 2021 (“The Bain Report”).

 

   

Capgemini Research Institute, How Sustainability is Fundamentally Changing Consumer Preferences, July 2020 (the “Capgemini Study”).

 

   

Euromonitor International, Fine Jewellery, May 2021 (“Euromonitor”).

 

   

McKinsey & Company, State of Fashion: Watches and Jewellery, June 2021 (“McKinsey”).

 

   

Nielsen, Global Corporate Sustainability Report, 2015 (the “Nielsen’s Sustainability Report”).

 

   

The Knot, The Knot 2019 Jewelry & Engagement Study, November 2019 (“The Knot 2019 Study”).

 

   

The Knot, The Knot 2020 Jewelry & Engagement Study, December 2020 (“The Knot 2020 Study”).

 

   

YPulse, Millennials’ & Gen Z Teens’ 2020 Spending Power, January 2020 (“YPulse”).

 

iii


Table of Contents
   

Brilliant Earth Customer Survey (the “Customer Insight Survey”), which we use to measure our customer’s preferences. Our methodology of conducting the Customer Insight Survey measures responses from customers who purchase products from us and chose to respond to the survey questions from January 2020 through April 2021. Throughout this prospectus, factors that are referred to as “an important factor” in our customers decision making process include customer responses that a factor is “somewhat important,” “moderately important,” “considerably important,” and “extremely important” and exclude responses that the factor was “not at all important.” We give no weight to customers who decline to answer the survey question.

This prospectus also includes references to our “Net Promoter Score” or “NPS”, which we use to measure our customers’ brand loyalty and satisfaction, and can range from -100 to +100. Responses were collected from 0, Not Likely, to 10, Very Likely. Our NPS was calculated by using the standard methodology of subtracting the percentage of customers who responded that they are not likely to recommend Brilliant Earth (6 or lower) from the percentage of customers who responded that they are very likely to recommend Brilliant Earth (9 or 10). The NPS gives no weight to customers who declined to answer the survey question. While NPS benchmark can vary significantly by industry, we believe this method is substantially consistent with how businesses across our industry typically calculate their NPS.

 

iv


Table of Contents

PROSPECTUS SUMMARY

This summary highlights selected information included elsewhere in this prospectus. This summary does not contain all of the information that you should consider before deciding to invest in our Class A common stock. You should read the entire prospectus carefully, including the “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements, and the related notes included elsewhere in this prospectus, before making an investment decision. Some of the statements in this prospectus constitute forward-looking statements. See “Cautionary Note Regarding Forward-Looking Statements.”

Our Mission

To create a more transparent, sustainable, and compassionate jewelry industry.

Our Story

From the beginning, our founders Beth and Eric have aspired to create a modern jewelry company that reflects their own values and transforms an outdated industry. They believe in fine jewelry that is different in every way—how it’s made, how it’s sold, how it’s sourced and crafted, and how it gives back.

For Beth, her journey began when she experienced firsthand the challenge of finding a responsibly sourced engagement ring that reflected her values. She had learned about environmental and social injustices in the jewelry industry and cared deeply that her own ring would not contribute to these injustices. Discouraged by opaque sourcing practices and impersonal shopping experiences, she believed there had to be a better way.

Beth shared her frustrations with her business school classmate Eric, and learned that he had been studying the jewelry industry. Eric shared Beth’s passion that this antiquated and slow-moving industry could be reinvented in a thoughtful and modern way to serve a new generation. Together, Beth and Eric founded Brilliant Earth in 2005 with the belief that consumers deserve transparent and responsible practices, beautiful, high-quality, and unique products, and a personalized shopping experience that brings joy into the jewelry buying process. What began as a partnership between two entrepreneurs has grown into a community of people who believe that beautifully designed jewelry can also be a powerful tool for change.

Our Company

Brilliant Earth is an innovative, digital-first jewelry company, and a global leader in ethically sourced fine jewelry. We offer exclusive designs with superior craftsmanship and supply chain transparency, delivered to customers through a highly personalized omnichannel experience.

Our mission is to create a more transparent, sustainable, and compassionate jewelry industry, and we are proud to offer customers distinctive and thoughtfully designed products that they can truly feel good about wearing. Our core values resonate strongly across many demographics and particularly with values-driven Millennial and Gen Z consumers.

Our extensive collection of premium-quality diamond engagement and wedding rings, gemstone rings, and fine jewelry is conceptualized by our leading in-house design studio and then brought to life by expert jewelers. From our award-winning jewelry designs to our responsibly sourced materials, at Brilliant Earth we aspire to exceptional standards in everything we do.


 

1


Table of Contents

We were founded in 2005 as an e-commerce company with an ambitious mission and a single showroom in San Francisco. We have rapidly scaled our business while remaining focused on our mission and elevating the omnichannel customer experience. Through our intuitive digital commerce platform and personalized individual appointments in our showrooms, we cater to the shopping preferences of tech-savvy next-generation consumers. We create an educational, joyful, and approachable experience that is unique in the jewelry industry. Today, Brilliant Earth has sold to consumers in all U.S. states and over 50 countries, and has served over 370,000 customers through our e-commerce platform and 14 showrooms.

Throughout our history, we have invested in technology to create a seamless customer experience, inform our data-driven decision-making, improve efficiencies, and advance our mission. Our technology enables dynamic product visualization, augmented reality try-on, blockchain-enabled transparency, and rapid fulfillment of our flagship Create Your Own product. We leverage powerful data capabilities to improve our marketing and operational efficiencies, personalize the customer experience, curate showroom inventory and merchandising, inform real estate decisions, and develop new product designs that reflect consumer preferences. We believe the Brilliant Earth digital experience drives higher satisfaction, engagement, and conversion both online and in-showroom.

Our financial model is compelling: high net sales growth, substantial first order profitability, and attractive margins. We are very capital efficient: our made-to-order capabilities and virtual inventory model generate attractive inventory turns and negative working capital. We have achieved strong financial performance and rapid growth since our founding with minimal outside funding, and believe we are in the early stages of realizing our potential in a massive market opportunity:

 

   

grew net sales to $251.8 million in 2020, compared to $201.3 million in 2019;

 

   

achieved net income of $21.6 million in 2020, compared to $(7.8) million in 2019;

 

   

achieved net income margin of 8.6% in 2020, compared to (3.9%) in 2019;

 

   

grew Adjusted EBITDA to $27.5 million in 2020, compared to $(4.5) million in 2019; and

 

   

improved Adjusted EBITDA margin to 10.9% in 2020, compared to (2.2%) in 2019.

Our performance in the first half of 2021 continues to demonstrate our ability to succeed in this market:

 

   

grew net sales to $163.0 million, up 77.7% from $91.8 million in the first half of 2020;

 

   

achieved net income of $10.9 million, up from $0.2 million in the first half of 2020;

 

   

achieved net income margin of 6.7%, compared to 0.2% in the first half of 2020;

 

   

grew Adjusted EBITDA to $21.0 million, up 600% from $3.0 million in the first half of 2020; and

 

   

improved Adjusted EBITDA margin to 12.9%, compared to 3.3% in the first half of 2020.


 

2


Table of Contents

LOGO

Our Opportunity

Global Jewelry Market Size and Growth ($bn)

 

LOGO

Source: Euromonitor.

Massive Global Jewelry Market

The fine jewelry market is estimated to be worth approximately $300 billion globally and approximately $61 billion in the U.S. according to Euromonitor, and has consistently grown at CAGRs of 7.4% and 4.7%, respectively, from 2010 to 2019. In the U.S., e-commerce is the fastest growing channel, with a CAGR of 15% from 2010 through 2020, increasing from 10% of sales in 2010 to 31% in 2020.

Despite its mammoth size, the jewelry industry is highly fragmented and includes players like mall jewelers, local independent stores, and department stores, among others. Globally, there is no single fine jewelry player with over 4% market share. According to Bain, approximately 65% of the industry is


 

3


Table of Contents

composed of thousands of small and independent jewelers, many of which are struggling to address evolving consumer preferences for personalization and e-commerce and are further limited by reduced purchasing power and an inventory-heavy model. Mall jewelers have also been slow to modernize an outdated retail experience, and face declining foot traffic. We believe the rapidly changing industry provides ample opportunity for Brilliant Earth to take share.

The bridal category—where we currently derive a large portion of our business—is among the most resilient in the jewelry industry. Engagement and wedding rings are an enduring tradition. According to The Knot 2019 Study, 96% of U.S. couples exchanged a ring and 83% of engagement rings featured diamonds. Each year, there are over two million marriages in the U.S. alone, a number that has been consistent for the past ten years according to U.S. government statistics.

Engagement rings also have a high average order value (“AOV”) and are a highly considered purchase, often one of the largest purchases that a consumer will make. Given the emotional significance of this purchase, customers often form strong connections with the company from which they buy bridal jewelry and return for special occasions or self-gifting fine jewelry purchases.

There is also a large opportunity with the branded fine jewelry segment. According to McKinsey, branded products can command around six times higher prices than for unbranded products. Looking ahead, branded fine jewelry is expected to grow at an 8 to 12% CAGR from 2019 to 2025.

Changing Consumer Preferences

Millennial and Gen Z consumers’ combined spending power neared $3 trillion in 2020, according to YPulse, and they are the largest opportunity for the jewelry industry. These consumers represent the core consumer of bridal-related products and a significant portion of the fine jewelry market. They are drawn to purpose-driven brands, are digitally savvy, and expect to shop whenever and wherever they want.

People are shopping for jewelry online more than ever before. According to Euromonitor, 31% of fine jewelry sales were online in 2020, up from 22% in 2019. As preferences continue to shift online, we believe consumers seek authentic brands with a strong digital presence and an engaged community. They are highly active on social media, where 81% of proposees looked for engagement ring inspiration.

While Millennial and Gen Z consumers appreciate digitally native brands, many also want an in-person experience where they can see, touch, and feel products, especially for a high value, considered purchase. They expect to be able to shop when and where they want with a seamless journey between brick-and-mortar and online. This requires strong digital capabilities and a true omnichannel experience.


 

4


Table of Contents

How Consumers Purchase Diamond Jewelry in the U.S.

 

LOGO

Source: The Bain Report.

Couples are also increasingly shopping together for engagement rings and wedding rings, so it is important for jewelry providers to cater to both parties. According to The Knot 2020 Study, seven in ten proposees say they were somewhat involved in selecting or purchasing their engagement ring. As the proposee becomes more involved in the experience, we believe that they are more connected to the jewelry brand and are more likely to buy for additional special occasions or self-purchases.

Consumers also seek purpose-driven brands that are authentic, engaged with social and environmental issues, and help them express their individuality. Within Millennial and Gen Z demographics in particular, there is a distinct preference for and prioritization of sustainability, brand, and mission:

 

   

73% of Millennials are willing to spend more on a product if it comes from a brand that stands for sustainability according to Nielsen’s Sustainability Report;

 

   

71% of Millennials are willing to pay more for a product knowing that a portion of the proceeds goes to charity according to the 5WPR Report; and

 

   

79% of all consumers are changing product preferences based on the social and environmental impacts of their purchases according to the Capgemini Study.

We believe Millennials and Gen Z consumers also seek unique products that speak to their individuality and personal preferences and that they have the option to personalize themselves.

The Brilliant Earth Difference

We are changing the way people shop for fine jewelry by offering a joyful, personalized, and meaningful jewelry experience. We believe Brilliant Earth has the right omnichannel model, award-winning designs, and mission-driven brand to serve the next generation fine jewelry consumer.

Exceptional Omnichannel Customer Experience

We have reimagined the jewelry shopping experience with our seamless omnichannel model—allowing our customers to shop anywhere, anytime. Customers have joyful, personalized, and meaningful experiences on our website and in our reimagined showrooms. For those who shop online, we deliver a leading mobile-first digital platform with dynamic visualization that brings the product to life, and innovative technology that streamlines the customer journey. For those who want to shop in-store, we


 

5


Table of Contents

provide personalized and curated individual appointments. Customers meet with a dedicated jewelry specialist in a fun, relaxing, and educational environment that fosters lasting connections and propels strong engagement and conversion across channels.

Our high-touch experience drives customer satisfaction, reflected in our high NPS of 75+ every year since 2016 and 62% of customers citing word-of-mouth referral as an important factor in their purchase decision.

Digitally Native, Tech-Driven and Customer-Obsessed

We are digitally native, and take a tech-driven, analytical approach to deliver our exceptional customer experience. The customer is at the forefront of our decision making, and we closely track their feedback and satisfaction across all our channels. We then use this data to create a personalized, premium experience however or wherever our customer chooses to shop.

Our custom e-commerce site guides customers through an intuitive, immersive shopping experience. Our advanced Virtual Try On feature and product visualization technology allow customers to envision our ring designs with diamonds and gemstones of any size, shape, and color. Dynamic product customization and an intelligent diamond recommendation engine simplify and personalize the shopping experience.

While many customers shop with us exclusively online, others also want an in-person experience. From early in our history, we have offered personalized individual appointments in our modern showrooms, with curated selections based on data collected from the customer. Our customers enjoy a fun, relaxing, and educational environment while learning about our mission and browsing gemstones and jewelry selected just for them.

Dedicated, non-commissioned jewelry specialists are available at every step of their journey via chat, phone, email, virtual appointment, or in our showrooms, which we believe drives strong engagement and high customer satisfaction. These specialists strive to create lasting connections with customers.

Unique and Award-Winning Designs

We believe that customers should never have to compromise between beauty, quality, and conscience. Our commitment to our core values is matched by our passion for innovative design and exceptional craftsmanship.

Our award-winning in-house design studio keeps thoughtful design at the heart of everything we do and allows us to quickly adapt to consumer insights and marketplace trends. We utilize our customer dataset, strong relationships with our customers, and highly engaged social media following to constantly uncover consumer insights and trends. We track over 50 attributes associated with our products to inform our development and merchandising decisions. We create unique, exclusive styles that are expertly crafted to be beautiful from every angle and have been featured in leading publications, including Vogue, Forbes, and WWD. Over two-thirds of our ring collection is proprietary and available exclusively at Brilliant Earth, and 99% of our customers cited quality of design as an important factor in their purchase decision, according to our Customer Insight Survey.

Our engagement rings are highly personalized to reflect our customers’ individuality and unique preferences. Through our Create Your Own model, customers choose their ideal ring design, precious metal type, and ring size, and select their diamond or gemstone from our marketplace of over 100,000


 

6


Table of Contents

natural and lab-grown diamonds. The customer’s one-of-a-kind ring is crafted with extraordinary care to fit the exact specifications of their chosen diamond and made just for them, typically in six to twelve business days. We believe the exacting standards of our made-to-order process deliver a higher quality finished product than other offerings that use pre-fabricated rings retrofitted to accommodate a new center gemstone and ring size.

Mission-Driven Ethos

Our mission is to create a more transparent, sustainable, and compassionate jewelry industry. We founded the company to provide an ethical alternative to historical jewelry industry practices, which have raised environmental and social concerns and lacked transparency.

 

   

Transparent: We go above and beyond current industry standards to offer Beyond Conflict Free Diamonds that have been selected for their ethical and environmentally responsible origins. As part of our commitment to transparent sourcing, we expect our suppliers to adhere to our strict Supplier Code of Conduct. We also integrate blockchain technology to showcase the journey of a select collection of blockchain-enabled diamonds. We are a certified and audited member of the Responsible Jewellery Council (“RJC”), a not-for-profit standard setting organization for the jewelry industry.

 

   

Sustainable: Our jewelry is crafted from primarily recycled precious metals and arrives in our iconic ring boxes crafted with wood sourced from Forest Stewardship Council (FSC) certified forests. Our shipping packaging is also primarily recycled content and comes from responsibly managed sources, and we continuously strive to increase the recycled content as part of our commitment to minimizing our environmental footprint. We are also a Certified Carbonfree® company and have partnered with Carbonfund.org to offset our carbon emissions by contributing to Carbonfund’s Envira Amazonia Project, a conservation project focused on protecting 500,000 acres of tropical rainforest in Brazil.

 

   

Compassionate: From our beginnings, we have donated to issues we are passionate about, and volunteering and giving back are especially important to our employees. We recently established the Brilliant Earth Foundation, a donor advised fund, to further our philanthropic mission. In 2015, we partnered with the Diamond Development Initiative to fund a primary school in a rural diamond mining community in the Democratic Republic of Congo. With our non-profit partner Pure Earth, we helped empower miners in an artisanal gold mining community in Peru in 2017 by providing training in mercury-free mining practices to help prevent destructive environmental contamination.

 

   

Inclusive: We are deeply committed to diversity, equity, and inclusion, and we strive to embody our values through our product collections, customer experience, non-profit initiatives, and internal practices. We are proud that women comprise majorities of our employees, senior executive team, and board of directors. We are also proud that our CEO and co-founder, Beth Gerstein, serves on the boards of Diamonds Do Good and the Women’s Jewelry Association. 31% of our leadership team and 38% of our total employees identify as Black, Indigenous, and People of Color (“BIPOC”). We believe that diversity makes us a stronger company, and we are proud to be a DEI leader in our industry.

Our Strengths

The Brilliant Earth Brand

We are a mission-driven, premium brand founded on core values of transparency, sustainability, inclusivity and giving back. These values resonate strongly with Millennial and Gen Z customers, 83% of whom say they will buy from brands whose values align with theirs, according to the 5WPR Report.


 

7


Table of Contents

Those same Millennial and Gen Z consumers collectively represented 87% of our active customers according to our Customer Insight Survey. We thoughtfully develop our brand messaging and customer experience to appeal to all genders, which is important because couples are increasingly shopping together for engagement and wedding rings. 72% of Brilliant Earth couples in 2020 and 2021 were both involved in their engagement ring purchase according to our Customer Insight Survey.

Alongside our mission, we believe our joyful, premium customer experience and unique, exclusive jewelry designs drive our strong brand affinity and loyalty, leading to our Net Promoter Score of 75+ every year since 2016. 76% of customers cited brand and 62% of customers cited word-of-mouth referral as an important factor in their decision to purchase from Brilliant Earth according to our Customer Insight Survey. When asked what words come to mind when they think about Brilliant Earth, the top three mentions were terms related to quality, beauty, and ethics.

Since our founding, we have fostered deep connections with our highly engaged community, leading to an outsized social media presence. We believe our brand resonance, authentic content, and relentless focus on staying ahead of social trends have contributed to our leading engagement rates. Our purpose-driven storytelling and beautiful imagery help us connect with our growing community, which as of June 2021 includes over 9.1 million monthly Pinterest viewers, 2.1 million Facebook followers and over 700,000 Instagram followers.

Exceptional Customer Experience

We have reimagined the jewelry shopping experience. Customers have joyful, personalized, and premium experiences on both our e-commerce site and in our reimagined showrooms. We deliver a leading digital platform, dynamic product customization, innovative technology, and a seamless omnichannel experience. For customers who wish to shop in-store, we provide personalized and curated individual appointments. Customers meet with a dedicated jewelry specialist in a fun, relaxing, and educational environment that fosters lasting connections and propels strong engagement and conversion across channels.

Unique and Exclusive Products

Our award-winning in-house design studio creates unique, exclusive styles that are expertly crafted to be beautiful from every angle. We leverage our data to curate collections and inform new product development strategy, so our offerings are current, fresh, and reflect consumer preferences. We have a vast collection of Beyond Conflict Free natural diamonds and lab-grown diamonds that meet rigorous standards for sourcing and quality. Our collection offers extensive coverage across quality characteristics and price points. Through our Create Your Own model, customers can customize their jewelry to reflect their individuality and personal preferences, creating one-of-a-kind jewelry pieces. In 2020, we also released one of the industry’s first gender-fluid collections.

Innovative, Data-Driven Technology

As a digitally native company, we use technology to deliver a superior customer experience, improve marketing and operational efficiencies, curate showroom inventory and merchandising, inform real estate decisions, and develop new product designs that reflect consumer preferences. Our proprietary technology includes dynamic visualization, augmented reality try-on, and automated rapid fulfillment of our flagship Create Your Own product. We utilize leading technology for key business functions, including product design and personalization, customer relationship management (“CRM”) and data analytics, inventory and supply chain management, order fulfillment, and more.


 

8


Table of Contents

We apply cutting-edge technology to innovate and transform our supply chain. We were among the first retail jewelers to offer blockchain diamonds at scale, defining next-generation traceability standards in the jewelry industry, and now offer more than 10,000 blockchain-enabled diamonds. This technology tracks a diamond from its origins at the mining operator, through cutting and polishing, to the customer. This provides even greater transparency into the responsible origins of these blockchain-enabled diamonds.

Capital Efficient Operating Model

We have an asset-light operating model with attractive working capital dynamics, capital efficient showrooms, and a vast virtual inventory of premium natural and lab-grown diamonds. We are able to offer over 100,000 diamonds—hundreds of millions of dollars’ worth—while keeping our balance sheet inventory low, which has driven our attractive inventory turns of over 10x every year since 2018, compared to 1-2x inventory turns that are more typical for even high-performing traditional jewelers. Our limited owned-inventory and rapid cash cycle—where we are typically paid by our customers before we pay our suppliers—allow us to scale with limited capital outlays.

Our showroom strategy generates highly favorable unit economics and avoids the inefficiencies of traditional jewelers that have too many physical stores, employees, and inventory. Our showrooms are appointment-driven with large catchment regions, so we are less reliant on high foot traffic locations—with their high rents—than traditional retailers. We curate showroom inventory for scheduled visits and need minimal inventory for each location. When not in appointment, our tech-enabled team of jewelry specialists supports online customers, maximizing workforce utilization.

Omnichannel Model Driving Growth and Conversion

We believe our showrooms accelerate our financial performance in the markets where they are located. Metros with a showroom experience over 80% revenue growth on average in the first 12 months—substantially higher than our 32% blended revenue CAGR from 2016 to 2020—and 50% higher conversion within 12 months of opening and increasing to a 75% improvement by year two and a 90% improvement by year three. 50% of customers who have a showroom appointment ultimately make a purchase. On average, our showrooms yield approximately $8,000 in sales per square foot, far outpacing other jewelry retailers.

Founder-Led and Diverse Leadership Team Committed to Inclusion

We care deeply about diversity, equity, and inclusion. We are led by our CEO and co-founder Beth Gerstein, who also serves on the boards of the Women’s Jewelry Association and Diamonds Do Good. A majority of our board of directors, 73% of employees at the director level and above, and 80% of our total employees are women. 31% of our leadership team and 38% of our total employees identify as BIPOC. We believe our commitment to diversity helps drive employee engagement, with 91% of our surveyed employees in 2020 saying, “I am proud to work at Brilliant Earth.” Our diverse team and commitment to inclusion are integral to our company and inform our product offerings and customer experience.

Our Growth Strategies

There is a massive growth opportunity ahead. We are less than one percent penetrated in the jewelry category today. With our purpose-driven brand, digitally-driven omnichannel experience, award-winning products, and loyal customers, we believe we have significant opportunities to grow in both our existing and new markets.


 

9


Table of Contents

Increase Brand Awareness

Increasing brand awareness and growing favorable brand equity have been and remain central to our growth. As of June 30, 2021, our aided brand awareness is 54%, and we believe we have significant room to increase in the U.S. and internationally. From 2018 to 2021, our aided brand awareness grew from 43% to 54% generally and from 53% to 65% among consumers who recently purchased or are in the process of purchasing an engagement ring or wedding ring. We will continue to drive brand awareness through marketing, earned media, showroom expansion, and word-of-mouth referrals.

Expand Omnichannel Reach

We are in the early stages of expanding our showrooms nationwide, and expect to focus in the near term on major urban markets in the U.S. where we can maximize our growth potential. Expanding our number of showrooms has uplifted our e-commerce business, accelerated growth, increased average order value, and improved conversion in the showrooms’ metro regions. We have seen over 80% revenue growth on average over the first 12 months in metro areas where a new showroom has been opened. As we expand into new markets, we expect to see similar uplift in those new geographies.

Currently we have 14 locations. Because our showrooms serve as destinations with some customers traveling long distances to visit them, we believe that we can achieve near-national showroom coverage with under 100 locations. We expect this highly efficient showroom model to complement our digital strategy and continue to drive growth and profitability.

Expand Purchase Occasions with Existing and New Customers

Fine jewelry, which includes earrings, necklaces, bracelets, and rings (other than engagement or wedding), represented 63% of the massive global jewelry market in 2020 according to Bain. We believe we have significant opportunity to expand our relationship with our deeply loyal customer base beyond our current core engagement and wedding ring category into special occasions and self-purchases. We are just beginning our expansion into fine jewelry, and our early results are promising: in the first half of 2021, we drove over 100% revenue growth in our earring, pendant, and bracelet collection compared to the first half of 2020.

Our customer typically begins their Brilliant Earth journey with an engagement ring, so we are often the first significant jewelry purchase in our customer’s life, which we believe creates a lasting, emotional connection with the Brilliant Earth brand. While engagement ring purchases have historically been male-dominated, we thoughtfully built our brand messaging and customer experience to appeal to all genders. Our brand values of beauty, quality, and ethics resonate strongly with Brilliant Earth couples. For all of these reasons, we believe we are uniquely positioned in the industry to build on our brand loyalty to increase future purchases.

To capture these opportunities, we are investing in an expanded fine jewelry assortment, and we will continue to enhance our customer lifetime marketing and data-segmentation capabilities, which we believe will more effectively extend customer relationships beyond engagement and wedding purchases, whether customers are buying a gift or a piece for themselves. With our strong brand resonance with Millennials and Gen Z consumers, we also believe our expanded fine jewelry assortment and strategic customer acquisition will continue to drive fine jewelry orders from new customers.

Expand Internationally

We are in the early stages of expanding globally and believe there is significant opportunity for expansions. Approximately $239 billion of the almost $300 billion global fine jewelry market is outside of the U.S. Our early proof points from localizing our website for Canada, Australia, and the United Kingdom


 

10


Table of Contents

show promising growth in those markets. In addition, we have sold to customers from over 50 countries despite minimal existing language, logistics and currency support for those geographies. We believe that these are early positive signals and that there is substantial potential to launch e-commerce in new overseas markets, particularly in Asia, which is a large and fast-growing market for fine jewelry, and new showrooms in countries where we have already established a localized digital presence.

Summary Risk Factors

Participating in this offering involves substantial risk. Our ability to execute our strategy is also subject to certain risks. The risks described under the heading “Risk Factors” included elsewhere in this prospectus may cause us not to realize the full benefits of our strengths or may cause us to be unable to successfully execute all or part of our strategy. Some of the most significant challenges and risks we face include the following:

 

   

we have grown rapidly in recent years and have limited operating experience at our current scale of operations. If we are unable to manage our growth effectively, our brand, company culture, and financial performance may suffer;

 

   

increases in the costs of diamonds, other gemstones, and precious metals, lead times, supply shortages, and supply changes could disrupt our business and have an adverse effect on our operations, financial condition, and results;

 

   

our business model relies on maintaining a low cost of production and distribution. Fluctuations in the pricing and supply of diamonds, other gemstones, and precious metals, particularly responsibly sourced natural and lab-grown diamonds and recycled precious metals such as gold, which account for the majority of our merchandise costs, increases in labor costs for manufacturing such as wage rate increases, as well as inflation, and energy prices could adversely impact our earnings and cash availability;

 

   

if we fail to cost-effectively turn existing customers into repeat customers or to acquire new customers, our business, financial condition, and results of operations would be harmed;

 

   

we plan to expand showrooms in the U.S., which may expose us to significant risks;

 

   

the COVID-19 pandemic has had, and may in the future continue to have, a material adverse impact on our business;

 

   

we have a history of losses, and we may be unable to sustain profitability;

 

   

the fine jewelry retail industry is highly competitive, and if we do not compete successfully, our business may be adversely impacted;

 

   

our profitability and cash flows may be negatively affected if we are not successful in managing our inventory balances and inventory shrinkage;

 

   

we derive a significant portion of our revenue from sales of our Create Your Own rings. A decline in sales of our Create Your Own rings would negatively affect our business, financial condition, and results of operations;

 

   

if we fail to maintain and enhance our brand, our ability to engage or expand our base of customers may be impaired and our business, financial condition, and results of operations may suffer;

 

   

our marketing efforts to help grow our business may not be effective, and failure to effectively develop and expand our sales and marketing capabilities could harm our ability to increase our customer base and achieve broader market acceptance of our e-commerce and omnichannel approach to shopping for fine jewelry;


 

11


Table of Contents
   

environmental, social, and governance matters may impact our business and reputation;

 

   

our e-commerce and omnichannel business faces distinct risks, and our failure to successfully manage those risks could have a negative impact on our profitability;

 

   

if we are unable to effectively anticipate and respond to changes in consumer preferences and shopping patterns, or are unable to introduce new products or programs that appeal to new or existing customers, our sales and profitability could be adversely affected;

 

   

we expect a number of factors to cause our results of operations and operating cash flows to fluctuate on a quarterly and annual basis, which may make it difficult to predict our future performance;

 

   

the Tax Receivable Agreement requires us to make cash payments to the Continuing Equity Owners in respect of certain tax benefits to which we may become entitled, and we expect that such payments will be substantial;

 

   

our organizational structure, including the Tax Receivable Agreement, confers certain benefits upon the Continuing Equity Owners that will not benefit holders of our Class A common stock to the same extent that it will benefit the Continuing Equity Owners; and

 

   

the significant influence Mainsail and our Founders will have over us after the Transactions, including control over decisions that require the approval of stockholders.

Before you invest in our Class A common stock, you should carefully consider all the information in this prospectus, including matters set forth under the heading “Risk Factors.”

Summary of the Transactions

Brilliant Earth Group, Inc., a Delaware corporation, was formed on June 2, 2021 and is the issuer of the Class A common stock offered by this prospectus. Prior to this offering, all of our business operations have been conducted through Brilliant Earth, LLC. Prior to the Transactions, we expect there will initially be one holder of common stock of Brilliant Earth Group, Inc. We will consummate the following organizational transactions in connection with this offering:

 

   

we will amend and restate the existing limited liability company agreement of Brilliant Earth, LLC, which will become effective prior to the consummation of this offering, to, among other things, (1) recapitalize all existing ownership interests in Brilliant Earth, LLC into 85,998,351 LLC Interests, (2) appoint Brilliant Earth Group, Inc. as the sole managing member of Brilliant Earth, LLC upon its acquisition of LLC Interests in connection with this offering, and (3) provide certain redemption rights to the Continuing Equity Owners;

 

   

we will amend and restate Brilliant Earth Group, Inc.’s certificate of incorporation and will be authorized to issue four classes of common stock, which we refer to collectively as our “common stock,” and which are summarized in the following table:

 

Class of Common Stock

  

Votes

  

Economic Rights

Class A common stock    1    Yes
Class B common stock    1    No
Class C common stock    10    No
Class D common stock    10    Yes

Voting shares of our common stock will generally vote together as a single class on all matters submitted to a vote of our stockholders. We will issue shares of our Class A common stock to the investors in this offering. Our Class B common stock may only be held by the Continuing Equity Owners (excluding our Founders) and their respective permitted


 

12


Table of Contents

transferees as described in “Description of Capital Stock—Common Stock—Class B common stock.” Our Class C common stock and Class D common stock may only be held by our Founders and their respective permitted transferees as described in “Description of Capital Stock—Common Stock—Class C common stock” and “Description of Capital Stock—Common Stock—Class D common stock.” No shares of our Class D common stock will be outstanding upon the closing of this offering, but may be issued after the consummation of this offering by us in connection with an exchange by the Founders of their LLC Interests (along with an equal number of shares of Class C common stock (and such shares shall be immediately cancelled)). We do not intend to list our Class B common stock, Class C common stock or Class D common stock on any stock exchange;

 

   

we will issue 32,469,276 shares of our Class B common stock (after giving effect to the use of net proceeds as described below) to the Continuing Equity Owners (excluding our Founders), which is equal to the number of LLC Interests held by such Continuing Equity Owners (excluding our Founders), for nominal consideration;

 

   

we will issue 45,195,741 shares of our Class C common stock (after giving effect to the use of net proceeds as described below) to our Founders, which is equal to the number of LLC Interests held by such Founders, for nominal consideration;

 

   

we will issue 16,666,667 shares of our Class A common stock to the purchasers in this offering (or 19,166,667 shares if the underwriters exercise in full their option to purchase additional shares of Class A common stock) in exchange for net proceeds of approximately $229.4 million (or approximately $263.8 million if the underwriters exercise in full their option to purchase additional shares of Class A common stock) based upon an assumed initial public offering price of $15.00 per share (which is the midpoint of the estimated price range set forth on the cover page of this prospectus), less the underwriting discount and estimated offering expenses payable by us;

 

   

use of the net proceeds from this offering (1) to purchase 8,333,333 newly issued LLC Interests for approximately $117.2 million directly from Brilliant Earth, LLC at the initial public offering price less the underwriting discount, excluding estimated offering expenses of $5.0 million payable by us; and (2) to purchase 8,333,334 LLC Interests from each of the Continuing Equity Owners on a pro rata basis for $117.2 million in aggregate (or 10,833,334 LLC Interests for $152.3 million in aggregate if the underwriters exercise in full their option to purchase additional shares of Class A common stock) at a price per unit equal to the initial public offering price per share of Class A common stock in this offering less the underwriting discount;

 

   

Brilliant Earth, LLC intends to use the net proceeds from the sale of LLC Interests to Brilliant Earth Group, Inc. for general corporate purposes, as described under “Use of Proceeds”; and

 

   

Brilliant Earth Group, Inc. will enter into (1) the Stockholders Agreement with Mainsail and our Founders, (2) the Registration Rights Agreement with certain of the Continuing Equity Owners, and (3) the Tax Receivable Agreement with Brilliant Earth, LLC and the Continuing Equity Owners. For a description of the terms of the Stockholders Agreement, the Registration Rights Agreement, and the Tax Receivable Agreement, see “Certain Relationships and Related Party Transactions.”

Immediately following the consummation of the Transactions (including this offering and proposed use of proceeds):

 

   

Brilliant Earth Group, Inc. will be a holding company and its principal asset will consist of LLC Interests it acquires directly from Brilliant Earth, LLC;

 

   

Brilliant Earth Group, Inc. will be the sole managing member of Brilliant Earth, LLC and will control the business and affairs of Brilliant Earth, LLC;


 

13


Table of Contents
   

Brilliant Earth Group, Inc. will own, directly or indirectly, 16,666,667 LLC Interests of Brilliant Earth, LLC, representing approximately 17.7% of the economic interest in Brilliant Earth, LLC (or 19,166,667 LLC Interests, representing approximately 20.3% of the economic interest in Brilliant Earth, LLC if the underwriters exercise in full their option to purchase additional shares of Class A common stock);

 

   

the Continuing Equity Owners (excluding Mainsail and our Founders) will own (1) 3,327,834 LLC Interests of Brilliant Earth, LLC, representing approximately 3.5% of the economic interest in Brilliant Earth, LLC (or 3,220,713 LLC Interests, representing approximately 3.4% of the economic interest in Brilliant Earth, LLC if the underwriters exercise in full their option to purchase additional shares of Class A common stock) and (2) 3,327,834 shares of Class B common stock of Brilliant Earth Group, Inc., representing approximately 0.7% of the combined voting power of all of Brilliant Earth Group, Inc.’s common stock (or 3,220,713 shares of Class B common stock of Brilliant Earth Group, Inc., representing approximately 0.7% if the underwriters exercise in full their option to purchase additional shares of Class A common stock);

 

   

Mainsail will own (1) 29,141,442 LLC Interests of Brilliant Earth, LLC, representing approximately 30.9% of the economic interest in Brilliant Earth, LLC (or 28,203,393 LLC Interests, representing approximately 29.9% of the economic interest in Brilliant Earth, LLC if the underwriters exercise in full their option to purchase additional shares of Class A common stock) and (2) 29,141,442 shares of Class B common stock of Brilliant Earth Group, Inc., representing approximately 5.8% of the combined voting power of all of Brilliant Earth Group, Inc.’s common stock (or 28,203,393 shares of Class B common stock, representing approximately 5.8% if the underwriters exercise in full their option to purchase additional shares of Class A common stock);

 

   

our Founders will own (1) 45,195,741 LLC Interests of Brilliant Earth, LLC, representing approximately 47.9% of the economic interest in Brilliant Earth, LLC (or 43,740,911 LLC Interests, representing approximately 46.4% of the economic interest in Brilliant Earth, LLC if the underwriters exercise in full their option to purchase additional shares of Class A common stock) and (2) 45,195,741 shares of Class C common stock of Brilliant Earth Group, Inc., representing approximately 90.2% of the combined voting power of all of Brilliant Earth Group, Inc.’s common stock (or 43,740,911 shares of Class C common stock, representing approximately 89.6% if the underwriters exercise in full their option to purchase additional shares of Class A common stock);

 

   

the purchasers in this offering will own (1) 16,666,667 shares of Class A common stock of Brilliant Earth Group, Inc. (or 19,166,667 shares of Class A common stock of Brilliant Earth Group, Inc. if the underwriters exercise in full their option to purchase additional shares of Class A common stock), representing approximately 3.3% of the combined voting power of all of Brilliant Earth Group, Inc.’s common stock and approximately 17.7% of the economic interest in Brilliant Earth Group, Inc. (or approximately 3.9% of the combined voting power and approximately 20.3% of the economic interest if the underwriters exercise in full their option to purchase additional shares of Class A common stock), and (2) through Brilliant Earth Group, Inc.’s ownership of LLC Interests, indirectly will hold approximately 17.7% of the economic interest in Brilliant Earth, LLC (or approximately 20.3% of the economic interest in Brilliant Earth, LLC if the underwriters exercise in full their option to purchase additional shares of Class A common stock).

As the sole managing member of Brilliant Earth, LLC, we will operate and control all of the business and affairs of Brilliant Earth, LLC and, through Brilliant Earth, LLC, conduct our business. Following the


 

14


Table of Contents

Transactions, including this offering, Brilliant Earth Group, Inc. will control the management of Brilliant Earth, LLC as its sole managing member. As a result, Brilliant Earth Group, Inc. will consolidate Brilliant Earth, LLC and record a significant non-controlling interest in a consolidated entity in Brilliant Earth Group, Inc.’s consolidated financial statements for the economic interest in Brilliant Earth, LLC held by the Continuing Equity Owners.

Unless otherwise indicated, this prospectus assumes the shares of Class A common stock are offered at $15.00 per share (the midpoint of the estimated price range set forth on the cover page of this prospectus). For more information regarding the impact of the initial offering price on the share information included throughout this prospectus, see “—The Offering.”

Our corporate structure following this offering, as described below, is commonly referred to as an umbrella partnership-C corporation (“Up-C”) structure, which is often used by partnerships and limited liability companies when they undertake an initial public offering of their business. The Up-C structure will allow the Continuing Equity Owners to retain their equity ownership in Brilliant Earth, LLC and to continue to realize tax benefits associated with owning interests in an entity that is treated as a partnership, or “flow-through” entity, for U.S. federal income tax purposes following the offering. Investors in this offering will, by contrast, hold their equity ownership in Brilliant Earth Group, Inc., a Delaware corporation that is a domestic corporation for U.S. federal income tax purposes, in the form of shares of Class A common stock. One of the tax benefits to the Continuing Equity Owners associated with this structure is that future taxable income of Brilliant Earth, LLC that is allocated to the Continuing Equity Owners will be taxed on a flow-through basis and therefore will not be subject to corporate taxes at the entity level. Additionally, because the Continuing Equity Owners may redeem or exchange their LLC Interests for newly issued shares of our Class A common stock or Class D common stock, as applicable, on a one-for-one basis or, at our option, for cash, the Up-C structure also provides the Continuing Equity Owners with potential liquidity that holders of non-publicly traded limited liability companies are not typically afforded. The Continuing Equity Owners and Brilliant Earth Group, Inc. also each expect to benefit from the Up-C structure as a result of certain cash tax savings arising from redemptions or exchanges of the Continuing Equity Owner’s LLC Interests for Class A common stock or Class D common stock, as applicable, or cash, and certain other tax benefits covered by the Tax Receivable Agreement discussed in “Certain Relationships and Related Party Transactions–Tax Receivable Agreement.” See “Risk Factors—Risks Related to Our Organizational Structure.” In general, the Continuing Equity Owners expect to receive payments under the Tax Receivable Agreement of 85% of the amount of certain tax benefits, as described below, and Brilliant Earth Group, Inc. expects to benefit in the form of cash tax savings in amounts equal to 15% of certain tax benefits, as described below. Any payments made by us to the Continuing Equity Owners under the Tax Receivable Agreement will reduce cash otherwise arising from such tax savings. We expect such payments will be substantial.

As described below under “Certain Relationships and Related Party Transactions—Tax Receivable Agreement,” prior to the completion of this offering, we will enter into a Tax Receivable Agreement with Brilliant Earth, LLC and the Continuing Equity Owners that will provide for the payment by Brilliant Earth Group, Inc. to the Continuing Equity Owners of 85% of the amount of tax benefits, if any, that Brilliant Earth Group, Inc. actually realizes (or in some circumstances is deemed to realize) as a result of (1) increases in Brilliant Earth Group, Inc.’s allocable share of the tax basis of Brilliant Earth, LLC’s assets resulting from (a) Brilliant Earth Group, Inc.’s purchase of LLC Interests from each Continuing Equity Owner, as described under “Use of Proceeds”, (b) future redemptions or exchanges of LLC Interests for Class A common stock or cash as described below under “—Redemption rights of holders of LLC Interests,” and (c) certain distributions (or deemed distributions) by Brilliant Earth, LLC; and (2) certain tax benefits arising from payments made under the Tax Receivable Agreement.

For more information regarding the Transactions and our structure, see “Our Organizational Structure.”


 

15


Table of Contents

Ownership Structure

The diagram below depicts our organizational structure after giving effect to the Transactions, including this offering and proposed use of proceeds, assuming no exercise by the underwriters of their option to purchase additional shares of Class A common stock.

 

LOGO

 

(1)

Investors in this offering will hold approximately 3.3% of the voting interest.

(2)

Beth Gerstein and Eric Grossberg will hold their Class C common stock of Brilliant Earth Group, Inc. through Just Rocks, for which they share ownership equally.

(3)

Comprised of 28,455,761 shares of Class B common stock to be held by Mainsail Partners III, L.P., 629,112 shares of Class B common stock to be held by Mainsail Co-Investors III, L.P. and 56,569 shares of Class B common stock to be held by Mainsail Incentive Program, LLC.

Brilliant Earth Group, Inc., the issuer of the Class A common stock in this offering, was incorporated as a Delaware corporation on June 2, 2021. Our corporate headquarters are located at 300 Grant Avenue, Third Floor, San Francisco, CA 94108. Our telephone number is (800) 691-0952. Our principal website address is www.brilliantearth.com. The information on any of our websites is deemed not to be incorporated in this prospectus or to be part of this prospectus.

After giving effect to the Transactions, including this offering and proposed use of proceeds, Brilliant Earth Group, Inc. will be a holding company whose principal asset will consist of 17.7% of the outstanding LLC Interests of Brilliant Earth, LLC (or 20.3% if the underwriters exercise in full their option to purchase additional shares of our Class A common stock).

Mainsail

Mainsail Partners is a growth equity firm that invests in fast-growing, bootstrapped technology companies. The firm has raised over $1.3 billion across five flagship funds and has invested in more


 

16


Table of Contents

than 50 growing companies since 2003. Mainsail prioritizes investments in technology companies with differentiated products and compelling business models in growing markets. The firm’s approach to driving value creation is anchored in a dedicated Operations Team that is purpose-built to help founders scale their businesses and accelerate growth. These women and men include former software company operators who leverage real-world experience, well-established best practices, and a true partnership ethos to support management teams.

Implications of Being an Emerging Growth Company

We qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of certain reduced reporting and other requirements that are otherwise generally applicable to public companies. As a result:

 

   

we are required to have only two years of audited financial statements and only two years of related selected financial data and management’s discussion and analysis of financial condition and results of operations disclosure;

 

   

we are not required to engage an auditor to report on our internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”);

 

   

we are not required to comply with the requirement of the Public Company Accounting Oversight Board (“PCAOB”), regarding the communication of critical audit matters in the auditor’s report on the financial statements;

 

   

we are not required to submit certain executive compensation matters to stockholder advisory votes, such as “say-on-pay,” “say-on-frequency,” and “say-on-golden parachutes”; and

 

   

we are not required to comply with certain disclosure requirements related to executive compensation, such as the requirement to present a comparison of our Chief Executive Officer’s compensation to our median employee compensation.

We may take advantage of these reduced reporting and other requirements until such time that we are no longer an emerging growth company. We will remain an emerging growth company until the earliest of: (i) the last day of the fiscal year following the fifth anniversary of the consummation of this offering; (ii) the last day of the fiscal year in which we have total annual gross revenue of at least $1.07 billion; (iii) the last day of the fiscal year in which we are deemed to be a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which would occur if the market value of our common stock held by non-affiliates exceeded $700.0 million as of the last business day of the second fiscal quarter of such year; or (iv) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period. We may choose to take advantage of some but not all of these reduced burdens. We have elected to adopt the reduced requirements with respect to our financial statements and the related selected financial data and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure, including in this prospectus.

In addition, the JOBS Act permits an emerging growth company like us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We have elected to use this extended transition period. As a result, the information that we provide to stockholders may be different than the information you may receive from other public companies in which you hold equity.


 

17


Table of Contents

The Offering

 

Issuer

Brilliant Earth Group, Inc.

 

Shares of Class A common stock offered by us

16,666,667 shares (or 19,166,667 shares if the underwriters exercise in full their option to purchase additional shares).

 

Underwriters’ option to purchase additional shares of Class A common stock from us

2,500,000 shares.

 

Shares of Class A common stock to be outstanding immediately after this offering

16,666,667 shares, representing approximately 3.3% of the combined voting power of all of Brilliant Earth Group, Inc.’s common stock (or 19,166,667 shares, representing approximately 3.9% of the combined voting power of all of Brilliant Earth Group, Inc.’s common stock if the underwriters exercise in full their option to purchase additional shares of Class A common stock), 17.7% of the economic interest in Brilliant Earth Group, Inc., and 17.7% of the indirect economic interest in Brilliant Earth, LLC.

 

Shares of Class B common stock to be outstanding immediately after this offering

32,469,276 shares, representing approximately 6.5% of the combined voting power of all of Brilliant Earth Group, Inc.’s common stock (or 31,424,106 shares, representing approximately 6.4% of the combined voting power of all of Brilliant Earth Group, Inc.’s common stock if the underwriters exercise in full their option to purchase additional shares of Class A common stock) and no economic interest in Brilliant Earth Group, Inc.

 

Shares of Class C common stock to be outstanding immediately after this offering

45,195,741 shares, representing approximately 90.2% of the combined voting power of all of Brilliant Earth Group, Inc.’s common stock (or 43,740,911 shares, representing approximately 89.6% of the combined voting power of all of Brilliant Earth Group, Inc.’s common stock if the underwriters exercise in full their option to purchase additional shares of Class A common stock) and no economic interest in Brilliant Earth Group, Inc.

 

Shares of Class D common stock to be outstanding immediately after this offering

None. Shares of our Class D common stock have economic and voting rights.

 

18


Table of Contents

LLC Interests to be held by us immediately after this offering

16,666,667 LLC Interests, representing approximately 17.7% of the economic interest in Brilliant Earth, LLC (or 19,166,667 LLC Interests, representing approximately 20.3% of the economic interest in Brilliant Earth, LLC if the underwriters exercise in full their option to purchase additional shares of Class A common stock).

 

LLC Interests to be held directly by the Continuing Equity Owners (excluding Mainsail and our Founders) immediately after this offering

3,327,834 LLC Interests, representing approximately 3.5% of the economic interest in Brilliant Earth, LLC (or 3,220,713 LLC Interests, representing approximately 3.4% of the economic interest in Brilliant Earth, LLC if the underwriters exercise in full their option to purchase additional shares of Class A common stock).

 

LLC Interests to be held by Mainsail immediately after this offering

29,141,442 LLC Interests, representing approximately 30.9% of the economic interest in Brilliant Earth, LLC (or 28,203,393 LLC Interests, representing approximately 29.9% of the economic interest in Brilliant Earth, LLC if the underwriters exercise in full their option to purchase additional shares of Class A common stock).

 

LLC Interests to be held by our Founders immediately after this offering

45,195,741 LLC Interests, representing approximately 47.9% of the economic interest in Brilliant Earth, LLC (or 43,740,911 LLC Interests, representing approximately 46.4% of the economic interest in Brilliant Earth, LLC if the underwriters exercise in full their option to purchase additional shares of Class A common stock).

 

Ratio of shares of Class A common stock to LLC Interests

Our amended and restated certificate of incorporation and the Brilliant Earth LLC Agreement will require that we and Brilliant Earth, LLC at all times maintain a one-to-one ratio between the number of shares of Class A common stock issued by us and the number of LLC Interests owned by us, except as otherwise determined by us.

 

Ratio of shares of Class B common stock to LLC Interests

Our amended and restated certificate of incorporation and the Brilliant Earth LLC Agreement will require that we and Brilliant Earth, LLC at all times maintain a one-to-one ratio between the number of shares of Class B common stock owned by the Continuing Equity Owners (excluding our Founders) and their


 

19


Table of Contents
 

respective permitted transferees and the number of LLC Interests owned by the Continuing Equity Owners (excluding our Founders) and their respective permitted transferees, except as otherwise determined by us. Immediately after the Transactions, the Continuing Equity Owners (excluding our Founders) will together own 100% of the outstanding shares of our Class B common stock.

 

Ratio of shares of Class C common stock to LLC Interests

Our amended and restated certificate of incorporation and the Brilliant Earth LLC Agreement will require that we and Brilliant Earth, LLC at all times maintain a one-to-one ratio between the number of shares of Class C common stock owned by our Founders and their respective permitted transferees and the number of LLC Interests owned by our Founders and their respective permitted transferees, except as otherwise determined by us. Immediately after the Transactions, our Founders will together own 100% of the outstanding shares of our Class C common stock.

 

Ratio of shares of Class D common stock to LLC Interests

Our amended and restated certificate of incorporation and the Brilliant Earth LLC Agreement will require that we and Brilliant Earth, LLC at all times maintain a one-to-one ratio between the number of shares of Class D common stock issued by us and the number of LLC Interests owned by us, except as otherwise determined by us.

 

Permitted holders of shares of Class B common stock

Only the Continuing Equity Owners (excluding our Founders) and the permitted transferees of Class B common stock as described in this prospectus will be permitted to hold shares of our Class B common stock. Shares of Class B common stock are transferable for shares of Class A common stock only together with an equal number of LLC Interests. See “Certain Relationships and Related Party Transactions—Brilliant Earth LLC Agreement—Agreement in Effect Upon Consummation of the Transactions.”

 

Permitted holders of shares of Class C common stock

Only our Founders and the permitted transferees of Class C common stock as described in this prospectus will be permitted to hold shares of our Class C common stock. Shares of Class C common stock are transferable for shares of Class D common stock only together with an equal number of LLC Interests. See “Certain Relationships and Related Party Transactions—Brilliant Earth LLC Agreement—Agreement in Effect Upon Consummation of the Transactions.”

 

20


Table of Contents

Permitted holders of shares of Class D common stock

Only our Founders and the permitted transferees of Class D common stock as described in this prospectus will be permitted to hold shares of our Class D common stock. If any such shares are transferred to any other person, they automatically convert into shares of Class A common stock. See “Certain Relationships and Related Party Transactions—Brilliant Earth LLC Agreement—Agreement in Effect Upon Consummation of the Transactions.”

 

Voting rights

Holders of shares of our Class A common stock, Class B common stock, Class C common stock and Class D common stock will vote together as a single class on all matters presented to stockholders for their vote or approval, except as otherwise required by law or our amended and restated certificate of incorporation. Each share of our Class A common stock and Class B common stock entitles its holders to one vote per share and each share of our Class C common stock and Class D common stock entitles its holders to 10 votes per share on all matters presented to our stockholders generally. See “Description of Capital Stock.”

 

Redemption rights of holders of LLC Interests

The Continuing Equity Owners (excluding our Founders) may, subject to certain exceptions, from time to time at each of their options require Brilliant Earth, LLC to redeem all or a portion of their LLC Interests in exchange for, at our election (determined solely by our independent directors (within the meaning of the Nasdaq rules) who are disinterested), newly-issued shares of our Class A common stock on a one-for-one basis or a cash payment equal to a volume weighted average market price of one share of our Class A common stock for each LLC Interest so redeemed, in each case, in accordance with the terms of the Brilliant Earth LLC Agreement; provided that, at our election (determined solely by our independent directors (within the meaning of the Nasdaq rules) who are disinterested), we may effect a direct exchange by Brilliant Earth Group, Inc. of such Class A common stock or such cash, as applicable, for such LLC Interests. The Continuing Equity Owners may, subject to certain exceptions, exercise such redemption right for as long as their LLC Interests remain outstanding. See “Certain Relationships and Related Party Transactions—Brilliant Earth LLC Agreement—Agreement in Effect Upon Consummation of the Transactions.” Simultaneously with the payment of cash or shares of Class A common stock, as applicable, in connection with a redemption or exchange of LLC Interests pursuant to the terms of the Brilliant Earth LLC Agreement, a number of shares of our Class B common stock registered in the name of the redeeming or exchanging Continuing Equity Owner will automatically be transferred to the Company and will be


 

21


Table of Contents

cancelled for no consideration on a one-for-one basis with the number of LLC Interests so redeemed or exchanged.

 

  Our Founders may, subject to certain exceptions, from time to time at each of their options require Brilliant Earth, LLC to redeem all or a portion of their LLC Interests in exchange for, at our election (determined solely by our independent directors (within the meaning of the Nasdaq rules) who are disinterested), newly-issued shares of our Class D common stock on a one-for-one basis or a cash payment equal to a volume weighted average market price of one share of our Class A common stock for each LLC Interest so redeemed, in each case, in accordance with the terms of the Brilliant Earth LLC Agreement; provided that, at our election (determined solely by our independent directors (within the meaning of the Nasdaq rules) who are disinterested), we may effect a direct exchange by Brilliant Earth Group, Inc. of such Class D common stock or such cash, as applicable, for such LLC Interests. Our Founders may, subject to certain exceptions, exercise such redemption right for as long as their LLC Interests remain outstanding. See “Certain Relationships and Related Party Transactions—Brilliant Earth LLC Agreement—Agreement in Effect Upon Consummation of the Transactions.” Simultaneously with the payment of cash or shares of Class D common stock, as applicable, in connection with a redemption or exchange of LLC Interests pursuant to the terms of the Brilliant Earth LLC Agreement, a number of shares of our Class C common stock registered in the name of the redeeming or exchanging Founder will automatically be transferred to the Company and will be cancelled for no consideration on a one-for-one basis with the number of LLC Interests so redeemed or exchanged.

 

Use of proceeds

We estimate, based upon an assumed initial public offering price of $15.00 per share (which is the midpoint of the estimated price range set forth on the cover page of this prospectus), that we will receive net proceeds from this offering of approximately $229.4 million (or $263.8 million if the underwriters exercise in full their option to purchase additional shares of Class A common stock), after deducting the underwriting discount and estimated offering expenses payable by us. We intend to use the net proceeds from this offering (1) to purchase 8,333,333 newly issued LLC Interests for approximately $117.2 million directly from Brilliant Earth, LLC at the initial public offering price less the underwriting discount, excluding estimated offering expenses of $5.0 million payable by us; and (2) to purchase 8,333,334 LLC Interests from each of the Continuing Equity Owners on a pro rata basis for $117.2 million in aggregate (or 10,833,334 LLC Interests from each of the Continuing Equity Owners for $152.3 million in aggregate if


 

22


Table of Contents
 

the underwriters exercise in full their option to purchase additional shares of Class A common stock) at a price per unit equal to the initial public offering price per share of Class A common stock in this offering less the underwriting discount. Upon each purchase of LLC Interests from the Continuing Equity Owners, the corresponding shares of Class B common stock or Class C common stock will be canceled. We will only retain the net proceeds that are used to purchase newly issued LLC Interests from Brilliant Earth, LLC, which, in turn, Brilliant Earth, LLC intends to use for general corporate purposes. We may also use a portion of the net proceeds to acquire or invest in businesses, products, services or technologies; however, we do not have agreements or commitments for any material acquisitions or investments at this time. Brilliant Earth, LLC will bear or reimburse Brilliant Earth Group, Inc. for all of the expenses of this offering. See “Use of Proceeds.”

 

Dividend policy

We currently intend to retain all available funds and any future earnings to fund the development and growth of our business, and therefore, we do not anticipate declaring or paying any cash dividends on our Class A common stock and Class D common stock in the foreseeable future. Holders of our Class B common stock and Class C common stock are not entitled to participate in any dividends declared by our board of directors. Because we are a holding company, our ability to pay cash dividends on our Class A common stock and Class D common stock depends on our receipt of cash distributions from Brilliant Earth, LLC. Our ability to pay dividends may be restricted by the terms of any future credit agreement or any future debt or preferred equity securities of us. Any future determination as to the declaration and payment of dividends, if any, will be at the discretion of our board of directors, subject to the requirements of applicable law, compliance with contractual restrictions and covenants in the agreements governing our future indebtedness. Any such determination will also depend upon our business prospects, results of operations, financial condition, cash requirements and availability, industry trends, and other factors that our board of directors may deem relevant. See “Dividend Policy.”

 

Controlled company exception

After the consummation of the Transactions, we will be considered a “controlled company” for the purposes of the Nasdaq rules as our Founders will have more than 50% of the voting power for the election of directors. See “Principal Stockholders.” As a “controlled company,” we will not be subject to certain corporate governance requirements, including that: (1) a majority of our board of directors consists of “independent directors,” as defined under the Nasdaq rules; (2) we have a nominating and corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and


 

23


Table of Contents
 

responsibilities; (3) we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and (4) we perform annual performance evaluations of the nominating and corporate governance and compensation committees. As a result, we may not have a majority of independent directors on our board of directors, an entirely independent nominating and corporate governance committee, an entirely independent compensation committee or perform annual performance evaluations of the nominating and corporate governance and compensation committees unless and until such time as we are required to do so.

 

Directed Share Program

At our request, the underwriters have reserved up to 5.0% of the shares of Class A common stock offered by this prospectus for sale at the initial public offering price through a directed share program to certain individuals identified by management. Any shares sold under the directed share program will not be subject to the terms of any lock-up agreement, except in the case of shares purchased by our officers or directors. The number of shares of Class A common stock available for sale to the general public will be reduced by the number of reserved shares sold to these individuals. Any reserved shares not purchased by these individuals will be offered by the underwriters to the general public on the same basis as the other shares of Class A common stock offered under this prospectus. See the section titled “Underwriting—Directed Share Program.”

 

Tax receivable agreement

We will enter into a Tax Receivable Agreement with Brilliant Earth, LLC and the Continuing Equity Owners that will provide for the payment by Brilliant Earth Group, Inc. to the Continuing Equity Owners of 85% of the amount of tax benefits, if any, that Brilliant Earth Group, Inc. actually realizes (or in some circumstances is deemed to realize) as a result of (1) increases in Brilliant Earth Group, Inc.’s allocable share of the tax basis of Brilliant Earth, LLC’s assets resulting from (a) Brilliant Earth Group, Inc.’s purchase of LLC Interests from each Continuing Equity Owner, as described under “Use of Proceeds”, (b) future redemptions or exchanges of LLC Interests for Class A common stock or cash as described above under “—Redemption rights of holders of LLC Interests,” and (c) certain distributions (or deemed distributions) by Brilliant Earth, LLC; and (2) certain tax benefits arising from payments made under the Tax Receivable Agreement. See “Certain Relationships and Related Party Transactions—Tax Receivable Agreement” for a discussion of the Tax Receivable Agreement.

 

Registration rights agreement

Pursuant to the Registration Rights Agreement, we will, subject to the terms and conditions thereof, agree to register the resale


 

24


Table of Contents
 

of the shares of our Class A common stock that are issuable to certain of the Continuing Equity Owners in connection with the Transactions. See “Certain Relationships and Related Party Transactions—Registration Rights Agreement” for a discussion of the Registration Rights Agreement.

 

Risk factors

See “Risk Factors” beginning on page 31 and other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in shares of our Class A common stock.

 

Trading symbol

We intend to apply to list our Class A common stock on The Nasdaq Global Select Market under the symbol “BRLT.”

Unless we indicate otherwise or the context otherwise requires, all information in this prospectus:

 

   

gives effect to the amendment and restatement of the Brilliant Earth LLC Agreement that converts all existing ownership interests in Brilliant Earth, LLC into 85,998,351 LLC Interests, after giving effect to a conversion ratio of 1.8588, as well as the filing of our amended and restated certificate of incorporation;

 

   

gives effect to the other Transactions, including the consummation of this offering and proposed use of proceeds;

 

   

excludes approximately 2,306,412 LLC Interests to be held directly or indirectly by certain former profits unit holders that are subject to time-based vesting requirements;

 

   

excludes 10,919,558 shares of Class A common stock reserved for issuance under our 2021 Incentive Award Plan (the “2021 Plan”), as described under the caption “Executive Compensation—Equity Compensation Plans—2021 Incentive Award Plan”, including approximately 1,294,448 shares of Class A common stock issuable pursuant to the exercise of stock options (including Anti-Dilution Options (as defined herein)) and approximately 226,835 shares of Class A common stock issuable pursuant to the vesting of restricted stock units that we intend to grant to certain of our directors, executive officers and other employees, including certain of our named executive officers, in connection with this offering as described in “Executive Compensation—Narrative to Summary Compensation Table—Equity-Based Compensation” and restricted stock units having a grant date fair value of approximately $16.0 million in the aggregate to be granted to certain of our directors, executive officers and other employees, including certain of our executive officers, shortly following this offering;

 

   

excludes 1,637,933 shares of our Class A common stock reserved for issuance under the Employee Stock Purchase Plan (the “ESPP”), as described under the caption “Executive Compensation—Equity Compensation Plans—2021 Employee Stock Purchase Plan”;

 

   

assumes an initial public offering price of $15.00 per share of Class A common stock, which is the midpoint of the estimated price range set forth on the cover page of this prospectus;

 

   

assumes the exercise of warrants to purchase 560,884 LLC Interests, which will result in the issuance of 506,533 shares of Class B common stock in connection with this offering (after giving effect to the use of proceeds therefrom), assuming an initial public offering price of $15.00 per share of Class A common stock (which is the midpoint of the price range set forth on the cover page of this prospectus); and


 

25


Table of Contents
   

assumes no exercise by the underwriters of their option to purchase 2,500,000 additional shares of Class A common stock from us.

Our 2021 Plan and ESPP each provide for annual automatic increases in the number of shares reserved thereunder.

Unless otherwise indicated, this prospectus assumes the shares of Class A common stock are offered at $15.00 per share (the midpoint of the price range listed on the cover page of this prospectus). Although the combined number of LLC Interests, LLC Interests subject to time-based vesting requirements and restricted stock units to purchase shares of Class A common stock outstanding after the offering will remain fixed regardless of the initial public offering price in this offering, pursuant to the terms of the existing LLC Agreement the split between the number of LLC Interests, LLC Interests subject to time-based vesting requirements and restricted stock units to purchase shares of Class A common stock will vary depending on the initial public offering price in this offering. The initial public offering price will also impact the relative allocation of LLC Interests, LLC Interests subject to time-based vesting requirements and options and restricted stock units to purchase shares of Class A common stock issued in the Transactions among the Original Equity Owners, the number of options to purchase shares of Class A common stock issued in the Transactions, and, in turn, the shares of Class B common stock and Class C common stock issued to the Continuing Equity Owners in the Transactions. These changes will not significantly impact the relative economic and voting interests of the Continuing Equity Owners after giving effect to the Transactions.


 

26


Table of Contents

Summary Historical Financial and Other Data

The following tables present the summary historical financial and other data for Brilliant Earth, LLC. Brilliant Earth, LLC is the predecessor of Brilliant Earth Group, Inc. for financial reporting purposes. The summary statements of operations data and statements of cash flows data for the years ended December 31, 2020 and 2019, and the summary balance sheet data as of December 31, 2020 and 2019 are derived from the audited financial statements of Brilliant Earth, LLC included elsewhere in this prospectus. The summary statements of operations data and statements of cash flows data for the six months ended June 30, 2021 and 2020, and the summary balance sheet data as of June 30, 2021 are derived from the unaudited condensed financial statements of Brilliant Earth, LLC included elsewhere in this prospectus. The unaudited condensed financial statements of Brilliant Earth, LLC have been prepared on the same basis as the audited financial statements and, in our opinion, have included all adjustments, which include normal recurring adjustments, necessary to present fairly in all material respects our financial position and results of operations. The results for any interim period are not necessarily indicative of the results that may be expected for the full year. Historical results of operations for the periods presented below are not necessarily indicative of the results to be expected for any future period. The information set forth below should be read together with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section and the audited financial statements and the accompanying notes included elsewhere in this prospectus.

The summary unaudited pro forma condensed combined financial information of Brilliant Earth Group, Inc. presented below have been derived from our unaudited pro forma condensed combined financial information included elsewhere in this prospectus. The unaudited pro forma condensed combined financial information includes various estimates which are subject to material change and may not be indicative of what our operations or financial position would have been had this offering and related transactions taken place on the dates indicated, or that may be expected to occur in the future. See “Unaudited Pro Forma Condensed Combined Financial Information” for a complete description of the adjustments and assumptions underlying the summary unaudited pro forma condensed combined financial information.

The summary historical financial and other data of Brilliant Earth Group, Inc. has not been presented because Brilliant Earth Group, Inc. is a newly-incorporated entity and has had no business transactions or activities to date, besides the initial capitalization of the company.

 

    Brilliant Earth Group, Inc.
Pro Forma(1)
    Historical Brilliant Earth, LLC  
    For the six
months ended
June 30,
    Year ended
December 31,
    For the six months
ended June 30,
    Year ended
December 31,
 
    2021     2020     2021     2020     2020     2019  
    (In thousands)  

Summary Statements of Operations data:

           

Net sales

  $ 163,044     $ 251,820     $ 163,044     $ 91,764     $ 251,820     $ 201,343  

Cost of sales

    85,924       139,518       85,924       51,970       139,518       116,421  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    77,120       112,302       77,120       39,794       112,302       84,922  

Operating expenses:

           

Selling, general and administrative

    61,390       89,395       59,814       37,203       85,710       90,317  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    15,730       22,907       17,306       2,591       26,592       (5,395

Interest expense

    (3,874     (4,942     (3,874     (2,393     (4,942     (2,257

Other expense, net

    (101     (5,957     (2,547     (16     (74     (126
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) before tax

  $ 11,755     $ 12,008     $ 10,885     $ 182     $ 21,576     $ (7,778
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income tax expense

    (519     (530     —         —         —         —    

Net income (loss)

    11,236       11,478       —         —         —         —    

Net income allocable to non-controlling interest

    9,251       9,450       —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

27


Table of Contents
    Brilliant Earth Group, Inc.
Pro Forma(1)
    Historical Brilliant Earth, LLC  
    For the six
months ended
June 30,
    Year ended
December 31,
    For the six months
ended June 30,
    Year ended
December 31,
 
    2021     2020     2021     2020     2020     2019  
    (In thousands)  

Net income (loss) attributable to Brilliant Earth Group, Inc.

  $ 1,985     $ 2,028          
 

 

 

   

 

 

         
           
    (In thousands, except in share and per share amount)  

Pro forma per share data:

           

Pro forma net income (loss) per share:

           

Basic

  $ 0.12     $ 0.12          

Diluted

  $ 0.09     $ 0.10          

Pro forma weighted-average shares used to compute pro forma net income (loss) per share:

           

Basic

    16,666,667       16,666,667          

Diluted

    95,245,247       95,627,710          

 

     Brilliant Earth
Group, Inc.
Pro Forma(1)
    Historical Brilliant Earth, LLC  
     As of
June 30,
    As of
June 30,
    As of
December 31,
 
     2021     2021     2020     2019  
     (In thousands)  

Summary Balance Sheet Data:

        

Cash and cash equivalents

   $ 177,419     $ 65,001     $ 66,269     $ 40,394  

Total current assets

   $ 198,705       86,287       82,972       53,669  

Total assets

   $ 238,764       92,602       85,216       55,925  

Current portion of long-term debt

     10,263       10,263       —         —    

Total current liabilities

     58,450       59,829       38,708       31,964  

Long-term debt, net of debt issuance costs

     52,626       52,626       62,211       32,654  

Total liabilities

   $ 147,302       119,198       104,284       66,615  

Redeemable convertible preferred units

     —         250,746       66,327       80,829  

Total members’ deficit

     —         (277,342     (85,395     (91,519

Working capital, excluding cash(2)

     (37,164     (38,543     (22,005     (18,689

 

28


Table of Contents
     Brilliant Earth
Group, Inc.
Pro Forma(1)
    Brilliant Earth
Group, Inc.
Pro Forma(1)
    Historical Brilliant Earth, LLC  
     Six months
ended June 30,
    Year ended
December 31,
    Six months
ended June 30,
    Year ended
December 31,
 
     2021     2020     2021     2020     2020     2019  
           (In thousands)  

Summary Statements of Cash Flows Data:

            

Net cash provided by operating activities

       $ 20,210     $ 4,788     $ 26,723     $ 567  

Net cash used in investing activities

         (2,646     (179     (584     (678

Net cash provided by (used in) financing activities

         (18,832     2,657       (263     22,603  
      

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash, cash equivalents and restricted cash

       $ (1,268   $ 7,266     $ 25,876     $ 22,492  
      

 

 

   

 

 

   

 

 

   

 

 

 

Other data(3):

            

Adjusted EBITDA(4)

   $ 20,991     $ 27,526     $ 20,991     $ 2,999     $ 27,526     $ (4,503

Net income (loss) margin

     6.9     4.6     6.7     0.2     8.6     (3.9%

Adjusted EBITDA margin(4)

     12.9     10.9     12.9     3.3     10.9     (2.2%

Free cash flow(4)

       $ 17,564     $ 4,609     $ 26,139     $ (111)  

Operating cash flow conversion

         185.7     2,630.8     123.9     nm*  

Free cash flow conversion(4)

         161.4     2,532.4     121.1     nm*  

 

nm*

Not meaningful

 

(1)

Gives pro forma effect to the Transactions, including the offering and sale of 16,666,667 shares of Class A common stock in this offering at an initial public offering price of $15.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus and the proposed use of proceeds. See “Unaudited Pro Forma Condensed Combined Financial Information”.

(2)

Working capital represents current assets less current liabilities.

(3)

For definitions and further information about how we calculate operating data, including a reconciliation of Adjusted EBITDA, Adjusted EBITDA margin, Free cash flow, and Free cash flow conversion to their most directly comparable GAAP financial measure, net income (loss), net income (loss) margin, net cash provided by operating activities, and operating cash flow conversion and why we consider Adjusted EBITDA, Adjusted EBITDA margin, Free cash flow, and Free cash flow conversion useful, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Metrics and non-GAAP Financial Measures.”

 

(4)

Adjusted EBITDA, Adjusted EBITDA margin, Free cash flow, and Free cash flow conversion are included in this prospectus because they are non-GAAP financial measures used by management and our board of directors to assess our financial performance. We define Adjusted EBITDA as net income (loss) excluding interest expense, depreciation and amortization expense, showroom pre-opening expense, equity-based compensation expense and other expense, net and other unusual and/or infrequent costs, which we do not consider in our evaluation of ongoing operating performance. We define Adjusted EBITDA margin as Adjusted EBITDA calculated as a percentage of net sales. We define Free cash flow as net cash provided by operating activities less net cash used by investing activities. We define Free cash flow conversion as Free cash flow calculated as a


 

29


Table of Contents
  percentage of net income (loss). Our non-GAAP financial measures should not be considered in isolation from, or as substitutes for, financial information prepared in accordance with GAAP. Adjusted EBITDA, Adjusted EBITDA margin, Free cash flow, and Free cash flow conversion may be different than a similarly titled measure used by other companies. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for more information about Adjusted EBITDA, Adjusted EBITDA margin, Free cash flow, and Free cash flow conversion.

 

30


Table of Contents

RISK FACTORS

Investing in our Class A common stock involves a high degree of risk. You should consider and read carefully all of the risks and uncertainties described below, as well as other information included in this prospectus, including our consolidated financial statements and related notes appearing elsewhere in this prospectus, before making an investment decision. The risks described below are not the only ones we face. The occurrence of any of the following risks or additional risks and uncertainties not presently known to us or that we currently believe to be immaterial could materially and adversely affect our business, financial condition, or results of operations. In such case, the trading price of our Class A common stock could decline, and you may lose some or all of your original investment.

Risks Related to Our Business and Industry

We have grown rapidly in recent years and have limited operating experience at our current scale of operations. If we are unable to manage our growth effectively, our brand, company culture, and financial performance may suffer.

We have grown rapidly over the last several years, and our recent growth rates and financial performance should not necessarily be considered indicative of our future performance. We were founded in 2005 and since then, we have grown to 14 showrooms across the U.S. as of today. Additionally, our net sales increased 25.1% from $201.3 million for the year ended December 31, 2019 to $251.8 million for the year ended December 31, 2020 and increased 77.7% from $91.7 million for the six months ended June 30, 2020 to $163.0 million for the six months ended June 30, 2021. To effectively manage and capitalize on our growth, we must continue to expand our sales and marketing, continue to open showrooms in strategic locations, focus on innovative product and website development, and upgrade our management information systems and other processes. Our continued growth has in the past, and could in the future, strain our existing resources, and we could experience ongoing operating difficulties in managing our business across numerous jurisdictions, including difficulties in hiring, training, and managing a diffuse and growing employee base. Failure to scale and preserve our company culture with growth could harm our future success, including our ability to retain and recruit personnel and to effectively focus on and pursue our corporate objectives.

Moreover, the vertically integrated nature of our business, where we create our designs, source natural and lab-grown diamonds as well as other gemstones, customize our IT systems, and sell our products exclusively through our own showrooms and custom e-commerce site, exposes us to risk and disruption at many points that are critical to successfully operating our business and may make it more difficult for us to scale our business. If we do not adapt to meet these evolving challenges, or if our management team does not effectively scale with our growth, we may experience erosion to our brand, the quality of our products and services may suffer, and our company culture may be harmed.

Our growth strategy contemplates a significant increase in our advertising and other marketing spending, expanding our product offerings, and expanding our showroom presence. Many of our existing showrooms are relatively new, and we cannot assure you that these showrooms or that future showrooms will generate net sales and cash flow comparable with those generated by our more mature showrooms, especially as we move to new geographic markets. We also cannot assure you that there will not be delays in the development of our planned new showrooms, including those that we are currently planning to open by the end of 2021. Moreover, certain occurrences outside of our control may result in the closure of our showrooms or delay the development of new showrooms. For example, as a result of the ongoing COVID-19 pandemic, we temporarily closed all of our showrooms, and while we have reopened all showrooms, we have been under new operating limitations such as limited showroom capacity, including limited in-store appointments, mask guidelines for employees and customers, and other constraints on our previous retail sales strategies. We are unable to predict whether consumer shopping behaviors will change as we make these changes to adjust to the

 

31


Table of Contents

COVID-19 pandemic. Further, many of our showrooms are leased pursuant to multi-year short-term leases, and our ability to negotiate favorable terms on an expiring lease or for a lease renewal option may depend on factors that are not within our control. In addition, our ability to expand our showroom presence depends on our ability to find suitable showroom locations and negotiate acceptable lease terms. Successful implementation of our growth strategy will require significant expenditures before any substantial associated revenue is generated, and we cannot guarantee that these increased investments will result in corresponding and offsetting revenue growth.

The industry for design-driven, responsibly-sourced fine jewelry is rapidly evolving and may not develop as we expect. Even if our net sales continue to increase, our net sales growth rates may decline in the future as a result of a variety of factors, including macroeconomic factors, changes in supply and in the supply chain, changes in consumer preferences, increased competition, and the maturation of our business. As a result, you should not rely on our net sales growth rate for any prior period as an indication of our future performance. Overall growth of our net sales will depend on a number of factors, including our ability to:

 

   

price our products and services effectively so that we are able to attract new customers, and expand our relationships with existing customers;

 

   

accurately forecast our net sales and plan our operating expenses;

 

   

successfully compete with other companies that are currently in, or may in the future enter, the markets in which we compete, and respond to developments from these competitors such as pricing changes and the introduction of new products and services;

 

   

comply with existing and new laws and regulations applicable to our business;

 

   

successfully expand in existing markets and enter new markets, including new geographies and categories;

 

   

successfully launch new offerings and enhance our products and services and their features, including in response to new trends or competitive dynamics or the needs or preferences of customers;

 

   

successfully identify and acquire or invest in businesses, products, or technologies that we believe could complement or expand our business;

 

   

avoid interruptions or disruptions in distributing our products and services;

 

   

an increase in the supply of natural or lab-grown diamonds could result in a decrease in diamond prices;

 

   

provide customers with high-quality support that meets their needs;

 

   

hire, integrate, and retain talented sales, customer service, and other personnel;

 

   

effectively manage growth of our business, personnel, and operations, including new showroom openings;

 

   

effectively manage our costs related to our business and operations; and

 

   

maintain and enhance our reputation and the value of our brand.

Because we have a limited history operating our business at its current scale, it is difficult to evaluate our current business and future prospects, including our ability to plan for and model future growth. Our limited operating experience at this scale, combined with the rapidly evolving nature of the market in which we sell our products and services, substantial uncertainty concerning how these markets may develop, and other economic factors beyond our control, reduces our ability to accurately forecast quarterly or annual revenue. Failure to manage our future growth effectively could have an adverse effect on our business, financial condition, and operating results.

 

32


Table of Contents

We also expect to continue to expend substantial financial and other resources to ready our business for growth, and we may fail to allocate our resources in a manner that results in increased net sales growth in our business. Additionally, we may encounter unforeseen operating expenses, challenges, complications, delays, and other unknown factors that may result in losses in future periods. If our net sales growth does not meet our expectations in future periods, our business, financial condition, and results of operations may be harmed, and we may not sustain or increase profitability in the future.

Increases in the costs of diamonds, other gemstones and precious metals, lead times, supply shortages, and supply changes could disrupt our business and have an adverse effect on our operations, financial condition, and results.

Meeting customer demand partially depends on our ability to obtain timely and adequate delivery of materials for our products and services. The materials that go into the manufacturing of our products and services are sourced from a limited number of suppliers that are expected to adhere to our strict Supplier Code of Conduct and compliance requirements. Additionally, our natural diamonds in particular are subject to our Beyond Conflict Free Diamonds standards, requiring our suppliers to source diamonds that originate from specific mine operators that follow internationally recognized labor, trade, and environmental standards. Similarly, our gold and silver fine jewelry is crafted from recycled precious metals. Limited supply in the market poses a challenge to source recycled platinum, so we work with our suppliers to source recycled platinum when available and from refiners that are known to use recycled materials in their platinum products. We do not have long-term arrangements with most of our materials suppliers, and disruptions in the supply chain, such as those due to the COVID-19 pandemic, may affect the availability and cost of recycled precious metal, Beyond Conflict Free Diamonds, and other materials used in our products. Additionally, our Beyond Conflict Free Diamonds standards go beyond the Kimberly Process definition of “conflict free” diamonds, which limits our supply of ethically and environmentally sourced diamonds more than other fine jewelers. We are therefore subject to the risk of shortages and long lead times in the supply of these materials, and the risk that our suppliers discontinue or modify materials used in our products.

In addition, the lead times associated with certain materials are lengthy and may impede or preclude rapid changes in design, quantities, and delivery schedules. Our ability to meet increases in demand has been, and may in the future be, impacted by our reliance on the availability of materials. We have in the past and may in the future experience supply shortages, and the predictability of the availability of these materials may be limited. In the event of a shortage or interruption of supply of these materials, we may not be able to develop alternate sources in a timely or cost-effective manner. Developing alternate sources of supply for these materials may be time-consuming, difficult, and costly, and we may not be able to source these materials on terms that are acceptable to us, or at all, which may undermine our ability to fill orders in a timely manner. Any interruption or delay in the supply of any of these parts or materials, or the inability to obtain these materials from alternate sources at acceptable prices and within a reasonable amount of time, would harm our ability to timely ship products to our customers.

Moreover, volatile economic conditions may make it more likely that our suppliers and logistics providers may be unable to timely deliver supplies, or at all, and there is no guarantee that we will be able to timely locate alternative suppliers of comparable quality at an acceptable price. In addition, international supply chains may be impacted by events outside of our control and limit our ability to procure timely delivery of supplies or finished goods and services. Importing and exporting has involved more risk as since at least the beginning of 2018, there has been increasing rhetoric, in some cases coupled with legislative or executive action, from several U.S. and foreign leaders regarding tariffs against foreign imports of certain materials. Several of the materials that go into the manufacturing of our products are sourced internationally. These issues have been further exacerbated by the COVID-19 pandemic: we have seen, and may continue to see, increased

 

33


Table of Contents

congestion and/or new import/export restrictions implemented at ports that we rely on for our business. In some cases, we have had to secure alternative transportation, such as air freight, or use alternative routes, at increased costs to run our supply chain. These tariffs have an impact on our materials costs and have the potential to have an even greater impact depending on the outcome of the current trade negotiations. Increases in our materials costs could have a material effect on our gross margins. The loss of a significant supplier, an increase in materials costs, or delays or disruptions in the delivery of materials, could adversely impact our ability to generate future net sales and earnings and have an adverse effect on our business, financial condition, and operating results.

Our business model relies on maintaining a low cost of production and distribution. Fluctuations in the pricing and supply of diamonds, other gemstones, and precious metals, particularly responsibly sourced natural and lab-grown diamonds and recycled precious metals such as gold, which account for the majority of our merchandise costs, increases in labor costs for manufacturing such as wage rate increases, as well as inflation, and energy prices could adversely impact our earnings and cash availability.

The jewelry industry generally is affected by fluctuations in the price and supply of responsibly sourced natural diamonds, lab-grown diamonds, gold, and other precious and semi-precious metals and gemstones.

The mining, production, and inventory policies followed by major producers of rough diamonds can have a significant impact on natural diamond prices and demand, as can the inventory and buying patterns of jewelry retailers and other parties in the supply chain. The availability of diamonds is significantly influenced by the political situation in diamond producing countries and by the Kimberley Process, an inter-governmental agreement for the international trading of rough diamonds. Until acceptable alternative sources of diamonds can be developed, any sustained interruption in the supply of diamonds from significant producing countries, or to the trading in rough and polished diamonds, which could occur as a result of disruption to the Kimberley Process, could adversely affect our business, as well as the retail jewelry market as a whole. In addition, the current Kimberley Process decision-making procedure is dependent on reaching a consensus among member governments, which can result in the protracted resolution of issues, and there is little expectation of significant reform over the long-term. The impact of this review process on the supply of diamonds, and consumers’ perception of the diamond supply chain, is unknown. Our diamonds in particular are subject to our Beyond Conflict Free Diamonds standards requiring our suppliers to source diamonds that originate from specific mine operators who follow internationally recognized labor, trade, and environmental standards. The possibility of constraints in the supply of diamonds we require to meet our Beyond Conflict Free Diamonds requirements or our recycled or lab-grown diamonds requirements may result in changes in our supply chain practices. Additionally, a substantial increase in the supply of natural or lab-grown diamonds could result in a change in consumer perception of the value of diamonds as well as a decrease in the price of diamonds, which generally depend on the attributes of the diamond.

Similarly, we use primarily recycled precious metals in our gold and silver fine jewelry. There is a limited supply of recycled platinum, so we work with our suppliers to source recycled platinum when available and from refiners that are known to use recycled materials in their platinum products. In addition, we may from time to time choose to hold more inventory, purchase raw materials at an earlier stage in the supply chain, or enter into commercial agreements of a nature that we currently do not use. Such actions could require the investment of cash and/or additional management skills, and may not resolve supply issues or result in the expected returns and other projected benefits anticipated by management.

An inability to increase retail prices to reflect higher diamond, gemstone, or precious metal costs would result in lower profitability. There could also be a lag time before particularly sharp increases or other volatility in diamond, gemstones, and precious metal costs can be reflected in retail prices. Even if

 

34


Table of Contents

price changes are implemented, there is no certainty that these changes will be sustainable or sufficient. These factors may cause decreases in gross margins and earnings. In addition, any sustained increases in the cost of diamonds, other gemstones, and precious metals could increase costs, disrupt sales, or require higher inventory levels or changes in the merchandise available to customers.

In addition, increases in labor costs for manufacturing due to compensation, wage pressure, and other expenses may adversely affect our profitability. Increases in minimum wages and other wage and hour regulations can exacerbate this risk. Additional tariffs or other future cost increases, such as increases in the cost of merchandise, shipping rates, raw material prices, freight costs, and store occupancy costs, may also reduce our profitability. Inflationary pressures could further reduce our sales or profitability. Increases in other operating costs, including changes in energy prices and lease and utility costs, may increase our cost of products sold or selling, general, and administrative expenses. Our model and competitive pressures in the fine jewelry industry may inhibit our ability to reflect these increased costs in the prices of our products, in which case such increased costs could have a material adverse effect on our business, financial condition, and results of operations.

If we fail to cost-effectively turn existing customers into repeat customers or to acquire new customers, our business, financial condition, and results of operations would be harmed.

The growth of our business is dependent upon our ability to continue to grow by cost-effectively turn existing customers into repeat customers and adding new customers. Although we believe that many of our customers originate from word-of-mouth and other non-paid referrals, we expect to continue to expend resources and run marketing campaigns to acquire additional customers, all of which could impact our overall profitability. If we are not able to continue to expand our customer base or fail to retain customers, our net sales may grow more slowly than expected or decline.

Gaining market acceptance of the e-commerce and omnichannel approach to shopping for fine jewelry is critical to our continued customer retention and growth. Historically, consumers have been slower to adopt online shopping for fine jewelry than e-commerce offerings in other industries like consumer electronics and apparel. Transitioning the consumer in-store experience to an online platform for fine jewelry is difficult because jewelry tends to be a considered and high-value purchase that consumers like to physically see and touch before making a purchase. Changing traditional fine jewelry retail habits is difficult, and if consumers and retailers do not embrace the transition to an e-commerce and omnichannel fine jewelry retail experience as we expect, our business and operations could be harmed. Moreover, even if more consumers begin to shop for fine jewelry online, if we are unable to address their changing needs and anticipate or respond to market trends and new technologies in a timely and cost-efficient manner, we could experience increased customer churn and other negative impacts on our business and results of operations.

Our ability to attract new customers and increase net sales from existing customers also depends in large part on our ability to enhance and improve our existing products and to introduce new products and services, in each case, in a timely manner. We also must be able to identify and originate trends, as well as anticipate and react to changing consumer demands in a timely manner. The success of new products and services depends on several factors, including their timely introduction and completion, sufficient demand, and cost effectiveness. We are building and improving machine learning models and other technological capabilities to drive improved customer experience, as well as efficiencies in our operations, such as virtual try-ons, virtual appointments with jewelry specialists, optimized payment processing and customer service, and automated key support workflows. While we expect these technologies to lead to improvements in the performance of our business and operations, including inventory prediction and customer traffic prediction and management, any flaws or failures of such technologies could cause interruptions or delays in our service, which may harm our business.

 

35


Table of Contents

Our number of customers may decline materially or fluctuate as a result of many factors, including, among other things:

 

   

dissatisfaction with the quality, pricing of, or changes we make to our products and services;

 

   

the quality, consumer appeal and price of products and services offered by us;

 

   

intense competition in the fine jewelry retail industry, including certain competitors ability to offer lower prices by not charging sales tax;

 

   

negative publicity related to our brand;

 

   

lack of market acceptance of our business model, particularly in new geographies where we seek to expand; or

 

   

the unpredictable nature of the impact of the COVID-19 pandemic or a future outbreak of disease or similar public health concern.

In addition, if we are unable to provide high-quality support to customers or help resolve issues in a timely and acceptable manner, our ability to attract and retain customers could be adversely affected. If our number of customers declines or fluctuates for any of these or other reasons, our business would suffer.

We plan to expand showrooms in the U.S., which may expose us to significant risks.

Our growth strategy includes opening new showrooms throughout the U.S. There can be no assurance that we will be able to successfully expand or acquire critical market presence for our brand in new geographical markets in the U.S. Consumer characteristics and competition in new markets may differ substantially from those in the markets where we currently operate. Additionally, we may be unable to develop brand recognition, successfully market our products, or attract new customers in such markets, and we may be unable to identify appropriate locations in such markets. We face many other challenges in opening additional showrooms in the U.S., including:

 

   

selection and availability of and competition for suitable showroom locations;

 

   

negotiation of acceptable lease terms;

 

   

securing required applicable governmental permits and approvals;

 

   

impact of natural disasters and other acts of nature and terrorist acts or political instability;

 

   

employment, training, and retention of qualified personnel;

 

   

incurrence or assumption of debt to finance acquisitions or improvements and/or the assumption of long-term, non-cancelable leases;

 

   

availability of financing on acceptable terms; and

 

   

general economic and business conditions.

Should we not succeed in opening additional showrooms, there may be adverse impacts to our growth strategy and to our ability to generate additional profits, which in turn could materially and adversely affect our business and results of operations.

The COVID-19 pandemic has had, and may in the future continue to have, a material adverse impact on our business.

The COVID-19 pandemic and the travel restrictions, quarantines, other and related public health measures and actions taken by governments and the private sector have adversely affected global economies, financial markets, and the overall environment for our business, and the extent to which it

 

36


Table of Contents

may continue to impact our future results of operations and overall financial performance remains uncertain. The global macroeconomic effects of the pandemic may persist for an indefinite period of time, even after the pandemic has subsided.

As a result of the pandemic and the recommendations of government and health authorities, our showrooms closed to the public beginning in March 2020. We began reopening our showrooms to the public in May 2020 and, by the end of June 2020, we completed the reopening of all our showrooms. While we expect to be able to continue operations for the duration of the pandemic, our operations were and are still subject to local or regional public health orders, including temporary government-mandated closures, which may impact our showrooms or other operations. Social distancing protocols, government mandated occupancy limitations, and general consumer behaviors due to COVID-19 may continue to negatively impact showroom traffic, which may negatively impact sales in our showrooms. Such negative impacts may be exacerbated during peak traffic times such as the holiday shopping season. Further, while we have implemented strict safety protocols in showrooms that we have re-opened, there is no guarantee that such protocols will be effective or be perceived as effective, and any virus-related illnesses linked or alleged to be linked to our showrooms, whether accurate or not, may negatively affect our reputation, operating results, and/or financial condition. The COVID-19 pandemic also has disrupted the Company’s global supply chain, and may cause additional disruptions to operations, including increased costs of production and distribution and longer fulfillment times. For example, we faced production capacity issues in crafting sufficient quantities of certain products in 2020 due to government shutdowns, as well as disruption in jewelry manufacturing and sourcing of diamonds and gemstones, which could continue in 2021 and beyond due to the pandemic.

COVID-19 and related governmental reactions have had and may continue to have a negative impact on our financial condition, business, and results of operations due to the occurrence of some or all of the following events or circumstances, among others:

 

   

limited showroom capacity, including limited in-store appointments; our and our third-party suppliers’, contract manufacturers’, logistics providers’, and other business partners’ inability to operate worksites, including manufacturing facilities and shipping and fulfillment centers, due to employee illness or reluctance to appear at work, or “stay-at-home” regulations;

 

   

longer wait times and delayed responses to customer support inquiries and requests;

 

   

our inability to meet consumer demand and delays in the delivery of our products to our customers, which could also result in reputational harm and damaged customer relationships;

 

   

increased rates of post-purchase order cancellation, or consumer claims and litigation as a result of long delivery lead times and delivery reschedules;

 

   

increased return rates;

 

   

inventory shortages caused by any combination of increased demand that has been difficult to predict with accuracy, longer lead-times and/or material shortages, work restrictions related to COVID-19, import/export conditions such as port congestion, and local government orders;

 

   

interruptions in manufacturing (including the sourcing of key materials), shipment, and delivery of our products; for example, in certain instances, our business partners’ have temporarily closed certain manufacturing facilities for short periods of time, particularly in India, in response to COVID-19, which has caused longer fulfillment times for products;

 

   

our inability to manage our business effectively due to key employees becoming ill, working from home inefficiently, and being unable to travel to our showrooms and distribution centers;

 

   

disruptions of the operations of our third-party suppliers, which could impact our ability to purchase materials at efficient prices and in sufficient amounts; and

 

   

incurrence of significant increases to employee health care and benefits costs.

 

37


Table of Contents

The scope and duration of the pandemic, including the current resurgences in various regions in the U.S. and globally and other future resurgences, the pace at which government restrictions are lifted or whether additional actions may be taken to contain the virus, the impact on our customers and suppliers, the speed and extent to which markets recover from the disruptions caused by the pandemic, and the impact of these factors on our business, will depend on future developments that are highly uncertain and cannot be predicted with confidence. It is possible that changes in economic conditions and steps taken by the federal government and the Federal Reserve in response to the COVID-19 pandemic could lead to higher inflation than we had anticipated, which could in turn lead to an increase in our costs of products and services and other operating expenses. In addition, to the extent COVID-19 adversely affects our operations and global economic conditions more generally, it may also have the effect of heightening many of the other risks described herein.

While we believe that the long-term fundamentals of our business are sound, and anticipate that our operating results in future fiscal years will begin to reflect a more normal operating environment, the current economic and public health climate has created a high degree of uncertainty. As such, we continue to closely monitor this global health crisis and will continue to reassess our strategy and operational structure on a regular, ongoing basis as the situation evolves. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for more details on the potential impact of the COVID-19 pandemic and associated economic disruptions, and the actual operational and financial impacts that we have experienced to date.

We have a history of losses, and we may be unable to sustain profitability.

We have a history of incurring net losses. While we earned net income of $21.6 million for the year ended December 31, 2020, for the year ended December 31, 2019 we incurred net losses of $7.8 million. We earned net income of $10.9 million for the six months ended June 30, 2021, compared to $0.2 million for the six months ended June 30, 2020. Because we have a short operating history at scale, it is difficult for us to predict our future operating results. We will need to generate and sustain increased revenue and manage our costs to sustain profitability. Even if we do, we may not be able to sustain or increase our profitability.

While we have experienced significant revenue growth in recent periods, it is possible that this growth rate will decline or reverse in future periods, for example, our revenue declined year-over-year in the second quarter of 2020 due to the impacts of the COVID-19 pandemic, but we experienced strong growth in the second half of the year ended December 31, 2020, during which revenue grew year-over-year by 38.8% and also in the first half of 2021, during which revenue grew year-over-year by 77.7%.

Our ability to generate profit depends on our ability to grow our number of customers and drive operational efficiencies in our business to generate better margins. We expect to incur increased operating costs in the near term in order to:

 

   

increase the engagement of customers;

 

   

drive adoption of our products and services, and increase awareness of our brand, through marketing and other campaigns;

 

   

enhance our products and services with new designs and offerings; and

 

   

invest in our operations to support the growth in our business, including by opening additional showrooms.

We may discover that these initiatives are more expensive than we currently anticipate, and we may not succeed in increasing our net sales sufficiently to offset these expenses or realize the benefits we anticipate. We will also face greater compliance costs associated with the increased scope of our business and being a public company. Any failure to adequately increase net sales or manage

 

38


Table of Contents

operating costs could prevent us from sustaining or increasing profitability. As we expand our offerings and our showroom presence, we may be less profitable than we are now. Additionally, we may not realize the operating efficiencies we expect to achieve through our efforts to scale the business, reduce friction in the shopping experience, and optimize costs such as payments to raw material suppliers, payment processing, and customer support. As such, due to these factors and others, we may not be able to sustain or increase profitability in the near term or at all. If we are unable to sustain or increase profitability, the value of our business and the trading price of our Class A common stock may be negatively impacted.

The fine jewelry retail industry is highly competitive, and if we do not compete successfully, our business may be adversely impacted.

We operate in a competitive industry. Our primary competitors include global jewelry retailers and brands, department stores, and independent stores, many of which have an online presence. In addition, other retail categories and forms of expenditure, such as electronics and travel, also compete for consumers’ discretionary spending, particularly during the holiday gift giving season. The price of fine jewelry relative to other products also influences consumer spending habits for fine jewelry.

Many of our competitors have greater financial and operational resources, longer operating histories, greater brand recognition, and broader geographic presence than we do. As a result, they may be able to engage in extensive and prolonged price promotions or otherwise offer competitive prices, which may adversely affect our business. They may also be able to spend more than we do for advertising. We may be at a substantial disadvantage to larger competitors with greater economies of scale. If our costs are greater compared to those of our competitors, the pricing of our products and services may not be as attractive, thus depressing sales or the profitability of our products and services. Our competitors may expand into markets in which we currently operate, and we remain vulnerable to the marketing power and high level of customer recognition of these larger competitors and to the risk that these competitors or others could attract our customer base. Some of our competitors are vertically integrated and are also engaged in the manufacture and distribution of responsible fine jewelry. These competitors can advantageously leverage this structure to better compete with us, and certain vertically-integrated organizations with significant market power could potentially utilize this power to make it more difficult for us to compete. We purchase some of our products from suppliers who are affiliates of our competitors. In addition, if any of our competitors were to consolidate operations, such consolidation could exacerbate these risks.

We may not be able to continue to successfully compete against existing or future competitors. Our inability to respond effectively to competitive pressures, improved performance by our competitors, and changes in the retail markets could result in lost market share and have material adverse effects on our business, financial condition, and results of operations.

Our profitability and cash flows may be negatively affected if we are not successful in managing our inventory balances and inventory shrinkage.

Efficient inventory management is a key component of our business success and profitability. Our inventory management requires us to maintain the optimal mix of products to meet customer demand. To be successful, we keep our inventory low while still maintaining sufficient inventory levels, both in store and virtually, to meet our customers’ demands without allowing those levels to increase to such an extent that the costs to hold the goods unduly impacts our financial results. We must balance the need to maintain inventory levels that are sufficient to ensure competitive lead times against the risk of inventory obsolescence because of changing customer requirements, fluctuating commodity prices, changes to our products, product transfers or the life cycle of our products. For example, we faced production capacity issues in crafting sufficient quantities of certain products in 2020 due to government shutdowns in response to COVID-19, which could continue in 2021 and beyond. If our

 

39


Table of Contents

buying and distribution decisions do not accurately predict customer trends or spending levels in general or at particular stores or if we inappropriately price products, we may have to take unanticipated markdowns and discounts to dispose of obsolete or excess inventory or record potential write-downs relating to the value of obsolete or excess inventory. Conversely, if we underestimate future demand for a particular product or do not respond quickly enough to replenish our best performing products, we may have a shortfall in inventory of such products, likely leading to unfulfilled orders, reduced net sales, and customer dissatisfaction.

Maintaining adequate inventory requires significant attention and monitoring of market trends, local markets, developments with suppliers, and our distribution network, and it is not certain that we will be effective in our inventory management. We are subject to the risk of inventory loss or theft and we may experience higher rates of inventory shrinkage or incur increased security costs to combat inventory theft. In addition, any casualty or disruption to our facilities or those of our third-party suppliers may damage or destroy our inventory located there. As we expand our operations, it may be more difficult to effectively manage our inventory. If we are not successful in managing our inventory balances, it could have a material adverse effect on our business, financial condition, and results of operations.

We derive a significant portion of our revenue from sales of our Create Your Own rings. A decline in sales of our Create Your Own rings would negatively affect our business, financial condition, and results of operations.

We derive a significant portion of our revenue from the sale of our Create Your Own rings. Our fine jewelry is sold in highly competitive markets with limited barriers to entry. Introduction by competitors of comparable products at lower price points, a maturing product lifecycle, a decline in consumer spending, or other factors could result in a material decline in our revenue. Because we derive a significant amount of our revenue from the sale of our Create Your Own rings, any material decline in sales of our Create Your Own rings would have a material adverse impact on our business, financial condition, and operating results.

If we fail to maintain and enhance our brand, our ability to engage or expand our base of customers may be impaired and our business, financial condition, and results of operations may suffer.

Maintaining and enhancing our reputation as an authentic, socially conscious, inclusive, and innovative company is critical to attracting and expanding our relationships with customers. The successful promotion of our brand and the market’s awareness of our products and services will depend on a number of factors, including our marketing efforts, ability to continue to develop our products and services, and ability to successfully differentiate our offerings and customer experiences from those of our competitors. We expect to invest substantial resources to promote and maintain our brand, but there is no guarantee that our brand development strategies will enhance the recognition of our brand or lead to increased sales. The strength of our brand will depend largely on our ability to provide quality products, services, and customer experiences. Brand promotion activities may not yield increased net sales, and even if they do, the increased net sales may not offset the expenses we incur in promoting and maintaining our brand and reputation. In order to protect our brand, we also expend substantial resources to register and defend our trademarks, and to prevent others from using the same or substantially similar marks. Despite these efforts, we may not always be successful in protecting our trademarks, and we may suffer dilution, loss of reputation, or other harm to our brand. If our efforts to cost-effectively promote and maintain our brand are not successful, our results of operations and our ability to attract and engage customers, partners, and employees may be adversely affected.

Unfavorable publicity about our brand or products, including perceived quality and safety, customer service, or privacy practices, whether or not true or untrue, could also harm our reputation and diminish

 

40


Table of Contents

confidence in, and the popularity of, our products and services. In addition, negative publicity related to key brands with which we have partnered or with our third party suppliers, including any reputational issues arising from their failure to comply with applicable law, including environmental law, may damage our reputation, even if the publicity is not directly related to us. Our brand or reputation could also be adversely impacted if industry organizations were to find we did not or no longer meet their standards or membership criteria. If we fail to maintain, protect, and enhance our brand successfully or to maintain loyalty among customers, or if we incur substantial expenses in unsuccessful attempts to maintain, protect, and enhance our brand, we may fail to attract or increase the engagement of customers, and our business, financial condition, and results of operations may suffer.

Our marketing efforts to help grow our business may not be effective, and failure to effectively develop and expand our sales and marketing capabilities could harm our ability to increase our customer base and achieve broader market acceptance of our e-commerce and omnichannel approach to shopping for fine jewelry.

Promoting awareness of our products and services is important to our ability to grow our business, and attracting new customers can be costly. Our marketing efforts include traditional media and online advertising, as well as third-party social media platforms such as Facebook, Twitter, and Instagram, as marketing tools. As traditional advertising, online, and social media platforms continue to rapidly evolve or grow more competitive, we must continue to maintain a presence on these platforms and establish a presence on new or emerging popular social media and advertising and marketing platforms.

Many customers locate our platform through internet search engines, such as Google and Facebook, and advertisements on social networking sites and online streaming services. If we are listed less prominently or fail to appear in search results for any reason, visits to our website could decline significantly, and we may not be able to replace this traffic. Search engines revise their algorithms from time to time in an attempt to optimize their search results. If the search engines on which we rely for algorithmic listings modify their algorithms, we may appear less prominently or not at all in search results, which could result in reduced traffic to our website that we may not be able to replace. Additionally, if the costs of search engine marketing services, such as Google AdWords, increase, we may incur additional marketing expenses, we may be required to allocate a larger portion of our marketing spend to this channel or we may be forced to attempt to replace it with another channel (which may not be available at reasonable prices, if at all), and our business, financial condition, and results of operations could be adversely affected. Furthermore, social media platforms, search engines, and video streaming services may change their advertising policies from time to time. If any change to these policies delays or prevents us from advertising through these channels, it could result in reduced traffic to our website and sales. If we cannot cost effectively use these marketing tools, if we fail to promote our products and services efficiently and effectively, or if our marketing campaigns attract negative media attention, our business, financial condition, and results of operations may be adversely affected.

Additionally, changes in regulations could limit the ability of search engines and social media platforms, including, but not limited to, Google and Facebook, to collect data from users and engage in targeted advertising, making them less effective in disseminating our advertisements to our target customers. For example, the proposed Designing Accounting Safeguards to Help Broaden Oversight and Regulations on Data (DASHBOARD) Act would mandate annual disclosure to the SEC of the type and “aggregate value” of user data used by harvesting companies, such as, but not limited to, Facebook, Google, and Amazon, including how net sales is generated by user data and what measures are taken to protect the data. If the costs of advertising on search engines and social media platforms increase, we may incur additional marketing expenses or be required to allocate a larger portion of our marketing spend to other channels and our business and operating results could be adversely affected.

 

41


Table of Contents

Our ability to grow our marketing efforts depends to a significant extent on our ability to expand our sales and marketing organization. We plan to continue expanding our sales force, both in the U.S. and in Canada, and may further expand internationally in the future. We also plan to dedicate significant resources to sales and marketing programs. All of these efforts will require us to invest significant financial and other resources, including in channels and locations in which we have limited experience to date. We may not achieve anticipated net sales growth from expanding our sales force if we are unable to hire, develop, integrate, and retain talented and effective sales personnel, or if our new and existing sales personnel are unable to achieve desired productivity levels in a reasonable period of time. In addition, our efforts to acquire customers through direct marketing may subject us to increased regulatory scrutiny by state regulators pursuant to unfair methods of competition or unfair or deceptive acts or practices laws, which may impact our ability to achieve anticipated net sales growth from increased direct marketing.

Environmental, social, and governance matters may impact our business and reputation.

Increasingly, in addition to the importance of their financial performance, companies are being judged by their performance on a variety of environmental, social, and governance (“ESG”) matters, which are considered to contribute to the long-term sustainability of companies’ performance.

A variety of organizations measure the performance of companies on ESG topics, and the results of these assessments are widely publicized. In addition, investment in funds that specialize in companies that perform well in such assessments are increasingly popular, and major institutional investors have publicly emphasized the importance of ESG measures to their investment decisions. Topics taken into account in such assessments include, among others, the company’s efforts and impacts, including impacts associated with our suppliers or other partners, on climate change and human rights, ethics and compliance with law, diversity, and the role of the company’s board of directors in supervising various sustainability issues.

In light of investors’ increased focus on ESG matters, there can be no certainty that we will manage such issues successfully, or that we will successfully meet society’s expectations as to our proper role or our own ESG goals and values, including in respect of our diamond sourcing standards. This could lead to risk of litigation or reputational damage relating to our ESG policies or performance.

Further, our emphasis on ESG issues may not maximize short-term financial results and may yield financial results that conflict with the market’s expectations. We have and may in the future make business decisions that may reduce our short-term financial results if we believe that the decisions are consistent with our ESG goals, which we believe will improve our financial results over the long-term. These decisions may not be consistent with the short-term expectations of our stockholders and may not produce the long-term benefits that we expect, in which case our business, financial condition, and operating results could be harmed.

Our e-commerce and omnichannel business faces distinct risks, and our failure to successfully manage those risks could have a negative impact on our profitability.

As an e-commerce and omnichannel retailer, we encounter risks and difficulties frequently experienced by internet-based businesses. The successful operation of our business as well as our ability to provide a positive shopping experience that will generate orders and drive subsequent visits depends on efficient and uninterrupted operation of our order-taking and fulfillment operations. Risks associated with our e-commerce and omnichannel business include:

 

   

uncertainties associated with our websites, including changes in required technology interfaces, website downtime, and other technical failures, costs, and technical issues as we upgrade our website software, inadequate system capacity, computer viruses, human error, security breaches, legal claims related to our website operations, and e-commerce fulfillment;

 

42


Table of Contents
   

disruptions in internet service or power outages;

 

   

reliance on third parties for computer hardware and software, as well as delivery of merchandise to our customers;

 

   

rapid technology changes;

 

   

credit or debit card fraud and other payment processing related issues;

 

   

changes in applicable federal, state, and international regulations;

 

   

liability for online content;

 

   

cybersecurity and data privacy concerns and regulation; and

 

   

natural disasters or adverse weather conditions.

In addition, we must keep up to date with competitive technology trends, including the use of new or improved technology, creative user interfaces, virtual and augmented reality, and other e-commerce marketing tools such as paid search and mobile applications (“apps”), among others, which may increase our costs and may not increase sales or attract customers. Our competitors, some of whom have greater resources than we do, may also be able to benefit from changes in e-commerce technologies, which could harm our competitive position. If we are unable to allow real-time and accurate visibility to product availability when customers are ready to purchase, quickly and efficiently fulfill our customers’ orders using the fulfillment and payment methods they demand, provide a convenient and consistent experience for our customers regardless of the ultimate sales channel, or effectively manage our online sales, our ability to compete and our results of operations could be adversely affected.

If we are unable to effectively anticipate and respond to changes in consumer preferences and shopping patterns, or are unable to introduce new products or programs that appeal to new or existing customers, our sales and profitability could be adversely affected.

Our continued success depends on our ability to anticipate and respond in a timely and cost-effective manner to changes in consumer preferences for jewelry, natural and lab-grown diamonds and gemstones in particular, and other luxury goods, as well as attitudes towards the global jewelry industry as a whole, and the manner and locations in which consumers purchase such goods. Our business is subject to rapidly changing consumer preferences and future sales may suffer if the consumer preferences shift away from our product offerings or styles. Changes in fashion could also affect the popularity and, therefore, the value of engagement ring and fine jewelry designs and products. Any event or circumstance resulting in reduced market acceptance of one or more of our designs or offerings could reduce our sales. Unanticipated shifts in consumer preferences may also result in excess inventory. We recognize that consumer tastes cannot be predicted with certainty and are subject to change, which is compounded by the expanding use of digital and social media by consumers and the speed by which information and opinions are shared. Our product development strategy is to introduce new design collections, primarily jewelry, and/or expand certain existing collections regularly. If we are unable to anticipate and respond in a timely and cost-effective manner to changes in consumer preferences and shopping patterns, including the development of an engaging omnichannel experience for our customers, our sales and profitability could be adversely affected.

We expect a number of factors to cause our results of operations and operating cash flows to fluctuate on a quarterly and annual basis, which may make it difficult to predict our future performance.

Our results of operations could vary significantly from quarter to quarter and year to year because of a variety of factors, many of which are outside of our control. As a result, comparing our results of

 

43


Table of Contents

operations on a period-to-period basis may not be meaningful. In addition to other risk factors discussed in this section, factors that may contribute to the variability of our quarterly and annual results include:

 

   

our ability to accurately forecast net sales and appropriately plan our expenses;

 

   

changes to financial accounting standards and the interpretation of those standards, which may affect the way we recognize and report our financial results;

 

   

the effectiveness of our internal controls;

 

   

the seasonality of our business;

 

   

our ability to collect payments from customers on a timely basis; and

 

   

the impact of the COVID-19 pandemic on our business.

The impact of one or more of the foregoing and other factors may cause our results of operations to vary significantly. As such, quarter-to-quarter and year-over-year comparisons of our results of operations may not be meaningful and should not be relied upon as an indication of future performance.

Our inability to strategically expand our showroom footprint could negatively impact on our growth and profitability.

Our plan to continue to strategically open showrooms across the U.S. and, eventually, internationally, as part of our omnichannel expansion, is dependent upon a number of factors. These includes strategically picking new markets to expand into, the availability of desirable property, placement of showrooms in easily accessible locations with high visibility, the demographic characteristics of the area around the showroom, the design and maintenance of the showrooms, the availability of attractive locations within the markets that also meet the operational and financial criteria of management, and the ability to negotiate attractive lease terms. If we are unable to effectively expand our showroom footprint to satisfy our operational, and financial strategies, our growth and profitability could be negatively impacted.

Refunds, cancellations, and warranty claims could harm our business.

We allow our customers to return our products, subject to our refund policy, which generally allows customers to return our products within the first 30 days of when a purchase is available for shipment or pickup and receive a full refund or an exchange. At the time of sale, we establish a reserve for returns, based on historical experience and expected future returns, which is recorded as a reduction of sales. If we experience a substantial increase in refunds, our cancellation reserve levels might not be sufficient and our business, financial condition, and results of operations could be harmed.

In addition, we generally offer one complimentary resizing within 60 days of when a purchase is available for shipment or pickup. We could incur significant costs to honor this guarantee. Outside of the 60 day complimentary resize period, rings can be resized for a fee when within jeweler’s recommended sizing range.

We face the risk of theft, loss, or damage to our products from inventory or during shipment.

We have experienced and may continue to experience theft, loss, or damage to our products during the course of shipment to our customers by third-party shipping carriers or from our inventory. Additionally, we have 14 showrooms across the U.S. While these showrooms differ from traditional retailers in that they do not stock significant amounts of inventory to sell to consumers, they do have

 

44


Table of Contents

some products on display, and we allow customers to pick-up and return products purchased online to the store. We have taken steps to prevent theft of our products. However, if security measures fail, losses exceed our insurance coverage or we are not able to maintain insurance at a reasonable cost, we could incur significant losses from theft, which would substantially harm our business and results of operations.

We rely heavily on our information technology systems, as well as those of our third-party vendors and service providers, for our business to effectively operate and to safeguard confidential information and any significant failure, inadequacy or interruption of these systems, security breaches or loss of data could materially adversely affect our business, financial condition and operations.

We rely heavily on our information technology systems for many functions across our operations, including managing our supply chain and inventory, processing customer transactions in our showrooms, our financial accounting and reporting, compensating our employees, and operating our websites. Our ability to effectively manage our business and coordinate the sourcing, distribution, and sale of our products depends significantly on the reliability and capacity of these systems. We also collect, process, and store sensitive and confidential information, including our proprietary business information and personally identifiable information and that of our customers, employees, suppliers, and business partners. The secure processing, maintenance, and transmission of this information is critical to our operations.

Our systems may be subject to damage or interruption from power outages or damages, telecommunications problems, data corruption, software errors, network failures, physical or electronic break-ins, acts of war or terrorist attacks, fire, flood and natural disasters, and our existing safety systems, data backup, access protection, user management, and information technology emergency planning may not be sufficient to prevent data loss or long-term network outages. In addition, we may have to upgrade our existing information technology systems or choose to incorporate new technology systems from time to time for such systems to support the increasing needs of our expanding business. Costs and potential problems and interruptions associated with the implementation of new or upgraded systems and technology or with maintenance or adequate support of existing systems could disrupt or reduce the efficiency of our operations.

Our systems and those of our third-party service providers and business partners may be vulnerable to security breaches, attacks by hackers, acts of vandalism, computer viruses, misplaced or lost data, human errors, or other similar events. If unauthorized parties gain access to our networks or databases, or those of our third-party service providers or business partners, they may be able to steal, publish, delete, use inappropriately, or modify our private and sensitive third-party information, including credit card information and personal identification information. In addition, employees may intentionally or inadvertently cause data or security breaches that result in unauthorized release of personal or confidential information. Because the techniques used to circumvent security systems can be highly sophisticated, change frequently, are often not recognized until launched against a target, can originate from a wide variety of sources (including outside groups such as external service providers, organized crime affiliates, terrorist organizations, or hostile foreign governments or agencies), and may originate from less regulated and remote areas around the world, we may be unable to proactively address all possible techniques or implement adequate preventive measures for all situations.

Security incidents compromising the confidentiality, integrity, and availability of this information and our systems could result from cyber-attacks, computer malware, viruses, denial-of-service attacks, social engineering (including spear phishing and ransomware attacks), credential stuffing, efforts by individuals or groups of hackers and sophisticated organizations, including state-sponsored

 

45


Table of Contents

organizations, errors or malfeasance of our personnel, and security vulnerabilities in the software or systems on which we rely. Such incidents may occur in the future, resulting in unauthorized, unlawful, or inappropriate access to, inability to access, disclosure of, or loss of the sensitive, proprietary, and confidential information that we handle. While we employ security measures to prevent, detect, and mitigate potential for harm to our users from the misuse of user credentials on our network, these measures may not be effective in every instance. Moreover, while we maintain cybersecurity insurance that may help provide coverage for these types of incidents, we cannot assure you that our insurance will be adequate to cover costs and liabilities related to these incidents. Any such breach, attack, virus, or other event could result in costly investigations and litigation exceeding applicable insurance coverage or contractual rights available to us, civil or criminal penalties, operational changes or other response measures, loss of consumer confidence in our security measures, and negative publicity that could adversely affect our business, financial condition, and results of operations.

We also rely on a number of third-party service providers to operate our critical business systems and process confidential and personal information, such as the payment processors that process customer credit card payments. These service providers may not have adequate security measures and could experience a security incident that compromises the confidentiality, integrity, or availability of the systems they operate for us or the information they process on our behalf. Cybercrime and hacking techniques are constantly evolving, and we or our third-party service providers may be unable to anticipate attempted security breaches, react in a timely manner, or implement adequate preventative measures, particularly given increasing use of hacking techniques designed to circumvent controls, avoid detection, and remove or obfuscate forensic artifacts. While we have taken measures designed to protect the security of the confidential and personal information under our control, we cannot assure you that any security measures that we or our third-party service providers have implemented will be effective against current or future security threats. Moreover, we or our third-party service providers may be more vulnerable to such attacks in remote work environments, which have increased in response to the COVID-19 pandemic. If the information technology systems of our third-party service providers become subject to disruptions or security breaches, we may have insufficient recourse against such third parties and we may have to expend significant resources to mitigate the impact of such an event, and to develop and implement protections to prevent future events of this nature from occurring.

We also rely on a third-party provider for website services. Although alternative website providers could support our business on a substantially similar basis to our current third-party provider, transitioning our current website infrastructure to alternative providers could potentially be disruptive, and we could incur significant one-time costs. If we are unable to renew our agreement with our third-party provider on commercially acceptable terms, our agreement is prematurely terminated, or we add additional website providers, we may experience costs or downtime in connection with the transfer to, or the addition of, new website providers. If our website provider increases the costs of its services, our business, financial condition, or results of operations could be materially and adversely affected.

The regulatory environment surrounding information security and privacy is increasingly demanding, with the frequent imposition of new and changing requirements across our business. For example, if we are unable to comply with the security standards established by banks and the payment card industry, we may be subject to fines, restrictions, and expulsion from card acceptance programs, which could adversely affect our retail operations. Our business partners may have contractual rights of indemnification against us or seek to terminate our contracts with them in the event that their customer or proprietary business information is released as a result of a breach of our information technology. Additionally, under certain regulatory schemes, such as the CCPA, we may be liable for statutory damages on a per breached record basis, irrespective of any actual damages or harm to the individual. This means that in the event of a breach we could face government scrutiny or consumer class actions alleging statutory damages amounting to hundreds of millions, and possibly billions of U.S. dollars. And

 

46


Table of Contents

we may also be subject to civil claims under the General Data Protection Regulation (“GDPR”) and U.K. Data Protection Laws, including representative actions and other class action type litigation. The successful assertion of one or more large claims against us that exceed available insurance coverage, denial of coverage as to any specific claim, or any change or cessation in our insurance policies and coverages, including premium increases or the imposition of large deductible requirements, could have a material adverse effect on our business, results of operations, and financial condition. Any of these events could have a significant effect on our business and financial condition. As privacy and information security laws and regulations change, we may incur additional compliance costs.

Any material disruption or slowdown of our systems or those of our third-party service providers and business partners, could have a material adverse effect on our business, financial condition, and results of operations.

An overall decline in the health of the economy and other factors impacting consumer spending, such as recessionary conditions, governmental instability, and natural disasters, may affect consumer purchases, which could reduce demand for our products and harm our business, financial conditions, and results of operations.

Our business depends on consumer demand for our products and, consequently, is sensitive to a number of factors that influence consumer confidence and spending, such as general economic conditions, consumer disposable income, energy and fuel prices, recession and fears of recession, unemployment, minimum wages, availability of consumer credit, consumer debt levels, conditions in the housing market, interest rates, tax rates and policies, inflation, consumer confidence in future economic conditions and political conditions, war and fears of war, inclement weather, natural disasters, terrorism, outbreak of viruses or widespread illness, and consumer perceptions of personal well-being and security. As a result of the COVID-19 pandemic, we temporarily closed our showrooms to the public in the first half of 2020, which adversely affected our sales and profitability. Unfavorable economic conditions may lead consumers to delay or reduce purchases of our products and services and consumer demand for our products and services may not grow as we expect. Prolonged or pervasive economic downturns could also slow the pace of new showroom openings or cause current locations to close.

We plan to expand into international markets, which will expose us to significant risks.

As we expand our operations to other countries, significant resources and management attention is required and doing so subjects us to regulatory, economic, and political risks in addition to those we already face in the U.S., Canada, Australia, and the United Kingdom. There are significant risks and costs inherent in doing business in international markets, including:

 

   

difficulty establishing and managing international operations and the increased operations, travel, infrastructure, including establishment of showrooms and customer service operations, and legal compliance costs associated with locations in different countries or regions;

 

   

the need to vary pricing and margins to effectively compete in international markets;

 

   

the need to adapt and localize products for specific countries;

 

   

increased competition from local providers of similar products and services;

 

   

varying degrees of consumer acceptance of e-commerce and omnichannel business, specifically of fine jewelry;

 

   

challenges in obtaining, maintaining, protecting, and enforcing intellectual property rights abroad;

 

   

the need to offer content and customer support in various languages;

 

47


Table of Contents
   

difficulties in understanding and complying with local laws, regulations, and customs in other jurisdictions;

 

   

compliance with anti-bribery laws, such as the U.S. Foreign Corrupt Practices Act (“FCPA”), and the U.K. Bribery Act 2010 (“U.K. Bribery Act”), by us, our employees, and our business partners;

 

   

complexity and other risks associated with current and future legal requirements in other countries, including legal requirements related to consumer protection, consumer product safety, and data privacy frameworks, such as the Personal Information Protection and Electronic Documents Act (“PIPEDA”), the U.K. Data Protection Act, and the U.K. and E.U. General Data Protection Regulations;

 

   

varying levels of internet technology adoption and infrastructure, and increased or varying network and hosting service provider costs;

 

   

tariffs and other non-tariff barriers, such as quotas and local content rules, as well as tax consequences;

 

   

fluctuations in currency exchange rates and the requirements of currency control regulations, which might restrict or prohibit conversion of other currencies into U.S. dollars; and

 

   

political or social unrest or economic instability in a specific country or region in which we operate.

We have limited experience with international regulatory and business environments and market practices and may not be able to penetrate or successfully operate in the markets we choose to enter. In addition, we may incur significant expenses as a result of our international expansion, and we may not be successful. We may face limited brand recognition in certain parts of the world that could lead to non-acceptance or delayed acceptance of our products and services by consumers in new markets. Our failure to successfully manage these risks could harm our international operations and have an adverse effect on our business, financial condition, and operating results.

Our revenue could decline due to changes in credit markets and decisions made by credit providers.

Historically, some of our customers have financed their purchase of our products through third-party loan providers. If we are unable to maintain our relationships with our third-party loan providers, there is no guarantee that we will be able to find replacement partners who will provide our customers with financing on similar terms, and our ability to sell our products may be adversely affected. Further, reductions in consumer lending and the availability of consumer credit could limit the number of customers with the financial means to purchase our products. Higher interest rates could increase our costs or the monthly payments for consumer products financed through other sources of consumer financing. We also offer layaway payments for both U.S. and international customers. After an initial deposit, our layaway plan allows customers to make monthly payments on any purchase. There is a risk that if credit is extended to consumers during times when economic conditions are strong, and then economic conditions subsequently deteriorate, consumers may not meet their then-current payment obligations. In the future, we cannot be assured that third-party financing providers will continue to provide consumers with access to credit or that available credit limits will not be reduced. Such restrictions or reductions in the availability of consumer credit, or the loss of our relationship with our current financing partners, could have an adverse effect on our business, financial conditions, and operating results.

 

48


Table of Contents

Our business is affected by seasonality.

Our business is subject to seasonal fluctuation with a typical increase in sales around the holiday season, with the fourth quarter representing approximately 30% of annual net sales over a three-year period ending December 31, 2019 and a high percentage of annual net income. A number of factors, such as higher unemployment, the level of consumers’ disposable income, the availability of credit, interest rates, consumer debt, and asset values, delays in the issuance of tax refunds, or deteriorating economic conditions can impact consumer spending decisions. Jewelry purchases are discretionary and are dependent on many factors relating to discretionary consumer spending, particularly as jewelry is often perceived to be a luxury purchase. Adverse changes in the economy and periods when discretionary spending by consumers may be under pressure could unfavorably impact sales and earnings. In addition, in order to prepare for our peak shopping quarters, we must increase the staffing at our showrooms and order and keep in stock more merchandise than we carry during other parts of the year. This staffing increase and inventory build-up may require us to expend cash faster than is generated by our operations during these periods. Any unanticipated decrease in demand for our products during such a period could require us to sell excess inventory at a substantial markdown, which could have a material adverse effect on our business, financial condition, and results of operations.

Furthermore, our rapid growth in recent years may obscure the extent to which seasonality trends have affected our business and may continue to affect our business. Accordingly, yearly or quarterly comparisons of our operating results may not be useful and our results in any particular period will not necessarily be indicative of the results to be expected for any future period.

We depend on highly skilled personnel to grow and operate our business, and if we are unable to hire, retain, and motivate our personnel, we may not be able to grow effectively.

Our success and future growth depend largely upon the continued services of our management team, including our Co-Founders, Beth Gerstein and Eric Grossberg. From time to time, there may be changes in our executive management team resulting from the hiring or departure of these personnel. Our executive officers are employed on an at-will basis, which means they may terminate their employment with us at any time. The loss of one or more of our executive officers, or the failure by our executive team to effectively work with our employees and lead our company, could harm our business. We maintain key man life insurance with respect to certain key members of management.

In addition, our future success will depend, in part, upon our continued ability to identify and hire skilled personnel with the skills and technical knowledge that we require, including engineering, software design and programming, jewelry design, marketing, sales, and other key management personnel. Such efforts will require significant time, expense, and attention as there is intense competition for such individuals, particularly in the Denver and San Francisco areas, and new hires require significant training and time before they achieve full productivity, particularly in new sales segments and territories. In addition to hiring new employees, we must continue to focus on developing, motivating, and retaining our best employees, all of whom are at-will employees. If we fail to identify, recruit, and integrate strategic personnel hires, our business, financial condition, and results of operations could be adversely affected. We may need to invest significant amounts of cash and equity to attract and retain new employees, and we may never realize returns on these investments. If we hire employees from competitors or other companies, their former employers may attempt to assert that these employees or we have breached various legal obligations, resulting in a diversion of our time and resources. In addition, prospective and existing employees often consider the value of the equity awards they receive in connection with their employment. If the perceived value of our equity awards declines, experiences significant volatility, or increases such that prospective employees believe there is limited upside to the value of our equity awards, it may adversely affect our ability to recruit and retain key

 

49


Table of Contents

employees. If we are not able to effectively add and retain employees, our ability to achieve our strategic objectives will be adversely impacted, and our business and future growth prospects will be harmed.

Acquisitions, strategic investments, partnerships, or alliances could be difficult to identify, pose integration challenges, divert the attention of management, disrupt our business, dilute stockholder value, and adversely affect our business, financial condition, and results of operations.

Our success will depend, in part, on our ability to expand our services and grow our business in response to changing technologies, customer demands, and competitive pressures. In some circumstances, we may choose to expand our services and grow our business through the acquisition of complementary businesses and technologies rather than through internal development. The identification of suitable acquisition candidates can be difficult, time-consuming, and costly, and we may not be able to successfully complete identified acquisitions. In addition, once we have completed an acquisition, we may not be able to successfully integrate the acquired business. The risks we face in connection with acquisitions include:

 

   

an acquisition may negatively affect our financial results because it may require us to incur charges or assume substantial debt or other liabilities, may cause adverse tax consequences or unfavorable accounting treatment, may expose us to claims and disputes by stockholders and third parties, including intellectual property claims and disputes, may not generate sufficient financial return to offset additional costs and expenses related to the acquisition, or may not perform as well financially as expected;

 

   

we may encounter difficulties or unforeseen expenditures in integrating the business, offerings, technologies, personnel, or operations of any company that we acquire, particularly if key personnel of the acquired company decide not to work for us;

 

   

an acquisition may disrupt our ongoing business, divert resources, increase our expenses, and distract our management;

 

   

an acquisition may result in a delay or reduction of customer purchases for both us and the company acquired due to customer uncertainty about continuity and effectiveness of service from either company;

 

   

we may encounter difficulties in, or may be unable to, successfully sell any acquired products;

 

   

our use of cash to pay for an acquisition would limit other potential uses for our cash;

 

   

if we incur debt to fund such acquisition, such debt may subject us to material restrictions on our ability to conduct our business, as well as financial maintenance covenants; and

 

   

if we issue a significant amount of equity securities in connection with future acquisitions, existing stockholders may be diluted and earnings per share may decrease.

The occurrence of any of these foregoing risks could adversely affect our business, financial condition, and results of operations, and expose us to unknown risks or liabilities.

We may require additional capital to support the growth of our business, and this capital might not be available on acceptable terms, if at all.

We have funded our operations since inception primarily through equity financings and revenue generated from our products and services. We cannot be certain that our operations will continue to generate sufficient cash to fully fund our ongoing operations and the growth of our business. We intend

 

50


Table of Contents

to continue to make investments to support the development of our products and services and will require additional funds for such development. We may need additional funding for marketing expenses and to develop and expand sales resources, develop new features or enhance our products and services, improve our operating infrastructure, or acquire complementary businesses and technologies. Accordingly, we might need or may want to engage in future equity or debt financings to secure additional funds. Additional financing may not be available on terms favorable to us, if at all. If adequate funds are not available on acceptable terms, we may be unable to invest in future growth opportunities, which could harm our business, financial condition, and results of operations. If we are unable to obtain adequate financing or financing on terms satisfactory to us, our ability to develop our products and services, support our business growth, and respond to business challenges could be significantly impaired, and our business may be adversely affected.

If we incur debt, the debt holders would have rights senior to holders of common stock to make claims on our assets, and the terms of any debt could restrict our operations, including our ability to pay dividends on our common stock. Furthermore, if we issue additional equity securities, stockholders will experience dilution, and the new equity securities could have rights senior to those of our common stock. Because our decision to issue securities in the future will depend on numerous considerations, including factors beyond our control, we cannot predict or estimate the amount, timing, or nature of any future issuances of debt or equity securities. As a result, our stockholders bear the risk of future issuances of debt or equity securities reducing the value of our common stock and diluting their interests.

Our level of indebtedness could have a material adverse effect on our ability to generate sufficient cash to fulfil our obligations under such indebtedness, to react to changes in our business, and to incur additional indebtedness to fund future needs.

As of June 30, 2021, we had outstanding $65 million aggregate principal amount of borrowings under our Term Loan (as defined herein). If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital, or restructure or refinance our indebtedness. Our ability to restructure or refinance our current or future debt will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. The terms of existing or future debt instruments may restrict us from adopting some of these alternatives. Any failure to make payments of interest and principal on our outstanding indebtedness on a timely basis or failure to comply with certain restrictions in our debt instruments would result in a default under our debt instruments. In the event of a default under any of our current or future debt instruments, the lenders could elect to declare all amounts outstanding under such debt instruments to be due and payable.

In addition, our indebtedness under our Term Loan bears interest at variable rates. Because we have variable rate debt, fluctuations in interest rates may affect our cash flows or business, financial condition, and results of operations.

Our Term Loan contains financial covenants and other restrictions on our actions that may limit our operational flexibility or otherwise adversely affect our business, financial condition, and results of operations.

The terms of our Term Loan include a number of covenants that limit our ability to (subject to negotiated exceptions), among other things, incur additional indebtedness, incur liens on any of our property, enter into agreements related to mergers and acquisitions, dispose of property, or pay dividends and make distributions. The terms of our Term Loan may restrict our current and future

 

51


Table of Contents

operations and could adversely affect our ability to finance our future operations or capital needs. In addition, complying with these covenants may make it more difficult for us to successfully execute our business strategy and compete against companies that are not subject to such restrictions.

A failure by us to comply with the covenants specified in the Term Loan could result in an event of default under the agreement, which would give the lenders the right to stop advancing money or extending credit and to declare all obligations to pay the loans when due, together with principal interest, fees, and expenses, to be immediately due and payable. If the debt under the Term Loan were to be accelerated, we may not have sufficient cash or be able to borrow sufficient funds to refinance the debt or sell sufficient assets to repay the debt, which could adversely affect our business, financial condition and results of operations.

Risks Related to Our Legal and Regulatory Environment

Failure to comply with laws, regulations, and enforcement activities, or changes in statutory, regulatory, accounting, and other legal requirements could potentially impact our operating and financial results.

We are subject to numerous federal, state, local, and foreign laws and governmental regulations, including those relating to environmental protection, personal injury, intellectual property, consumer product safety, building, land use and zoning requirements, workplace regulations, wage and hour, privacy and information security, consumer protection laws, immigration, and employment law matters. If we fail to comply with existing or future laws or regulations, or if these laws or regulations are violated by importers, manufacturers, or distributors, we may be subject to governmental or judicial fines or sanctions, while incurring substantial legal fees and costs. In addition, our capital expenditures could increase due to remediation measures that may be required if we are found to be noncompliant with any existing or future laws or regulations.

Further, the Federal Trade Commission (“FTC”) has authority to investigate and prosecute practices that constitute “unfair trade practices,” “deceptive trade practices” or “unfair methods of competition.” State attorneys general typically have comparable authority, and many states also permit private plaintiffs to bring actions on the basis of these laws. Federal and state consumer protection laws and regulations may apply to our operations and retail offers.

Our transactions with suppliers and other parties outside the U.S. may subject us to FCPA, U.S. export controls, including the Export Administration Regulations, and trade sanction laws, and similar anti-corruption, anti-bribery, and international trade laws, any violation of which could create substantial liability for us and also harm our reputation. Our operations may subject us to various federal, state, and local laws, regulations, and other requirements pertaining to protection of the environment, public health, and employee safety, including regulations governing the management of hazardous substances and the maintenance of safe working conditions, such as the Occupational Safety and Health Act of 1970, as amended. These laws also apply generally to all our properties. Our failure to comply with these laws can subject us to criminal and civil liabilities. In connection with our philanthropic endeavors, we must also comply with additional federal, state, and local tax and other laws and regulations.

Additionally, because we accept debit and credit cards for payment, we are subject to the Payment Card Industry (“PCI”) Standard issued by the Payment Card Industry Security Standards Council, with respect to payment card information. The PCI Standard contains compliance guidelines with regard to our security surrounding the physical and electronic storage, processing, and transmission of cardholder data. Compliance with the PCI Standard and implementing related procedures, technology, and information security measures requires significant resources and ongoing attention. Costs and

 

52


Table of Contents

potential problems and interruptions associated with the implementation of new or upgraded systems and technology such as those necessary to achieve compliance with the PCI Standard or with maintenance or adequate support of existing systems could also disrupt or reduce the efficiency of our operations. Any material interruptions or failures in our payment-related systems could have a material adverse effect on our business, financial condition, and results of operations. If there are amendments to the PCI Standard, the cost of re-compliance could also be substantial and we may suffer loss of critical data and interruptions or delays in our operations as a result.

Failure to adequately obtain, maintain, protect and enforce our intellectual property and proprietary rights or prevent third parties from making unauthorized use of such rights could harm our brand, devalue our proprietary content and technology, and adversely affect our ability to compete effectively.

Our success depends to a significant degree on our ability to obtain, maintain, protect, and enforce our intellectual property rights, including our brand, proprietary designs, technology, and know-how. We rely on a variety of mechanisms to protect our intellectual property rights, including trademark and copyright laws, trade secret protection, domain name registration, confidentiality agreements, and other contractual arrangements with our employees, affiliates, clients, strategic partners, and others. However, the protective steps we have taken and plan to take may be inadequate to deter infringement, misappropriation or other violations of our intellectual property, proprietary designs, technology, know-how, and our brand. We may not learn of, or may be unable to detect, the unauthorized use of, or take appropriate steps to enforce, our intellectual property rights. Effective intellectual property protection may not be available to us or available in every jurisdiction in which we offer or may offer our products and services. Failure to adequately protect our intellectual property could harm our brand, devalue our proprietary designs, technology, and other intellectual property, and adversely affect our ability to compete effectively. Further, defending our intellectual property rights could result in the expenditure of significant financial resources and divert attention of management, which could adversely affect our business, financial condition, and results of operations.

If we fail to protect our intellectual property rights adequately, our competitors may exploit our intellectual property and develop and commercialize substantially identical products and we may lose an important advantage in the markets in which we compete. In addition, defending our intellectual property rights might entail significant expense. Any trademarks, copyrights, patents, or other intellectual property rights that we have or may obtain may be challenged or circumvented by others or invalidated or held unenforceable through administrative processes, including re-examination, inter partes review, interference and derivation proceedings, and equivalent proceedings in foreign jurisdictions (e.g., opposition proceedings), or litigation. Any challenge to our intellectual property rights could result in them being narrowed in scope or declared invalid or unenforceable. We do not currently own any issued patents, and even if we seek patent protection in the future, we may be unable to obtain or maintain such protection. In addition, any patents issued from future patent applications or licensed to us in the future may not provide us with competitive advantages or may be successfully challenged by third parties. Further, the laws of some foreign countries may not be as protective of intellectual property rights as those in the U.S., and mechanisms for enforcement of intellectual property rights in those countries may be inadequate. Moreover, policing unauthorized use of our technologies, trade secrets, and intellectual property may be difficult, expensive, and time-consuming. Despite our precautions, it may be possible for unauthorized third parties to copy our offerings and capabilities and use information that we regard as proprietary to create offerings that compete with ours. If our trademarks and trade names are not adequately protected, then we may not be able to build name recognition in our markets of interest and our business may be adversely affected. The value of our intellectual property could diminish if others assert rights in or ownership of our trademarks and other intellectual property rights, or trademarks that are similar to our trademarks. We may be unable to successfully resolve these types of conflicts to our satisfaction.

 

53


Table of Contents

We enter into confidentiality and invention assignment agreements with our employees and consultants and enter into confidentiality agreements with other third parties, including suppliers and other partners. However, we cannot guarantee that we have entered into such agreements with each party that has or may have had access to our proprietary information, know-how, and trade secrets or may have developed intellectual property on our behalf. Moreover, no assurance can be given that these agreements will be effective in controlling access to our proprietary information or the distribution, use, misuse, misappropriation, reverse engineering, or disclosure of our proprietary information, know-how, and trade secrets. These agreements may not be self-executing or they may be breached, and we may not have adequate remedies for any such breach. Additionally, we may be subject to claims that our employees misappropriated relevant rights from their previous employers. Further, these agreements may not prevent our competitors from independently developing technologies that are substantially equivalent or superior to our offerings and capabilities.

In order to protect our intellectual property rights, we may be required to spend significant resources to monitor and protect our intellectual property rights. Litigation may be necessary in the future to enforce our intellectual property rights and to protect our trade secrets. Litigation brought to protect and enforce our intellectual property rights could be costly, time-consuming, and distracting to management, and could result in the impairment or loss of portions of our intellectual property. Further, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims, and countersuits attacking the validity and enforceability of our intellectual property rights, and if such defenses, counterclaims, or countersuits are successful, we could lose valuable intellectual property rights. Our inability to protect our intellectual property against unauthorized copying or use, as well as any costly litigation or diversion of our management’s attention and resources, could delay further sales or the implementation of our offerings and capabilities, impair the functionality of our offerings and capabilities, delay introductions of new offerings, or injure our reputation.

Third parties may assert rights in or ownership of our trademarks and other intellectual property rights, or trademarks that are similar to our trademarks, or claim that we are infringing, misappropriating or otherwise violating their intellectual property rights. Intellectual property-related litigations and proceedings are expensive and time consuming to defend, and, if resolved adversely, could materially adversely impact our business, financial condition and results of operations.

Our commercial success depends in part on avoiding infringement, misappropriation or other violations of the intellectual property and proprietary rights of third parties and other intellectual property-related disputes. Our registered or unregistered trademarks or trade names may be challenged, infringed, circumvented, diluted or declared generic or determined to be infringing on other marks. Effective trademark protection may not be available or may not be sought in every country in which our products are made available, and contractual disputes may affect the use of marks governed by private contract. Further, at times, competitors may adopt trade names or trademarks similar to ours, thereby impeding our ability to build brand identity and possibly leading to market confusion. In addition, there could be potential trade name or trademark infringement claims brought by owners of other trademarks or trademarks that incorporate variations of our registered or unregistered trademarks or trade names. Over the long term, if we are unable to establish name recognition based on our trademarks and trade names, then we may not be able to compete effectively and our business may be adversely affected. Similarly, not every variation of a domain name may be available or be registered, even if available. The occurrence of any of these events could result in the erosion of our brand and limit our ability to market our brand using our various domain names, as well as impede our ability to effectively compete against competitors with similar products or technologies.

In addition to fighting intellectual property infringement from third parties, we may need to defend claims against us related to our intellectual property rights. Some third-party intellectual property rights

 

54


Table of Contents

may prove to be extremely broad, and it may not be possible for us to conduct our operations in such a way as to avoid violating those intellectual property rights. As we face increasing competition, the possibility of intellectual property rights claims against us grows. Such claims and litigation may involve adverse intellectual property rights holders who have no relevant product revenue, and, therefore, our own issued and pending copyrights, trademarks, and other intellectual property rights may provide little or no deterrence to these rights holders in bringing intellectual property rights claims against us. There may be intellectual property rights held by others that cover significant aspects of our offerings and we cannot assure that we are not infringing or violating, and have not infringed or violated, any third-party intellectual property rights, or that we will not be held to have done so or be accused of doing so in the future. In addition, any disputes with third parties with respect to any third-party intellectual property agreements could narrow what we believe to be the scope of our rights to the relevant intellectual property or increase our obligations under such agreements, either of which could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

Any claim that we have violated intellectual property or other proprietary rights of third parties, with or without merit, and whether or not it results in litigation, is settled out of court or is determined in our favor, could be expensive and time-consuming to address and resolve, and could divert the time and attention of management and technical personnel from our business. The litigation process is subject to inherent uncertainties, and we may not prevail in litigation matters regardless of the merits of our position. Intellectual property lawsuits or claims may become extremely disruptive if plaintiffs were to succeed in blocking the trade of our products and services. An adverse outcome of a dispute may result in an injunction and could require us to pay substantial monetary damages, including treble damages and attorneys’ fees, if we are found to have willfully infringed a party’s intellectual property rights. Further, our liability insurance may not cover potential claims of this type adequately or at all. We may be unable to successfully resolve these types of conflicts to our satisfaction and may be required to enter into costly license agreements, if available at all; be required to pay significant royalty, settlements costs, or damages; be required to rebrand our products; and/or be prevented from selling some of our products. The terms of such a settlement or judgment may require us to cease some or all of our operations or pay substantial amounts to the other party. Even if we have an agreement to indemnify us against such costs, the indemnifying party may be unable or unwilling to uphold its contractual obligations. In addition, we may have to seek a license to continue practices found to be in violation of a third party’s rights. If we are required, or choose to enter into royalty or licensing arrangements, such arrangements may not be available on reasonable terms, or at all, and may significantly increase our operating costs and expenses. Such arrangements may also only be available on a non-exclusive basis, such that third parties, including our competitors, could have access to use the same intellectual property to compete with us. We may also have to redesign our products so they do not infringe, misappropriate, or otherwise violate third-party intellectual property rights, which may not be possible or may require substantial monetary expenditures and time, during which our products may not be available for commercialization or use. Such outcomes would increase our operating expenses, and if we cannot redesign our products in a non-infringing manner or obtain a license for any allegedly infringing aspect of our business, we may be forced to limit our product offerings, which could adversely affect our ability to compete effectively.

We are subject to rapidly changing and increasingly stringent laws and industry standards relating to privacy, data security, and data protection. The restrictions and costs imposed by these laws, or our actual or perceived failure to comply with them, could subject us to liabilities that adversely affect our business, operations, and financial performance.

We collect, process, store, and use a wide variety of data from current and prospective customers, including personal information, such as home addresses and geolocation. These activities are regulated by a variety of federal, state, local, and foreign privacy, data security, and data protection laws and regulations, which have become increasingly stringent in recent years.

 

55


Table of Contents

Domestic privacy and data security laws are complex and changing rapidly. In the U.S., we are subject to a variety of laws and regulations, including regulation by federal government agencies, including the FTC, and state and local agencies. In addition to federal laws such as Section 5 of the Federal Trade Commission Act, the Gramm-Leach-Bliley Act, and the Fair Credit Reporting Act, many states have enacted laws regulating the collection, use, and disclosure of personal information and requiring that companies implement reasonable data security measures. Laws in all states and U.S. territories also require businesses to notify affected individuals, governmental entities, and/or credit reporting agencies of certain security breaches affecting personal information. These laws are not consistent, and compliance with them in the event of a widespread data breach is complex and costly.

Further, the California Consumer Privacy Act (the “CCPA”) took effect on January 1, 2020. The CCPA gives California residents expanded rights related to their personal information, including the right to access and delete their personal information, and receive detailed information about how their personal information is used and shared. The CCPA also created restrictions on “sales” of personal information that allow California residents to opt-out of certain sharing of their personal information and may restrict the use of cookies and similar technologies for advertising purposes. Our products rely on these technologies and could be adversely affected by the CCPA’s restrictions. The CCPA prohibits discrimination against individuals who exercise their privacy rights, provides for civil penalties for violations, and creates a private right of action for data breaches that is expected to increase data breach litigation. Additionally, a new California ballot initiative, the California Privacy Rights Act (the “CPRA”), was recently passed in California. The CPRA will restrict use of certain categories of sensitive personal information that we handle; further restrict the use of cross-context behavioral advertising techniques on which our products may rely in the future; establish restrictions on the retention of personal information; expand the types of data breaches subject to the private right of action; and establish the California Privacy Protection Agency to implement and enforce the new law, as well as impose administrative fines. The majority of the CPRA’s provisions will go into effect on January 1, 2023 (with a look back to January 1, 2022), and additional compliance investment and potential business process changes will likely be required. Additionally, Virginia enacted the Virginia Consumer Data Protection Act (the “CDPA”), another comprehensive state privacy law, that will also be effective January 1, 2023. The CCPA, CPRA, and CDPA may increase our compliance costs and potential liability, particularly in the event of a data breach, and could have a material adverse effect on our business, including how we use personal information, our financial condition, the results of our operations or prospects. Similar laws have been proposed in other states and at the federal level, reflecting a trend toward more stringent privacy legislation in the U.S. The enactment of such laws could have potentially conflicting requirements that would make compliance challenging.

In addition, laws, regulations, and standards covering marketing, advertising, and other activities conducted by telephone, email, mobile devices, and the internet, may be or become applicable to our business, such as the Federal Communications Act, the Federal Wiretap Act, the Electronic Communications Privacy Act, the Telephone Consumer Protection Act (the “TCPA”), the Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003 (the “CAN-SPAM Act”), and similar state consumer protection and communication privacy laws, such as California’s Invasion of Privacy Act. In particular, the TCPA imposes significant restrictions on the ability to make telephone calls or send text messages to mobile telephone numbers without the prior consent of the person being contacted. Claims that we have violated the TCPA could be costly to litigate, and if successful, expose us to substantial statutory damages.

Foreign privacy laws are also undergoing a period of rapid change, have become more stringent in recent years, and may increase the costs and complexity of offering our products in new geographies. In Canada, where we operate, PIPEDA, and various provincial laws require that companies give detailed privacy notices to consumers, obtain consent to use personal information, with limited exceptions, allow individuals to access and correct their personal information, and report certain data

 

56


Table of Contents

breaches. In addition, Canada’s Anti-Spam Legislation (“CASL”) prohibits email marketing without the recipient’s consent, with limited exceptions. Failure to comply with PIPEDA, CASL, or provincial privacy or data protection laws could result in significant fines and penalties or possible damage awards.

We operate in the European Union, which has adopted strict data privacy and security regulations in its GDPR. The GDPR imposes strict requirements on controllers and processors of personal data, including, for example, higher standards for obtaining consent from individuals to process their personal data, more robust disclosures to individuals and a strengthened individual data rights regime, shortened timelines for data breach notifications, and restrictions on the flow of personal data outside of the EU. The GDPR also provides individuals with various rights in respect of their personal data, including rights of access, erasure, portability, rectification, restriction, and objection. Following its departure from the European Union, the United Kingdom has adopted a separate regime based on the GDPR that imposes similarly onerous requirements. Companies that violate the EU or U.K. regime can face private litigation, prohibitions on data processing, and fines of up to the greater of 4% of their worldwide annual revenue or 20 million Euros (for the EU) or £17.5 million (for the U.K.). Other EU and U.K. data protection laws restrict the ability of companies to market electronically, including through the use of cookies and similar technologies on which we rely for our marketing. Other countries outside of Europe increasingly emulate European data protection laws. As a result, operating our business or offering our services in Europe or other countries with similar data protection laws would subject us to substantial compliance costs and potential liability and may require changes to the ways we collect and use consumer information.

In addition, privacy advocates and industry groups have regularly proposed, and may propose in the future, self-regulatory standards by which we are legally or contractually bound. If we fail to comply with these contractual obligations or standards, we may face substantial liability or fines. Consumer resistance to the collection and sharing of the data used to deliver targeted advertising, increased visibility of consent or “do not track” mechanisms as a result of industry regulatory or legal developments, the adoption by consumers of browser settings or “ad-blocking” software, and the development and deployment of new technologies could materially impact our ability to collect data or reduce our ability to deliver relevant promotions or media, which could materially impair the results of our operations.

Further, we are subject to the PCI Data Security Standard, which is a multifaceted security standard that is designed to protect credit card account data as mandated by payment card industry entities. We rely on vendors to handle PCI matters and to ensure PCI compliance. Despite our compliance efforts, we may become subject to claims that we have violated the PCI Data Security Standard, based on past, present, and future business practices, which could have an adverse impact on our business and reputation. See also “Failure to comply with laws, regulations, and enforcement activities, or changes in statutory, regulatory, accounting, and other legal requirements could potentially impact our operating and financial results.”

Despite our efforts to comply with all applicable data protection laws and regulations, our interpretations of such laws and regulations and such measures to comply therewith may have been or may prove to be insufficient or incorrect, and we may not be successful in achieving compliance with the rapidly evolving privacy, data security, and data protection requirements discussed above. Any actual or perceived non-compliance could result in litigation and proceedings against us by governmental entities, customers, or others, fines and civil or criminal penalties, limited ability or inability to operate our business, offer services, or market our business in certain jurisdictions, negative publicity and harm to our brand and reputation, and reduced overall demand for our products and services. Such occurrences could adversely affect our business, financial condition, and results of operations. Our general liability insurance may not cover all potential claims to which we are exposed and may not be adequate to indemnify us for the full extent of our potential liabilities.

 

57


Table of Contents

Our business could be adversely impacted by changes in the internet and mobile device accessibility of users. Companies and governmental agencies may restrict access to our products and services, our mobile apps, website, app stores, or the internet generally, which could negatively impact our operations.

Our business depends on customers accessing our products and services via a mobile device or a personal computer, and the internet. We may operate in jurisdictions that provide limited internet connectivity, particularly as we expand internationally. Internet access and access to a mobile device or personal computer are frequently provided by companies with significant market power that could take actions that degrade, disrupt, or increase the cost of consumers’ ability to access our products and services. In addition, the internet infrastructure that we and our customers rely on in any particular geographic area may be unable to support the demands placed upon it and could interfere with the speed and availability of our products and services. Any such failure in internet or mobile device or computer accessibility, even for a short period of time, could adversely affect our results of operations.

Governmental agencies in any of the countries in which we or our customers are located could block access to or require a license for our mobile apps, website, or the internet generally for a number of reasons, including security, confidentiality, or regulatory concerns. In addition, companies may adopt policies that prohibit their employees from using our products and services. If companies or governmental entities block, limit, or otherwise restrict customers from accessing our products and services, our business could be negatively impacted, the number of customers could decline or grow more slowly, and our results of operations could be adversely affected.

We are subject to anti-corruption, anti-bribery, anti-money laundering, and similar laws, and non-compliance with such laws can subject us to criminal or civil liability and harm our business, financial condition, and results of operations.

We are subject to the FCPA, U.S. domestic bribery laws, and other anti-corruption and anti-money laundering laws in the countries in which we conduct activities. Anti-corruption and anti-bribery laws have been enforced aggressively in recent years and are interpreted broadly to generally prohibit companies, their employees, and their third-party intermediaries from authorizing, offering, or providing, directly or indirectly, improper payments or benefits to recipients in the public or private sector. As we increase our international sales and business, we may engage with business partners and third-party intermediaries to market our offerings and to obtain necessary permits, licenses, and other regulatory approvals. In addition, we or our third-party intermediaries may have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities. We can be held liable for the corrupt or other illegal activities of these third-party intermediaries, our employees, representatives, contractors, partners, and agents, even if we do not explicitly authorize such activities.

We cannot assure you that all of our employees and agents will not take actions in violation of any of the above laws, for which we may be ultimately held responsible. As we increase our international sales and business, our risks under these laws may increase.

Detecting, investigating, and resolving actual or alleged violations of any of the above laws can require a significant diversion of time, resources, and attention from senior management. In addition, noncompliance with anti-corruption, anti-bribery, or anti-money laundering laws could subject us to whistleblower complaints, investigations, sanctions, settlements, prosecution, enforcement actions, fines, damages, other civil or criminal penalties or injunctions, suspension or debarment from contracting with certain persons, reputational harm, adverse media coverage, and other collateral consequences. If any subpoenas or investigations are launched, or governmental or other sanctions are imposed, or if we do not prevail in any possible civil or criminal proceeding, our business, financial

 

58


Table of Contents

condition, and results of operations could be harmed. In addition, responding to any action will likely result in a materially significant diversion of management’s attention and resources and significant defense costs and other professional fees.

From time to time, we may be subject to legal proceedings, regulatory disputes, and governmental inquiries that could cause us to incur significant expenses, divert our management’s attention, and materially harm our business, financial condition, and operating results.

From time to time, we may be subject to claims, lawsuits, government investigations, and other proceedings involving products liability, competition and antitrust, intellectual property, data privacy and protection, consumer protection, securities, tax, labor and employment, commercial disputes, and other matters that could adversely affect our business operations and financial condition. As we have grown, we have seen a rise in the number and significance of these disputes and inquiries. Litigation and regulatory proceedings may be protracted and expensive, and the results are difficult to predict. Certain of these matters include speculative claims for substantial or indeterminate amounts of damages and include claims for injunctive relief. Additionally, our litigation costs could be significant. Adverse outcomes with respect to litigation or any of these legal proceedings may result in significant settlement costs or judgments, penalties and fines, or require us to modify our products or services, all of which could negatively affect our revenue growth. The results of litigation, investigations, claims, and regulatory proceedings cannot be predicted with certainty, and determining reserves for pending litigation and other legal and regulatory matters requires significant judgment. There can be no assurance that our expectations will prove correct, and even if these matters are resolved in our favor or without significant cash settlements, these matters, and the time and resources necessary to litigate or resolve them, could harm our business, financial condition, and operating results.

Risks Related to Our Dependence on Third Parties

We face risks associated with suppliers from whom our products are sourced and are dependent on a limited number of suppliers.

We purchase substantially all of the resources for our products including diamonds, gemstones, precious metals, parts, packaging, and raw materials from domestic and international suppliers. For our business to be successful, our suppliers must be willing and able to provide us with resources in substantial quantities, in compliance with regulatory requirements, and further in compliance with our ethical and environmentally responsible standards, at acceptable costs and on a timely basis. Our ability to obtain a sufficient selection or volume of resources on a timely basis at competitive prices could suffer as a result of any deterioration or change in our supplier relationships or events that adversely affect our suppliers.

We typically do not enter into long-term contracts with our suppliers, and in some cases do not have formal written contracts, and, as such, we operate without significant contractual assurances of continued supply, pricing or access to resources. Pricing with suppliers is typically established and renegotiated based on product specifications, market conditions, and other variables. Any of our suppliers could discontinue supplying us with desired inputs in sufficient quantities or offer us less favorable terms on future transactions for a variety of reasons. The benefits we currently experience from our supplier relationships could be adversely affected if our suppliers:

 

   

discontinue selling resources to us;

 

   

enter into arrangements with competitors that could impair our ability to source their products, including by giving our competitors exclusivity arrangements or limiting our access to certain resources;

 

59


Table of Contents
   

raise the prices they charge us;

 

   

change pricing terms to require us to pay on delivery or upfront, including as a result of changes in the credit relationships some of our suppliers have with their various lending institutions; or

 

   

lengthen their lead times.

Events that adversely impact our suppliers could impair our ability to obtain adequate and timely supplies. Such events include, among others, difficulties or problems associated with our suppliers’ businesses, their financial instability and labor problems, resource quality and safety issues, natural or man-made disasters, inclement weather conditions, war, acts of terrorism and other political instability, economic conditions, shipment issues, the availability of their raw materials, and increased production costs. Our suppliers may be forced to reduce their production, shut down their operations, or file for bankruptcy. The occurrence of one or more of these events could impact our ability to get products to our customers, result in disruptions to our operations, increase our costs, and decrease our profitability.

We also source resources directly from suppliers outside of the U.S., including Russia, Canada, Botswana, Namibia, South Africa, Australia, Malawi, Sea of Cortez, Sri Lanka, and Zambia. A majority of the world’s supply of rough diamonds is controlled by a small number of diamond mining firms. Furthermore, Our Beyond Conflict Free Diamonds are sourced from a select group of diamond suppliers with a robust chain of custody protocol for their diamonds and are required to source diamonds that originate from specific mine operations or specific countries that have demonstrated their commitment to follow internationally recognized labor, trade, and environmental standards. As a result, any decisions made to restrict the supply of rough diamonds by these firms to our suppliers of Beyond Conflict Free Diamonds could substantially impair our ability to acquire such diamonds at commercially reasonable prices, if at all. Generally, diamond prices depend on the attributes of the diamond. Similarly, we craft our gold and silver fine jewelry from primarily recycled precious metals, and we work with our suppliers to source recycled platinum when available and from refiners that are known to use recycled materials in their platinum products. Global sourcing and foreign trade involve numerous factors and uncertainties beyond our control, including increased shipping costs, the imposition of additional import or trade restrictions, including legal or economic restrictions on overseas suppliers’ ability to produce and deliver resources, increased custom duties and tariffs, unforeseen delays in customs clearance of goods, more restrictive quotas, loss of a most favored nation trading status, currency exchange rates, transportation delays, port of entry issues and foreign government regulations, political instability, and economic uncertainties in the countries from which we or our suppliers source our products. For example, our resource sourcing could be impacted by current and future travel restrictions and/or the shut-down of certain businesses globally due to the COVID-19 pandemic, and our precious metals sourcing has been disrupted by the COVID-19 pandemic, including in India where we source our recycled platinum. In addition, a majority of the world’s diamond supply is cut and polished in India, which could by adversely impacted by the COVID-19 pandemic. Our sourcing operations may also be hurt by health concerns regarding infectious diseases in countries in which our resources are produced. Moreover, negative press or reports about internationally sourced resources may sway public opinion, and thus customer confidence, away from the products sold in our stores. These and other issues affecting our international suppliers or internationally sourced resources could have a material adverse effect on our business, financial condition, and results of operations.

Material changes in the pricing practices of our suppliers could negatively impact our profitability. Our suppliers may also increase their pricing if their raw materials became more expensive. The resources used to manufacture our products are subject to availability constraints and price volatility. Our suppliers may pass the increase in sourcing costs to us through price increases, thereby impacting our margins.

 

60


Table of Contents

Moreover, many suppliers and manufacturers of diamonds, as well as retailers of diamonds and diamond jewelry, are vertically integrated, and we expect they will continue to vertically integrate their operations either by developing retail channels for the products they manufacture or acquiring sources of supply, including, without limitation, diamond mining operations. To the extent such vertical integration efforts are successful, some of the fragmentation in the existing diamond supply chain could be eliminated, our ability to obtain an adequate supply of diamonds and fine jewelry from multiple sources could be limited, and our competitors may be able to obtain diamonds at lower prices.

In addition, some of our suppliers may not have the capacity to supply us with sufficient resources to keep pace with our growth plans, especially if we plan to manufacturer significantly greater amounts of inventory. In such cases, our ability to pursue our growth strategy will depend in part upon our ability to develop new supplier relationships. Some of our suppliers are owned by vertically-integrated companies with retail divisions that compete with us and, as such, we are exposed to the risk that these suppliers may not be willing, or may become unwilling, to sell their products to us on acceptable terms, or at all.

We rely on a limited number of suppliers to supply the majority of the resources to our products and are thus exposed to concentration of supplier risk. If we were to lose any significant supplier, we may be unable to establish additional or replacement sources for our products that meet our quality controls and standards in a timely manner or on commercially reasonable terms, if at all.

We rely on our suppliers, third-party carriers, and third-party jewelers as part of our fulfillment process, and these third parties may fail to adequately serve our customers.

We significantly rely on our suppliers to promptly ship us diamonds and other fine jewelry ordered by our customers. Any failure by our suppliers to sell and ship such products to us in a timely manner will have an adverse effect on our ability to fulfill customer orders and harm our business and results of operations. Our suppliers, in turn, rely on third-party carriers to ship diamonds to us, and in some cases, directly to our customers. We also rely on a limited number of third-party carriers to deliver inventory to us and product shipments to our customers. We and our suppliers are therefore subject to the risks, including employee strikes, inclement weather, power outages, national disasters, rising fuel costs, and financial constraints associated with such carriers’ abilities to provide delivery services to meet our and our suppliers’ shipping needs. In addition, for some customer orders we rely on third-party jewelers to assemble and ship the product. Our suppliers’, third-party carriers’, or third-party jewelers’ failure to deliver high-quality products to us or our customers in a timely manner or to otherwise adequately serve our customers would damage our reputation and brand, and substantially harm our business and results of operations.

We rely on a limited number of contract manufacturers and logistics partners for our products. A loss of any of these partners could negatively affect our business.

We rely on a limited number of contract manufacturers and logistics partners to manufacture and transport our products. In the event of interruption from any of our contract manufacturers, we may not be able to increase capacity from other sources or develop alternate or secondary sources without incurring material additional costs and substantial delays. Our contract manufacturers’ primary facilities are principally located in the U.S., India, Mexico, and Thailand, and furthermore are geographically concentrated in limited regions of each. Thus, our business could be adversely affected if one or more of our manufacturers is impacted by a natural disaster, an epidemic such as the current COVID-19 pandemic, or other interruption at a particular location. For example, the COVID-19 pandemic caused interruptions in the development, manufacturing (including the sourcing of key materials), and shipment of our products, which could adversely impact our revenue, gross margins, and operating results. Such interruptions may be due to, among other things, temporary closures of our facilities or those of our contract manufacturers, and other vendors in our supply chain; restrictions on travel or the import/export of goods and services from certain ports that we use; and local quarantines.

 

61


Table of Contents

If we experience a significant increase in demand for our products that cannot be satisfied adequately through our existing manufacturing channels, or if we need to replace an existing manufacturer, we may be unable to supplement or replace them on terms that are acceptable to us, which may undermine our ability to deliver our products in a timely manner. For example, if we require additional manufacturing support, it may take a significant amount of time to identify a manufacturer that has the capability and resources to build our products to our specifications in sufficient volume. Identifying suitable manufacturers and logistics partners is an extensive process that requires us to become satisfied with their quality control, technical capabilities, responsiveness and service, financial stability, regulatory compliance, and labor and other ethical practices. Accordingly, a loss of any of our contract manufacturers or logistics partners could have an adverse effect on our business, financial condition, and operating results.

We rely on third parties for elements of the payment processing infrastructure underlying our business and are subject to risks related to online payment methods.

The convenient payment mechanisms provided by our business are key factors contributing to the development of our business. We rely on third parties for elements of our payment processing infrastructure to accept payments from customers and remit payments to suppliers. These third parties may refuse to renew our agreements with them on commercially reasonable terms or at all. If these companies become unwilling or unable to provide these services to us on acceptable terms or at all, our business may be disrupted. For certain payment methods, including credit and debit cards, and third party financing sources, we generally pay interchange fees and other processing and gateway fees, and such fees result in significant costs. In addition, online payment providers are under continued pressure to pay increased fees to banks to process funds, and there is no assurance that such online payment providers will not pass any increased costs on to us. If these fees increase over time, our operating costs will increase, which could adversely affect our business, financial condition, and results of operations.

Future failures of the payment processing infrastructure underlying our business could cause customers to lose trust in our payment operations and could cause them to instead turn to our competitors’ products and services. If the quality or convenience of our payment processing infrastructure declines as a result of these limitations or for any other reason, the attractiveness of our business to customers could be adversely affected. If we are forced to migrate to other third-party payment service providers for any reason, the transition would require significant time and management resources, and may not be as effective, efficient, or well-received by our customers.

As our business changes, we also may be subject to different rules under existing standards, which may require new assessments that involve costs above what we currently pay for compliance. If we fail to comply with the rules or requirements of any provider of a payment method we accept, if the volume of fraud in our transactions limits or terminates our rights to use payment methods we currently accept, or if a data breach occurs relating to our payment systems, we may, among other things, be subject to fines or higher transaction fees and may lose, or face restrictions placed upon, our ability to accept credit card and debit card payments from customers or facilitate other types of online payments. If any of these events were to occur, our business, financial condition, and results of operations could be materially adversely affected.

We occasionally receive orders placed with fraudulent credit card or other payment data, including stolen credit card numbers, or from clients who have closed bank accounts or have insufficient funds in open bank accounts to satisfy payment obligations. We may suffer losses as a result of orders placed with fraudulent credit card data or other fraudulent payment date even if the associated financial institution approved payment of the orders. Under current credit card practices and the practices of our

 

62


Table of Contents

other payment processing partners, we may be liable for fraudulent credit card or other payment transactions. If we are unable to detect or control credit card or other fraud, our liability for these transactions could harm our business, financial condition, and results of operations.

Our business relies on third party providers of cloud services, and any disruption of, or interference with, our use of cloud services could adversely affect our business, financial condition, or results of operations.

We outsource substantially all of our core cloud infrastructure services to third-party providers, including Amazon Web Services and NetSuite. The third-party providers provide the cloud computing infrastructure we use to host our website and mobile apps, serve our customers, and support our operations and many of the internal tools we use to operate our business. Our website, mobile apps, and internal tools use computing, storage, data transfer, and other functions and services provided by third parties. We do not have control over the operations of the facilities of the third-party providers that we use. The third-party providers’ facilities may be vulnerable to damage or interruption from earthquakes, hurricanes, floods, fires, cybersecurity attacks, terrorist attacks, power losses, telecommunications failures, and other events beyond our control. In the event that any third-party provider’s systems or service abilities are hindered by any of the events discussed above, particularly in a region where our website is mainly hosted, our ability to operate our business may be impaired. A decision to close the facilities without adequate notice or other unanticipated problems or disruptions could result in lengthy interruptions to our business. All of the aforementioned risks may be exacerbated if our business continuity and disaster recovery plans prove to be inadequate.

Additionally, data stored with any third-party provider is vulnerable to experiencing cyberattacks from computer malware, ransomware, viruses, social engineering (including phishing attacks), denial-of-service or other attacks, employee theft or misuse and general hacking. Any of these security incidents could result in unauthorized access to, damage to, disablement or encryption of, use or misuse of, disclosure of, modification of, destruction of, or loss of our data or our customers’ data, or disrupt our ability to provide our products and services, including due to any failure by us to properly configure our third-party provider environment. Our business’ continuing and uninterrupted performance is critical to our success. Customers may become dissatisfied by any system failure that interrupts our ability to provide our products and services to them. We may not be able to easily switch our current operations to another cloud or other data center provider if there are disruptions or interference with our use of a third-party provider, and, even if we do switch our operations, other cloud and data center providers are subject to the same risks. Sustained or repeated system failures would reduce the attractiveness of our products and services, harm our reputation, and potentially reduce net sales. Moreover, negative publicity arising from these types of disruptions could damage our reputation and may adversely impact our business. For more information, see “—We rely heavily on our information technology systems, as well as those of our third-party vendors and service providers, for our business to effectively operate and to safeguard confidential information and any significant failure, inadequacy or interruption of these systems, security breaches or loss of data could materially adversely affect our business, financial condition and operations.”

The third-party providers do not have an obligation to renew their agreements with us on terms acceptable to us or at all. Although alternative data center providers could host our business on a substantially similar basis to our current third-party providers, transitioning our current cloud infrastructure to alternative providers could potentially be disruptive, and we could incur significant one-time costs. If we are unable to renew our agreement with our third-party providers on commercially acceptable terms, if our agreements with our third-party providers are prematurely terminated, or if we add additional infrastructure providers, we may experience costs or downtime in connection with the transfer to, or the addition of, new data center providers. If any of our infrastructure providers increase the costs of their services, our business, financial condition, or results of operations could be materially and adversely affected.

 

63


Table of Contents

We rely primarily on third-party insurance policies to insure our operations-related risks. If our insurance coverage is insufficient for the needs of our business or our insurance providers are unable to meet their obligations, we may not be able to mitigate the risks facing our business, which could adversely affect our business, financial condition, and results of operations.

We procure third-party insurance policies to cover various operations-related risks, including employment practices liability, workers’ compensation, property and casualty, cybersecurity, directors’ and officers’ liability, and general business liabilities. We rely on a limited number of insurance providers, and should such providers discontinue or increase the cost of coverage, we cannot guarantee that we would be able to secure replacement coverage on reasonable terms or at all. If our insurance carriers change the terms of our policies in a manner not favorable to us, our insurance costs could increase, and our ability to adequately ensure the risks to our business could be impaired. A substantial amount of our inventory is in the custody of third parties such as our manufacturing partners, at any given time, and we are reliant on the adequacy of their insurance policies to cover potential loss or damage of our inventory in the custody of third parties. Any failure of such insurance policies to cover an event of loss or damage to inventory in the custody of third parties may result in a material loss to us. Further, if the insurance coverage we maintain is not adequate to cover losses that occur, or if we are required to purchase additional insurance for other aspects of our business, we could be liable for significant additional costs. Additionally, if any of our insurance providers becomes insolvent, it would be unable to pay any operations-related claims that we make.

If the amount of one or more operations-related claims were to exceed our applicable aggregate coverage limits, we would bear the excess, in addition to amounts already incurred in connection with deductibles, self-insured retentions, co-insurance, or otherwise paid by our insurance policy. Insurance providers have raised premiums and deductibles for many businesses and may do so in the future. As a result, our insurance and claims expense could increase, or we may decide to raise our deductibles or self-insured retentions when our policies are renewed or replaced. Our business, financial condition, and results of operations could be adversely affected if the cost per claim, premiums, the severity of claims, or the number of claims significantly exceeds our historical experience and coverage limits; we experience a claim in excess of our coverage limits; our insurance providers fail to pay on our insurance claims; we experience a claim for which coverage is not provided; or the number of claims under our deductibles or self-insured retentions differs from historical averages.

Risks Related to Our Organizational Structure

Our principal asset after the completion of this offering will be our interest in Brilliant Earth, LLC, and, as a result, we will depend on distributions from Brilliant Earth, LLC to pay our taxes and expenses, including payments under the Tax Receivable Agreement. Brilliant Earth, LLC’s ability to make such distributions may be subject to various limitations and restrictions.

Upon the consummation of this offering and the Transactions, we will be a holding company and will have no material assets other than our ownership of LLC Interests. As such, we will have no independent means of generating revenue or cash flow, and our ability to pay our taxes and operating expenses or declare and pay dividends in the future, if any, will be dependent upon the financial results and cash flows of Brilliant Earth, LLC and distributions we receive from Brilliant Earth, LLC. There can be no assurance that Brilliant Earth, LLC will generate sufficient cash flow to distribute funds to us or that applicable state law and contractual restrictions, including negative covenants in any applicable debt instruments, will permit such distributions. Brilliant Earth, LLC is currently subject to debt instruments or other agreements that restrict its ability to make distributions to us, which may in turn affect Brilliant Earth, LLC’s ability to pay distributions to us and thereby adversely affect our cash flows.

Brilliant Earth, LLC will continue to be treated as a partnership for U.S. federal income tax purposes and, as such, generally will not be subject to any entity-level U.S. federal income tax. Instead, any

 

64


Table of Contents

taxable income of Brilliant Earth, LLC will be allocated to holders of LLC Interests, including us. Accordingly, we will incur income taxes on our allocable share of any net taxable income of Brilliant Earth, LLC. Under the terms of the Brilliant Earth LLC Agreement, Brilliant Earth, LLC will be obligated, subject to various limitations and restrictions, including with respect to our debt agreements, to make tax distributions to holders of LLC Interests, including us. In addition to tax expenses, we will also incur expenses related to our operations, including payments under the Tax Receivable Agreement, which we expect will be significant. See “Certain Relationships and Related Party Transactions—Tax Receivable Agreement.” We intend, as its managing member, to cause Brilliant Earth, LLC to make cash distributions to the holders of LLC Interests in an amount sufficient to (1) fund all or part of their tax obligations in respect of taxable income allocated to them and (2) cover our operating expenses, including payments under the Tax Receivable Agreement. However, Brilliant Earth, LLC’s ability to make such distributions may be subject to various limitations and restrictions, such as restrictions on distributions that would either violate any contract or agreement to which Brilliant Earth, LLC is then a party, including debt agreements, or any applicable law, or that would have the effect of rendering Brilliant Earth, LLC insolvent. If we do not have sufficient funds to pay tax or other liabilities, or to fund our operations (including, if applicable, as a result of an acceleration of our obligations under the Tax Receivable Agreement), we may have to borrow funds, which could materially and adversely affect our liquidity and financial condition, and subject us to various restrictions imposed by any lenders of such funds. To the extent we are unable to make timely payments under the Tax Receivable Agreement for any reason, such payments generally will be deferred and will accrue interest until paid; provided, however, that nonpayment for a specified period may constitute a material breach of a material obligation under the Tax Receivable Agreement resulting in the acceleration of payments due under the Tax Receivable Agreement. See “Certain Relationships and Related Party Transactions—Tax Receivable Agreement” and “Certain Relationships and Related Party Transactions—Brilliant Earth LLC Agreement—Agreement in Effect Upon Consummation of the Transactions—Distributions.” In addition, if Brilliant Earth, LLC does not have sufficient funds to make distributions, our ability to declare and pay cash dividends will also be restricted or impaired, although we do not anticipate declaring or paying any cash dividends on our Class A common stock and Class D common stock in the foreseeable future. See “—Risks related to the offering and ownership of our Class A common stock” and “Dividend Policy.”

Under the Brilliant Earth LLC Agreement, we intend to cause Brilliant Earth, LLC, from time to time, to make distributions in cash to its equityholders (including us) in amounts sufficient to cover the taxes imposed on their allocable share of taxable income of Brilliant Earth, LLC. As a result of (1) potential differences in the amount of net taxable income allocable to us and to Brilliant Earth, LLC’s other equityholders, (2) the lower tax rate applicable to corporations as opposed to individuals, and (3) certain tax benefits that we anticipate from (a) future purchases or redemptions of LLC Interests from the Continuing Equity Owners, (b) payments under the Tax Receivable Agreement and (c) any acquisition of interests in Brilliant Earth, LLC from other equityholders in connection with the consummation of the Transactions, these tax distributions may be in amounts that exceed our tax liabilities. Our board of directors will determine the appropriate uses for any excess cash so accumulated, which may include, among other uses, the payment of obligations under the Tax Receivable Agreement and the payment of other expenses. We will have no obligation to distribute such cash (or other available cash) to our stockholders. No adjustments to the exchange ratio for LLC Interests and corresponding shares of Class A common stock or Class D common stock, as applicable, will be made as a result of any cash distribution by us or any retention of cash by us. To the extent we do not distribute such excess cash as dividends on our Class A common stock or Class D common stock we may take other actions with respect to such excess cash, for example, holding such excess cash, or lending it (or a portion thereof) to Brilliant Earth, LLC, which may result in shares of our Class A common stock and Class D common stock increasing in value relative to the value of LLC Interests. The holders of LLC Interests may benefit from any value attributable to such cash balances if they acquire shares of Class A common stock or Class D common stock, as applicable, in exchange

 

65


Table of Contents

for their LLC Interests, notwithstanding that such holders may have participated previously as holders of LLC Interests in distributions that resulted in such excess cash balances.

The Tax Receivable Agreement with the Continuing Equity Owners requires us to make cash payments to them in respect of certain tax benefits to which we may become entitled, and we expect that such payments will be substantial.

In connection with the consummation of this offering, we will enter into a Tax Receivable Agreement with Brilliant Earth, LLC and each of the Continuing Equity Owners. Under the Tax Receivable Agreement, we will be required to make cash payments to the Continuing Equity Owners equal to 85% of the tax benefits, if any, that we actually realize, or in certain circumstances are deemed to realize, as a result of (1) increases in Brilliant Earth Group, Inc.’s allocable share of the tax basis of Brilliant Earth, LLC’s assets resulting from (a) Brilliant Earth Group, Inc.’s purchase of LLC Interests directly from Brilliant Earth, LLC and from each Continuing Equity Owner, as described under “Use of Proceeds”, (b) any future redemptions or exchanges of LLC Interests for Class A common stock, Class D common stock, or cash as described under “Certain Relationships and Related Party Transactions—Brilliant Earth LLC Agreement—Agreement in Effect Upon Consummation of the Transactions—Common Unit Redemption Right,” and (c) certain distributions (or deemed distributions) by Brilliant Earth, LLC; and (2) certain tax benefits arising from payments under the Tax Receivable Agreement. We expect that the amount of the cash payments we will be required to make under the Tax Receivable Agreement will be substantial. Any payments made by us to the Continuing Equity Owners under the Tax Receivable Agreement will not be available for reinvestment in our business and will generally reduce the amount of overall cash flow that might have otherwise been available to us. To the extent that we are unable to make timely payments under the Tax Receivable Agreement for any reason, the unpaid amounts will be deferred and will accrue interest until paid by us; provided, however, that nonpayment for a specified period may constitute a material breach of a material obligation under the Tax Receivable Agreement resulting in the acceleration of payments due under the Tax Receivable Agreement. See “Certain Relationships and Related Party Transactions—Tax Receivable Agreement” and “Certain Relationships and Related Party Transactions—Brilliant Earth Agreement—Agreement in Effect Upon Consummation of the Transactions—Distributions.” Payments under the Tax Receivable Agreement are not conditioned upon continued ownership of Brilliant Earth, LLC by the exchanging Continuing Equity Owners. Furthermore, our future obligation to make payments under the Tax Receivable Agreement could make us a less attractive target for an acquisition, particularly in the case of an acquirer that cannot use some or all of the tax benefits that are the subject of the Tax Receivable Agreement. For more information, see “Certain Relationships and Related Party Transactions—Tax Receivable Agreement.” Assuming no material changes in the relevant tax laws and that we earn sufficient taxable income to realize all tax benefits that are subject to the Tax Receivable Agreement, we expect that the tax savings associated with the purchase of LLC Interests in connection with this offering, together with future redemptions or exchanges of all remaining LLC Interests owned by the Continuing Equity Owners pursuant to the Brilliant Earth LLC Agreement as described above, would aggregate to approximately $422.5 million over 20 years from the date of this offering based on the assumed initial public offering price of $15.00 per share of our Class A common stock, which is the midpoint of the range set forth on the cover page of this prospectus, and assuming all future redemptions or exchanges would occur one year after this offering. Under such scenario, assuming future payments are made on the date each relevant tax return is due, without extensions, we would be required to pay approximately 85% of such amount, or approximately $360.4 million, over the 20-year period from the date of this offering. The actual increase in tax basis and the actual utilization of any resulting tax benefits, as well as the amount and timing of any payments under the Tax Receivable Agreement, will vary depending upon a number of factors including: the timing of redemptions by the Continuing Equity Owners; the price of shares of our Class A common stock at the time of the exchange; the extent to which such exchanges are taxable; the amount of gain recognized by such Continuing Equity Owners; the amount and timing of the taxable income allocated to us or otherwise

 

66


Table of Contents

generated by us in the future; the portion of our payments under the Tax Receivable Agreement constituting imputed interest; and the federal and state tax rates then applicable.

Our organizational structure, including the Tax Receivable Agreement, confers certain benefits upon the Continuing Equity Owners that will not benefit holders of our Class A common stock to the same extent that it will benefit the Continuing Equity Owners.

Our organizational structure, including the Tax Receivable Agreement, confers certain benefits upon the Continuing Equity Owners that will not benefit the holders of our Class A common stock to the same extent that it will benefit the Continuing Equity Owners. We will enter into the Tax Receivable Agreement with Brilliant Earth, LLC and the Continuing Equity Owners in connection with the completion of this offering and the Transactions, which will provide for the payment by us to the Continuing Equity Owners of 85% of the amount of tax benefits, if any, that we actually realize, or in some circumstances are deemed to realize, as a result of (1) increases in Brilliant Earth Group, Inc.’s allocable share of the tax basis of Brilliant Earth, LLC’s assets resulting from (a) Brilliant Earth Group, Inc.’s purchase of LLC Interests from each Continuing Equity Owner, as described under “Use of Proceeds”, (b) any future redemptions or exchanges of LLC Interests for Class A common stock or Class D common stock as described under “Certain Relationships and Related Party Transactions—Brilliant Earth LLC Agreement—Agreement in Effect Upon Consummation of the Transactions—Common Unit Redemption Right,” and (c) certain distributions (or deemed distributions) by Brilliant Earth, LLC; and (2) certain tax benefits arising from payments under the Tax Receivable Agreement. See “Certain Relationships and Related Party Transactions—Tax Receivable Agreement.” Although we will retain 15% of the amount of such tax benefits, this and other aspects of our organizational structure may adversely impact the future trading market for our Class A common stock.

In certain cases, payments under the Tax Receivable Agreement to the Continuing Equity Owners may be accelerated or significantly exceed any actual benefits we realize in respect of the tax attributes subject to the Tax Receivable Agreement.

The Tax Receivable Agreement will provide that if (1) we materially breach any of our material obligations under the Tax Receivable Agreement, (2) certain mergers, asset sales, other forms of business combinations or other changes of control occur after the consummation of this offering, or (3) we elect an early termination of the Tax Receivable Agreement, then our obligations, or our successor’s obligations, under the Tax Receivable Agreement to make payments will be determined based on certain assumptions, including an assumption that we will have sufficient taxable income to fully utilize all potential future tax benefits that are subject to the Tax Receivable Agreement.

As a result of the foregoing, we would be required to make an immediate cash payment equal to the present value of the anticipated future tax benefits that are the subject of the Tax Receivable Agreement, based on certain assumptions (including that we earn sufficient taxable income to realize all potential tax benefits that are subject to the Tax Receivable Agreement), which payment may be made significantly in advance of the actual realization, if any, of such future tax benefits. Such cash payment to the Continuing Equity Owners could be greater than the specified percentage of any actual benefits we ultimately realize in respect of the tax benefits that are subject to the Tax Receivable Agreement. In these situations, our obligations under the Tax Receivable Agreement could have a substantial negative impact on our liquidity and could have the effect of delaying, deferring or preventing certain mergers, asset sales, other forms of business combinations or other changes of control. For example, should we elect to terminate the Tax Receivable Agreement immediately following this offering, assuming no material changes in the relevant tax laws or tax rates, we estimate that the aggregate of termination payments would be approximately $322.8 million based on the assumed initial public offering price of $15.00 per share of our Class A common stock, which is the midpoint of the range set forth on the cover page of this prospectus, and assuming LIBOR (as defined

 

67


Table of Contents

in the Tax Receivable Agreement) were to be 1.2%. There can be no assurance that we will be able to fund or finance our obligations under the Tax Receivable Agreement. We may need to incur debt to finance payments under the Tax Receivable Agreement to the extent our cash resources are insufficient to meet our obligations under the Tax Receivable Agreement as a result of timing discrepancies or otherwise.

We will not be reimbursed for any payments made to the Continuing Equity Owners under the Tax Receivable Agreement in the event that any tax benefits are disallowed.

Payments under the Tax Receivable Agreement will be based on the tax reporting positions that we determine, and the U.S. Internal Revenue Service (the “IRS”), or another tax authority, may challenge all or part of the tax basis increases or other tax benefits we claim, as well as other related tax positions we take, and a court could sustain such challenge. If the outcome of any such challenge would reasonably be expected to adversely affect the rights and obligations of Mainsail or Just Rocks in any material respect under the Tax Receivable Agreement, then we will not be permitted to settle such challenge without the consent (not to be unreasonably withheld or delayed) of Mainsail or Just Rocks, as applicable. The interests of Mainsail and Just Rocks in any such challenge may differ from or conflict with our interests and your interests, and Mainsail and Just Rocks may exercise their consent rights relating to any such challenge in a manner adverse to our interests and your interests. We will not be reimbursed for any cash payments previously made to the Continuing Equity Owners under the Tax Receivable Agreement in the event that any tax benefits initially claimed by us and for which payment has been made to a Continuing Equity Owner are subsequently challenged by a taxing authority and are ultimately disallowed. Instead, any excess cash payments made by us to a Continuing Equity Owner will be netted against future cash payments, if any, that we might otherwise be required to make to such Continuing Equity Owner, under the terms of the Tax Receivable Agreement. However, we might not determine that we have effectively made an excess cash payment to a Continuing Equity Owner for a number of years following the initial time of such payment and, if any of our tax reporting positions are challenged by a taxing authority, we will not be permitted to reduce any future cash payments under the Tax Receivable Agreement until any such challenge is finally settled or determined. Moreover, the excess cash payments we made previously under the Tax Receivable Agreement could be greater than the amount of future cash payments against which we would otherwise be permitted to net such excess. The applicable U.S. federal income tax rules for determining applicable tax benefits we may claim are complex and factual in nature, and there can be no assurance that the IRS or a court will not disagree with our tax reporting positions. As a result, payments could be made under the Tax Receivable Agreement significantly in excess of any actual cash tax savings that we realize in respect of the tax attributes with respect to a Continuing Equity Owner that are the subject of the Tax Receivable Agreement.

Changes in effective tax rates or adverse outcomes resulting from examination of our income or other tax returns could adversely affect our results of operations and financial condition.

We are subject to taxation by U.S. federal, state, local, and foreign tax authorities. Our future effective tax rates could be subject to volatility or adversely affected by a number of factors, including:

 

   

allocation of expenses to and among different jurisdictions;

 

   

changes to our assessment about our ability to realize, or in the valuation of, our deferred tax assets that are based on estimates of our future results, the prudence and feasibility of possible tax planning strategies, and the economic and political environments in which we do business;

 

   

expected timing and amount of the release of any tax valuation allowances;

 

   

tax effects of stock-based compensation;

 

   

costs related to intercompany restructurings;

 

68


Table of Contents
   

changes in tax laws, tax treaties, regulations or interpretations thereof;

 

   

the outcome of current and future tax audits, examinations, or administrative appeals;

 

   

lower than anticipated future earnings in jurisdictions where we have lower statutory tax rates and higher than anticipated future earnings in jurisdictions where we have higher statutory tax rates; and

 

   

limitations or adverse findings regarding our ability to do business in some jurisdictions.

Any changes in U.S. or foreign taxation may increase our worldwide effective tax rate and harm our business, financial condition, and results of operations. In particular, new income or other tax laws or regulations could be enacted at any time, which could adversely affect our business operations and financial performance. Further, existing tax laws and regulations could be interpreted, modified, or applied adversely to us.

If we were deemed to be an investment company under the Investment Company Act of 1940, as amended (the “1940 Act”), including as a result of our ownership of Brilliant Earth, LLC, applicable restrictions could make it impractical for us to continue our business as contemplated and could have a material adverse effect on our business.

Under Sections 3(a)(1)(A) and (C) of the 1940 Act, a company generally will be deemed to be an “investment company” for purposes of the 1940 Act if (1) it is, or holds itself out as being, engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities, or (2) it engages, or proposes to engage, in the business of investing, reinvesting, owning, holding or trading in securities and it owns or proposes to acquire investment securities having a value exceeding 40% of the value of its total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis. We do not believe that we are an “investment company,” as such term is defined in either of those sections of the 1940 Act.

We and Brilliant Earth, LLC intend to conduct our operations so that we will not be deemed an investment company. As the sole managing member of Brilliant Earth, LLC, we will control and operate Brilliant Earth, LLC. On that basis, we believe that our interest in Brilliant Earth, LLC is not an “investment security” as that term is used in the 1940 Act. However, if we were to cease participation in the management of Brilliant Earth, LLC, or if Brilliant Earth, LLC itself becomes an investment company, our interest in Brilliant Earth, LLC could be deemed an “investment security” for purposes of the 1940 Act.

We and Brilliant Earth, LLC intend to conduct our operations so that we will not be deemed an investment company. If it were established that we were an unregistered investment company, there would be a risk that we would be subject to monetary penalties and injunctive relief in an action brought by the SEC, that we would be unable to enforce contracts with third parties and that third parties could seek to obtain rescission of transactions undertaken during the period it was established that we were an unregistered investment company. If we were required to register as an investment company, restrictions imposed by the 1940 Act, including limitations on our capital structure and our ability to transact with affiliates, could make it impractical for us to continue our business as contemplated and could have a material adverse effect on our business.

Risks related to the Offering and Ownership of Our Class A Common Stock

The Continuing Equity Owners will continue to have significant influence over us after this offering, including control over decisions that require the approval of stockholders.

Upon consummation of this offering, the Continuing Equity Owners will control, in the aggregate, approximately 96.7% of the voting power represented by all our outstanding classes of stock. As a

 

69


Table of Contents

result, the Continuing Equity Owners will continue to exercise significant influence over all matters requiring stockholder approval, including the election and removal of directors and the size of our board, any amendment of our amended and restated certificate of incorporation or bylaws, and any approval of significant corporate transactions (including a sale of all or substantially all of our assets), and will continue to have significant control over our business, affairs, and policies, including the appointment of our management. The directors that the Continuing Equity Owners will have the ability to elect through their voting power have the authority to incur additional debt, issue or repurchase stock, declare dividends, and make other decisions that could be detrimental to stockholders.

We expect that members of our board will continue to be appointed by and/or affiliated with the Continuing Equity Owners. The Continuing Equity Owners can take actions that have the effect of delaying or preventing a change of control of us or discouraging others from making tender offers for our shares, which could prevent stockholders from receiving a premium for their shares. These actions may be taken even if other stockholders oppose them. The concentration of voting power with the Continuing Equity Owners may have an adverse effect on the price of our Class A common stock. The Continuing Equity Owners may have interests that are different from yours and may vote in a way with which you disagree and that may be adverse to your interests.

Our stock price may change significantly following the offering, and you may not be able to resell shares of our Class A common stock at or above the price you paid or at all, and you could lose all or part of your investment as a result.

The initial public offering price for the shares was determined by negotiations between us and the underwriters. You may not be able to resell your shares at or above the initial public offering price due to a number of factors included herein, including the following:

 

   

results of operations that vary from the expectations of securities analysts and investors;

 

   

results of operations that vary from those of our competitors;

 

   

changes in expectations as to our future financial performance, including financial estimates and investment recommendations by securities analysts and investors;

 

   

technology changes, changes in consumer behavior in our industry;

 

   

security breaches related to our systems or those of our affiliates or strategic partners;

 

   

changes in economic conditions for companies in our industry;

 

   

changes in market valuations of, or earnings and other announcements by, companies in our industry;

 

   

declines in the market prices of stocks generally, particularly those of jewelry and consumer retail;

 

   

strategic actions by us or our competitors;

 

   

announcements by us, our competitors or our strategic partners of significant contracts, new products, acquisitions, joint marketing relationships, joint ventures, other strategic relationships, or capital commitments;

 

   

changes in general economic or market conditions or trends in our industry or the economy as a whole and, in particular, in the jewelry and consumer retail environment;

 

   

changes in business or regulatory conditions;

 

   

future sales of our Class A common stock or other securities;

 

   

investor perceptions of the investment opportunity associated with our Class A common stock relative to other investment alternatives;

 

70


Table of Contents
   

the public’s response to press releases or other public announcements by us or third parties, including our filings with the SEC;

 

   

announcements relating to litigation or governmental investigations;

 

   

guidance, if any, that we provide to the public, any changes in this guidance, or our failure to meet this guidance;

 

   

the development and sustainability of an active trading market for our stock;

 

   

changes in accounting principles; and

 

   

other events or factors, including those resulting from system failures and disruptions, natural disasters, war, acts of terrorism, an outbreak of highly infectious or contagious diseases, such as COVID-19, or responses to these events.

Furthermore, the stock market may experience extreme volatility that, in some cases, may be unrelated or disproportionate to the operating performance of particular companies. These broad market and industry fluctuations may adversely affect the market price of our Class A common stock, regardless of our actual operating performance. In addition, price volatility may be greater if the public float and trading volume of our Class A common stock is low.

In the past, following periods of market volatility, stockholders have instituted securities class action litigation. If we were involved in securities litigation, it could have a substantial cost and divert resources and the attention of management from our business regardless of the outcome of such litigation.

We cannot predict the effect our multi-class structure may have on the market price of our Class A common stock.

We cannot predict whether our multi-class structure will result in a lower or more volatile market price of our Class A common stock, in adverse publicity, or other adverse consequences. For example, certain index providers have announced restrictions on including companies with multiple-class share structures in certain of their indices. In July 2017, FTSE Russell announced that it plans to require new constituents of its indices to have greater than 5% of the company’s voting rights in the hands of public stockholders, and S&P Dow Jones announced that it will no longer admit companies with multiple-class share structures to certain of its indices. Affected indices include the Russell 2000 and the S&P 500, S&P MidCap 400, and S&P SmallCap 600, which together make up the S&P Composite 1500. Also in 2017, MSCI, a leading stock index provider, opened public consultations on their treatment of no-vote and multi-class structures and temporarily barred new multi-class listings from certain of its indices and in October 2018, MSCI announced its decision to include equity securities “with unequal voting structures” in its indices and to launch a new index that specifically includes voting rights in its eligibility criteria. Under such announced policies, the multi-class structure of our stock would make us ineligible for inclusion in certain indices and, as a result, mutual funds, exchange-traded funds and other investment vehicles that attempt to track those indices would not invest in our Class A common stock. These policies are relatively new and it is unclear what effect, if any, they will have on the valuations of publicly-traded companies excluded from such indices, but it is possible they may depress valuations, compared to similar companies that are included. Given the sustained flow of investment funds into passive strategies that seek to track certain indices, exclusion from certain stock indices would likely preclude investment by many of these funds and could make our Class A common stock less attractive to other investors. As a result, the market price of our Class A common stock could be adversely affected.

 

71


Table of Contents

We are a “controlled company” within the meaning of the Nasdaq rules and, as a result, will qualify for, and intend to rely on, exemptions from certain corporate governance requirements. You may not have the same protections afforded to stockholders of companies that are subject to such corporate governance requirements.

After the consummation of this offering, Mainsail and our Founders will have more than 50% of the voting power for the election of directors, and, as a result, we will be considered a “controlled company” for the purposes of the corporate governance rules of Nasdaq. As such, we will qualify for, and intend to rely on, exemptions from certain corporate governance requirements, including the requirements to have a majority of independent directors on our board of directors, an entirely independent nominating and corporate governance committee, an entirely independent compensation committee or to perform annual performance evaluations of the nominating and corporate governance and compensation committees.

The corporate governance requirements and specifically the independence standards are intended to ensure that directors who are considered independent are free of any conflicting interest that could influence their actions as directors. Following this offering, we intend to utilize certain exemptions afforded to a “controlled company.” As a result, we will not be subject to certain corporate governance requirements, including that a majority of our board of directors consists of “independent directors,” as defined under the Nasdaq rules. In addition, we will not be required to have a nominating and corporate governance committee or compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities or to conduct annual performance evaluations of the nominating and corporate governance and compensation committees.

Accordingly, you may not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of Nasdaq. Our status as a controlled company could make our Class A common stock less attractive to some investors or otherwise harm our stock price.

Certain provisions of Delaware law and antitakeover provisions in our organizational documents could delay or prevent a change of control.

Certain provisions of Delaware law and our amended and restated certificate of incorporation and amended and restated bylaws may have an antitakeover effect and may delay, defer, or prevent a merger, acquisition, tender offer, takeover attempt or other change of control transaction that a stockholder might consider in its best interest, including those attempts that might result in a premium over the market price for the shares held by our stockholders. These provisions provide for, among other things:

 

   

a classified board of directors with staggered three-year terms;

 

   

the ability of our board of directors to issue one or more series of preferred stock;

 

   

at any time when Mainsail and our Founders beneficially own, in the aggregate, at least a majority of the voting power of our outstanding capital stock, our stockholders may take action by consent without a meeting, and at any time when Mainsail and our Founders beneficially own, in the aggregate, less than the majority of the voting power of our outstanding capital stock, our stockholders may not take action by consent, but may only take action at a meeting of stockholders;

 

   

vacancies on our board of directors will be able to be filled only by our board of directors and not by stockholders, subject to the rights granted pursuant to the stockholders agreement;

 

   

advance notice procedures apply for stockholders (other than the parties to our stockholders agreement for nominations made pursuant to the terms of the stockholders agreement) to

 

72


Table of Contents
 

nominate candidates for election as directors or to bring matters before an annual meeting of stockholders;

 

   

the inability of our stockholders to call a special meeting of stockholders;

 

   

prohibit cumulative voting in the election of directors;

 

   

at any time when Mainsail and our Founders beneficially own, in the aggregate, at least a majority of the voting power of our outstanding capital stock, directors may be removed at any time with or without cause upon the affirmative vote of the holders of capital stock representing a majority of the voting power of our outstanding shares of capital stock entitled to vote thereon, and at any time when Mainsail and our Founders beneficially own, in the aggregate, less than the majority of the voting power of our outstanding shares of capital stock entitled to vote generally in the election of directors, in the aggregate, directors may only be removed for cause and only upon the affirmative vote of at least 66 2/3% of the holders of capital stock representing the voting power of our outstanding shares of capital stock entitled to vote thereon; and

 

   

that certain provisions of amended and restated certificate of incorporation may be amended only by the affirmative vote of at least 66 2/3% of the voting power represented by our then-outstanding common stock.

These antitakeover provisions could make it more difficult for a third party to acquire us, even if the third party’s offer may be considered beneficial by many of our stockholders. As a result, our stockholders may be limited in their ability to obtain a premium for their shares.

In addition, we have opted out of Section 203 of the General Corporation Law of the State of Delaware, which we refer to as the DGCL, but our amended and restated certificate of incorporation will provide that engaging in any of a broad range of business combinations with any “interested” stockholder (generally defined as any stockholder with 15% or more of our voting stock) for a period of three years following the date on which the stockholder became an “interested” stockholder is prohibited, subject to certain exceptions. See “Description of Capital Stock.”

The JOBS Act will allow us to postpone the date by which we must comply with certain laws and regulations intended to protect investors and to reduce the amount of information we provide in our reports filed with the SEC. We cannot be certain if this reduced disclosure will make our Class A common stock less attractive to investors.

The JOBS Act is intended to reduce the regulatory burden on “emerging growth companies.” As defined in the JOBS Act, a public company whose initial public offering of common equity securities occurs after December 8, 2011, and whose annual net sales are less than $1.07 billion will, in general, qualify as an “emerging growth company” until the earliest of:

 

   

the last day of its fiscal year following the fifth anniversary of the date of its initial public offering of common equity securities;

 

   

the last day of its fiscal year in which it has annual gross revenue of $1.07 billion or more;

 

   

the date on which it has, during the previous three-year period, issued more than $1.07 billion in nonconvertible debt; and

 

   

the date on which it is deemed to be a “large accelerated filer, ” which will occur at such time as the company (1) has an aggregate worldwide market value of common equity securities held by non-affiliates of $700 million or more as of the last business day of its most recently completed second fiscal quarter, (2) has been required to file annual and quarterly reports under the Exchange, for a period of at least 12 months, and (3) has filed at least one annual report pursuant to the Exchange Act.

 

73


Table of Contents

Under this definition, we will be an “emerging growth company” upon completion of this offering and could remain an “emerging growth company” until as late as the fifth anniversary of the completion of this offering. For so long as we are an “emerging growth company,” we will, among other things:

 

   

not be required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act;

 

   

not be required to hold a nonbinding advisory stockholder vote on executive compensation pursuant to Section 14A(a) of the Exchange Act;

 

   

not be required to seek stockholder approval of any golden parachute payments not previously approved pursuant to Section 14A(b) of the Exchange Act;

 

   

be exempt from the requirement of the PCAOB, regarding the communication of critical audit matters in the auditor’s report on the financial statements; and

 

   

be subject to reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements.

In addition, Section 107 of the JOBS Act provides that an emerging growth company can use the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. This permits an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to use this extended transition period and, as a result, our consolidated financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective dates for new or revised accounting standards that are applicable to public companies.

We cannot predict if investors will find our Class A common stock less attractive as a result of our decision to take advantage of some or all of the reduced disclosure requirements above. If some investors find our Class A common stock less attractive as a result, there may be a less active trading market for our Class A common stock and our stock price may be more volatile.

Pursuant to the Dodd-Frank Act and SEC rules, we must file public disclosures regarding the country of origin of certain supplies, which could damage our reputation or impact our ability to obtain merchandise if customers or other stakeholders react negatively to our disclosures.

In August 2012, the SEC, pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), issued final rules, which require annual disclosure and reporting on the source and use of certain minerals, including gold, from the Democratic Republic of Congo and adjoining countries. The gold supply chain is complex and, while management believes that the rules currently cover less than 1% of annual worldwide gold production (based upon recent estimates), the final rules require us and other affected companies that file with the SEC to make specified country of origin inquiries of our suppliers, and otherwise to exercise reasonable due diligence in determining the country of origin and certain other information relating to any of the statutorily designated minerals (gold, tin, tantalum, and tungsten), that are used in products sold by us in the U.S. and elsewhere.

There may be reputational risks associated with any potential negative response of our customers and other stakeholders to future disclosures by us in the event that, due to the complexity of the global supply chain, we are unable to sufficiently verify the origin of the relevant metals. Also, if future responses to verification requests by suppliers of any of the covered minerals used in our products are inadequate or adverse, our ability to obtain merchandise may be impaired, and its compliance costs may increase. The final rules also cover tungsten and tin, which are contained in a small proportion of items that are sold by us. It is possible that other minerals, such as diamonds, could be subject to similar rules.

 

74


Table of Contents

Because we have no current plans to pay regular cash dividends on our Class A common stock following this offering, you may not receive any return on investment unless you sell your Class A common stock for a price greater than that which you paid for it.

We do not anticipate paying any regular cash dividends on our Class A common stock following this offering. Any decision to declare and pay dividends in the future will be made at the discretion of our board of directors and will depend on, among other things, general and economic conditions, our results of operations and financial condition, our available cash and current and anticipated cash needs, capital requirements, contractual, legal, tax and regulatory restrictions, and such other factors that our board of directors may deem relevant. In addition, our ability to pay dividends is, and may be, limited by covenants of any future outstanding indebtedness we or our subsidiaries incur. Therefore, any return on investment in our Class A common stock is solely dependent upon the appreciation of the price of our Class A common stock on the open market, which may not occur. See “Dividend Policy” for more detail.

No market currently exists for our Class A common stock, and an active, liquid trading market for our Class A common stock may not develop, which may cause our Class A common stock to trade at a discount from the initial offering price and make it difficult for you to sell the Class A common stock you purchase.

Prior to this offering, there has not been a public market for our Class A common stock. We cannot predict the extent to which investor interest in us will lead to the development of a trading market or how active and liquid that market may become. If an active and liquid trading market does not develop or continue, you may have difficulty selling any of our Class A common stock that you purchase at a price above the price you purchase it or at all. The initial public offering price for the shares was determined by negotiations between us and the underwriters and may not be indicative of prices that will prevail in the open market following this offering. The failure of an active and liquid trading market to develop and continue would likely have a material adverse effect on the value of our Class A common stock. The market price of our Class A common stock may decline below the initial offering price, and you may not be able to sell your shares of our Class A common stock at or above the price you paid in this offering, or at all. An inactive market may also impair our ability to raise capital to continue to fund operations by selling shares and may impair our ability to acquire other companies or technologies by using our shares as consideration.

In addition, we currently anticipate that up to 2% of the shares of Class A common stock offered hereby will, at our request, be offered to retail investors through Robinhood Financial, LLC, as a selling group member, via its online brokerage platform. There may be risks associated with the use of the Robinhood platform that we cannot foresee, including risks related to the technology and operation of the platform, and the publicity and the use of social media by users of the platform that we cannot control.

Our amended and restated certificate of incorporation will provide that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for certain stockholder litigation matters and the federal district courts of the U.S. shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or stockholders.

Our amended and restated certificate of incorporation will provide (A) (i) any derivative action or proceeding brought on behalf of the Company, (ii) any action asserting a claim of breach of a fiduciary duty owed by any current or former director, officer, other employee or stockholder of the Company to the Company or the Company’s stockholders, (iii) any action asserting a claim arising pursuant to any provision of the DGCL, our amended and restated certificate of incorporation or our amended and restated bylaws (as either may be amended or restated) or as to which the DGCL confers jurisdiction

 

75


Table of Contents

on the Court of Chancery of the State of Delaware or (iv) any action asserting a claim governed by the internal affairs doctrine of the law of the State of Delaware shall, to the fullest extent permitted by law, be exclusively brought in the Court of Chancery of the State of Delaware or, if such court does not have subject matter jurisdiction thereof, the federal district court of the State of Delaware; and (B) the federal district courts of the U.S. shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act. Notwithstanding the foregoing, the exclusive forum provision shall not apply to claims seeking to enforce any liability or duty created by the Exchange Act. The choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or other employees, which may discourage such lawsuits against us and our directors, officers, and other employees. Alternatively, if a court were to find the choice of forum provision contained in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business, results of operations, and financial condition. Any person or entity purchasing or otherwise acquiring or holding any interest in shares of our capital stock shall be deemed to have notice of and consented to the forum provisions in our amended and restated certificate of incorporation.

If securities analysts do not publish research or reports about our business or if they downgrade our stock or our sector, or if there is any fluctuation in our credit rating, our stock price and trading volume could decline.

The trading market for our Class A common stock will rely in part on the research and reports that industry or financial analysts publish about us or our business. We do not control these analysts. Securities and industry analysts do not currently, and may never, publish research on our company. If no securities or industry analysts commence coverage of us, the trading price of our shares would likely be negatively impacted. Furthermore, if one or more of the analysts who do cover us downgrade our stock or our industry, or the stock of any of our competitors, or publish inaccurate or unfavorable research about our business, the price of our stock could decline. If one or more of these analysts stops covering us or fails to publish reports on us regularly, we could lose visibility in the market, which, in turn, could cause our stock price or trading volume to decline.

Additionally, any fluctuation in the credit rating of us or our subsidiaries may impact our ability to access debt markets in the future or increase our cost of future debt, which could have a material adverse effect on our operations and financial condition, which in return may adversely affect the trading price of shares of our Class A common stock.

If our estimates or judgments relating to our critical accounting policies prove to be incorrect, our results of operations could be adversely affected.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes appearing elsewhere in this prospectus. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as provided in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates.” The results of these estimates form the basis for making judgments about the carrying values of assets, liabilities, and equity, and the amount of revenue and expenses. Significant estimates and judgments involve: revenue recognition, including revenue-related reserves; legal contingencies; valuation of our common stock and equity awards; income taxes; and sales and indirect tax reserves. Our results of operations may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our results of operations to fall below the expectations of securities analysts and investors, resulting in a decline in the market price of our Class A common stock.

 

76


Table of Contents

Future sales, or the perception of future sales, by us or our existing stockholders in the public market following this offering could cause the market price for our Class A common stock to decline.

After this offering, the sale of shares of our Class A common stock in the public market, or the perception that such sales could occur, could harm the prevailing market price of shares of our Class A common stock. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.

Upon consummation of the Transactions, we will have outstanding a total of 16,666,667 shares of Class A common stock. Of the outstanding shares, the 16,666,667 shares sold in this offering (or 19,166,667 shares if the underwriters exercise in full their option to purchase additional shares) will be freely tradable without restriction or further registration under the Securities Act, other than any shares held by our affiliates. Any shares of Class A common stock held by our affiliates will be eligible for resale pursuant to Rule 144 under the Securities Act, subject to the volume, manner of sale, holding period and other limitations of Rule 144.

Our directors and executive officers, and substantially all of our stockholders will enter into lock-up agreements with the underwriters prior to the commencement of this offering pursuant to which each of these persons or entities, subject to certain exceptions, restrict the sale of the shares of our Class A common stock and certain other securities held by them for a period of 180 days after the date of this prospectus. J.P. Morgan Securities LLC and Credit Suisse Securities (USA) LLC may, in their sole discretion and at any time without notice, release all or any portion of the shares or securities subject to any such lock-up agreements. See “Underwriting.”

In addition, we have reserved 10,919,558 shares of Class A common stock for issuance under the 2021 Plan and 1,637,933 shares of Class A common stock for issuance under the ESPP. Any Class A common stock that we issue under the 2021 Plan, the ESPP, or other equity incentive plans that we may adopt in the future would dilute the percentage ownership held by the investors who purchase Class A common stock in this offering.

As restrictions on resale end or if these stockholders exercise their registration rights, the market price of our shares of Class A common stock could drop significantly if the holders of these shares sell them or are perceived by the market as intending to sell them. These factors could also make it more difficult for us to raise additional funds through future offerings of our shares of Class A common stock or other securities.

In the future, we may also issue securities in connection with investments, acquisitions or capital raising activities. In particular, the number of shares of our Class A common stock issued in connection with an investment or acquisition, or to raise additional equity capital, could constitute a material portion of our then-outstanding shares of our Class A common stock. Any such issuance of additional securities in the future may result in additional dilution to you, or may adversely impact the price of our Class A common stock.

If you purchase shares of Class A common stock in this offering, you will suffer immediate and substantial dilution of your investment.

The initial public offering price of our Class A common stock is substantially higher than the net tangible book value per share of our Class A common stock. Therefore, if you purchase shares of our Class A common stock in this offering, you will pay a price per share that substantially exceeds our net tangible book value per share after this offering. You will experience immediate dilution of $14.03 per share, representing the difference between our net tangible book value per share after giving effect to

 

77


Table of Contents

this offering and the initial public offering price. In addition, investors who purchase Class A common stock from us in this offering will have contributed 100% of the aggregate price paid by all purchasers of our outstanding equity but will own only approximately 17.7% of our outstanding equity after this offering. See “Dilution” for more detail, including the calculation of the net tangible book value per share of our Class A common stock.

General Risk Factors

As a public reporting company, we will be subject to rules and regulations established from time to time by the SEC and Nasdaq regarding our internal control over financial reporting. If we fail to establish and maintain effective internal control over financial reporting and disclosure controls and procedures, we may not be able to accurately report our financial results, or report them in a timely manner.

Upon completion of this offering, we will become a public reporting company subject to the rules and regulations established from time to time by the SEC and Nasdaq. These rules and regulations will require, among other things, that we establish and periodically evaluate procedures with respect to our internal control over financial reporting. Reporting obligations as a public company are likely to place a considerable strain on our financial and management systems, processes and controls, as well as on our personnel.

In addition, as a public company we will be required to document and test our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act so that our management can certify as to the effectiveness of our internal control over financial reporting by the time our second annual report is filed with the SEC and thereafter, which will require us to document and make significant changes to our internal control over financial reporting. Likewise, our independent registered public accounting firm will be required to provide an attestation report on the effectiveness of our internal control over financial reporting at such time as we cease to be an “emerging growth company,” as defined in the JOBS Act, and we become an accelerated or large accelerated filer. As described above, we could potentially qualify as an “emerging growth company” until as late as the fifth anniversary of the completion of this offering.

We expect to incur costs related to implementing an internal audit and compliance function in the upcoming years to further improve our internal control environment. If we identify future deficiencies in our internal control over financial reporting or if we are unable to comply with the demands that will be placed upon us as a public company, including the requirements of Section 404 of the Sarbanes-Oxley Act, in a timely manner, we may be unable to accurately report our financial results, or report them within the timeframes required by the SEC. We also could become subject to sanctions or investigations by the SEC or other regulatory authorities. In addition, if we are unable to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting, when required, investors may lose confidence in the accuracy and completeness of our financial reports, we may face restricted access to the capital markets and our stock price may be adversely affected.

We will incur significant costs as a result of operating as a public company.

Prior to this offering, we operated on a private basis, and most of our management team does not have public company experience. After this offering, we will be subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Act, the listing requirements of the                      and other applicable securities laws and regulations. The expenses incurred by public companies generally for reporting and corporate governance purposes have been increasing. We expect these

 

78


Table of Contents

rules and regulations to increase our legal and financial compliance costs and to make some activities more difficult, time-consuming and costly, although we are currently unable to estimate these costs with any degree of certainty. We also expect that being a public company and being subject to new rules and regulations will make it more expensive for us to obtain director and officer liability or other types of insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These laws and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as our executive officers. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our Class A common stock, fines, sanctions, and other regulatory action, and potentially civil litigation. These factors may, therefore, strain our resources, divert management’s attention, and affect our ability to attract and retain qualified board members.

 

79


Table of Contents

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. All statements other than statements of historical facts contained in this prospectus may be forward-looking statements. Statements regarding our future results of operations and financial position, business strategy, and plans and objectives of management for future operations, including, among others, statements regarding the Transactions, including the consummation of this offering, expected growth, future capital expenditures, and debt service obligations, are forward-looking statements. In some cases, you can identify forward-looking statements by terms, such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “targets,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential,” or “continue,” or the negative of these terms or other similar expressions. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions, and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements.

Forward-looking statements contained in this prospectus include, but are not limited to, statements about:

 

   

our future financial performance, including our expectations regarding our revenue, rate of growth, operating expenses including changes in sales and marketing, research and development, and general and administrative expenses (including any components of the foregoing), and our ability to achieve and sustain future profitability; any changes in the costs of diamonds, other gemstones, and precious metals, lead times, supply shortages, and supply changes;

 

   

the effects of the ongoing COVID-19 pandemic in the markets in which we operate;

 

   

our business plan and our ability to effectively manage our expenses or grow our revenue;

 

   

our ability to successful manage our inventory balances and inventory shrinkage;

 

   

anticipated trends, growth rates, and challenges in our business and in the markets in which we operate; our market opportunity;

 

   

our ability to expand into new domestic and international markets;

 

   

beliefs and objectives for future operations;

 

   

the effects of seasonal and cyclical trends on our results of operations;

 

   

the effects of increased competition in our markets and our ability to compete effectively;

 

   

our ability to stay in compliance with laws and regulations that currently apply or become applicable to our business both in the U.S. and, if and as applicable, internationally; and

 

   

economic and industry trends, growth forecasts, or trend analysis.

We caution you that the foregoing list may not contain all of the forward-looking statements made in this prospectus.

We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties, and assumptions, including those described in the section titled “Risk Factors.” Moreover, we operate in a very competitive and rapidly changing environment.

 

80


Table of Contents

New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties, and assumptions, the future events and trends discussed in this prospectus may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

You should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, performance, or achievements. We undertake no obligation to update any of these forward-looking statements for any reason after the date of this prospectus or to conform these statements to actual results or revised expectations, except as required by law.

You should read this prospectus and the documents that we reference in this prospectus and have filed with the SEC as exhibits to the registration statement of which this prospectus is a part with the understanding that our actual future results, performance, and events and circumstances may be materially different from what we expect.

 

81


Table of Contents

OUR ORGANIZATIONAL STRUCTURE

Brilliant Earth Group, Inc., a Delaware corporation, was formed on June 2, 2021 and is the issuer of the Class A common stock offered by this prospectus. Prior to this offering and the Transactions (as defined below), all of our business operations have been conducted through Brilliant Earth, LLC and the Original Equity Owners are the only owners of Brilliant Earth, LLC. We will consummate the Transactions, excluding this offering, prior to the consummation of this offering.

Existing Organization

Brilliant Earth, LLC is treated as a partnership for U.S. federal income tax purposes and, as such, is generally not subject to any U.S. federal entity-level income taxes. Taxable income or loss of Brilliant Earth, LLC is included in the U.S. federal income tax returns of Brilliant Earth, LLC’s members. Immediately prior to the consummation of this offering, the Original Equity Owners were the only members of Brilliant Earth, LLC.

Transactions

Prior to the Transactions, we expect there will initially be one holder of common stock of Brilliant Earth Group, Inc. We will consummate the following organizational transactions in connection with this offering:

 

   

we will amend and restate the existing limited liability company agreement of Brilliant Earth, LLC, which will become effective prior to the consummation of this offering, to, among other things, (1) recapitalize all existing ownership interests in Brilliant Earth, LLC into 85,998,351 LLC Interests, (2) appoint Brilliant Earth Group, Inc. as the sole managing member of Brilliant Earth, LLC upon its acquisition of LLC Interests in connection with this offering, and (3) provide certain redemption rights to the Continuing Equity Owners;

 

   

we will amend and restate Brilliant Earth Group, Inc.’s certificate of incorporation and will be authorized to issue four classes of common stock, which we refer to collectively as our “common stock” and which are summarized in the following table:

 

Class of Common Stock

  

Votes

  

Economic Rights

Class A common stock    1    Yes
Class B common stock    1    No
Class C common stock    10    No
Class D common stock    10    Yes

Voting shares of our common stock will generally vote together as a single class on all matters submitted to a vote of our stockholders. We will issue shares of our Class A common stock to the investors in this offering. Our Class B common stock may only be held by the Continuing Equity Owners (excluding our Founders) and their respective permitted transferees as described in “Description of Capital Stock—Common Stock—Class B common stock.” Our Class C common stock and Class D common stock may only be held by our Founders and their respective permitted transferees as described in “Description of Capital Stock—Common Stock—Class C common stock” and “Description of Capital Stock—Common Stock—Class D common stock.” No shares of our Class D common stock will be outstanding upon the closing of this offering, but may be issued after the consummation of this offering by us in connection with an exchange by the Founders of their LLC Interests (along with an equal number of shares of Class C common stock (and such shares shall be immediately cancelled)). We do not intend to

 

82


Table of Contents

list our Class B common stock, Class C common stock, or Class D common stock on any stock exchange;

 

   

we will issue 32,469,276 shares of our Class B common stock (after giving effect to the use of net proceeds as described below) to the Continuing Equity Owners (excluding our Founders), which is equal to the number of LLC Interests held by such Continuing Equity Owners (excluding our Founders), for nominal consideration;

 

   

we will issue 45,195,741 shares of our Class C common stock (after giving effect to the use of net proceeds as described below) to our Founders, which is equal to the number of LLC Interests held by such Founder, for nominal consideration;

 

   

we will issue 16,666,667 shares of our Class A common stock to the purchasers in this offering (or 19,166,667 shares if the underwriters exercise in full their option to purchase additional shares of Class A common stock) in exchange for net proceeds of approximately $229.4 million (or approximately $263.8 million if the underwriters exercise in full their option to purchase additional shares of Class A common stock) based upon an assumed initial public offering price of $15.00 per share (which is the midpoint of the estimated price range set forth on the cover page of this prospectus), less the underwriting discount and estimated offering expenses payable by us;

 

   

we will use the net proceeds from this offering (1) to purchase 8,333,333 newly issued LLC Interests for approximately $117.2 million directly from Brilliant Earth, LLC at the initial public offering price less the underwriting discount, excluding estimated offering expenses of $5.0 million payable by us; and (2) to purchase 8,333,334 LLC Interests from each of the Continuing Equity Owners on a pro rata basis for $117.2 million in aggregate (or 10,833,334 LLC Interests for $152.3 million in aggregate if the underwriters exercise in full their option to purchase additional shares of Class A common stock) at a price per unit equal to the initial public offering price per share of Class A common stock in this offering less the underwriting discount;

 

   

Brilliant Earth, LLC intends to use the net proceeds from the sale of LLC Interests to Brilliant Earth Group, Inc. for general corporate purposes, as described under “Use of Proceeds”; and

 

   

Brilliant Earth Group, Inc. will enter into (1) the Stockholders Agreement with Mainsail and our Founders, (2) the Registration Rights Agreement with certain of the Continuing Equity Owners, and (3) the Tax Receivable Agreement with Brilliant Earth, LLC and the Continuing Equity Owners. For a description of the terms of the Stockholders Agreement, the Registration Rights Agreement and the Tax Receivable Agreement, see “Certain Relationships and Related Party Transactions.”

Organizational Structure Following the Transactions

 

   

Brilliant Earth Group, Inc. will be a holding company and its principal asset will consist of LLC Interests it acquires directly from Brilliant Earth, LLC and from each Continuing Equity Owner;

 

   

Brilliant Earth Group, Inc. will be the sole managing member of Brilliant Earth, LLC and will control the business and affairs of Brilliant Earth, LLC;

 

   

Brilliant Earth Group, Inc. will own, directly or indirectly, 16,666,667 LLC Interests of Brilliant Earth, LLC, representing approximately 17.7% of the economic interest in Brilliant Earth, LLC (or 19,166,667 LLC Interests, representing approximately 20.3% of the economic interest in Brilliant Earth, LLC if the underwriters exercise in full their option to purchase additional shares of Class A common stock);

 

   

the Continuing Equity Owners (excluding Mainsail and our Founders) will own (1) 3,327,834 LLC Interests of Brilliant Earth, LLC, representing approximately 3.5% of the economic interest in Brilliant Earth, LLC (or 3,220,713 LLC Interests, representing

 

83


Table of Contents
 

approximately 3.4% of the economic interest in Brilliant Earth, LLC if the underwriters exercise in full their option to purchase additional shares of Class A common stock) and (2) 3,327,834 shares of Class B common stock of Brilliant Earth Group, Inc., representing approximately 0.7% of the combined voting power of all of Brilliant Earth Group, Inc.’s common stock (or 3,220,713 shares of Class B common stock of Brilliant Earth Group, Inc., representing approximately 0.7% if the underwriters exercise in full their option to purchase additional shares of Class A common stock);

 

   

Mainsail will own (1) 29,141,442 LLC Interests of Brilliant Earth, LLC, representing approximately 30.9% of the economic interest in Brilliant Earth, LLC (or 28,203,393 LLC Interests of Brilliant Earth, LLC, representing approximately 29.9% of the economic interest in Brilliant Earth, LLC if the underwriters exercise in full their option to purchase additional shares of Class A common stock) and (2) 29,141,442 shares of Class B common stock of Brilliant Earth Group, Inc., representing approximately 5.8% of the combined voting power of all of Brilliant Earth Group, Inc.’s common stock (or 28,203,393 shares of Class B common stock, representing approximately 5.8% if the underwriters exercise in full their option to purchase additional shares of Class A common stock);

 

   

our Founders will own (1) 45,195,741 LLC Interests of Brilliant Earth, LLC, representing approximately 47.9% of the economic interest in Brilliant Earth, LLC (or 43,740,911 LLC Interests of Brilliant Earth, LLC, representing approximately 46.4% of the economic interest in Brilliant Earth, LLC if the underwriters exercise in full their option to purchase additional shares of Class A common stock) and (2) 45,195,741 shares of Class C common stock of Brilliant Earth Group, Inc., representing approximately 90.2% of the combined voting power of all of Brilliant Earth Group, Inc.’s common stock (or 43,740,911 shares of Class C common stock, representing approximately 89.6% if the underwriters exercise in full their option to purchase additional shares of Class A common stock);

 

   

the purchasers in this offering will own (1) 16,666,667 shares of Class A common stock of Brilliant Earth Group, Inc. (or 19,166,667 shares of Class A common stock of Brilliant Earth Group, Inc. if the underwriters exercise in full their option to purchase additional shares of Class A common stock), representing approximately 3.3% of the combined voting power of all of Brilliant Earth Group, Inc.’s common stock and approximately 17.7% of the economic interest in Brilliant Earth Group, Inc. (or approximately 3.9% of the combined voting power and approximately 20.3% of the economic interest if the underwriters exercise in full their option to purchase additional shares of Class A common stock), and (2) through Brilliant Earth Group, Inc.’s ownership of LLC Interests, indirectly will hold approximately 17.7% of the economic interest in Brilliant Earth, LLC (or approximately 20.3% of the economic interest in Brilliant Earth, LLC if the underwriters exercise in full their option to purchase additional shares of Class A common stock).

Our corporate structure following this offering, as described below, is commonly referred to as an umbrella partnership-C corporation (“Up-C”) structure, which is often used by partnerships and limited liability companies when they undertake an initial public offering of their business. The Up-C structure will allow the Continuing Equity Owners to retain their equity ownership in Brilliant Earth, LLC and to continue to realize tax benefits associated with owning interests in an entity that is treated as a partnership, or “flow-through” entity, for U.S. federal income tax purposes following the offering. Investors in this offering will, by contrast, hold their equity ownership in Brilliant Earth Group, Inc., a Delaware corporation that is a domestic corporation for U.S. federal income tax purposes, in the form of shares of Class A common stock. One of the tax benefits to the Continuing Equity Owners associated with this structure is that future taxable income of Brilliant Earth, LLC that is allocated to the Continuing Equity Owners will be taxed on a flow-through basis and therefore will not be subject to corporate taxes at the entity level. Additionally, because the Continuing Equity Owners may redeem or exchange their LLC Interests for newly issued shares of our Class A common stock or Class D common stock, as applicable, on a one-for-one basis or, at our option, for cash, the Up-C structure

 

84


Table of Contents

also provides the Continuing Equity Owners with potential liquidity that holders of non-publicly traded limited liability companies are not typically afforded. The Continuing Equity Owners and Brilliant Earth Group, Inc. also each expect to benefit from the Up-C structure as a result of certain cash tax savings arising from redemptions or exchanges of the Continuing Equity Owner’s LLC Interests for Class A common stock or Class D common stock, as applicable, or cash, and certain other tax benefits covered by the Tax Receivable Agreement discussed in “Certain Relationships and Related Party Transactions–Tax Receivable Agreement.” See “Risk Factors—Risks Related to Our Organizational Structure.” In general, the Continuing Equity Owners expect to receive payments under the Tax Receivable Agreement of 85% of the amount of certain tax benefits, as described below, and Brilliant Earth Group, Inc. expects to benefit in the form of cash tax savings in amounts equal to 15% of certain tax benefits, as described below. Any payments made by us to the Continuing Equity Owners under the Tax Receivable Agreement will reduce cash otherwise arising from such tax savings. We expect such payments will be substantial.

As described below under “Certain Relationships and Related Party Transactions—Tax Receivable Agreement,” prior to the completion of this offering, we will enter into a tax receivable agreement with Brilliant Earth, LLC and the Continuing Equity Owners that will provide for the payment by Brilliant Earth Group, Inc. to the Continuing Equity Owners of 85% of the amount of tax benefits, if any, that Brilliant Earth Group, Inc. actually realizes (or in some circumstances is deemed to realize) as a result of (1) increases in Brilliant Earth Group, Inc.’s allocable share of the tax basis of Brilliant Earth, LLC’s assets resulting from (a) Brilliant Earth Group, Inc.’s purchase of LLC Interests from each Continuing Equity Owner, as described under “Use of Proceeds”, (b) future redemptions or exchanges of LLC Interests for Class A common stock or cash as described below under “ —Redemption rights of holders of LLC Interests,” and (c) certain distributions (or deemed distributions) by Brilliant Earth, LLC; and (2) certain tax benefits arising from payments made under the Tax Receivable Agreement.

The diagram below depicts our organizational structure after giving effect to the Transactions, including this offering, assuming no exercise by the underwriters of their option to purchase additional shares of Class A common stock.

 

LOGO

 

(1)

Investors in this offering will hold approximately 3.3% of the voting interest.

 

85


Table of Contents
(2)

Beth Gerstein and Eric Grossberg will hold their Class C common stock of Brilliant Earth Group, Inc. through Just Rocks, for which they share ownership equally.

(3)

Comprised of 28,455,761 shares of Class B common stock to be held by Mainsail Partners III, L.P., 629,112 shares of Class B common stock to be held by Mainsail Co-Investors III, L.P., and 56,569 shares of Class B common stock to be held by Mainsail Incentive Program, LLC.

As the sole managing member of Brilliant Earth, LLC, we will operate and control all of the business and affairs of Brilliant Earth, LLC and, through Brilliant Earth, LLC, conduct our business. Following the Transactions, including this offering, Brilliant Earth Group, Inc. will control the management of Brilliant Earth, LLC as its sole managing member. As a result, Brilliant Earth Group, Inc. will consolidate Brilliant Earth, LLC and record a significant non-controlling interest in a consolidated entity in Brilliant Earth Group, Inc.’s consolidated financial statements for the economic interest in Brilliant Earth, LLC held by the Continuing Equity Owners.

Incorporation of Brilliant Earth Group, Inc.

Brilliant Earth Group, Inc., the issuer of the Class A common stock offered by this prospectus, was incorporated as a Delaware corporation on June 2, 2021. Brilliant Earth Group, Inc. has not engaged in any material business or other activities except in connection with its formation and the Transactions. The amended and restated certificate of incorporation of Brilliant Earth Group, Inc. that will become effective immediately prior to the consummation of this offering will, among other things, authorize four classes of common stock, Class A common stock, Class B common stock, Class C common stock, and Class D common stock, each having the terms described in “Description of Capital Stock.”

Reclassification and Amendment and Restatement of the Brilliant Earth LLC Agreement

Prior to the consummation of this offering, the existing limited liability company agreement of Brilliant Earth, LLC will be amended and restated to, among other things, recapitalize its capital structure by creating a single new class of units that we refer to as “common units” and provide for a right of redemption of common units in exchange for, at our election (determined solely by our independent directors (within the meaning of the Nasdaq rules), who are disinterested), shares of our Class A common stock or cash. See “Certain Relationships and Related Party Transactions—Brilliant Earth LLC Agreement.”

 

86


Table of Contents

USE OF PROCEEDS

We estimate, based upon an assumed initial public offering price of $15.00 per share (which is the midpoint of the estimated price range set forth on the cover page of this prospectus), that we will receive net proceeds from this offering of approximately $229.4 million (or $263.8 million if the underwriters exercise in full their option to purchase additional shares of Class A common stock), after deducting the underwriting discount and estimated offering expenses payable by us.

We intend to use the net proceeds from this offering to: (1) purchase 8,333,333 newly issued LLC Interests for approximately $117.2 million directly from Brilliant Earth, LLC at the initial public offering price less the underwriting discount, excluding estimated offering expenses of $5.0 million payable by us; and (2) purchase 8,333,334 LLC Interests from each of the Continuing Equity Owners on a pro rata basis for $117.2 million in aggregate (or 10,833,334 LLC Interests from each of the Continuing Equity Owners for $152.3 million in aggregate if the underwriters exercise in full their option to purchase additional shares of Class A common stock at a price per unit equal to the initial public offering price per share of Class A common stock in this offering less the underwriting discount). Upon each purchase of LLC Interests, the corresponding shares of Class B common stock or Class C common stock will be canceled.

We will only retain the net proceeds that are used to purchase newly issued LLC Interests from Brilliant Earth, LLC, which, in turn, Brilliant Earth, LLC intends to use for general corporate purposes. We may also use a portion of the net proceeds to acquire or invest in businesses, products, services or technologies; however, we do not have agreements or commitments for any material acquisitions or investments at this time.

Assuming no exercise of the underwriters’ option to purchase additional shares of Class A common stock, each $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share (which is the midpoint of the estimated price range set forth on the cover page of this prospectus) would increase (decrease) the net proceeds to us from this offering by approximately $15.6 million and, in turn, the net proceeds received by Brilliant Earth, LLC from the sale of LLC Interests to Brilliant Earth Group, Inc. by $7.8 million, assuming the number of shares offered, as set forth on the cover page of this prospectus, remains the same, and after deducting the underwriting discount and estimated offering expenses payable by us.

Each 1,000,000 share increase (decrease) in the number of shares offered by us in this offering would increase (decrease) the net proceeds to us by approximately $14.1 million and, in turn, increase (decrease) the net proceeds by $7.0 million used to purchase newly issued LLC Interests from Brilliant Earth, LLC, and by $7.0 million used to purchase LLC interests from the Continuing Equity Owners, assuming that the price per share for the offering remains at $15.00 (which is the midpoint of the estimated price range set forth on the cover page of this prospectus), and after deducting the underwriting discount and estimated offering expenses payable by us.

Brilliant Earth, LLC will bear or reimburse Brilliant Earth Group, Inc. for all of the expenses incurred in connection with the Transactions, including this offering, which we estimate to be approximately $5.0 million.

 

87


Table of Contents

CAPITALIZATION

The following table sets forth the cash and capitalization as of June 30, 2021, as follows:

 

   

of Brilliant Earth, LLC on a historical basis; and

 

   

of Brilliant Earth Group, Inc. and its subsidiaries on an as adjusted basis to give effect to the Transactions, including the sale of the shares of Class A common stock in this offering at an assumed initial public offering price of $15.00 per share (which is the midpoint of the estimated price range set forth on the cover page of this prospectus), after deducting the underwriting discount and estimated offering expenses payable by us, and the application of the net proceeds therefrom as described under “Use of Proceeds.”

For more information, please see “Our Organizational Structure” and “Use of Proceeds” included elsewhere in this prospectus. You should read this information in conjunction with our financial statements and the related notes included elsewhere in this prospectus and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section and other financial information contained in this prospectus.

 

     As of June 30, 2021  
     Brilliant Earth, LLC
Actual
     Brilliant Earth Group, Inc.
Pro Forma(1)
 

(in thousands, except per share and share amounts)

     

Cash and cash equivalents

   $ 65,001      $ 177,419  
  

 

 

    

 

 

 

Current portion of long-term debt (2)

   $ 10,263      $ 10,263  

Long-term debt, net of debt issuance costs (2)

     52,626        52,626  

Redeemable convertible preferred units (Class P Units)

     250,746        —    

Members’ deficit:

     

Class F Units

     (277,830      —    

Class M Units

     488        —    
  

 

 

    

 

 

 

Total members’ deficit

     (277,342      —    

Shareholders’ equity

     

Class A common stock, par value $0.0001 per share; no shares authorized, issued and outstanding, actual; 1,200,000,000 shares authorized, 16,666,667 shares issued and outstanding, Brilliant Earth Group, Inc. pro forma

     —          2  

Class B common stock, par value $0.0001 per share; no shares authorized, issued and outstanding, actual; 150,000,000 shares authorized, 32,469,276 shares issued and outstanding, Brilliant Earth Group, Inc. pro forma

     —          3  

Class C common stock, par value $0.0001 per share; no shares authorized, issued and outstanding, actual; 150,000,000 shares authorized, 45,195,741 shares issued and outstanding, Brilliant Earth Group, Inc. pro forma

     —          5  

 

88


Table of Contents
     As of June 30, 2021  
     Brilliant Earth, LLC
Actual
     Brilliant Earth Group, Inc.
Pro Forma(1)
 

Class D common stock, par value $0.0001 per share; no shares authorized, issued and outstanding, actual; 150,000,000 shares authorized, no shares issued and outstanding, Brilliant Earth Group, Inc. pro forma

     —          —    

Additional paid-in-capital

     —          16,150  

Retained earnings/accumulated deficit

     —          —    
  

 

 

    

 

 

 

Equity attributable to Brilliant Earth Group, Inc.

     —          16,160  

NCI attributable to Brilliant Earth LLC

     —          75,302  
  

 

 

    

 

 

 

Total shareholders’ and members’ equity (deficit)

     (277,342      91,462  
  

 

 

    

 

 

 

Total capitalization

   $ 36,293      $ 154,351  
  

 

 

    

 

 

 

 

(1)

A $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share, which is the midpoint of the price range listed on the cover page of this prospectus, would increase (decrease) the pro forma amount of each of cash and cash equivalents, additional paid-in capital, total stockholders’ equity, and total capitalization by approximately $15.6 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

(2)

As of June 30, 2021, we had $65.0 million of principal outstanding under the Term Loan, excluding unamortized debt issuance costs of $2.1 million. For a further description of our Term Loan, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Term Loan Agreement”.

 

89


Table of Contents

DIVIDEND POLICY

We currently intend to retain all available funds and any future earnings to fund the development and growth of our business, and therefore we do not anticipate declaring or paying any cash dividends on our Class A common stock and Class D common stock in the foreseeable future. Holders of our Class B common stock and Class C common stock are not entitled to participate in any dividends declared by our board of directors. Furthermore, because we are a holding company, our ability to pay cash dividends on our Class A common stock depends on our receipt of cash distributions from Brilliant Earth, LLC. Our Term Loan agreement contains certain convents that restrict, subject to certain exceptions, our ability to pay dividends. See “Management’s Discussion and Analysis of Financial Condition and Results of Operation—Liquidity and Capital Resources—Term Loan Agreement.” Our ability to pay dividends may be restricted by the terms of any future credit agreement or any future debt or preferred equity securities of us. See “Description of Capital Stock” and “Management’s Discussion and Analysis of Financial Condition and Results of Operation—Liquidity and Capital Resources.” Any future determination as to the declaration and payment of dividends, if any, will be at the discretion of our board of directors and subject to the requirements of applicable law, compliance with contractual restrictions and covenants in the agreements governing our future indebtedness. Any such determination will also depend upon our business prospects, results of operations, financial condition, cash requirements and availability and other factors that our board of directors may deem relevant.

Accordingly, you may need to sell your shares of our Class A common stock to realize a return on your investment, and you may not be able to sell your shares at or above the price you paid for them. See “Risk Factors—Risks related to the offering and ownership of our Class A common stock—Because we have no current plans to pay regular cash dividends on our Class A common stock following this offering, you may not receive any return on investment unless you sell your Class A common stock for a price greater than that which you paid for it.”

Immediately following this offering, we will be a holding company, and our principal asset will be the LLC Interests we purchase from Brilliant Earth, LLC. If we decide to pay a dividend in the future, we would need to cause Brilliant Earth, LLC to make distributions to us in an amount sufficient to cover such dividend. If Brilliant Earth, LLC makes such distributions to us, the other holders of LLC Interests will be entitled to receive pro rata distributions. See “Risk Factors—Risks related to Our Organizational Structure—Our principal asset after the completion of this offering will be our interest in Brilliant Earth, LLC, and, as a result, we will depend on distributions from Brilliant Earth, LLC to pay our taxes and expenses, including payments under the Tax Receivable Agreement. Brilliant Earth, LLC’s ability to make such distributions may be subject to various limitations and restrictions.”

 

90


Table of Contents

DILUTION

The Continuing Equity Owners will own LLC Interests after the Transactions. Because the Continuing Equity Owners do not own any Class A common stock or have any right to receive distributions from Brilliant Earth Group, Inc., we have presented dilution in pro forma net tangible book value per share both before and after this offering assuming that all of the holders of LLC Interests (other than Brilliant Earth Group, Inc.) had their LLC Interests redeemed or exchanged for newly-issued shares of Class A common stock on a one-for-one basis (rather than for cash) and the transfer to the Company and cancellation for no consideration of all of their shares of Class B and Class C common stock (which are not entitled to receive distributions or dividends, whether cash or stock from Brilliant Earth Group, Inc.) in order to more meaningfully present the dilutive impact on the investors in this offering. We refer to the assumed redemption or exchange of all LLC Interests for shares of Class A common stock as described in the previous sentence as the “Assumed Redemption.”

Dilution is the amount by which the offering price paid by the purchasers of the Class A common stock in this offering exceeds the pro forma net tangible book value per share of Class A common stock after the offering. Brilliant Earth, LLC’s pro forma net tangible book value as of June 30, 2021 prior to this offering and after giving effect to the recapitalization transaction and the Assumed Redemption was a deficit of $26.6 million. Pro forma net tangible book value per share prior to this offering is determined by subtracting our total liabilities from the total book value of our tangible assets and dividing the difference by the number of shares of Class A common stock deemed to be outstanding after giving effect to the Assumed Redemption.

If you invest in our Class A common stock in this offering, your ownership interest will be immediately diluted to the extent of the difference between the initial public offering price per share and the pro forma net tangible book value per share of our Class A common stock after this offering.

Pro forma net tangible book value per share after this offering is determined by subtracting our total liabilities from the total book value of our tangible assets and dividing the difference by the number of shares of Class A common stock deemed to be outstanding, after giving effect to the Transactions, including this offering and the application of the proceeds from this offering as described in “Use of Proceeds”, and the Assumed Redemption. Our pro forma net tangible book value as of June 30, 2021, after giving effect to this offering would have been approximately $91.5 million, or $0.97 per share of Class A common stock. This amount represents an immediate increase in pro forma net tangible book value of $1.28 per share to our existing stockholders and an immediate dilution in pro forma net tangible book value of approximately $14.03 per share to new investors purchasing shares of Class A common stock in this offering. We determine dilution by subtracting the pro forma net tangible book value per share after this offering from the amount of cash that a new investor paid for a share of Class A common stock. The following table illustrates this dilution:

 

Assumed initial public offering price per share

     $ 15.00  

Pro forma net tangible book value (deficit) as of June 30, 2021 before this offering (a)

   $ (0.31  

Increase per share attributable to new investors in this offering

     1.28    
  

 

 

   

Pro forma net tangible book value (deficit) per share after this offering (b)

     $ 0.97  
    

 

 

 

Dilution per share to new Class A common stock investors in this offering

     $ 14.03  
    

 

 

 

(a)   Numerator

    

Historical book value of tangible asset as of June 30, 2021

     $ 92,602  

Less: Total liabilities

       (119,198

Pro forma net tangible book value (deficit)

     $ (26,596
    

 

 

 

 

91


Table of Contents

       Denominator

     

Common LLC Interests outstanding prior to this offering on a Class A common share “as converted” basis as a result of the Assumed Redemption

        85,998,351  
     

 

 

 

Pro forma net tangible book value (deficit) per share as of June 30, 2021 before this offering

      $ (0.31

(b)   Numerator

     

Pro forma book value of tangible assets as of June 30, 2021 after giving effect to this offering

      $ 238,764  

Less: Total liabilities

        (147,302
     

 

 

 

Pro forma net tangible book value (deficit)

      $ 91,462  
     

 

 

 

Denominator

     

Class A shares outstanding after giving effect to this offering, plus Common LLC Interests on a Class A share “as converted” basis

        94,331,684  
     

 

 

 

Pro forma net tangible book value (deficit) per share as of June 30, 2021 after this offering

      $ 0.97  

A $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus, would increase (decrease) the pro forma net tangible book value (deficit) per share after this offering by approximately $0.10 and dilution per share to new Class A common stock investors in this offering by approximately $0.90 assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discount and estimated offering expenses payable by us.

If the underwriters exercise in full their option to purchase additional shares of Class A common stock, the pro forma net tangible book value (deficit) after the offering per share, the pro forma net tangible book value per share to existing stockholders and the dilution in pro forma net tangible book value to new investors would be unchanged, in each case assuming an initial public offering price of $15.00 per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus.

The following table summarizes, as of June 30, 2021, after giving effect to the Transactions (including this offering and proposed use of proceeds) and the Assumed Redemption, the number of shares of Class A common stock purchased from us, the total consideration paid, or to be paid, to us and the average price per share paid, or to be paid, by existing owners and by the new investors. The calculation below is based on an assumed initial public offering price of $15.00 per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus, before deducting the underwriting discount and estimated offering expenses payable by us.

 

     Shares Purchased     Total Consideration     Weighted-
Average Price
Per Share
 
     Number      Percent     Amount      Percent  
                  (in thousands)        

Existing unitholders before this offering

     77,665,017        82.3   $ 17,488        6.5   $ 0.23  

New public investors

     16,666,667        17.7   $ 250,000        93.5   $ 15.00  
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

     94,331,684        100.0   $ 267,488        100.0   $ 2.84  
  

 

 

    

 

 

   

 

 

    

 

 

   

Each $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share would increase (decrease) the total consideration paid by new investors and the total consideration paid by all stockholders by $15.6 million, assuming the number of shares offered by us remains the same and after deducting the underwriting discount but before estimated offering expenses.

 

92


Table of Contents

Except as otherwise indicated, the discussion and the tables above assume no exercise of the underwriters’ option to purchase additional shares of Class A common stock. In addition, the discussion and tables above exclude shares of Class B and Class C common stock, because holders of the Class B and Class C common stock are not entitled to distributions or dividends, whether cash or stock, from Brilliant Earth Group, Inc. The number of shares of our Class A common stock outstanding after this offering as shown in the tables above is based on the number of shares outstanding as of June 30, 2021, after giving effect to the Transactions and the Assumed Redemption, and (i) excludes 10,919,558 shares of Class A common stock reserved for issuance under our 2021 Incentive Award Plan, or 2021 Plan and 1,637,933 shares of Class A common stock reserved for issuance under our ESPP (each as described in “Executive Compensation—Equity Compensation Plans—2021 Incentive Award Plan”), including approximately 1,294,448 shares of Class A common stock issuable pursuant to the exercise of stock options and approximately 226,835 shares of Class A common stock issuable pursuant to the settlement of restricted stock units, in each case which we intend to grant to certain of our directors, executive officers and other employees in connection with this offering as described under the caption “Executive Compensation—Narrative to Summary Compensation Table—Equity-Based Compensation” and restricted stock units having a grant date fair value of approximately $16.0 million in the aggregate to be granted to certain of our directors, executive officers and other employees shortly following this offering; and (ii) excludes 2,306,412 LLC Interests to be held directly or indirectly by certain former profits unit holders that are subject to time-based vesting requirements.

To the extent any of these outstanding options are exercised, there will be further dilution to new investors. To the extent all of such outstanding options had been exercised as of June 30, 2021, the pro forma net tangible book value per share after this offering would be $0.84 and total dilution per share to new investors would be $14.16.

If the underwriters exercise in full their option to purchase additional shares of Class A common stock:

 

   

the percentage of shares of Class A common stock held by the Former Equity Owners will decrease to approximately 79.7% of the total number of shares of our Class A common stock outstanding after this offering; and

 

   

the number of shares of Class A common stock held by new investors in this offering will increase to 19,166,667, or approximately 20.3% of the total number of shares of our Class A common stock outstanding after this offering.

 

93


Table of Contents

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

The unaudited pro forma condensed combined financial statements have been prepared in accordance with Article 11 of Regulation S-X, as amended, to give effect to the Transactions discussed in “Our Organizational Structure,” and to other financing events consummated by Brilliant Earth Group, Inc. that are not yet reflected in the historical financial information of Brilliant Earth, LLC and are considered material events separate from those contemplated by the Transactions.

Following the completion of the Transactions, Brilliant Earth Group, Inc. will be a holding company whose principal asset will consist of 17.7% of the outstanding LLC Interests (or 20.3% of LLC Interests if the underwriters exercise in full their option to purchase additional shares of Class A common stock) that it acquires directly from Brilliant Earth, LLC or from each of the Continuing Equity Owners. Brilliant Earth Group, Inc. will act as the sole managing member of Brilliant Earth, LLC, will operate and control the business and affairs of Brilliant Earth, LLC and, through Brilliant Earth, LLC, will conduct its business.

The following unaudited pro forma condensed combined balance sheet as of June 30, 2021 presents our unaudited pro forma balance sheet after giving effect to the Transactions, including this offering, and the other events summarized below, as if they had occurred as of June 30, 2021. The following unaudited pro forma condensed combined statements of operations for the six months ended June 30, 2021 and the year ended December 31, 2020 give effect to the Transactions, including this offering, and the other events summarized below, as if they had occurred on January 1, 2020.

We have derived the unaudited pro forma condensed combined balance sheet and unaudited pro forma condensed combined statement of operations from the audited financial statements of Brilliant Earth, LLC to reflect the accounting for the Transactions in accordance with U.S. GAAP. The unaudited pro forma condensed combined financial information reflects adjustments that are described in the accompanying notes and are based on available information and certain assumptions we believe are reasonable, but are subject to change. Brilliant Earth Group, Inc. was formed on June 2, 2021 and on June 3, 2021 was capitalized at one cent, and will have no results of operations until the completion of this offering; therefore, its financial position as of June 30, 2021 and its historical results of operations for the period then ended are not shown in separate columns in the unaudited pro forma condensed combined balance sheet or statement of operations.

As a public company, we will be implementing additional procedures and processes for the purpose of addressing the standards and requirements applicable to public companies. We expect to incur additional annual expenses related to these steps and, among other things, additional directors’ and officers’ liability insurance, director fees, reporting requirements of the SEC, transfer agent fees, hiring additional accounting, legal, and administrative personnel, increased auditing and legal expenses, and other related costs. Due to the scope and complexity of these activities, the amount of these costs could increase or decrease materially and would be based on subjective estimates and assumptions that could not be factually supported. We have not included any pro forma adjustments related to these costs.

The unaudited pro forma condensed combined financial information is provided for informational purposes only and is not necessarily indicative of the operating results that would have occurred if the Transactions had been completed as of the dates set forth above, nor is it indicative of our future results.

The unaudited pro forma condensed combined financial information should be read together with “Our Organizational Structure,” “Capitalization,” “Use of Proceeds,” “Summary Historical Financial and Other Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and

 

94


Table of Contents

our historical financial statements and related notes of Brilliant Earth, LLC and Brilliant Earth Group, Inc. and related notes thereto, each included elsewhere in this prospectus.

Summary of the Transactions

The following unaudited pro forma condensed combined balance sheet as of June 30, 2021 and unaudited pro forma condensed combined statements of operations for the six months ended June 30, 2021 and the year ended December 31, 2020 give pro forma effect to the Transactions that comprise reorganization transactions, offering transactions and other financing events follows:

Reorganization Transactions

The pro forma adjustments related to the reorganization transactions are described in the notes to the unaudited pro forma condensed combined financial information and primarily include:

 

   

amendment and restatement of the existing limited liability company agreement of Brilliant Earth, LLC, which will become effective prior to the consummation of this offering, to, among other things, (1) recapitalize all existing ownership interests in Brilliant Earth, LLC into 85,998,351 LLC Interests, after applying a conversion ratio of 1.8588, (2) appoint Brilliant Earth Group, Inc. as the sole managing member of Brilliant Earth, LLC upon its acquisition of LLC Interests in connection with this offering (which will be presented in our consolidated balance sheet as a non-controlling interest), and (3) provide certain redemption rights to the Continuing Equity Owners;

 

   

amendment and restatement of Brilliant Earth Group, Inc.’s certificate of incorporation to, among other things, provide for four classes of common stock, which we refer to collectively as our “common stock” and which are summarized in the following table:

 

Class of Common Stock

   Votes    Economic Rights
Class A common stock    1    Yes
Class B common stock    1    No
Class C common stock    10    No
Class D common stock    10    Yes

Voting shares of our common stock will generally vote together as a single class on all matters submitted to a vote of our stockholders. We will issue shares of our Class A common stock to the investors in this offering. Our Class B common stock may only be held by the Continuing Equity Owners (excluding our Founders) and their respective permitted transferees as described in “Description of Capital Stock—Common Stock— Class B common stock.” Our Class C common stock and Class D common stock may only be held by our Founders and their respective permitted transferees as described in “Description of Capital Stock—Common Stock—Class C common stock” and “Description of Capital Stock—Common Stock—Class D common stock.” No shares of our Class D common stock will be outstanding upon the closing of this offering, but may be issued after the consummation of this offering by us in connection with an exchange by the Founders of their LLC Interests (along with an equal number of shares of Class C common stock (and such shares shall be immediately cancelled));

 

   

issuance of 32,469,276 shares of our Class B common stock to the Continuing Equity Owners (excluding our Founders), which is equal to the number of LLC Interests held by such Continuing Equity Owners (excluding our Founders), for nominal consideration;

 

   

issuance of 45,195,741 shares of our Class C common stock to our Founders, which is equal to the number of LLC Interests held by such Founders, for nominal consideration; and

 

95


Table of Contents
   

enter into a Tax Receivable Agreement (the “TRA”) with Brilliant Earth, LLC and the Continuing Equity Owners that will provide for the payment by Brilliant Earth Group, Inc. to the Continuing Equity Owners of 85% of the amount of tax benefits, if any, that Brilliant Earth Group, Inc. actually realizes (or in some circumstances is deemed to realize) related to certain tax basis adjustments and payments made under the Tax Receivable Agreement. See “Certain Relationships and Related Party Transactions—Tax Receivable Agreement” for a discussion of the Tax Receivable Agreement.

Our agreements will include a provision for the Continuing Equity Owners, subject to certain exceptions from time to time at each of their option, to require Brilliant Earth, LLC to redeem all or a portion of their LLC Interests in exchange for, at our election, newly-issued shares of our Class A common stock or Class D common stock, as applicable, on a one-for-one basis or a cash payment equal to a volume weighted average market price of one share of our Class A common stock for each LLC Interest so redeemed, in each case, in accordance with the terms of the Brilliant Earth LLC Agreement.

Offering and Other Transactions

The pro forma adjustments related to the offering transactions are described in the notes to the unaudited pro forma condensed combined financial information and primarily include:

 

   

issuance of 16,666,667 shares of our Class A common stock to the purchasers in this offering (or 19,166,667 shares if the underwriters exercise in full their option to purchase additional shares of Class A common stock) in exchange for net proceeds of approximately $229.4 million (or approximately $263.8 million if the underwriters exercise in full their option to purchase additional shares of Class A common stock) based upon an assumed initial public offering price of $15.00 per share (which is the midpoint of the estimated price range set forth on the cover page of this prospectus), less the underwriting discount and estimated offering expenses payable by us;

 

   

use of the net proceeds from this offering (1) to purchase 8,333,333 newly issued LLC Interests for approximately $117.2 million directly from Brilliant Earth, LLC at the initial public offering price less the underwriting discount, excluding estimated offering expenses of $5.0 million payable by us; and (2) to purchase 8,333,334 LLC Interests from each of the Continuing Equity Owners on a pro rata basis for $117.2 million in aggregate (or 10,833,334 LLC Interests from each of the Continuing Equity Owners for $152.3 million in aggregate if the underwriters exercise in full their option to purchase additional shares of Class A common stock) at a price per unit equal to the initial public offering price per share of Class A common stock in this offering less the underwriting discount;

 

   

the purchase of LLC Interests from the Continuing Equity Owners will reduce their ownership interest from 85,998,351 LLC Interests to 77,665,017;

 

   

recognition of the obligation under the Tax Receivable Agreement triggered by the purchase of LLC Interests from each of the Continuing Equity Owners discussed above, and related set-up of deferred tax assets on the TRA and on the basis difference associated with the purchase of LLC Interests from each of the Continuing Equity Owners; and

 

   

the exercise of warrants with the carrying value of $2.5 million as of June 30, 2021 into 560,884 newly issued LLC Units on a net settlement basis, elected at the option of the holder, as if such exercise occurred as of January 1, 2020.

Except as otherwise indicated, the unaudited pro forma condensed combined financial information presented assumes no exercise by the underwriters of their option to purchase additional shares of Class A common stock in the offering.

 

96


Table of Contents

Expected Accounting Treatment of the Transactions

Following the completion of the Transactions, Brilliant Earth Group, Inc. will become the sole managing member of Brilliant Earth, LLC. Although we will have a minority economic interest in Brilliant Earth, LLC, we will have the sole voting interest in, and control of, the business and affairs of Brilliant Earth, LLC. As a result, we will consolidate Brilliant Earth, LLC and record a significant non-controlling interest in equity in our consolidated financial statements for the economic interest in Brilliant Earth, LLC held directly or indirectly by the Continuing Equity Owners.

Under generally accepted accounting principles, since the members of Brilliant Earth, LLC prior to the exchange will continue to hold a controlling interest in Brilliant Earth, LLC after the exchange (i.e., there was no change in control of Brilliant Earth, LLC) and since Brilliant Earth Group, Inc. is considered a “shell company” which does not meet the definition of a business, the financial statements of the combined entity represent a continuation of the financial position and results of operations of Brilliant Earth, LLC. Accordingly, the historical cost basis of assets, liabilities, capital, and accumulated deficit of Brilliant Earth, LLC are carried over to the consolidated financial statements of the merged company as a common control transaction. Also, after consummation of this offering, Brilliant Earth Group, Inc. will become subject to U.S. federal, state, and local income taxes with respect to our allocable share of any taxable income of Brilliant Earth, LLC which will be taxed at the prevailing corporate tax rates.

Accordingly, this prospectus contains the following historical financial statements:

 

   

Brilliant Earth Group, Inc. Other than the inception balance sheets dated as of June 3, 2021 and June 30, 2021, the historical financial information of Brilliant Earth Group, Inc. and has not been included in this prospectus as it is a newly incorporated entity, has had no business transactions or activities to date, besides the initial capitalization of the company.

 

   

Brilliant Earth, LLC. Because Brilliant Earth Group, Inc. will have no interest in any operations other than those of Brilliant Earth, LLC, the historical financial information included in this prospectus is that of Brilliant Earth, LLC.

 

97


Table of Contents

UNAUDITED PRO FORMA CONDENSED

COMBINED BALANCE SHEETS

As of June 30, 2021

(In thousands, except unit amounts)

 

     Brilliant
Earth,
LLC
historical
    Reorganization
transaction
pro forma
adjustments
    Offering
and other
transactions
    Brilliant Earth
Group, Inc.,
as adjusted
on pro forma
basis
 

Assets

            

Current assets:

            

Cash and cash equivalents

   $ 65,001     $ —         $ 229,606       (b   $ 177,419  
           (117,188     (c  

Restricted cash

     205               205  

Inventories, net

     17,162               17,162  

Prepaid expenses and other current assets

     3,919               3,919  
  

 

 

   

 

 

     

 

 

     

 

 

 

Total current assets

     86,287       —           112,418         198,705  

Property and equipment, net

     4,194               4,194  

Other assets

     2,121           (1,610     (b     511  

Deferred income taxes

           27,351       (d     35,354  
           8,003       (d  
  

 

 

   

 

 

     

 

 

     

 

 

 

Total assets

   $ 92,602     $ —         $ 146,162       $ 238,764  
  

 

 

   

 

 

     

 

 

     

 

 

 

Liabilities, preferred units and equity

            

Current liabilities:

            

Accounts payable

   $ 11,726     $ —         $ —         $ 11,726  

Accrued expenses and other current liabilities

     17,838           (1,379     (b     16,459  

Current portion of deferred revenue

     20,002               20,002  

Current portion of long-term debt

     10,263               10,263  
  

 

 

   

 

 

     

 

 

     

 

 

 

Total current liabilities

     59,829       —           (1,379       58,450  

Long-term debt, net of debt issuance costs

     52,626               52,626  

Long-term deferred revenue

     205               205  

Deferred rent

     1,395               1,395  

Warrant liability

     2,530           5,883       (e     —    
           (8,413     (e  

Other long-term liabilities

     2,613               2,613  

Obligations under the tax receivable agreements

           32,013       (d     32,013  
  

 

 

   

 

 

     

 

 

     

 

 

 

Total liabilities

     119,198       —           28,104         147,302  
  

 

 

   

 

 

     

 

 

     

 

 

 

Redeemable convertible preferred units (Class P Units)

     250,746       (250,746     (a         —    
  

 

 

   

 

 

     

 

 

     

 

 

 

Members’ deficit:

            

Class F Units

     (277,830     277,830       (a         —    

Class M Units

     488       (488     (a         —    
  

 

 

   

 

 

     

 

 

     

 

 

 

Total members’ deficit

     (277,342     277,342         —           —    

Stockholders’ equity:

            

Class A common stock

           2       (b     2  

Class B common stock

           3       (b     3  

Class C common stock

           5       (b     5  

Class D common stock

               —    

Additional paid-in-capital

           229,365       (b     16,150  
           3,341       (d  
           (216,556     (f  

Retained earnings (accumulated deficit)

               —    
  

 

 

   

 

 

     

 

 

     

 

 

 

Equity attributable to Brilliant Earth Group, Inc.

     —         —           16,160         16,160  

NCI attributable to Brilliant Earth, LLC

       (26,596     (a     (117,188     (c     75,302  
           (5,883     (e  
           8,413       (e  
           216,556       (f  
  

 

 

   

 

 

     

 

 

     

 

 

 

Total stockholders’ and members’ equity (deficit)

     (277,342     (26,596       118,058         91,462  
  

 

 

   

 

 

     

 

 

     

 

 

 

Total liabilities, preferred units and equity

   $ 92,602     $ —         $ 146,162       $ 238,764  
  

 

 

   

 

 

     

 

 

     

 

 

 

See accompanying notes to unaudited pro forma combined condensed financial information.

 

98


Table of Contents

UNAUDITED PRO FORMA CONDENSED COMBINED

STATEMENTS OF OPERATIONS

For the six months ended June 30, 2021

(In thousands, except per unit amounts)

 

     Brilliant
Earth, LLC
historical
    Pro forma
adjustments
     As adjusted on
pro forma basis
 

Net sales

   $ 163,044     $ —          $ 163,044    

Cost of sales

     85,924       —            85,924    
  

 

 

   

 

 

      

 

 

   

Gross profit

     77,120       —            77,120    

Operating expenses:

           

Selling, general and administrative

     59,814       1,576       (aa)        61,390    
  

 

 

   

 

 

      

 

 

   

Income (loss) from operations

     17,306       (1,576        15,730    

Interest expense

     (3,874     —            (3,874  

Other expense, net

     (2,547     2,446       (bb)        (101  
  

 

 

   

 

 

      

 

 

   

Income (loss) before tax

     10,885       870          11,755    

Income tax expense

     —         (519     (cc)        (519  
  

 

 

   

 

 

      

 

 

   

Net income (loss)

     10,885       351          11,236    

Net income allocable to non-controlling interest

     —         9,251       (dd)        9,251    
  

 

 

   

 

 

      

 

 

   

Net income (loss) allocable to Brilliant Earth Group, Inc.

   $ 10,885     $ (8,900      $ 1,985    
  

 

 

   

 

 

      

 

 

   

Pro forma per share data:

           

Pro forma net income per share

           

Basic

          $ 0.12       (ee)  

Diluted

          $ 0.09       (ee)  

Pro forma weighted-average shares used to compute pro forma net income per share

           

Basic

            16,666,667       (ee)  

Diluted

            95,245,247       (ee)  

See accompanying notes to unaudited pro forma combined condensed financial information.    

 

99


Table of Contents

UNAUDITED PRO FORMA CONDENSED COMBINED

STATEMENTS OF OPERATIONS

For the year ended December 31, 2020

(in thousands, except per unit amounts)

 

     Brilliant
Earth, LLC
historical
    Pro forma
adjustments
    As adjusted on
pro forma basis
 

Net sales

   $ 251,820     $ —         $ 251,820    
          

Cost of sales

     139,518       —           139,518    
  

 

 

   

 

 

     

 

 

   

Gross profit

     112,302       —           112,302    

Operating expenses:

          
          

Selling, general and administrative

     85,710       3,685       (aa)       89,395    
  

 

 

   

 

 

     

 

 

   

Income (loss) from operations

     26,592       (3,685       22,907    

Interest expense

     (4,942     —           (4,942  

Other expense, net

     (74     (5,883     (bb)       (5,957  
  

 

 

   

 

 

     

 

 

   

Income (loss) before tax

     21,576       (9,568       12,008    

Income tax expense

     —         (530     (cc)       (530  
  

 

 

   

 

 

     

 

 

   

Net income (loss)

     21,576       (10,098       11,478    

Net income allocable to non-controlling interest

     —         9,450       (dd)       9,450    
  

 

 

   

 

 

     

 

 

   

Net income (loss) allocable to Brilliant Earth Group, Inc.

   $ 21,576     $ (19,548     $ 2,028    
  

 

 

   

 

 

     

 

 

   

Pro forma per share data:

          

Pro forma net income per share

          

Basic

         $ 0.12       (ee

Diluted

         $ 0.10       (ee

Pro forma weighted-average shares used to compute pro forma net income per share

          

Basic

           16,666,667       (ee

Diluted

           95,627,710       (ee

See accompanying notes to unaudited pro forma combined condensed financial information.    

 

100


Table of Contents

Notes to Unaudited Pro Forma Condensed

Combined Financial Information

Note 1: Basis of Presentation

The unaudited pro forma condensed combined balance sheet as of June 30, 2021 assumes that the Transactions and the other events summarized above occurred on June 30, 2021. The unaudited pro forma condensed combined statements of operations for the six months ended June 30, 2021 and for the year ended December 31, 2020 give pro forma effect to the Transactions and the other events summarized above, as if the Transactions and the other events summarized above, had been completed on January 1, 2020, the beginning of the earliest period presented.

The unaudited condensed pro forma adjustments, which are described in the accompanying notes, may be revised as additional information becomes available and is evaluated. Therefore, it is likely that the actual adjustments will differ from the pro forma adjustments and it is possible the difference may be material. Management believes that these assumptions and methodologies provide a reasonable basis for presenting all of the significant effects of the Transactions based on information available to management at the time, and that the pro forma adjustments give appropriate effect to those assumptions and are properly applied in the unaudited pro forma condensed combined financial information.

One-time direct and incremental transaction costs anticipated to be incurred prior to, or concurrent with, the Transactions and the other events summarized above are reflected in the unaudited pro forma condensed combined balance sheet as a direct reduction to additional paid-in capital (“APIC”) and are assumed to be cash settled.

Brilliant Earth Group, Inc. was formed on June 2, 2021 and on June 3, 2021 was capitalized at one cent, and will have no results of operations until the completion of this offering. Therefore, its financial position as of June 30, 2021 and its historical results of operations for the period then ended are not shown in separate columns in the unaudited pro forma condensed combined balance sheet or statement of operations.

Note 2: Adjustments to Unaudited Pro Forma Condensed Combined Balance Sheet

The adjustments included in the unaudited pro forma condensed combined balance sheet as of June 30, 2021, are as follows:

 

  (a)

Reflects (i) the conversion of all outstanding Class F, Class P and Class M Units with a net carrying value deficit of $26.6 million into LLC Interests in Brilliant Earth, LLC, presented as non-controlling interests in Brilliant Earth Group, Inc., to reflect control of Brilliant Earth, LLC by Brilliant Earth Group, Inc., (ii) the authorization of Class A common stock, Class B common stock, Class C common stock, and Class D common stock, and (iii) the issuance to various members of our Continuing Equity Owners of Class B and Class C common stock for nominal consideration, as described in greater detail under “Our Organizational Structure,” in connection with the completion of this offering.

 

  (b)

Reflects the net effect on cash of the receipt of net offering proceeds to us of $229.4 million, based on the authorization, issuance, and assumed sale of 16,666,667 shares of Class A common stock at an assumed initial public offering of $15.00 per share (the midpoint of the estimated price range set forth on the cover page of this prospectus), after deducting the underwriting discount and estimated offering expenses payable by us aggregating $20.6 million (of which $1.6 million was prepaid, and $1.4 million was accrued, resulting in adjusted net cash proceeds of $229.6 million after consideration of prepaid and accrued costs) and assuming the underwriters’ option to purchase additional shares of Class A common stock is not exercised.

 

101


Table of Contents
  (c)

Reflects purchase of 8,333,334 LLC Interests from each of the Continuing Equity Owners on a pro rata basis for $117.2 million in aggregate (or 10,833,334 LLC Interests from each of the Continuing Equity Owners for $152.3 million in aggregate if the underwriters exercise in full their option to purchase additional shares of Class A common stock) at a price per unit equal to the initial public offering price per share of Class A common stock in this offering less the underwriting discount.

 

  (d)

Reflects adjustments for deferred tax assets and obligations under the Tax Receivable Agreement triggered by the purchase of LLC Interests from each of the Continuing Equity Owners, as described in greater detail under “Our Organizational Structure” and “Certain Relationships and Related Party Transactions—Tax Receivable Agreement,” in connection with the completion of this offering. The pro forma adjustments reflect the following:

 

   

Estimated deferred tax benefit of $27.4 million recognized for the tax benefit of the difference in basis between reporting under generally accepted accounting principles and income tax reporting purposes associated with the purchase of LLC Interests from each of the Continuing Equity Owners. In connection with this purchase, we intend to make an IRC 754 election, which will allow us to succeed to the aggregate historical tax basis of the LLC Interests. The total tax benefit from such historical tax basis, including any increases thereto as a result of the Transactions, will primarily be amortized over 15 years pursuant to Section 197 of the U.S. Internal Revenue Code of 1986, as amended (the “Code”), subject to further allocation adjustments to be made at the time of preparation of our tax returns.

 

   

Estimated deferred tax benefit of $8.0 million associated with the obligation under the Tax Receivable Agreement.

 

   

Corresponding liability under the Tax Receivable Agreement triggered by the purchase of LLC Interests from each of the Continuing Equity Owners of $32.0 million representing 85% of the amount of tax benefits that Brilliant Earth Group, Inc. expects to realize related to certain tax basis adjustments and payments made under the Tax Receivable Agreement.

 

   

Credit to APIC associated with the deferred tax assets ($27.4 million and $8.0 million) reduced by a charge for the obligation under the Tax Receivable Agreement for a total adjustment of $32.0 million, for a total net credit of $3.3 million.

Due to the uncertainty as to the amount and timing of future redemptions or exchanges of the LLC Interests by the Continuing Equity Owners and as to the price per share of our Class A common stock at the time of any such exchanges, the unaudited pro forma condensed combined financial information does not assume any future exchanges of LLC Interests. See Note 5, Deferred Income Taxes and Tax Receivable Agreement for further discussion.

 

  (e)

Adjusts the fair market value of the warrant liability of $2.5 million for an increase of $5.9 million related to the estimated mark-to-market adjustment that will be recorded immediately prior to the assumed exercise of the warrants based on an assumed initial public offering price of $15 per share as if the measurement occurred on June 30, 2021; then reflects assumed exercise of the warrant liability with an adjusted pro forma carrying value of $8.4 million on a net settlement basis into 560,884 LLC Interests at the election of the holder based on a notice received in August 2021 in connection with the Transactions, as if such exercise occurred on January 1, 2020.

 

  (f)

Adjusts equity attributable to Brilliant Earth Group, Inc. and Brilliant Earth, LLC to reflect the relative percent interest of each investor in the total equity of the combined business. Brilliant Earth Group, Inc.’s and Brilliant Earth, LLC’s economic interests are 17.7% and 82.3%, respectively.

Upon completion of the Transactions, we will become the sole managing member of Brilliant Earth, LLC. Although we will have a minority economic interest in Brilliant Earth, LLC, we will

 

102


Table of Contents

have the sole voting interest in, and control of the management of, Brilliant Earth, LLC. As a result, we will consolidate the financial results of Brilliant Earth, LLC and will report a 17.7% economic interest in Brilliant Earth, LLC on our consolidated balance sheet (or a 20.3% economic interest if the underwriters exercise in full their option to purchase additional shares of Class A common stock). Immediately following the Transactions, the economic interest held by the non-controlling interest will be approximately 82.3% (or 79.7% economic interest if the underwriters exercise in full their option to purchase additional shares of Class A common stock).

The pro forma allocation of total equity as a result of the Reorganization and Offering Transactions can be calculated as follows:

 

     Amount      Percent  

Brilliant Earth Group, Inc. consolidated equity before adjustment for NCI on a pro forma basis

   $ 232,716     

Allocation to NCI

     (216,556   
  

 

 

    

Brilliant Earth Group, Inc. consolidated equity on a pro forma basis, as adjusted

     16,160        17.7
  

 

 

    

NCI consolidated equity before adjustment on a pro forma basis

     (141,254   

Allocation from Brilliant Earth Group, Inc.

     216,556     
  

 

 

    

NCI consolidated equity on a pro forma basis, as adjusted

     75,302        82.3
  

 

 

    

 

 

 

Total consolidated stockholders’ and members’ equity

   $ 91,462        100.0
  

 

 

    

 

 

 

Note 3: Adjustments to Unaudited Pro Forma Condensed Combined Statements of Operations

The pro forma adjustments included in the unaudited pro forma condensed combined statements of operations for the six months ended June 30, 2021 and the year ended December 31, 2020 are as follows:

 

  (aa)

Reflects the increase in share-based compensation expense we expect to incur following the completion of this offering as if such awards were granted as of January 1, 2020. We expect to convert 2,006,212 unvested M Units as of August 31, 2021 into 2,306,412 unvested Common LLC Units after modification for the conversion ratio and the M Unit distribution threshold. We expect to grant approximately 226,835 RSUs and approximately 1,294,448 stock options to our directors and employees in connection with this offering. The conversion of M Units and issuance of RSUs and stock options will result in $1.6 million and $3.7 million of additional compensation costs for the six months ended June 30, 2021 and the year ended December 31, 2020, respectively, on a pro forma basis as if the awards were converted or granted on January 1, 2020 and assuming an initial public offering of $15.00 per share, the midpoint of the estimated price range set forth on the cover of the prospectus. The grant date fair value of stock options was determined using the Black-Scholes valuation model using the following assumptions:

 

Expected volatility

     35.0

Expected dividend yield

     Nil  

Expected term (in years)

     6.25 Years  

Risk free interest rate

     0.9

 

103


Table of Contents
  (bb)

Reverses the expense related to the mark-to-market adjustment of $2.4 million included in the historical results of operations for the six months ended June 30, 2021 to the warrant liability which would not have been recognized had the warrant been exercised as of January 1, 2020.

Adjusts the expense related to the mark-to-market adjustment for the year ended December 31, 2020, for the difference between the carrying value of $2.5 million as of June 30, 2021 in the historical balance sheet and the fair value based on the IPO price of $8.4 million as if the exercise occurred on January 1, 2020.

 

  (cc)

Provides for an assumed income tax expense on our taxable earnings which is calculated at 17.7% of income before income tax expense. Following the Transactions, we will be subject to U.S. federal income taxes in addition to applicable state and local taxes with respect to our allocable share of any net taxable income of Brilliant Earth, LLC. Accordingly, we have provided income taxes assuming a federal and combined state and local rate of 25% on our allocable share of taxable income, and assuming no adjustments for non-deductible amounts of income and expenses. The actual rate could vary from the rate used in the pro forma financial statements.

 

  (dd)

Reflects the portion of our net income allocable to the non-controlling interest. After the Transactions, we will become the managing member of Brilliant Earth, LLC with a 17.7% economic interest but will control the management of Brilliant Earth, LLC. The Continuing Equity Owners will own the remaining 82.3% economic interest in Brilliant Earth, LLC, which will be accounted for as a non-controlling interest in our future consolidated financial results.

 

  (ee)

Pro forma basic net income per share is computed by dividing the net income available to Class A common stock by the weighted average shares of Class A common stock assumed outstanding during the period. Pro forma diluted net income per share is computed by adjusting the net income available to Class A common stock and the weighted average shares of Class A common stock assumed outstanding to give effect to potentially dilutive securities.

 

104


Table of Contents

The following table sets forth a reconciliation of the numerators and denominators used to compute pro forma basic and diluted net income per share (in thousands, except share and per share data):

 

     Six months
ended
June 30, 2021
     Year ended
December 31,
2020
 

Numerator:

     

Pro forma net income

   $ 11,236      $ 11,478  

Pro forma net income attributable to non-controlling interests

     9,251        9,450  
  

 

 

    

 

 

 

Pro forma net income attributable to Brilliant Earth Group, Inc., basic

     1,985        2,028  

Dilutive effects of:

     

Assumed redemption of LLC Units for Class A common stock, net of income tax

     6,938        7,088  
  

 

 

    

 

 

 

Pro forma net income attributable to Brilliant Earth Group, Inc., diluted

   $ 8,923      $ 9,116  
  

 

 

    

 

 

 

Denominator:

     

Weighted average Class A common stock assumed outstanding, basic

     16,666,667        16,666,667  

Dilutive effects of:

     

LLC Units that are exchangeable for Class A common stock

     77,665,017        77,665,017  

Unvested LLC Units, RSUs and stock options

     913,563        1,296,026  
  

 

 

    

 

 

 

Weighted average Class A common stock assumed outstanding, diluted

     95,245,247        95,627,710  
  

 

 

    

 

 

 

Basic pro forma net income per share

   $ 0.12      $ 0.12  

Diluted pro forma net income per share

   $ 0.09      $ 0.10  

The computation of pro forma net income per share in the preceding table assumes we will elect to issue shares of common stock upon redemption of LLC Units rather than cash settle. Unvested LLC Units of 2,306,412, RSUs of approximately 226,835, and stock options of approximately 1,294,448 assumed outstanding as of June 30, 2021 have been considered in the computation of diluted pro forma net income per share.

Shares of our Class B and our Class C common stock are not entitled to receive any distributions or dividends other than in connection with a liquidation and have no rights to convert into Class A common stock or Class D common stock, separate from an exchange or redemption of the LLC Interests corresponding to such shares of Class B common stock or Class C common stock, as applicable. When a common unit is exchanged, at our election, for cash or Class A common stock or Class D common stock by a Continuing Equity Owner who holds shares of our Class B common stock or Class C common stock, such Continuing Equity Owner will be required to surrender a share of Class B common stock or Class C common stock, as applicable, which we will cancel for no consideration.

 

105


Table of Contents

Note 4. Deferred Income Taxes and Tax Receivable Agreement

As each of the Continuing Equity Owners of the various LLC Interests of Brilliant Earth, LLC elect to convert their LLC Interests into our Class A common stock or Class D common stock, as applicable, we will succeed to their aggregate historical tax basis which will create a net tax benefit to us. These tax benefits including any increases thereto as a result of the Transactions are expected to be amortized over 15 years pursuant to Sections 743(b) and 197 of the Code. We will only recognize a deferred tax asset for financial reporting purposes when it is “more-likely-than-not” that we will realize the tax benefit.

In addition, as part of the Transactions, we will enter into a Tax Receivable Agreement with the Continuing Equity Owners to pay them 85% of the tax savings from the tax basis adjustment as such savings are realized. Amounts payable under the Tax Receivable Agreement are contingent upon, among other things, generation of sufficient future taxable income during the term of the Tax Receivable Agreement.

If all of the Continuing Equity Owners were to exchange or redeem their remaining LLC Interests as of the date of closing of our IPO, we would recognize an additional deferred tax asset of approximately $362.8 million and a related liability for payments under the Tax Receivable Agreement of approximately $328.4 million assuming, among other factors (i) all exchanges occurred on the same day; (ii) a price of $15.00 per share of Class A common stock (the midpoint of the estimated offering price set forth on the cover of this prospectus); (iii) a constant corporate tax rate of 25%; (iv) sufficient taxable income to fully utilize the tax benefits; (v) Brilliant Earth, LLC is able to fully depreciate or amortize its assets; and (vi) no material changes in applicable tax law. For each 5% increase (decrease) in the amount of LLC Interests exchanged by the Continuing Equity Owners, our deferred tax asset would increase (decrease) by approximately $18.1 million and the related liability for payments under the Tax Receivable Agreement would increase (decrease) by approximately $16.4 million assuming that the price per share of the Class A common stock at the time of the exchange and corporate tax rate remain the same. These amounts are estimates and have been prepared for informational purposes only. The actual amount of deferred tax assets and related liabilities that we will recognize will differ based on, among other things, the timing of the redemptions or exchanges, the price of our shares of Class A common stock at the time of the redemptions or exchanges, availability of sufficient taxable income and the tax rates then in effect.

We may elect to terminate the Tax Receivable Agreement early by making an immediate cash payment equal to the present value of the anticipated future tax benefits that would be required to be paid by us to the Continuing Equity Owners under the Tax Receivable Agreement. The calculation of such cash payment would be based on certain assumptions, including, among others (i) that any Continuing Equity Owners’ LLC Interests that have not been exchanged are deemed exchanged, in general, for the fair market value of our Class A common stock or Class D common stock, as applicable, that would be received by such Continuing Equity Owner if such LLC Interests had been exchanged at the time of termination; (ii) we will have sufficient taxable income in each future taxable year to fully realize all potential tax savings; (iii) the federal tax rates for future years will be those specified in the law as in effect at the time of termination and the combined state and local tax rates will be an assumed tax rate; and (iv) certain non-amortizable assets are deemed disposed of within specified time periods. In addition, the present value of such tax benefit payments are discounted at a rate equal to 1.2% per annum, compounded annually. Assuming that the fair market value of our Class A common stock were to be equal to $15.00 per share, the midpoint of the estimated offering price range set forth on the cover of this prospectus, and that the relevant interest rate were to be 1.2%, we estimate that the aggregate amount of these termination payments would be approximately $322.8 million if we were to exercise our termination right immediately following this offering.

 

106


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis provides information that we believe is relevant to an assessment and understanding of our results of operations and financial condition. You should read this analysis in conjunction with our audited and unaudited financial statements and the related notes and other financial information appearing elsewhere in this prospectus. In addition to historical financial information, this discussion and analysis contains statements of a forward-looking nature relating to future events or our future financial performance. These statements are only predictions, and actual events or results may differ materially. In evaluating such statements, you should carefully consider the various factors identified in this prospectus which could cause actual results to differ materially from those expressed in, or implied by, any forward-looking statements, including those set forth in “Risk Factors” in this prospectus. See “Cautionary Note Regarding Forward-Looking Statements.”

Company Overview

Brilliant Earth is an innovative, digital-first jewelry company, and a global leader in ethically sourced fine jewelry. We offer exclusive designs with superior craftsmanship and supply chain transparency, delivered to customers through a highly personalized omnichannel experience.

Our mission is to create a more transparent, sustainable, and compassionate jewelry industry, and we are proud to offer customers distinctive and thoughtfully designed products that they can truly feel good about wearing. Our core values resonate strongly across many demographics and particularly with values-driven Millennial and Gen Z consumers.

Our extensive collection of premium-quality diamond engagement and wedding rings, gemstone rings, and fine jewelry is conceptualized by our leading in-house design studio and then brought to life by expert jewelers. From our award-winning jewelry designs to our responsibly sourced materials, at Brilliant Earth we aspire to exceptional standards in everything we do.

We were founded in 2005 as an e-commerce company with an ambitious mission and a single showroom in San Francisco. We have rapidly scaled our business while remaining focused on our mission and elevating the omnichannel customer experience. Through our intuitive digital commerce platform and personalized individual appointments in our showrooms, we cater to the shopping preferences of tech-savvy next-generation consumers. We create an educational, joyful, and approachable experience that is unique in the jewelry industry. Today, Brilliant Earth has sold to consumers in all U.S. states and over 50 countries, and has served over 370,000 customers through our e-commerce platform and 14 showrooms.

Throughout our history, we have invested in technology to create a seamless customer experience, inform our data-driven decision-making, improve efficiencies, and advance our mission. Our technology enables dynamic product visualization, augmented reality try-on, blockchain-enabled transparency, and rapid fulfillment of our flagship Create Your Own product. We leverage powerful data capabilities to improve our marketing and operational efficiencies, personalize the customer experience, curate showroom inventory and merchandising, inform real estate decisions, and develop new product designs that reflect consumer preferences. We believe the Brilliant Earth digital experience drives higher satisfaction, engagement, and conversion both online and in-showroom.

Our financial model is compelling: high net sales growth, substantial first order profitability, and attractive margins. We are very capital efficient: our made-to-order capabilities and virtual inventory model generate attractive inventory turns and negative working capital. We have achieved strong

 

107


Table of Contents

financial performance and rapid growth since our founding with minimal outside funding, and believe we are in the early stages of realizing our potential in a massive market opportunity:

 

   

grew net sales to $251.8 million in 2020, compared to $201.3 million in 2019;

 

   

achieved net income of $21.6 million in 2020, compared to $(7.8) million in 2019;

 

   

achieved net income margin of 8.6% in 2020, compared to (3.9%) in 2019;

 

   

grew Adjusted EBITDA to $27.5 million in 2020, compared to $(4.5) million in 2019; and

 

   

improved Adjusted EBITDA margin to 10.9% in 2020, compared to (2.2%) in 2019.

Our performance in the first half of 2021 continues to demonstrate our ability to succeed in this market:

 

   

grew net sales to $163.0 million, up 77.7% from $91.8 million in the first half of 2020;

 

   

achieved net income of $10.9 million, up from $0.2 million in the first half of 2020;

 

   

achieved net income margin of 6.7%, compared to 0.2% in the first half of 2020;

 

   

grew Adjusted EBITDA to $21.0 million, up 600% from $3.0 million in the first half of 2020; and

 

   

improved Adjusted EBITDA margin to 12.9%, compared to 3.3% in the first half of 2020.

We operate in one operating and reporting segment, the retail sale of diamonds, gemstones, and jewelry.

 

LOGO

Key Factors Affecting Our Performance

Our Ability to Increase Brand Awareness

Increasing brand awareness and growing favorable brand equity have been and remain key to our growth. We have a significant opportunity to continue to grow our brand awareness, broaden our customer reach, and maximize lifetime value through brand and performance marketing. We have

 

108


Table of Contents

made significant investments to strengthen the Brilliant Earth brand through our dynamic marketing strategy, which includes brand marketing campaigns across email, digital, social media, earned media, and media placements and with key influencers. As of June 30, 2021, our aided brand awareness was 54% with significant room to increase in the U.S. and internationally through marketing and earned media, showroom expansion, and word-of-mouth referrals. In order to compete effectively and increase our share of the jewelry market, we must maintain our strong customer experience, produce compelling products, and continue our mission of creating a more transparent, sustainable, and compassionate jewelry industry. Our performance will also depend on our ability to increase the number of consumers aware of Brilliant Earth and our product assortment. We believe our brand strength will enable us to continue to expand across categories and channels, to deepen relationships with consumers, and to expand our presence in U.S. and international markets.

Cost-Effective Acquisition of New Customers and Retention of Existing Customers.

We have historically had attractive customer acquisition economics, including substantial first order profitability. To continue to grow our business, we must continue to acquire new customers and retain existing customers in a cost-effective manner. The success of our customer acquisition strategy depends on a number of factors, including the level and pattern of consumer spending in the product categories in which we operate, and our ability to cost-effectively drive traffic to our website and showrooms and to convert these visitors to customers. With our strong brand resonance and passionate customer base, we generate significant earned and organic traffic, impressions, and media placements. We continually evolve our dynamic marketing strategies, optimizing our messaging, creative assets, and spending across channels. We also believe our expanded fine jewelry assortment and strategic customer acquisition will continue to drive fine jewelry orders from new customers and repeat orders from existing customers.

Our Ability to Continue Expansion of our Omnichannel Strategy

Our ability to expand our omnichannel presence to new markets and locations is key to our success. Historically, we have been successful in every new geographic market we have entered, and we are in the early stages of expanding our premium showroom footprint nationwide. We intend to continue leveraging our marketing strategy and growing brand awareness to drive increased qualified consumer traffic to and sales from our website and premium showrooms.

We believe expanding our number of showrooms will drive accelerated growth by increasing our AOV compared to e-commerce orders, improving conversion in the showrooms’ metro regions by 50% or more compared to pre-opening conversion, and raising our brand awareness. As of today, we have 14 showroom locations. We intend to strategically open showrooms in the future, and we believe we can achieve near-national showroom coverage with under 100 locations. We rely on this highly efficient showroom model to complement our digital strategy and to continue to drive growth and profitability.

Our Ability to Successfully Introduce New Products

Product expansion allows us significant opportunity to drive new and repeat purchases by expanding purchase occasions beyond engagement and bridal. We intend to leverage our in-house design capabilities and nimble data-driven product development to expand product assortment for special occasions and self-purchase. In addition, we will have more opportunity to enhance and leverage our CRM and data-segmentation capabilities to increase repeat purchases and lifetime value. We have consistently invested in technology to create a seamless customer experience, including dynamic visualization, augmented reality try-on, and automated, rapid fulfillment, and we intend to continue investing in technology to enhance the digital and showroom experience and help drive conversion.

 

109


Table of Contents

Expanding affiliations and brand collaborations will also broaden our existing assortment, reinforce our brand ethos, and feature like-minded designers, which will help to drive both new and repeat purchases.

International Expansion

We are in the early stages of expanding globally, and a larger geographic footprint will help drive future growth. Our early proof-points from localizing our website for Canada, Australia, and the United Kingdom, and our sales to customers from over 50 countries, provide encouraging signs for future global expansion. We see strong potential in launching e-commerce in new overseas markets, particularly in Asia, and new showrooms in countries where we have already established a localized digital presence. We plan to drive brand awareness through localized marketing channels and expect our data-driven technology platform to continue providing insights for product recommendations and inventory management.

Operational and Marketing Efficiency

We have a unique, asset-light operating model with attractive working capital dynamics, capital-efficient showrooms, and a vast virtual inventory of premium natural and lab-grown diamonds that allows us to offer over 100,000 diamonds worth hundreds of millions of dollars, while keeping our balance sheet inventory low. This has driven attractive inventory turns of over 10x every year since 2018 and allows us to operate with negative working capital, which we define as our current assets less cash minus our current liabilities. Our showroom strategy avoids the inefficiencies of traditional, retail-first jewelers. Our showrooms are appointment-driven with large catchment regions, so we are less reliant on expensive high foot traffic retail locations. We also curate showroom inventory for scheduled visits and require minimal inventory in each location. Our tech-enabled jewelry specialist team supports online customers when not in appointment, maximizing workforce utilization. As we continue to scale our business, our future success is dependent on maintaining this capital efficient operating model and driving continued operational improvement as we expand to new locations both in the U.S. and internationally.

Costs of Operating as a Public Company

After this offering, we anticipate that the costs of operating as a public company will be significant as we will be subject to the reporting, listing, and compliance requirements of various governing bodies and applicable securities laws and regulations that we were previously not subjected to as a privately-held company. These costs have been rapidly increasing over time, and we expect these rules and regulations to increase our legal, financial, and technology compliance costs, and to make some activities more difficult, time-consuming, and costly. Remaining compliant and satisfying our obligations as a public company, while maintaining forecasted gross margins and operating results, and attracting and retaining qualified persons to serve on our board of directors, our board committees, or as our executive officers will be critical to our future success.

Macroeconomic Trends

We believe we are well-positioned at the intersection of key macro-level trends impacting our industry. Consumers are increasingly becoming more conscious of the products they purchase, seeking brands that stand for sustainability, supply chain transparency, and social and environmental responsibility. This has contributed to our strong brand affinity and loyalty, and further differentiates us from our competitors. Consumers are increasingly favoring seamless omnichannel shopping experiences, and we believe our model is well-suited to satisfy these consumer preferences. Changes in macro-level consumer spending trends, including as a result of the COVID-19 pandemic, could result in fluctuations in our operating results.

 

110


Table of Contents

Effects of COVID-19 on Our Business

As a result of the COVID-19 pandemic and the recommendations of government and health authorities, our showrooms closed to the public beginning in March 2020, but we continued to fulfill orders. We began reopening our showrooms to the public in May 2020 and, by June 2020, had re-opened all our showrooms to the public. While we expect to be able to continue operations for the duration of the pandemic, our operations were and are still subject to local or regional public health orders, including temporary government-mandated closures, which may impact our showrooms or other operations. The COVID-19 pandemic also has disrupted our global supply chain, and may cause additional disruptions to operations, including increased costs of production and distribution and longer fulfillment times. For example, we faced production capacity issues in crafting sufficient quantities of certain products in 2020 due to government shutdowns, as well as disruption in jewelry manufacturing and sourcing of diamonds and gemstones, which could continue in 2021 due to the pandemic.

Although our financial performance was adversely impacted by the COVID-19 pandemic in the first half of the year ended December 31, 2020, our business operations recovered in the second half of the year ended December 31, 2020, during which revenue grew year-over-year by 38.8% and into the first half of 2021, during which revenue grew year-over-year by 77.7%. While our business operations have recovered since the first half of the year ended December 31, 2020, and we have experienced strong growth since the second half of the year ended December 31, 2020, the pandemic remains ongoing. The duration and magnitude of its future impact on the jewelry industry, and on our operations and supply chain, remains unknown and depends on factors outside of our control, including the duration and intensity of the pandemic (including that of any COVID-19 variants), the availability and efficacy of treatments and vaccines, and the impact of the pandemic on financial markets, industry supply chains and consumer behavior. Thus, the potential impact of these factors on our future liquidity, financial condition, and results of operations cannot be estimated.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law in response to the COVID-19 pandemic. The CARES Act includes many measures to provide relief to companies. We obtained a U.S. Small Business Administration Paycheck Protection Program Loan (“PPP Loan”) under the CARES Act, which was fully repaid in December 2020. See “—Liquidity and Capital Resources.”

We do not yet know the full extent of the impacts of the COVID-19 pandemic on our business, our operations, or the global economy as a whole. However, the effects could have a material impact on our results of operations. See “Risk Factors—Risks Related to Our Business and Industry—The COVID-19 pandemic has had, and may in the future continue to have, a material adverse impact on our business.”

Reorganization Transactions

The historical results of operations discussed in this section are those of Brilliant Earth, LLC prior to the completion of the Transactions, including this offering, and do not reflect certain items that we expect will affect our results of operations and financial condition after giving effect to the Transactions and the use of proceeds from this offering.

Following the completion of the Transactions, Brilliant Earth Group, Inc. will become the sole managing member of Brilliant Earth, LLC. Although we will have a minority economic interest in Brilliant Earth, LLC, we will have the sole voting interest in, and control of the business and affairs of, Brilliant Earth, LLC. As a result, Brilliant Earth Group, Inc. will consolidate Brilliant Earth, LLC and record a significant non-controlling interest in a consolidated entity in Brilliant Earth Group, Inc.’s consolidated financial statements for the economic interest in Brilliant Earth, LLC held directly or indirectly by the Continuing

 

111


Table of Contents

Equity Owners. Immediately after the Transactions, investors in this offering will collectively own 17.7% of our outstanding Class A common stock, consisting of 16,666,667 shares (or 19,166,667 shares if the underwriters exercise in full their option to purchase additional shares of Class A common stock), Brilliant Earth Group, Inc. will own 16,666,667 LLC Interests (or 19,166,667 LLC Interests if the underwriters exercise in full their option to purchase additional shares of Class A common stock), representing 17.7% of the LLC Interests (or 20.3% if the underwriters exercise in full their option to purchase additional shares of Class A common stock) and the Continuing Equity Owners will collectively own 77,665,017 LLC Interests, representing 82.3% of the LLC Interests (or 75,165,017 LLC interests, representing 79.7% if the underwriters exercise in full their option to purchase additional shares of Class A common stock). Accordingly, net income (loss) attributable to non-controlling interests will represent 82.3% of the income (loss) before income tax benefit (expense) of Brilliant Earth Group, Inc. (or 79.7% if the underwriters exercise in full their option to purchase additional shares of Class A common stock). Brilliant Earth Group, Inc. is a holding company that conducts no operations and, as of the consummation of this offering, its principal asset will be LLC Interests we purchase from Brilliant Earth, LLC.

After consummation of this offering, Brilliant Earth Group, Inc. will become subject to U.S. federal, state, and local income taxes with respect to our allocable share of any taxable income of Brilliant Earth, LLC and will be taxed at the prevailing corporate tax rates. In addition to tax expenses, we also will incur expenses related to our status as a public company, plus payment obligations under the Tax Receivable Agreement, which we expect to be significant. We intend to cause Brilliant Earth, LLC to make distributions to us in an amount sufficient to allow us to pay these expenses and fund any payments due under the Tax Receivable Agreement. See “Certain Relationships and Related Party Transactions - Brilliant Earth, LLC Agreement-Agreement in Effect upon Consummation of the Transactions - Distributions.”

Key Metrics and Non-GAAP Financial Measures

Key Metrics

We monitor the key business metrics set forth below to help us evaluate our business and growth trends, establish budgets, measure the effectiveness of our sales and marketing efforts, and assess operational efficiencies. The calculation of the key metrics discussed below may differ from other similarly titled metrics used by other companies, securities analysts or investors.

The following table sets forth our key performance indicators for the periods presented:

 

     Six months ended June 30,            Year ended December 31,  
     2021      2020      Change      % Change            2020      2019      Change     % Change  

Total orders

     49,878        29,745        20,133        67.7        79,890        61,604        18,286       29.7

AOV

   $ 3,269      $ 3,085      $ 184        6.0      $ 3,152      $ 3,268      $ (116     (3.6 %) 

Total Orders

We define total orders as the total number of customer orders delivered less total orders returned in a given period (excluding those repair, resize, and other orders which have no revenue). We view total orders as a key indicator of the velocity of our business and an indication of the desirability of our products to our customers. Total orders, together with AOV, is an indicator of the net sales we expect to recognize in a given period. Total orders may fluctuate based on the number of visitors to our website and showrooms, and our ability to convert these visitors to customers. We believe that total orders is a measure that is useful to investors and management in understanding our ongoing operations and in an analysis of ongoing operating trends.

 

112


Table of Contents

Average Order Value

We define average order value, or AOV, as net sales in a given period divided by total orders in that period. We believe that AOV is a measure that is useful to investors and management in understanding our ongoing operations and in an analysis of ongoing operating trends. AOV varies depending on the product type and number of items per order. AOV may also fluctuate as we expand into and increase our presence in additional product categories and price points, and open additional showrooms.

Non-GAAP Financial Measures

In addition to our results determined in accordance with GAAP, we believe the following non-GAAP financial measures are useful in evaluating our operating performance and liquidity, as applicable.

We report our financial results in accordance with GAAP. However, management believes that certain non-GAAP financial measures provide users of our financial information with additional useful information in evaluating our performance and liquidity, as applicable, and to more readily compare these financial measures between past and future periods. There are limitations to the use of the non-GAAP financial measures presented in this prospectus. For example, our non-GAAP financial measures may not be comparable to similarly titled measures of other companies. Other companies, including companies in our industry, may calculate non-GAAP financial measures differently than we do, limiting the usefulness of those measures for comparative purposes.

Adjusted EBITDA and Adjusted EBITDA Margin

Adjusted EBITDA and Adjusted EBITDA margin are included in this prospectus because they are non-GAAP financial measures used by management and our board of directors to assess our financial performance. We define Adjusted EBITDA as net income (loss) excluding interest expense, depreciation and amortization expense, equity-based compensation expense, showroom pre-opening expense, certain non-operating expenses and income, and other unusual and/or infrequent costs, which we do not consider in our evaluation of ongoing operating performance. We define Adjusted EBITDA margin as Adjusted EBITDA calculated as a percentage of net sales. These non-GAAP financial measures provide users of our financial information with useful information in evaluating our operating performance and exclude certain items from net income (loss) that may vary substantially in frequency and magnitude from period to period. These non-GAAP financial measures are not meant to be considered as indicators of performance in isolation from or as a substitute for net income (loss) prepared in accordance with GAAP and should be read only in conjunction with financial information presented on a GAAP basis. Reconciliations of each of Adjusted EBITDA and Adjusted EBITDA margin to its most directly comparable GAAP financial measure, net income (loss) and net income (loss) margin, are presented below. We encourage you to review the reconciliations in conjunction with the presentation of the non-GAAP financial measures for each of the periods presented. In future periods, we may exclude similar items, may incur income and expenses similar to these excluded items, and may include other expenses, costs and non-recurring items.

 

113


Table of Contents

The following table presents a reconciliation of net income (loss) and net income (loss) margin, the most comparable GAAP financial measures, to Adjusted EBITDA and Adjusted EBITDA margin, respectively, for the periods presented (amounts in thousands):

 

    Brilliant Earth
Group, Inc.
Pro Forma(1)
             
    Six months
ended
June 30,
    Year ended
December 31,
    Six months ended
June 30,
    Year ended
December 31,
 
    2021     2020     2021     2020     2020     2019  

Net income (loss)

  $ 11,236     $ 11,478     $ 10,885     $ 182     $ 21,576     $ (7,778

Interest expense

    3,874       4,942       3,874       2,393       4,942       2,257  

Income tax expense

    519       530       —         —         —         —    

Depreciation and amortization expense

    321       646       321       339       646       622