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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549 
_______________________________________________________________   
FORM 10-Q
_______________________________________________________________   
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 31, 2023
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ______ to ______

Commission File Number: 001-37873
_______________________________________________________________ 
e.l.f. Beauty, Inc.
(Exact name of registrant as specified in its charter)
_______________________________________________________________
Delaware 46-4464131
(State or other jurisdiction of
incorporation or organization)
 (I.R.S. Employer
Identification No.)
570 10th Street
Oakland,
CA94607
 (Address of principal executive offices)(Zip code)
_______________________________________________________________ 
(510)
778-7787
(Registrant’s telephone number, including area code)
_______________________________________________________________ 
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.01 per shareELFNew York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.      Yes      No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).      Yes      No
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 filerAccelerated filer
Non- accelerated filerSmaller 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 13(a) of the Exchange Act.  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).      Yes     No
The number of shares of the registrant’s common stock, par value $0.01 per share, outstanding as of February 1, 2024 was 55,506,934 shares.




CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this “Quarterly Report”) contains forward-looking statements within the meaning of the federal securities laws concerning our business, operations and financial performance and condition, as well as our plans, objectives and expectations for our business operations and financial performance and condition. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “aim,” “anticipate,” “assume,” ”believe,” “contemplate,” “continue,” "could,” “due,” “estimate,” “expect,” “goal,” “intend,” “may,” “objective,” “plan,” “predict,” “potential,” “positioned,” “seek,” “should,” “target,” “will,” “would” and other similar expressions that are predictions of or indicate future events and future trends, or the negative of these terms or other comparable terminology. These forward-looking statements are based on management's current expectations, estimates, forecasts and projections about our business and the industry in which we operate and management’s beliefs and assumptions and are not guarantees of future performance or development and involve known and unknown risks, uncertainties and other factors that are in some cases beyond our control. Although we believe that the expectations reflected in the forward-looking statements contained herein are reasonable, our actual results and the timing of selected events may differ materially. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under “Risk factors” in Part II, Item 1A of this Quarterly Report and elsewhere in this Quarterly Report. Potential investors are urged to consider these factors carefully in evaluating the forward-looking statements. These forward-looking statements speak only as of the date of this Quarterly Report. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.
SUMMARY OF MATERIAL RISKS ASSOCIATED WITH OUR BUSINESS
The principal risks and uncertainties affecting our business include the following:
The beauty industry is highly competitive, and if we are unable to compete effectively our results will suffer.
Our new product introductions may not be as successful as we anticipate.
Any damage to our reputation or brands may materially and adversely affect our business, financial condition and results of operations.
Our success depends, in part, on the quality, performance and safety of our products.
We may not be able to successfully implement our growth strategy.
Our growth and profitability are dependent on a number of factors, and our historical growth may not be indicative of our future growth.
We may be unable to continue to grow our business effectively or efficiently, which would harm our business, financial condition and results of operations.
Acquisitions or investments, such as our acquisition of Naturium LLC, could disrupt our business and harm our financial condition.
A disruption in our operations, including a disruption in the supply chain for our products, could materially and adversely affect our business.
We rely on a number of third-party suppliers, manufacturers, distributors and other vendors, and they may not continue to produce products or provide services that are consistent with our standards or applicable regulatory requirements, which could harm our brands, cause consumer dissatisfaction, and require us to find alternative suppliers of our products or services.
Adverse economic conditions in the United States or any of the other countries in which we conduct significant business could negatively affect our business, financial condition and results of operations.




We depend on a limited number of retailers for a large portion of our net sales, and the loss of one or more of these retailers, or business challenges at one or more of these retailers, could adversely affect our results of operations.
We have significant operations in China, which exposes us to risks inherent in doing business in that country.
We are subject to international business uncertainties.
If we are unable to protect our intellectual property, the value of our brands and other intangible assets may be diminished, and our business may be adversely affected.
Our success depends on our ability to operate our business without infringing, misappropriating or otherwise violating the trademarks, patents, copyrights and other proprietary rights of third parties.
The summary risk factors described above should be read together with the text of the full risk factors below in the section titled “Risk factors” and the other information set forth in this Quarterly Report, including our unaudited condensed consolidated financial statements and the related notes, as well as in other documents that we file with the U.S. Securities and Exchange Commission (the “SEC”). The risks summarized above or described in the section titled “Risk factors” are not the only risks that we face. Additional risks and uncertainties not precisely known to us or that we currently deem to be immaterial may also materially adversely affect our business, financial condition, results of operations and future growth prospects.




e.l.f. Beauty, Inc.
Table of Contents

4

Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial statements (unaudited)
e.l.f. Beauty, Inc. and subsidiaries
Condensed consolidated balance sheets
(unaudited)
(in thousands, except share and per share data)
December 31, 2023March 31, 2023December 31, 2022
Assets
Current assets:
Cash and cash equivalents$72,705 $120,778 $87,021 
Accounts receivable, net121,061 67,928 66,237 
Inventory, net204,504 81,323 81,250 
Prepaid expenses and other current assets56,630 33,296 28,382 
Total current assets454,900 303,325 262,890 
Property and equipment, net12,805 7,874 8,726 
Intangible assets, net230,658 78,041 80,071 
Goodwill340,165 171,620 171,620 
Investments1,155 2,875 2,875 
Other assets68,601 31,866 29,743 
Total assets$1,108,284 $595,601 $555,925 
Liabilities and stockholders' equity  
Current liabilities:  
Current portion of long-term debt and finance lease obligations$100,394 $5,575 $5,690 
Accounts payable72,917 31,427 32,049 
Accrued expenses and other current liabilities129,628 70,974 49,798 
Total current liabilities302,939 107,976 87,537 
Long-term debt and finance lease obligations164,403 60,881 62,177 
Deferred tax liabilities4,281 3,742 7,783 
Long-term operating lease obligations21,720 11,201 12,329 
Other long-term liabilities717 784 795 
Total liabilities494,060 184,584 170,621 
Commitments and contingencies (Note 9)
Stockholders' equity:  
Common stock, par value of $0.01 per share; 250,000,000 shares authorized as of December 31, 2023, March 31, 2023 and December 31, 2022; 55,412,234, 53,770,482 and 53,165,462 shares issued and outstanding as of December 31, 2023, March 31, 2023 and December 31, 2022, respectively
553 535 528 
Additional paid-in capital922,592 832,481 823,021 
Accumulated other comprehensive loss(58)  
Accumulated deficit(308,863)(421,999)(438,245)
Total stockholders' equity614,224 411,017 385,304 
Total liabilities and stockholders' equity$1,108,284 $595,601 $555,925 
The accompanying notes are an integral part of these condensed consolidated financial statements.
5

Table of Contents
e.l.f. Beauty, Inc. and subsidiaries
Condensed consolidated statements of operations
(unaudited)
(in thousands, except share and per share data)
 Three months ended December 31,Nine months ended December 31,
 2023202220232022
Net sales$270,943 $146,537 $702,789 $391,487 
Cost of sales78,986 47,812 205,895 130,217 
Gross profit191,957 98,725 496,894 261,270 
Selling, general and administrative expenses160,121 75,434 364,246 201,172 
Operating income 31,836 23,291 132,648 60,098 
Other income (expense), net2,565 730 1,902 (2,195)
Impairment of equity investment  (1,720) 
Interest expense, net(3,985)(463)(3,021)(1,912)
Loss on extinguishment of debt (176) (176)
Income before provision for income taxes30,416 23,382 129,809 55,815 
Income tax provision(3,528)(4,277)(16,673)(10,531)
Net income $26,888 $19,105 $113,136 $45,284 
Net income per share:
Basic$0.49 $0.36 $2.08 $0.87 
Diluted$0.46 $0.34 $1.97 $0.82 
Weighted average shares outstanding:
Basic55,140,887 52,707,406 54,503,518 52,239,761 
Diluted58,030,115 55,840,137 57,550,094 54,906,065 
The accompanying notes are an integral part of these condensed consolidated financial statements.
6

Table of Contents
e.l.f. Beauty, Inc. and subsidiaries
Condensed consolidated statements of comprehensive income
(unaudited)
(in thousands)
Three months ended December 31,Nine months ended December 31,
2023202220232022
Net income$26,888 $19,105 $113,136 $45,284 
Other comprehensive loss, net of tax
Foreign currency translation adjustment(58) (58) 
Other comprehensive loss, net of tax(58) (58) 
Comprehensive income$26,830 $19,105 $113,078 $45,284 
The accompanying notes are an integral part of these condensed consolidated financial statements.
7

Table of Contents
e.l.f. Beauty, Inc. and subsidiaries
Condensed consolidated statements of stockholders’ equity
(unaudited)
(in thousands, except share data)
 Common stockAdditional
paid-in
capital
Accumulated other
comprehensive loss
Accumulated
deficit
Total
stockholders'
equity
 SharesAmount
Balance as of March 31, 202353,571,577 $535 $832,481 $ $(421,999)$411,017 
Net income— — — — 52,977 52,977 
Stock-based compensation— — 7,223 — — 7,223 
Exercise of stock options and vesting of restricted stock754,953 8 477 — — 485 
Balance as of June 30, 202354,326,530 $543 $840,181 $ $(369,022)$471,702 
Net income— — — — 33,271 33,271 
Stock-based compensation— — 11,190 — — 11,190 
Exercise of stock options and vesting of restricted stock203,982 2 263 — — 265 
Balance as of September 30, 202354,530,512 $545 $851,634 $ $(335,751)$516,428 
Net income— — — — 26,888 26,888 
Stock-based compensation— — 11,051 — — 11,051 
Exercise of stock options and vesting of restricted stock213,014 2 2,141 — — 2,143 
Issuance of common stock as consideration for acquisition577,659 6 57,766 — — 57,772 
Foreign currency translation adjustment— — — (58)— (58)
Balance as of December 31, 202355,321,185 $553 $922,592 $(58)$(308,863)$614,224 
The accompanying notes are an integral part of these condensed consolidated financial statements.
8

Table of Contents
e.l.f. Beauty, Inc. and subsidiaries
Condensed consolidated statements of stockholders’ equity
(unaudited)
(in thousands, except share data)
 Common stockAdditional
paid-in
capital
Accumulated
deficit
Total
stockholders'
equity
 SharesAmount
Balance as of March 31, 202251,524,307 $515 $795,443 $(483,529)$312,429 
Net income— — — 14,469 14,469 
Stock-based compensation— — 6,549 — 6,549 
Exercise of stock options and vesting of restricted stock558,336 2 — — 2 
Balance as of June 30, 202252,082,643 $517 $801,992 $(469,060)$333,449 
Net income— — — 11,710 11,710 
Stock-based compensation— — 8,022 — 8,022 
Exercise of stock options and vesting of restricted stock471,966 8 3,771 — 3,779 
Balance as of September 30, 202252,554,609 $525 $813,785 $(457,350)$356,960 
Net income— — — 19,105 19,105 
Stock-based compensation— — 7,239 — 7,239 
Exercise of stock options and vesting of restricted stock269,051 3 1,997 — 2,000 
Balance as of December 31, 202252,823,660 $528 $823,021 $(438,245)$385,304 
The accompanying notes are an integral part of these condensed consolidated financial statements.

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e.l.f. Beauty, Inc. and subsidiaries
Condensed consolidated statements of cash flows
(unaudited)
(in thousands)
 Nine months ended December 31,
 20232022
Cash flows from operating activities:  
Net income $113,136 $45,284 
Adjustments to reconcile net income to net cash provided by operating activities:
 
Depreciation and amortization24,247 16,496 
Stock-based compensation expense29,459 21,833 
Amortization of debt issuance costs and discount on debt290 271 
Deferred income taxes(1,684)(1,819)
Impairment of equity investment1,720  
Acquisition-related seller expenses(10,549) 
Loss on extinguishment of debt 176 
Other, net27 (1)
Changes in operating assets and liabilities:  
Accounts receivable(45,878)(20,620)
Inventory(106,898)3,248 
Prepaid expenses and other assets(50,696)(15,223)
Accounts payable and accrued expenses84,733 22,610 
Other liabilities(3,768)(3,254)
Net cash provided by operating activities34,139 69,001 
Cash flows from investing activities:  
Acquisition, net of cash acquired(274,973) 
Purchase of property and equipment(5,984)(1,647)
Net cash used in investing activities(280,957)(1,647)
Cash flows from financing activities:  
Proceeds from revolving line of credit89,500  
Proceeds from long-term debt115,000  
Repayment of long-term debt(5,188)(28,750)
Debt issuance costs paid(665) 
Cash received from issuance of common stock2,893 5,652 
Other, net(489)(588)
Net cash provided by (used in) financing activities201,051 (23,686)
Effect of exchange rate changes on cash and cash equivalents(56) 
Net (decrease) increase in cash, cash equivalents and restricted cash
(45,823)43,668 
Cash, cash equivalents and restricted cash - beginning of period120,778 43,353 
Cash, cash equivalents and restricted cash - end of period$74,955 $87,021 
The accompanying notes are an integral part of these condensed consolidated financial statements.
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e.l.f. Beauty, Inc. and subsidiaries
Notes to condensed consolidated financial statements (unaudited)
Note 1—Nature of operations
e.l.f. Beauty, Inc., a Delaware corporation (“e.l.f. Beauty” and together with its subsidiaries, the “Company”), is a multi-brand beauty company that offers inclusive, accessible, clean, vegan and cruelty-free cosmetics and skincare products. The Company's mission is to make the best of beauty accessible to every eye, lip, face and skin concern.
The Company believes its ability to deliver cruelty-free, clean, vegan and premium-quality products at accessible prices with broad appeal differentiates it in the beauty industry. The Company believes the combination of its value proposition, innovation engine, ability to attract and engage consumers, and its world-class team’s ability to execute with speed, has positioned the Company well to navigate the competitive beauty market.
The Company's family of brands includes e.l.f. Cosmetics, e.l.f. SKIN, Naturium, Well People and Keys Soulcare. The Company's brands are available online and across leading beauty, mass-market and specialty retailers. The Company has strong relationships with its retail customers such as Target, Walmart, Ulta Beauty and other leading retailers that have enabled the Company to expand distribution both domestically and internationally.
Note 2—Summary of significant accounting policies
Basis of presentation
The accompanying unaudited condensed consolidated financial statements and related notes have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in the Company’s annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. In the opinion of the Company, these interim financial statements contain all adjustments, including normal recurring adjustments, necessary for a fair statement of its financial position as of December 31, 2023, March 31, 2023 and December 31, 2022, and its results of operations and stockholders' equity for the three and nine months ended December 31, 2023 and December 31, 2022 and its cash flows for the nine months ended December 31, 2023 and December 31, 2022. All intercompany balances and transactions have been eliminated in consolidation.
These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2023 (the “Annual Report”). Operating results for the interim periods are not necessarily indicative of the results that may be expected for the full year.
Use of estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Segment reporting
Operating segments are components of an enterprise for which separate financial information is available that is evaluated by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Utilizing these criteria, the Company manages its business on the basis of one operating segment and one reportable segment. It is impracticable for the Company to provide revenue by product line.
Significant accounting policies
Business combinations
The purchase price of a business acquisition is allocated to the assets acquired and liabilities assumed based upon their estimated fair values at the business combination date. The excess of purchase price over the fair value of assets acquired and liabilities assumed is recorded as goodwill. Determining fair value of identifiable assets, particularly intangibles, and liabilities acquired also requires the Company to make estimates, which are based on all available information and in some cases
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assumptions with respect to the timing and amount of future revenues and expenses associated with an asset. Unanticipated events or circumstances may occur that could affect the accuracy of the Company’s fair value estimates, and under different assumptions, the resulting valuations could be materially different.
Costs that are incurred to complete the business combination, such as legal and other professional fees, are not considered as a part of consideration transferred and are charged to selling, general and administrative expense as they are incurred.
The Company made no other material changes in the application of its significant accounting policies that were disclosed in Note 2, “Summary of significant accounting policies,” to the audited consolidated financial statements as of and for the fiscal year ended March 31, 2023 included in the Annual Report.
Revenue recognition
The Company distributes products both through national and international retailers, as well as direct-to-consumers through its e-commerce channel. The marketing and consumer engagement benefits that the direct-to-consumer channel provides are integral to the Company’s brand and product development strategy and drive sales across channels. As such, the Company views its two primary distribution channels as components of one integrated business, as opposed to discrete revenue streams.
The Company sells a variety of beauty products but does not consider them to be meaningfully different revenue streams given similarities in the nature of the products, the target consumer and the innovation and distribution processes.
The following table provides disaggregated revenue from contracts with customers by geographical market, as the nature, amount, timing and uncertainty of revenue and cash flows can differ between domestic and international customers (in thousands).
 Three months ended December 31,Nine months ended December 31,
Net sales by geographic region:2023202220232022
United States$229,101 $127,457 $599,552 $343,869 
International41,842 19,080 103,237 47,618 
Total net sales$270,943 $146,537 $702,789 $391,487 
As of December 31, 2023, other than accounts receivable, the Company had no material contract assets, contract liabilities or deferred contract costs recorded on its unaudited condensed consolidated balance sheet.
Recent accounting pronouncements
No new accounting pronouncements issued but not yet adopted are expected to have a material impact on the Company's unaudited condensed consolidated financial statements.
Note 3—Restricted cash
Restricted cash amounting to $2.3 million as of December 31, 2023, included in prepaid expenses and other current assets on the accompanying unaudited condensed consolidated balance sheets, represents part of the purchase consideration held in escrow for the settlement of general representation and warranty provisions in connection with the Company’s acquisition of Naturium LLC (“Naturium”). The Company determines current or non-current classification of restricted cash based on the expected duration of the restriction.
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The reconciliation of cash, cash equivalents and restricted cash recorded in the condensed consolidated balance sheets to amounts reported in the condensed consolidated statements of cash flows are as follows (in thousands):
Nine months ended December 31,
 Balance sheet classification20232022
Cash and cash equivalentsCash and cash equivalents$72,705 $87,021 
Restricted cash held in escrowPrepaid expenses and other current assets2,250  
Cash, cash equivalents and restricted cash - end of period$74,955 $87,021 
Note 4—Investment in equity securities
On April 14, 2017, the Company invested $2.9 million in a social media analytics company, which is included in investments on its unaudited condensed consolidated balance sheets. The Company has elected the measurement alternative for equity investments that do not have readily determinable fair values. The Company recorded an impairment charge of $1.7 million on its investment as a separate line under other income (expense), net during the three months ended June 30, 2023, as an identified event or change in circumstances resulted in an indicator of impairment. The Company did not record an additional impairment charge on its investment during the three months ended December 31, 2023.
Note 5—Acquisition
On October 4, 2023, the Company, through its wholly owned subsidiary, e.l.f. Cosmetics, Inc., completed its acquisition of Naturium (including the indirect acquisition of equity interests in Naturium through the purchase of a “tax blocker” holding company) (the “Acquisition”), which furthered the Company’s mission to make the best of beauty accessible to every eye, lip, face and skin concern. Naturium is a skincare company that provides clinically effective products at an affordable price. The Company directly and indirectly acquired all rights, title and interest in and to the outstanding equity securities of Naturium for a purchase price of $333.0 million. The following table summarizes the fair market value of the consideration transferred and how the Company calculates the goodwill resulting from the acquisition (in thousands):
Cash consideration
$275,266 
Equity consideration (common stock issued)(1)
57,772 
Total consideration transferred
333,038 
Less: Net assets acquired
Net assets acquired, excluding liability assumed for acquisition-related seller expenses
$175,042 
Liability assumed for acquisition-related seller expenses(2)
(10,549)
Net assets acquired
(164,493)
Goodwill
$168,545 
(1) The fair market value of the $57.8 million common stock issued (equivalent to 577,659 shares of common stock) was determined on the basis of the opening market price of the Company’s stock of $100.01 per share on the acquisition date.
(2) In connection with the Acquisition, the Company paid Naturium’s acquisition-related expenses of $10.5 million recognized as an assumed liability at the acquisition date.
The Company incurred and expensed acquisition transaction costs of $0.6 million and $3.1 million during the three and nine months ended December 31, 2023, respectively, which are included as a component of selling, general and administrative expenses in the condensed consolidated statements of operations.
The Acquisition has been accounted for as a business combination under the acquisition method and, accordingly, the total purchase price is allocated to the tangible and intangible assets acquired and the liabilities assumed based on their respective fair values on the acquisition date. The purchase price allocation, deferred tax calculations and residual goodwill are preliminary and pending finalization. Naturium’s results of operations have been included in the Company's condensed consolidated financial statements from the date of acquisition.
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The following table presents the preliminary purchase price allocation recorded in the Company's condensed consolidated balance sheet on the acquisition date (in thousands):
Cash$293 
Accounts receivable7,388 
Inventory16,282 
Prepaid expenses and other current assets1,899 
Property and equipment28 
Goodwill(1)
168,545 
Intangible assets 162,800 
Total assets acquired
357,235 
Accounts payable(15,897)
Accrued expenses and other current liabilities(6,077)
Net deferred tax liability(2,223)
Total liabilities assumed(24,197)
Total purchase price
$333,038 
(1) The goodwill represents the excess value over both tangible and intangible assets acquired and liabilities assumed. The goodwill recognized in this transaction is primarily attributable to the Company’s expectation that Naturium can continue to expand distribution and deliver new skincare products. A substantial amount of the goodwill is expected to be deductible for tax purposes.
Intangible assets
Fair ValueEstimated Useful Life
(in thousands)(in years)
Fair Value Methodology
Customer relationships – retailers$20,000 10
Excess earnings method
Customer relationships – e-commerce18,300 
3
Excess earnings method and with and without method
Trademarks124,500 15
Relief from Royalty method
Total identified intangible assets$162,800 
Certain financial information (unaudited)
The amounts of Naturium’s net sales included in the Company's condensed consolidated financial statements from the date of acquisition and the net sales of the combined companies on an unaudited pro forma basis, had the acquisition date been April 1, 2022), are as follows (in thousands):
 
Amount
Actual Naturium net sales from October 4, 2023 to December 31, 2023
$22,458 
Supplemental pro forma combined net sales for the three months ended December 31, 2023
271,579 
Supplemental pro forma combined net sales for the nine months ended December 31, 2023
744,583 
Supplemental pro forma combined net sales for the three months ended December 31, 2022
159,811 
Supplemental pro forma combined net sales for the nine months ended December 31, 2022
425,423 
The unaudited pro forma financial information shown in the table above are presented for informational purposes only and are not indicative of the results of operations that would have been achieved if the acquisition had taken place at April 1, 2022 (the beginning of comparable period presented).
The pro forma earnings of the combined companies are not presented as the effects of the Acquisition in earnings are not material in relation to the overall consolidated financial statements.
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Note 6—Goodwill and intangible assets
Information regarding the Company’s goodwill and intangible assets as of December 31, 2023 is as follows (in thousands):
 Estimated useful lifeGross carrying amountAccumulated amortizationNet carrying amount
Customer relationships – retailers10 years$97,600 $(72,100)$25,500 
Customer relationships – e-commerce
3 years
22,240 (5,465)16,775 
Trademarks
10 to 15 years
128,000 (3,417)124,583 
Total finite-lived intangibles247,840 (80,982)166,858 
TrademarksIndefinite63,800 — 63,800 
Goodwill340,165 — 340,165 
Total goodwill and other intangibles$651,805 $(80,982)$570,823 
Information regarding the Company’s goodwill and intangible assets as of March 31, 2023 is as follows (in thousands):
 Estimated useful lifeGross carrying amountAccumulated amortizationNet carrying amount
Customer relationships – retailers10 years$77,600 $(65,780)$11,820 
Customer relationships – e-commerce3 years3,940 (3,940) 
Trademarks10 years3,500 (1,079)2,421 
Total finite-lived intangibles85,040 (70,799)14,241 
TrademarksIndefinite63,800 — 63,800 
Goodwill171,620 — 171,620 
Total goodwill and other intangibles$320,460 $(70,799)$249,661 
Information regarding the Company’s goodwill and intangible assets as of December 31, 2022 is as follows (in thousands):
 Estimated useful lifeGross carrying amountAccumulated amortizationNet carrying amount
Customer relationships – retailers10 years$77,600 $(63,840)$13,760 
Customer relationships – e-commerce3 years3,940 (3,938)2 
Trademarks10 years3,500 (991)2,509 
Total finite-lived intangibles85,040 (68,769)16,271 
TrademarksIndefinite63,800 — 63,800 
Goodwill171,620 — 171,620 
Total goodwill and other intangibles$320,460 $(68,769)$251,691 
Amortization expenses on finite-lived intangible assets were $6.1 million and $2.0 million in the three months ended December 31, 2023 and December 31, 2022, respectively, and $10.2 million and $6.1 million in the nine months ended December 31, 2023 and December 31, 2022, respectively. Certain trademark assets have been classified as indefinite-lived intangible assets and accordingly, are not subject to amortization. There were no impairments of goodwill or intangible assets recorded in the three and nine months ended December 31, 2023 and December 31, 2022.
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The estimated future amortization expense related to finite-lived intangible assets, assuming no impairment as of December 31, 2023 is as follows (in thousands):
Remainder of fiscal 2024$4,981 
202517,630 
202617,630 
202714,580 
202811,530 
Thereafter100,507 
Total$166,858 
Note 7—Accrued expenses and other current liabilities
Accrued expenses and other current liabilities as of December 31, 2023, March 31, 2023 and December 31, 2022 consisted of the following (in thousands):
 December 31, 2023March 31, 2023December 31, 2022
Accrued expenses$44,979 $22,726 $19,298 
Accrued inventory23,562 1,330 468 
Accrued marketing21,241 23,761 7,036 
Current portion of operating lease liabilities7,010 4,510 4,528 
Accrued compensation16,588 13,098 10,591 
Taxes payable9,937 2,851 5,076 
Other current liabilities6,311 2,698 2,801 
Accrued expenses and other current liabilities$129,628 $70,974 $49,798 
Note 8—Debt
The Company’s outstanding debt as of December 31, 2023, March 31, 2023 and December 31, 2022 consisted of the following (in thousands):
 December 31, 2023March 31, 2023December 31, 2022
Revolving line of credit(1)
$89,500 $ $ 
Term loan(1)
176,063 66,250 67,500 
Finance lease obligations144 633 832 
Total debt(2)
265,707 66,883 68,332 
Less: debt issuance costs(910)(427)(465)
Total debt, net of issuance costs264,797 66,456 67,867 
Less: current portion(100,394)(5,575)(5,690)
Long-term portion of debt$164,403 $60,881 $62,177 
(1) See further discussion below. As of December 31, 2023, the Company was in compliance with all applicable financial covenants under the Amended Credit Agreement.
(2) The gross carrying amounts of the Company’s long-term debt, before reduction of the debt issuance costs, and finance lease obligations approximate their fair values, based on Level 2 inputs (quoted prices for similar assets and liabilities in active markets or inputs that are observable), as the stated rates approximate market rates for loans with similar terms. The Company did not transfer any liabilities measured at fair value on a recurring basis to or from Level 2 for any of the periods presented.
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Amended Credit Agreement
On April 30, 2021, the Company amended and restated its prior credit agreement (such amended and restated credit agreement, as further amended, supplemented or modified from time to time, the “Amended Credit Agreement”) and refinanced all loans under the prior credit agreement. The Amended Credit Agreement has a five year term and consists of (i) a $100 million revolving credit facility (the “Amended Revolving Credit Facility”) and (ii) a $100 million term loan facility (the “Amended Term Loan Facility”).
All amounts under the Amended Revolving Credit Facility are available for draw until the maturity date on April 30, 2026. The Amended Revolving Credit Facility is collateralized by substantially all of the Company’s assets and requires payment of an unused fee ranging from 0.10% to 0.30% (based on the Company’s consolidated total net leverage ratio (as defined in the Amended Credit Agreement)) times the average daily amount of unutilized commitments under the Amended Revolving Credit Facility. The Amended Revolving Credit Facility also provides for sub-facilities in the form of a $7 million letter of credit and a $5 million swing line loan; however, all amounts drawn under the Amended Revolving Credit Facility cannot exceed $100 million. The unused balance of the Amended Revolving Credit Facility as of December 31, 2023 was $10.5 million.
Prior to the Second Amendment (as defined below), both the Amended Revolving Credit Facility and the Amended Term Loan Facility bore interest, at the borrowers’ option, at either (i) a rate per annum equal to an adjusted LIBOR rate determined by reference to the cost of funds for the United States (“US”) dollar deposits for the applicable interest period (subject to a minimum floor of 0%) plus an applicable margin ranging from 1.25% to 2.125% based on our consolidated total net leverage ratio or (ii) a floating base rate plus an applicable margin ranging from 0.25% to 1.125% based on our consolidated total net leverage ratio. On March 29, 2023, the Company amended the Amended Credit Agreement to transition the benchmark from LIBOR to an adjusted Secured Overnight Financing Rate (“SOFR”) (which is equal to the applicable SOFR plus 0.10%) (such transaction, the “First Amendment”). In connection with the First Amendment, all outstanding LIBOR loans were converted to SOFR loans. The annual interest rate for SOFR borrowings will be equal to term SOFR plus 0.10%, subject to a floor of 0%, plus a margin ranging from 1.25% to 2.125%.
The interest rate as of December 31, 2023 for the Amended Revolving Credit Facility and the Amended Term Loan Facility was approximately 6.7%.
Second Amended Credit Agreement
On August 28, 2023, the Company entered into the Second Amendment to the Amended and Restated Credit Agreement (the “Second Amendment”). Pursuant to the Second Amendment, the Company may borrow incremental term loans in a principal amount equal to $115.0 million under the Amended Credit Agreement (the “Incremental Term Loan”). The Incremental Term Loan will bear interest at a rate per annum equal to, at the Company’s election, adjusted term SOFR or an alternate base rate as set forth in the Second Amendment, plus an interest rate margin, to be based on consolidated total net leverage ratio levels, ranging from, (i) in the case of SOFR loans, 1.50% to 2.375%; provided that if SOFR is less than 0.00%, such rate shall be deemed to be 0.00%, and (ii) in the case of alternate base rate loans, 0.50% to 1.375%; provided that if the alternate base rate is less than 1.00%, such rate shall be deemed to be 1.00%. The Incremental Term Loan amortizes at 5.00% per annum payable in equal quarterly installments of 1.25% per annum, commencing with the fiscal quarter ending on December 31, 2023. The Company used the Incremental Term Loan together with cash from its balance sheet and additional borrowings under its Amended Revolving Credit Facility to consummate the Acquisition (as defined in Note 5 hereto) and to pay related fees and expenses in connection with the Acquisition and Second Amendment.
The interest rate as of December 31, 2023 for the Incremental Term Loan was approximately 6.9%.
The Amended Credit Agreement contains a number of covenants that, among other things and subject to certain exceptions, restrict the Company’s ability to pay dividends and distributions or repurchase capital stock, incur additional indebtedness, create liens on assets, engage in mergers or consolidations and sell or otherwise dispose of assets. The Amended Credit Agreement also includes reporting, financial and maintenance covenants that require the Company to, among other things, comply with certain consolidated total net leverage ratios and consolidated fixed charge coverage ratios.
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Note 9—Commitments and contingencies
Legal contingencies
The Company is from time to time subject to, and is currently involved in legal proceedings, claims and litigation arising in the ordinary course of business. The Company is not currently a party to any matters that management expects will have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.
Note 10—Income taxes
The Company’s quarterly tax provision is based upon an estimated annual effective tax rate as adjusted for any discrete items. The Company’s provision for income taxes were $3.5 million and $4.3 million for the three months ended December 31, 2023 and December 31, 2022, respectively, and $16.7 million and $10.5 million for the nine months ended December 31, 2023 and December 31, 2022, respectively, with an effective tax rate of 11.6% and 18.3% for the three months ended December 31, 2023 and December 31, 2022, respectively, and an effective tax rate of 12.8% and 18.9% for the nine months ended December 31, 2023 and December 31, 2022, respectively. The effective tax rate differs from the U.S. statutory tax rate primarily due to discrete tax benefit related to stock-based compensation.
Note 11—Stock-based compensation
Stock based compensation expense is recognized on a straight-line basis over the requisite service period. Total stock-based compensation is shown in the table below (in thousands):
Three months ended December 31,Nine months ended December 31,
 2023202220232022
Service-based vesting options$41 $89 $128 $266 
Restricted stock and RSUs11,001 7,168 29,331 21,567 
Total stock compensation expense$11,042 $7,257 $29,459 $21,833 
As of December 31, 2023, there was $0.1 million and $88.3 million of total unrecognized stock-based compensation cost related to unvested service-based stock options and shares subject to RSAs and RSUs, respectively. The unrecognized stock-based compensation is expected to be recognized over the remaining weighted-average period of 1.8 years for service-based stock options and 2.0 years for shares subject to RSAs and RSUs, respectively.
Note 12—Repurchase of common stock
On May 8, 2019, the Company announced that its board of directors authorized a share repurchase program to acquire up to $25.0 million of the Company’s common stock (the “Share Repurchase Program”). Purchases under the Share Repurchase Program may be made from time to time, in such amounts as management deems appropriate, through a variety of methods, which may include open market purchases, privately negotiated transactions, block trades, accelerated share repurchase transactions, or by any combination of such methods. The timing and amount of any repurchases pursuant to the Share Repurchase Program will be determined based on market conditions, share price and other factors. The Share Repurchase Program does not have an expiration date, does not require the Company to repurchase any specific number of shares of its common stock, and may be modified, suspended or terminated at any time without notice. There is no guarantee that any additional shares will be purchased under the Share Repurchase Program and such shares are intended to be retired after purchase.
The covenants in the Amended Credit Agreement require the Company to be in compliance with certain leverage ratios to make repurchases under the Share Repurchase Program.
The Company did not repurchase any shares during the three and nine months ended December 31, 2023. A total of $17.1 million remains available for future share repurchases under the Share Repurchase Program as of December 31, 2023.
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Note 13—Net income per share
The Company computes basic net income per share using the weighted-average number of shares of common stock outstanding. Diluted net income per share amounts are calculated using the treasury stock method for equity-based compensation awards. The following is a reconciliation of the numerator and denominator in the basic and diluted net income per common share computations (in thousands, except share and per share data):
 Three months ended December 31,Nine months ended December 31,
 2023202220232022
Numerator:    
Net income $26,888 $19,105 $113,136 $45,284 
Denominator:    
Weighted-average common shares outstanding – basic55,140,887 52,707,406 54,503,518 52,239,761 
Dilutive common equivalent shares from equity awards2,889,228 3,132,731 3,046,576 2,666,304 
Weighted-average common shares outstanding – diluted58,030,115 55,840,137 57,550,094 54,906,065 
Net income per share:    
Basic$0.49 $0.36 $2.08 $0.87 
Diluted$0.46 $0.34 $1.97 $0.82 
Weighted-average anti-dilutive shares from outstanding equity awards excluded from diluted earnings per share31,021 9,215 58,792 257,292 
Note 14—Leases
The Company leases warehouses, distribution centers, office space and equipment. The majority of the Company's leases include one or more options to renew, with renewal terms that can extend the lease term for up to five years. The exercise of lease renewal options is at the Company's sole discretion and such renewal options are included in the lease term if they are reasonably certain to be exercised. Certain leases also include options to purchase the leased asset. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants. Most of the Company's equipment leases are finance leases of assets used to operate its distribution center in Ontario, California.
Significant judgment is required to determine whether commercial contracts contain a lease for purposes of ASC 842. The Company uses its incremental borrowing rate to determine the present value of lease payments.
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Supplemental balance sheet information related to leases as of December 31, 2023, March 31, 2023 and December 31, 2022 is as follows (in thousands):
 ClassificationDecember 31, 2023March 31, 2023December 31, 2022
Assets
Operating lease assets Other assets$27,224 $14,071 $15,120 
Finance lease assets (a)
Other assets 245 350 
Total leased assets$27,224 $14,316 $15,470 
Liabilities
Current
Operating Accrued expenses and other current liabilities$7,010 $4,510 $4,528 
FinanceCurrent portion of long-term debt and finance lease obligations144 575 690 
Noncurrent
Operating Long-term operating lease obligations21,720 11,201 12,329 
FinanceLong-term debt and finance lease obligations 58 142 
Total lease liabilities$28,874 $16,344 $17,689 
_____________________
(a) Finance leases are recorded net of accumulated amortization of $1.5 million, $3.4 million and $3.3 million as of December 31, 2023, March 31, 2023 and December 31, 2022, respectively.
For the three and nine months ended December 31, 2023 and December 31, 2022, the components of operating and finance lease costs were as follows (in thousands):
Three months ended December 31,Nine months ended December 31,
 Classification2023202220232022
Operating lease cost Selling, general and administrative (“SG&A”) expenses$2,203 $1,149 $4,905 $3,458 
Finance lease cost
Amortization of leased assetsSG&A expenses 105 210 315 
Interest on lease liabilitiesInterest expense, net3 7 10 25 
Total lease cost $2,206 $1,261 $5,125 $3,798 
As of December 31, 2023, the aggregate future minimum lease payments under non-cancellable leases presented in accordance with ASC 842 are as follows (in thousands):
Operating
leases
Finance
leases
Total
Remainder of fiscal 2024$1,985 $87 $2,072 
20258,434 58 8,492 
20268,424  8,424 
20275,060  5,060 
20281,921  1,921 
Thereafter6,994  6,994 
Total lease payments32,818 145 32,963 
Less: Interest4,088 1 4,089 
Present value of lease liabilities$28,730 $144 $28,874 
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For leases commencing prior to January 1, 2019, minimum lease payments exclude payments to landlords for real estate taxes and common area maintenance. These payments can be either fixed or variable, depending on the lease.
As of December 31, 2023 and December 31, 2022, the weighted-average remaining lease term (in years) and discount rate were as follows:
 December 31, 2023December 31, 2022
Weighted-average remaining lease term
Operating leases4.8 years4.7 years
Finance leases0.4 years1.1 years
Weighted-average discount rate
Operating leases4.9 %2.6 %
Finance leases1.6 %2.8 %
Operating cash outflows from operating leases for the nine months ended December 31, 2023 and December 31, 2022 were $3.2 million and $3.6 million, respectively.

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Item 2. Management’s discussion and analysis of financial condition and results of operations.
Management’s discussion and analysis of financial condition and results of operations (“MD&A”) should be read together with the MD&A presented in the Annual Report on Form 10-K for the year ended March 31, 2023 (the “Annual Report”) and the unaudited condensed consolidated financial statements and accompanying notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q (this “Quarterly Report”), which include additional information about our accounting policies, practices and the transactions underlying our financial results.
Overview and Business Trends
e.l.f. Beauty, Inc., a Delaware corporation (“e.l.f. Beauty” and together with its subsidiaries, the “Company,” or “we”), is a multi-brand beauty company that offers inclusive, accessible, clean, vegan and cruelty-free cosmetics and skincare products. Our mission is to make the best of beauty accessible to every eye, lip, face and skin concern.
We believe our ability to deliver cruelty-free, clean, vegan and premium-quality products at accessible prices with broad appeal differentiates us in the beauty industry. We believe the combination of our value proposition, innovation engine, ability to attract and engage consumers, and our world-class team’s ability to execute with speed has positioned us well to navigate the competitive beauty market.
Our family of brands includes e.l.f. Cosmetics, e.l.f. SKIN, Naturium, Well People and Keys Soulcare. Our brands are available online and across leading beauty, mass-market, and specialty retailers. We have strong relationships with our retail customers such as Target, Walmart, Ulta Beauty and other leading retailers that have enabled us to expand distribution both domestically and internationally.
Our Acquisition of Naturium
On October 4, 2023, we consummated our acquisition of Naturium LLC, a Delaware limited liability company (“Naturium”), and TCB-N Prelude Blocker Corp., a Delaware corporation (“Blocker”), pursuant to a Securities Purchase Agreement, dated August 28, 2023 (the "Purchase Agreement"), by and among the Company, e.l.f. Cosmetics, Inc., Naturium, Blocker and various sellers. Pursuant to the Purchase Agreement, we acquired all rights, title and interest in and to the outstanding equity securities of Naturium and Blocker for a purchase price of $333.0 million paid in cash and shares of our common stock (the "Acquisition"). See Note 5, “Acquisition,” in our unaudited condensed consolidated financial statements for further details.
Seasonality
Our results of operations are subject to seasonal fluctuations, with net sales in the third and fourth fiscal quarters typically being higher than in the first and second fiscal quarters. The higher net sales in our third and fourth fiscal quarters are largely attributable to the increased levels of purchasing by retailers for the holiday season and customer shelf reset activities, respectively. Lower inventory builds from our retailers in preparation for the holiday season or shifts in customer shelf reset activity could have a disproportionate effect on our results of operations for the entire fiscal year. To support anticipated higher sales during the third and fourth fiscal quarters, we make investments in working capital to ensure inventory levels can support demand. Fluctuations throughout the year are also driven by the timing of product restocking or rearrangement by our major retail customers as well as expansion into new retail customers. Because a limited number of our retail customers account for a large percentage of our net sales, a change in the order pattern of one or more of our large retail customers could cause a significant fluctuation of our quarterly results or impact our liquidity.
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Results of operations
The following table sets forth our consolidated statements of operations data in dollars and as a percentage of net sales for the periods presented:
 Three months ended December 31,Nine months ended December 31,
(in thousands)2023202220232022
Net sales$270,943 $146,537 $702,789 $391,487 
Cost of sales78,986 47,812 205,895 130,217 
Gross profit191,957 98,725 496,894 261,270 
Selling, general and administrative expenses160,121 75,434 364,246 201,172 
Operating income 31,836 23,291 132,648 60,098 
Other income (expense), net2,565 730 1,902 (2,195)
Impairment of equity investment— — (1,720)— 
Interest expense, net(3,985)(463)(3,021)(1,912)
Loss on extinguishment of debt— (176)— (176)
Income before provision for income taxes30,416 23,382 129,809 55,815 
Income tax provision(3,528)(4,277)(16,673)(10,531)
Net income $26,888 $19,105 $113,136 $45,284 
 Three months ended December 31,Nine months ended December 31,
(percentage of net sales)2023202220232022
Net sales100 %100 %100 %100 %
Cost of sales29 %33 %29 %33 %
Gross margin71 %67 %71 %67 %
Selling, general and administrative expenses59 %51 %52 %51 %
Operating income 12 %16 %19 %15 %
Other income (expense), net%— %— %(1)%
Impairment of equity investment— %— %— %— %
Interest expense, net(1)%— %— %— %
Income before provision for income taxes11 %16 %18 %14 %
Income tax provision(1)%(3)%(2)%(3)%
Net income 10 %13 %16 %12 %
Comparison of the three months ended December 31, 2023 to the three months ended December 31, 2022
Net sales
Net sales increased $124.4 million, or 85%, to $270.9 million for the three months ended December 31, 2023, from $146.5 million for the three months ended December 31, 2022. The increase was driven by strength across both our retailer and e-commerce channels. Net sales increased $86.8 million, or 67%, in our retailer channels and $37.6 million, or 216%, in our e-commerce channels. From a price and volume perspective, a higher volume of units sold drove $81.9 million of the increase in net sales and a higher average item price within retailer and e-commerce orders drove the remaining $42.5 million increase in net sales as compared to the three months ended December 31, 2022.
Gross profit
Gross profit increased $93.2 million, or 94%, to $192.0 million for the three months ended December 31, 2023, compared to $98.7 million for the three months ended December 31, 2022. Higher unit volume drove $55.2 million of the increase in gross profit, with the remaining increase of $38.0 million driven by higher average item price and mix. Gross margin increased to 71% from 67% when compared to the three months ended December 31, 2022. The increase in gross margin rate was primarily driven by favorable foreign exchange impacts, improved transportation costs, cost savings and mix in the three months ended December 31, 2023.
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Selling, general and administrative expenses
Selling, general and administrative (“SG&A”) expenses were $160.1 million for the three months ended December 31, 2023, an increase of $84.7 million, or 112%, from $75.4 million for the three months ended December 31, 2022. SG&A expenses as a percentage of net sales increased to 59% for the three months ended December 31, 2023 from 51% for the three months ended December 31, 2022. The $84.7 million increase was primarily related to an increase in marketing and digital spend of $44.0 million, increased compensation and benefits of $10.5 million, increased operations costs of $8.8 million, increased retail fixturing and visual merchandising costs of $7.4 million, increased depreciation and amortization of $5.9 million and increased professional fees of $2.3 million.
Other income, net
Other income, net totaled $2.6 million for the three months ended December 31, 2023, as compared to $0.7 million for the three months ended December 31, 2022. The year-over-year variance is primarily due to an increase in unrealized gain in the quarter attributable to favorable foreign currency rate fluctuation.
Interest expense, net
Interest expense, net was $4.0 million for the three months ended December 31, 2023, as compared to $0.5 million for the three months ended December 31, 2022. The change compared to last year was primarily due to additional borrowings for the three months ended December 31, 2023 as well as higher interest costs. See Note 8, “Debt,” in our unaudited condensed consolidated financial statements for further details on our debt.
Income tax provision
The provision for income taxes was $3.5 million, or an effective rate of 11.6%, for the three months ended December 31, 2023, as compared to a provision of $4.3 million, or an effective rate of 18.3%, for the three months ended December 31, 2022. The change in the provision for income taxes was primarily driven by an increase in discrete tax benefits of $3.7 million, primarily related to stock-based compensation, partially offset by an increase in income before taxes of $7.0 million.
Comparison of the nine months ended December 31, 2023 to the nine months ended December 31, 2022
Net sales
Net sales increased $311.3 million, or 80%, to $702.8 million for the nine months ended December 31, 2023, compared to $391.5 million for the nine months ended December 31, 2022. The increase was driven primarily by strength in both our retailer and e-commerce channels. Net sales increased $249.2 million, or 72%, in our retailer channels and $62.1 million, or 142%, in our e-commerce channels. From a price and volume perspective, a higher volume of units sold drove $220.2 million of the increase in net sales and a higher average item price within retailer and e-commerce orders drove the remaining $91.1 million increase in net sales as compared to the nine months ended December 31, 2022.
Gross profit
Gross profit increased $235.6 million, or 90%, to $496.9 million for the nine months ended December 31, 2023, compared to $261.3 million for the nine months ended December 31, 2022. Higher unit volume drove $147.0 million of the increase in gross profit, with the remaining increase of $88.6 million driven by higher average item price and mix. Gross margin increased to 71% from 67% when compared to the nine months ended December 31, 2022. The increase in gross margin rate in the nine months ended December 31, 2023 was primarily driven by favorable foreign exchange impacts, cost savings and mix, improved transportation costs, and lower inventory adjustments, partially offset by costs associated with retailer activity and space expansion.
Selling, general and administrative expenses
SG&A expenses were $364.2 million for the nine months ended December 31, 2023, an increase of $163.1 million, or 81%, from $201.2 million for the nine months ended December 31, 2022. SG&A expenses as a percentage of net sales increased to 52% for the nine months ended December 31, 2023 from 51% for the nine months ended December 31, 2022. The $163.1 million increase was primarily related to an increase in marketing and digital spend of $84.6 million, increased compensation and benefits of $22.3 million, increased operations costs of $17.6 million, increased retail fixturing and visual merchandising costs of $13.5 million, increased depreciation and amortization of $7.0 million and increased professional fees of $6.9 million.
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Other income (expense), net
Other income, net totaled $1.9 million for the nine months ended December 31, 2023, as compared to other expense, net of $2.2 million for the nine months ended December 31, 2022. The year-over-year variance is primarily due to an increase in unrealized gain in the period attributable to favorable foreign currency rate fluctuation.
Impairment of equity investment
Impairment of equity investment was $1.7 million for the nine months ended December 31, 2023. See Note 4, “Investment in equity securities,” in our unaudited condensed consolidated financial statements for further details.
Interest expense, net
Interest expense, net was $3.0 million for the nine months ended December 31, 2023, as compared to $1.9 million for the nine months ended December 31, 2022. The year-over-year variance was primarily due to additional borrowings for the three months ended December 31, 2023 as well as higher interest costs, partially offset by increased interest earned on our cash balances. See Note 8, “Debt,” in our unaudited condensed consolidated financial statements for further details on our debt.
Income tax provision
The provision for income taxes was $16.7 million, or an effective rate of 12.8%, for the nine months ended December 31, 2023, as compared to a provision of $10.5 million, or an effective rate of 18.9%, for the nine months ended December 31, 2022. The change in the provision for income taxes was primarily driven by an increase in income before taxes of $74.0 million, partially offset by an increase in discrete tax benefits of $16.9 million, primarily related to stock-based compensation.
Financial condition, liquidity and capital resources
Overview
As of December 31, 2023, we had $72.7 million of cash and cash equivalents and $2.3 million of restricted cash. In addition, as of December 31, 2023, we had borrowing capacity of $10.5 million under our Amended Revolving Credit Facility.
Our primary cash needs are for working capital, fixturing, retail product displays and digital investments. Cash needs typically vary depending on strategic initiatives selected for the fiscal year, including investments in infrastructure, digital capabilities and expansion within or to additional retailer store locations.
We expect to fund ongoing cash needs from existing cash and cash equivalents, cash generated from operations and, if necessary, draws on our Amended Revolving Credit Facility.
Our primary working capital requirements are for product and product-related costs, compensation and benefits, distribution costs, advertising and marketing. Fluctuations in working capital are primarily driven by the timing of when a retailer rearranges or restocks its products, expansion of space within our existing retailer base or to new retailers and the general seasonality of our business. As of December 31, 2023, we had working capital, excluding cash and cash equivalents and restricted cash, of $77.0 million, compared to $74.6 million as of March 31, 2023. Working capital, excluding cash and cash equivalents, restricted cash and debt, was $177.4 million and $80.1 million as of December 31, 2023 and March 31, 2023, respectively.
We believe that our operating cash flow, existing cash and cash equivalents and available financing under the Amended Revolving Credit Facility will be adequate to meet our planned operating, investing and financing needs for the next twelve months. The unused balance of the Amended Revolving Credit Facility as of December 31, 2023 was $10.5 million. If necessary, we can borrow funds under our Amended Revolving Credit Facility to finance our liquidity requirements, subject to customary borrowing conditions. To the extent additional funds are necessary to meet our long-term liquidity needs as we continue to execute our business strategy, we anticipate that they will be obtained through the incurrence of additional indebtedness, additional equity financings or a combination of these potential sources of funds; however, such financing may not be available on favorable terms, or at all. Our ability to meet our operating, investing and financing needs depends to a significant extent on our future financial performance, which will be subject in part to general economic, competitive, financial, regulatory and other factors that are beyond our control, including those described elsewhere in Part II, Item 1A “Risk factors.” In addition to these general economic and industry factors, the principal factors in determining whether our cash flows will be sufficient to meet our liquidity requirements will be based on our ability to provide innovative products to our customers, manage production and our supply chain.
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Cash flows
 Nine months ended December 31,
(in thousands)20232022
Net cash provided by (used in):  
Operating activities$34,139 $69,001 
Investing activities(280,957)(1,647)
Financing activities201,051 (23,686)
Cash provided by operating activities
For the nine months ended December 31, 2023, net cash provided by operating activities was $34.1 million. This included net income as adjusted for depreciation, amortization and other non-cash items of $167.2 million, and payment of acquisition-related seller expenses of $10.5 million in connection with the Acquisition, partially offset by an increase in operating assets and liabilities as shown on the statement of cash flows of $122.5 million. The increase in operating assets and liabilities was primarily driven by a $106.9 million increase in inventory. The increase was reflective of building inventory to support net sales growth, as well as $8.7 million related to Naturium inventory, and $27.7 million related to a change in certain vendor arrangements where we now take ownership of inventory at shipment from China versus when it enters our U.S. distribution center. Additional changes to assets and liabilities include a $50.7 million increase in prepaid expense and other assets, a $45.9 million increase in accounts receivable and a $3.8 million decrease related to other liabilities, partially offset by an $84.7 million increase in accounts payable and accrued expenses.
For the nine months ended December 31, 2022, net cash provided by operating activities was $69.0 million. This included net income as adjusted for depreciation, amortization and other non-cash items of $82.2 million and an increase in operating assets and liabilities as shown on the statement of cash flows of $13.2 million. The increase in operating assets and liabilities was primarily driven by a $15.2 million increase of prepaid expense and other assets, a $20.6 million increase in accounts receivable and a $3.3 million decrease related to other liabilities. This was partially offset by a $22.6 million increase in accounts payable and accrued expenses and a $3.2 million decrease in inventory.
Cash used in investing activities
For the nine months ended December 31, 2023, net cash used in investing activities was $281.0 million. This includes $275.0 million paid for the Acquisition, and capital expenditures related to fixturing, equipment and software of $6.0 million.
For the nine months ended December 31, 2022, net cash used in investing activities was $1.6 million consisting of capital expenditures related to fixturing, equipment and software.
Cash provided by (used in) financing activities
For the nine months ended December 31, 2023, net cash provided by financing activities was $201.1 million and was primarily driven by proceeds from the Amended Term Loan Facility of $115.0 million and Revolving Credit Facility of $89.5 million and cash received from the exercise of stock options of $2.9 million. This was partially offset by repayment on the Amended Term Loan Facility of $5.2 million and payment of debt issuance costs of $0.7 million associated with the Second Amendment.
For the nine months ended December 31, 2022, net cash used in financing activities was $23.7 million and was primarily driven by repayment on the Amended Term Loan Facility of $28.8 million, partially offset by cash received from the exercise of stock options of $5.7 million.

Description of indebtedness
Amended Credit Agreement
On April 30, 2021, we entered into the Amended Credit Agreement and refinanced all loans under the prior credit agreement. The Amended Credit Agreement has a five year term and consists of the Amended Revolving Credit Facility and the Amended Term Loan Facility.
All amounts under the Amended Revolving Credit Facility are available for draw until the maturity date on April 30, 2026. The Amended Revolving Credit Facility is collateralized by substantially all of our assets and requires payment of an unused fee ranging from 0.10% to 0.30% (based on our consolidated total net leverage ratio (as defined in the Amended Credit Agreement)) times the average daily amount of unutilized commitments under the Amended Revolving Credit Facility. The Amended Revolving Credit Facility also provides for sub-facilities in the form of a $7 million letter of credit and a $5 million
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swing line loan; however, all amounts drawn under the Amended Revolving Credit Facility cannot exceed $100 million. The unused balance of the Amended Revolving Credit Facility as of December 31, 2023 was $10.5 million.
Prior to the Second Amendment (as defined below), both the Amended Revolving Credit Facility and the Amended Term Loan Facility bear interest, at borrowers’ option, at either (i) a rate per annum equal to an adjusted LIBOR rate determined by reference to the cost of funds for the US dollar deposits for the applicable interest period (subject to a minimum floor of 0%) plus an applicable margin ranging from 1.25% to 2.125% based on our consolidated total net leverage ratio or (ii) a floating base rate plus an applicable margin ranging from 0.25% to 1.125% based on our consolidated total net leverage ratio. On March 29, 2023, we amended the Amended Credit Agreement to transition the benchmark from LIBOR to an adjusted Secured Overnight Financing Rate (“SOFR”) (which is equal to the applicable SOFR plus 0.10%) (such transaction, the “First Amendment”). In connection with the First Amendment, all outstanding LIBOR loans were converted to SOFR loans. The annual interest rate for SOFR borrowings will be equal to term SOFR, subject to a floor of 0%, plus a margin ranging from 1.25% to 2.125%.
The interest rate as of December 31, 2023 for the Amended Revolving Credit Facility and the Amended Term Loan Facility was approximately 6.7%.
Second Amended Credit Agreement
On August 28, 2023, we entered into the Second Amendment to the Amended Credit Agreement (the “Second Amendment”). Pursuant to the Second Amendment, we may borrow incremental term loans in a principal amount equal to $115.0 million under the Amended Credit Agreement (the “Incremental Term Loan”). The Incremental Term Loan will bear interest at a rate per annum equal to, at our election, adjusted term SOFR or an alternate base rate as set forth in the Second Amendment, plus an interest rate margin, to be based on consolidated total net leverage ratio levels, ranging from, (i) in the case of SOFR loans, 1.50% to 2.375%; provided that if SOFR is less than 0.00%, such rate shall be deemed to be 0.00%, and (ii) in the case of alternate base rate loans, 0.50% to 1.375%; provided that if the alternate base rate is less than 1.00%, such rate shall be deemed to be 1.00%. The Incremental Term Loan amortizes at 5.00% per annum payable in equal quarterly installments of 1.25% per annum, commencing with the fiscal quarter ending on December 31, 2023. We used the Incremental Term Loan together with cash from our balance sheet and additional borrowings under our Amended Revolving Credit Facility to consummate the Acquisition and to pay related fees and expenses in connection with the Acquisition and Second Amendment.
The interest rate as of December 31, 2023 for the Incremental Term Loan was approximately 6.9%.
The Amended Credit Agreement contains a number of covenants that, among other things and subject to certain exceptions, restrict our ability to pay dividends and distributions or repurchase our capital stock, incur additional indebtedness, create liens on assets, engage in mergers or consolidations and sell or otherwise dispose of assets. The Amended Credit Agreement also includes reporting, financial and maintenance covenants that require us to, among other things, comply with certain consolidated total net leverage ratios and consolidated fixed charge coverage ratios. As of December 31, 2023, we were in compliance with all financial covenants under the Amended Credit Agreement.

Contractual obligations and commitments
There have been no material changes to our contractual obligations and commitments as included in the Annual Report.
Off-balance sheet arrangements
We are not party to any off-balance sheet arrangements.
Critical accounting policies and estimates
The MD&A is based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these unaudited condensed consolidated financial statements required the use of estimates and judgments that affect the reported amounts of our assets, liabilities, revenues and expenses. Management bases estimates on historical experience and other assumptions it believes to be reasonable under the circumstances and evaluates these estimates on an on-going basis. Actual results may differ from these estimates. There have been no significant changes to the critical accounting policies and estimates included in the Annual Report.
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Recent accounting pronouncements
Recent accounting pronouncements are disclosed in Note 2 to our unaudited condensed consolidated financial statements.
Item 3. Quantitative and qualitative disclosures about market risk.
There have been no material changes to our primary risk exposures or management of market risks from those disclosed in the Annual Report.
Item 4. Controls and procedures.
Evaluation of disclosure controls and procedures over financial reporting
As of December 31, 2023, our management conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2023, our disclosure controls and procedures were effective to provide reasonable assurance that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to the officers who certify our financial reports and to the members of the Company’s senior management and board of directors as appropriate to allow timely decisions regarding required disclosure.
Changes in internal control over financial reporting
We have assessed the impact on changes to our internal controls over financial reporting and concluded that there have been no changes to our internal control over financial reporting that occurred during the quarter ended December 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal proceedings.
We are from time to time subject to, and are presently involved in, legal proceedings, claims and litigation arising in the ordinary course of business. We are not currently a party to any matters that management expects will have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Item 1A. Risk factors.
Certain risks may have a material and/or adverse effect on our business, financial condition and results of operations. These risks include those described below and may include additional risks and uncertainties not presently known to us or that we currently deem immaterial. These risks should be read in conjunction with the other information in this Quarterly Report, including our unaudited condensed consolidated financial statements and related notes thereto and “Management’s discussion and analysis of financial condition and results of operations” in Part I, Item 2 of this Quarterly Report.
Risk factors related to the beauty industry
The beauty industry is highly competitive, and if we are unable to compete effectively our results will suffer.
We face vigorous competition from companies throughout the world, including large multinational consumer products companies that have many beauty brands under ownership and independent beauty and skincare brands, including those that may target the latest trends or specific distribution channels. Competition in the beauty industry is based on the introduction of new products, pricing of products, quality of products and packaging, brand awareness, perceived value and quality, innovation, in-store presence and visibility, promotional activities, advertising, editorials, e-commerce and mobile-commerce initiatives and other activities. We must compete with a high volume of new product introductions and existing products by diverse companies across several different distribution channels.
Many multinational consumer companies have greater financial, technical or marketing resources, longer operating histories, greater brand recognition or larger customer bases than we do and may be able to respond more effectively to changing business and economic conditions than we can. Many of these competitors’ products are sold in a wider selection or greater number of retail stores and possess a larger presence in these stores, typically having significantly more inline shelf space than we do. Given the finite space allocated to beauty products by retail stores, our ability to grow the number of retail stores in which our products are sold and expand our space allocation once in these retail stores may require the removal or reduction of the shelf space of these competitors. We may be unsuccessful in our growth strategy in the event retailers do not reallocate shelf space from our competitors to us. Increasing shelf space allocated to our products may be especially challenging in instances when a retailer has its own brand. In addition, our competitors may attempt to gain market share by offering products at prices at or below the prices at which our products are typically offered, including through the use of large percentage discounts and “buy one and get one free” offers. Competitive pricing may require us to reduce our prices, which would decrease our profitability or result in lost sales. Our competitors, many of whom have greater resources than we do, may be better able to withstand these price reductions and lost sales.
It is difficult for us to predict the timing and scale of our competitors’ activities in these areas or whether new competitors will emerge in the beauty industry. In recent years, numerous online, “indie,” celebrity and influencer-backed beauty companies have emerged and garnered significant followings. In addition, further technological breakthroughs, including new and enhanced technologies which increase competition in the online retail market, new product offerings by competitors and the strength and success of our competitors’ marketing programs may impede our growth and the implementation of our business strategy.
Our ability to compete also depends on the continued strength of our brands and products, the success of our marketing, innovation and execution strategies, the continued diversity of our product offerings, the successful management of new product introductions and innovations, strong operational execution, including in order fulfillment, our ability to adapt to changes in technology, including the successful utilization of data analytics, artificial intelligence and machine learning, and our success in entering new markets and expanding our business in existing geographies. If we are unable to continue to compete effectively, it could have a material adverse effect on our business, financial condition and results of operations.
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Our new product introductions may not be as successful as we anticipate.
The beauty industry is driven in part by fashion and beauty trends, which may shift quickly. Our continued success depends on our ability to anticipate, gauge and react in a timely and cost-effective manner to changes in consumer preferences for beauty products, consumer attitudes toward our industry and brands and where and how consumers shop for those products. We must continually work to develop, produce and market new products, maintain and enhance the recognition of our brands, maintain a favorable mix of products and develop our approach as to how and where we market and sell our products.
We have a process for the development, evaluation and validation of our new product concepts. Nonetheless, each new product launch involves risks, as well as the possibility of unexpected consequences. For example, the acceptance of new product launches and sales to our retail customers may not be as high as we anticipate due to lack of acceptance of the products themselves or their price or limited effectiveness of our marketing strategies. In addition, our ability to launch new products may be limited by delays or difficulties affecting the ability of our suppliers or manufacturers to timely manufacture, distribute and ship new products or displays for new products. Sales of new products may be affected by inventory management by our retail customers, and we may experience product shortages or limitations in retail display space by our retail customers. We may also experience a decrease in sales of certain existing products as a result of newly-launched products, the impact of which could be exacerbated by shelf space limitations or any shelf space loss. Any of these occurrences could delay or impede our ability to achieve our sales objectives, which could have a material adverse effect on our business, financial condition and results of operations.
As part of our ongoing business strategy, we expect that we will need to continue to introduce new products in the color cosmetics and skincare categories, while also expanding our product launches into adjacent categories in which we may have little to no operating experience. The success of product launches in adjacent product categories could be hampered by our relative inexperience operating in such categories, the strength of our competitors or any of the other risks referred to above. Furthermore, any expansion into new product categories may prove to be an operational and financial constraint which inhibits our ability to successfully accomplish such expansion. Our inability to introduce successful products in our traditional categories or in adjacent categories could limit our future growth and have a material adverse effect on our business, financial condition and results of operations.
Any damage to our reputation or brands may materially and adversely affect our business, financial condition and results of operations.
We believe that developing and maintaining our brands is critical and that our financial success is directly dependent on consumer perception of our brands. Furthermore, the importance of brand recognition may become even greater as competitors offer more products similar to ours.
We have relatively low brand awareness among consumers when compared to legacy beauty brands, and maintaining and enhancing the recognition and reputation of our brands is critical to our business and future growth. Many factors, some of which are beyond our control, are important to maintaining our reputation and brands. These factors include our ability to comply with ethical, social, product, labor and environmental standards. Any actual or perceived failure in compliance with such standards could damage our reputation and brands.
The growth of our brands depends largely on our ability to provide a high-quality consumer experience, which in turn depends on our ability to bring innovative products to the market at competitive prices that respond to consumer demands and preferences. Additional factors affecting our consumer experience include our ability to provide appealing store sets in retail stores, the maintenance and stocking of those sets by our retail customers, the overall shopping experience provided by our retail customers, a reliable and user-friendly website interface and mobile applications for our consumers to browse and purchase products on our e-commerce websites and mobile applications. If we are unable to preserve our reputation, enhance our brand recognition or increase positive awareness of our products and in-store and Internet platforms, it may be difficult for us to maintain and grow our consumer base, and our business, financial condition and results of operations may be materially and adversely affected.
The success of our brands may also suffer if our marketing plans or product initiatives do not have the desired impact on our brands' image or our ability to attract consumers. Further, our brand value could diminish significantly due to a number of factors, including consumer perception that we have acted in an irresponsible manner, adverse publicity about our products, our failure to maintain the quality of our products, product contamination, the failure of our products to deliver consistently positive consumer experiences, or our products becoming unavailable to consumers.
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Our success depends, in part, on the quality, performance and safety of our products.
Any loss of confidence on the part of consumers in the ingredients used in our products, whether related to product contamination or product safety or quality failures, actual or perceived, or inclusion of prohibited ingredients, could tarnish the image of our brands and could cause consumers to choose other products. Allegations of contamination or other adverse effects on product safety or suitability for use by a particular consumer, even if untrue, may require us to expend significant time and resources responding to such allegations and could, from time to time, result in a recall of a product from any or all of the markets in which the affected product was distributed. Any such issues or recalls could negatively affect our profitability and image of our brands.
If our products are found to be, or perceived to be, defective or unsafe, or if they otherwise fail to meet our consumers’ expectations, our relationships with consumers could suffer, the appeal of our brands could be diminished, we may need to recall some of our products and/or become subject to regulatory action, and we could lose sales or market share or become subject to boycotts or liability claims. In addition, safety or other defects in our competitors’ products could reduce consumer demand for our own products if consumers view them to be similar. Any of these outcomes could result in a material adverse effect on our business, financial condition and results of operations.
Risk factors related to our growth and profitability
We may not be able to successfully implement our growth strategy.
Our future growth, profitability and cash flows depend upon our ability to successfully implement our business strategy, which, in turn, is dependent upon a number of key initiatives, including our ability to:
build demand in our brands;
invest in digital capabilities;
lead innovation by providing prestige quality products at an extraordinary value;
drive productivity and space expansion with our retailers;
deliver profitable growth; and
pursue strategic extensions that can leverage our strengths and bring new capabilities.
There can be no assurance that we can successfully achieve any or all of the above initiatives in the manner or time period that we expect. Further, achieving these objectives will require investments which may result in short-term cost increases with net sales materializing on a longer-term horizon and, therefore, may be dilutive to our earnings. We cannot provide any assurance that we will realize, in full or in part, the anticipated benefits we expect our strategy will achieve. The failure to realize those benefits could have a material adverse effect on our business, financial condition and results of operations.
Our growth and profitability are dependent on a number of factors, and our historical growth may not be indicative of our future growth.
Our historical growth may not be indicative of our future performance as we may not be successful in executing our growth strategy, and, even if we achieve our strategic imperatives, we may not be able to sustain profitability. In future periods, our revenue could decline or grow more slowly than we expect. We also may incur significant losses in the future for a number of reasons, including the following risks and the other risks described in this report, and we may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors:
we may lose one or more significant retail customers, or sales of our products through these retail customers may decrease;
the ability of our third-party suppliers and manufacturers to produce our products and of our distributors to distribute our products could be disrupted;
because substantially all of our products are sourced and manufactured in China, our operations are susceptible to risks inherent in doing business there;
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our products may be the subject of regulatory actions, including, but not limited to, actions by the US Food and Drug Administration (the “FDA”), the Federal Trade Commission (the “FTC”) and the Consumer Product Safety Commission (the “CPSC”) in the United States and comparable foreign authorities outside the United States;
we may be unable to introduce new products that appeal to consumers or otherwise successfully compete with our competitors in the beauty industry;
we may be unsuccessful in enhancing the recognition and reputation of our brands, and our brands may be damaged as a result of, among other reasons, our failure, or alleged failure, to comply with applicable ethical, social, product, labor or environmental standards;
we may experience service interruptions, data corruption, cyber-based attacks or network security breaches which result in the disruption of our operating systems or the loss of confidential information of our consumers;
we may be unable to retain key members of our senior management team or attract and retain other qualified personnel; and
we may be affected by adverse economic conditions in the United States or internationally.
We may be unable to continue to grow our business effectively or efficiently, which would harm our business, financial condition and results of operations.
Since our formation, we have experienced significant growth in our business, customer base, employee headcount and operations, and we expect to continue to grow our business. Growing our business has placed, and we expect that it will continue to place, strain on our management team, personnel, financial and information systems, supply chain and distribution capacity and other resources. To manage our growth effectively, we must continue to enhance our operational, financial and management systems, including our warehouse management and inventory control; maintain and improve our internal controls and disclosure controls and procedures; maintain and improve our information technology systems and procedures; and expand, train and manage our employee base while maintaining close coordination among our executive, accounting, finance, legal, human resources, marketing, regulatory, sales and operations functions.
We may not be able to continue to effectively manage our expansion in any one or more of these areas, and any failure to do so could significantly harm our business, financial condition and results of operations. Growing our business may make it difficult for us to adequately predict the expenditures we will need to make in the future. If we do not make the necessary overhead expenditures to accommodate our future growth, we may not be successful in executing our growth strategy, and our results of operations would suffer.
Acquisitions or investments, such as our acquisition of Naturium, could disrupt our business and harm our financial condition.
We frequently review acquisition and strategic investment opportunities that would expand our current product offerings, our distribution channels, increase the size and geographic scope of our operations or otherwise offer growth and operating efficiency opportunities. There can be no assurance that we will be able to identify suitable candidates or consummate these transactions on favorable terms. The process of integrating an acquired business, product or technology can create unforeseen operating difficulties, expenditures and other challenges such as:
potentially increased regulatory and compliance requirements;
implementation or remediation of controls, procedures and policies at the acquired business;
diversion of management time and focus from operation of our then-existing business to acquisition integration challenges;
coordination of product, sales, marketing and program and systems management functions;
transition of the users and customers of the acquired business, product, or technology onto our system;
retention of employees from the acquired business;
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integration of employees from the acquired business into our organization;
integration of the acquired business’ accounting, information management, human resources and other administrative systems and operations into our systems and operations;
liability for activities of the acquired business, product or technology prior to the acquisition, including violations of law, commercial disputes and tax and other known and unknown liabilities; and
litigation or other claims in connection with the acquired business, product or technology, including claims brought by terminated employees, customers, former stockholders or other third parties.
If we are unable to address these difficulties and challenges or other problems encountered in connection with any acquisition or investment, we might not realize the anticipated benefits of that acquisition or investment, and we might incur unanticipated liabilities or otherwise suffer harm to our business generally. For example, if the integration of Naturium's business with our business is more difficult, costly or time-consuming than expected, we may not fully realize the expected benefits of our acquisition of Naturium, which may adversely affect our business, financial condition and results of operations. See also “Risk factors related to our acquisition of Naturium.”
To the extent that we pay the consideration for any acquisitions or investments in cash, it reduces the amount of cash available to us for other purposes. Acquisitions or investments can also result in dilutive issuances of our equity securities or the incurrence of debt, contingent liabilities, amortization expenses, increased interest expenses or impairment charges against goodwill on our consolidated balance sheet, any of which could have a material adverse effect on our business, financial condition and results of operations. For example, in connection with our acquisition of Naturium, we paid total consideration of approximately $333 million using an incremental term loan under the Company’s existing credit facility, borrowings on the Company’s existing revolving facility, cash on the balance sheet and approximately $58 million of Company stock.
Risk factors related to our acquisition of Naturium
We have made certain assumptions relating to our acquisition of Naturium that may prove to be materially inaccurate.
We have made certain assumptions relating to our acquisition of Naturium that may prove to be inaccurate, including as the result of the failure to realize the expected benefits of the acquisition, failure to realize expected revenue growth rates and higher than expected operating, transaction and integration costs, as well as general economic and business conditions that adversely affect the Company. If the assumptions are incorrect, our business, financial condition and results of operations may be materially adversely affected.
Naturium may have liabilities that are not known to us.
Naturium may have liabilities that we failed, or were unable, to discover in the course of performing our due diligence investigations in connection with our acquisition of Naturium. We may learn additional information about Naturium that materially and adversely affects us and Naturium, such as unknown or contingent liabilities and liabilities related to compliance with applicable laws. Moreover, Naturium may be subject to audits, reviews, inquiries, investigations and claims of non-compliance and litigation by federal and state regulatory agencies which could result in liabilities or other sanctions. Any such liabilities or sanctions, individually or in the aggregate, could have an adverse effect on our business, financial condition and results of operations.
Risk factors related to our business operations and macroeconomic conditions
A disruption in our operations, including a disruption in the supply chains for our products, could materially and adversely affect our business.
As a company engaged in distribution on a global scale, our operations, including those of our third-party manufacturers, suppliers, brokers and delivery service providers, are subject to the risks inherent in such activities, including industrial accidents, environmental events, strikes and other labor disputes, disruptions or delays in shipments, disruptions in information systems, product quality control, safety, licensing requirements and other regulatory issues, as well as natural disasters, pandemics (such as the coronavirus pandemic), border disputes, international conflict (such as the Israel-Hamas war
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or the ongoing military conflict in Ukraine), acts of terrorism and other external factors over which we and our third-party manufacturers, suppliers, brokers and delivery service providers have no control. The loss of, or damage to, the manufacturing facilities or distribution centers of our third-party manufacturers, suppliers, brokers and delivery service providers could materially and adversely affect our business, financial condition and results of operations.
We depend heavily on ocean container delivery, as well as fast boats, rail and air freight, to receive shipments of our products from our third-party manufacturers located in China and contracted third-party delivery service providers to deliver our products to our distribution facilities and logistics providers, and from there to our retail customers. Further, we rely on postal and parcel carriers for the delivery of products sold directly to consumers through our e-commerce websites and mobile applications. Interruptions, to or failures in, these delivery services could prevent the timely or successful delivery of our products. These interruptions or failures may be due to unforeseen events that are beyond our control or the control of our third-party delivery service providers, such as port congestion, container shortages, inclement weather, natural disasters, international conflict, labor unrest or other transportation disruptions. In addition, port congestion, container shortages, inclement weather, natural disasters, international conflict, labor unrest or other transportation disruptions may increase the costs to supply or transport our products or the components of our products. If our products are not delivered on time or are delivered in a damaged state, retail customers and consumers may refuse to accept our products and have less confidence in our services. In addition, a vessel and container shortage globally could delay future inventory receipts and, in turn, could delay deliveries to our retailer customers and availability of products in our direct-to-consumer e-commerce channel. Such potential delays, additional transportation expenses and shipping disruptions could negatively impact our results of operations through higher inventory costs and reduced sales. Furthermore, the delivery personnel of contracted third-party delivery service providers act on our behalf and interact with our consumers personally. Any failure to provide high-quality delivery services to our consumers may negatively affect the shopping experience of our consumers, damage our reputation and cause us to lose consumers.
Our ability to meet the needs of our consumers and retail customers depends on the proper operation of our distribution facilities, where most of our inventory that is not in transit is housed. Although we currently insure our inventory, our insurance coverage may not be sufficient to cover the full extent of any loss or damage to our inventory or distribution facilities, and any loss, damage or disruption of the facilities, or loss or damage of the inventory stored there, could materially and adversely affect our business, financial condition and results of operations.
Our success depends, in part, on our retention of key members of our senior management team and ability to attract and retain qualified personnel.
Our success depends, in part, on our ability to attract and retain key employees, including our executive officers, senior management team and operations, finance, sales and marketing personnel. The labor markets in the United States and China, where most of our employees are located, are hyper competitive, and attracting and retaining top talent requires significant organizational costs and attention. We are a relatively small company that relies on a few key employees, any one of whom would be difficult to replace, and because we are a small company, we believe that the loss of key employees may be more disruptive to us than it would be to a larger company. Our success also depends, in part, on our continuing ability to identify, hire, train and retain other highly qualified personnel. In addition, we may be unable to effectively plan for the succession of senior management, including our Chief Executive Officer. The loss of key personnel or the failure to attract and retain qualified personnel may have a material adverse effect on our business, financial condition and results of operations.
We rely on a number of third-party suppliers, manufacturers, distributors and other vendors, and they may not continue to produce products or provide services that are consistent with our standards or applicable regulatory requirements, which could harm our brands, cause consumer dissatisfaction, and require us to find alternative suppliers of our products or services.
We use multiple third-party suppliers and manufacturers, primarily based in China, to source and manufacture substantially all of our products. We engage our third-party suppliers and manufacturers on a purchase order basis and are not party to long-term contracts with any of them. The ability of these third parties to supply and manufacture our products may be affected by competing orders placed by other persons and the demands of those persons. Further, we are subject to risks associated with disruptions or delays in shipments whether due to port congestion, container shortages, labor disputes, product regulations and/or inspections or other factors, natural disasters or health pandemics, or other transportation disruptions. If we experience significant increases in demand or need to replace a significant number of existing suppliers or manufacturers, there can be no assurance that additional supply and manufacturing capacity will be available when required on terms that are acceptable to us, or at all, or that any supplier or manufacturer will allocate sufficient capacity to us in order to meet our requirements.
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In addition, quality control problems, such as the use of ingredients and delivery of products that do not meet our quality control standards and specifications or comply with applicable laws or regulations could harm our business. These quality control problems could result in regulatory action, such as restrictions on importation, products of inferior quality or product stock outages or shortages, harming our sales and creating inventory write-downs for unusable products.
We have also outsourced significant portions of our distribution process, as well as certain technology-related functions, to third-party service providers. Specifically, we rely on third-party distributors to sell our products in a number of foreign countries, our warehouses and distribution facilities are managed and staffed by third-party service providers, we are dependent on a single third-party vendor for credit card processing, and we utilize a third-party hosting and networking provider to host our e-commerce websites and mobile applications. The failure of one or more of these entities to provide the expected services on a timely basis, or at all, or at the prices we expect, or the costs and disruption incurred in changing these outsourced functions to being performed under our management and direct control or that of a third-party, may have a material adverse effect on our business, financial condition and results of operations. We are not party to long-term contracts with some of our distributors, and upon expiration of these existing agreements, we may not be able to renegotiate the terms on a commercially reasonable basis, or at all.
Further, our third-party manufacturers, suppliers and distributors may:
have economic or business interests or goals that are inconsistent with ours;
take actions contrary to our instructions, requests, policies or objectives;
be unable or unwilling to fulfill their obligations under relevant purchase orders, including obligations to meet our production deadlines, quality standards, pricing guidelines and product specifications, or to comply with applicable regulations, including those regarding the safety and quality of products and ingredients and good manufacturing practices;
have financial difficulties;
encounter raw material or labor shortages;
encounter increases in raw material or labor costs which may affect our procurement costs;
disclose our confidential information or intellectual property to competitors or third parties;
engage in activities or employment practices that may harm our reputation; and
work with, be acquired by, or come under control of, our competitors.
The occurrence of any of these events, alone or together, could have a material adverse effect on our business, financial condition and results of operations. In addition, such problems may require us to find new third-party suppliers, manufacturers or distributors, and there can be no assurance that we would be successful in finding third-party suppliers, manufacturers or distributors meeting our standards of innovation and quality.
The management and oversight of the engagement and activities of our third-party suppliers, manufacturers and distributors requires substantial time, effort and expense of our employees, and we may be unable to successfully manage and oversee the activities of our third-party manufacturers, suppliers and distributors. If we experience any supply chain disruptions caused by our manufacturing process or by our inability to locate suitable third-party manufacturers or suppliers, or if our manufacturers or raw material suppliers experience problems with product quality or disruptions or delays in the manufacturing process or delivery of the finished products or the raw materials or components used to make such products, our business, financial condition and results of operations could be materially and adversely affected.
If we fail to manage our inventory effectively, our results of operations, financial condition and liquidity may be materially and adversely affected.
Our business requires us to manage a large volume of inventory effectively. We depend on our forecasts to estimate demand for and popularity of various products to make purchasing decisions and to manage our inventory of stock-keeping units. Demand for products, however, can change significantly between the time inventory or components are ordered and the date of sale. Demand may be affected by seasonality, new product launches, rapid changes in product cycles and pricing, product
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defects, promotions, changes in consumer spending patterns, changes in consumer tastes with respect to our products and other factors, and our consumers may not purchase products in the quantities that we expect. It may be difficult to accurately forecast demand and determine appropriate levels of product or components. We generally do not have the right to return unsold products to our suppliers.
If we fail to manage our inventory effectively or negotiate favorable credit terms with third-party suppliers, we may be subject to a heightened risk of inventory obsolescence, a decline in inventory values, and significant inventory write-downs or write-offs. In addition, if we are required to lower sale prices in order to reduce inventory level or to pay higher prices to our suppliers, our profit margins might be negatively affected. Any of the above may materially and adversely affect our business, financial condition and results of operations. See also “Risk factors related to our retail customers, consumers and the seasonality of our businessOur quarterly results of operations fluctuate due to seasonality, order patterns from key retail customers and other factors, and we may not have sufficient liquidity to meet our seasonal working capital requirements.”
Public health crises could adversely affect our business, financial condition and results of operations.
The COVID-19 pandemic and government and private sector responsive measures taken to contain or mitigate the effects of the pandemic, as well as related changes in consumer shopping behaviors, adversely affected our business, financial condition and results of operations. The emergence of another pandemic, epidemic or infectious disease outbreak could have a similar effect. The potential impacts of such public health crises include, but are not limited to:
the possibility of closures, reduced operating hours and/or decreased retail traffic for our retail customers, resulting in a decrease in sales of our products;
disruption to our distribution centers and our third-party suppliers and manufacturers, including the effects of facility closures as a result of disease outbreaks or other illnesses, or measures taken by federal, state or local governments to reduce its spread, reductions in operations hours, labor shortages and real-time changes in operating procedures, including for additional cleaning and disinfection procedures; and
significant disruption of global financial markets, which could have a negative impact on our ability to access capital in the future.
The COVID-19 pandemic contributed significantly to global supply chain constraints, with restrictions and limitations on related activities causing disruption and delay. These disruptions and delays strained domestic and international supply chains, resulting in port congestion, transportation delays as well as labor and container shortages, and affected the flow or availability of certain products.
The emergence of another pandemic, epidemic or infectious disease outbreak, and any required or voluntary actions to help limit the spread of illness, could impact our ability to carry out our business and may materially adversely impact global economic conditions, our business, financial condition and results of operations. There is a risk that our suppliers and distribution centers may become less productive or encounter disruptions as a result of the emergence and spread of another disease, and/or these facilities may no longer be allowed to operate based on directives from public health officials or government authorities in the United States, China or other jurisdictions. Such events could materially increase our costs, negatively impact our sales and damage our results of operations and liquidity, possibly to a significant degree.
The full extent of the impact of a pandemic, such as the COVID-19 pandemic, an epidemic or an infectious disease outbreak on our business, financial condition and results of operations will depend on future developments that are highly uncertain and unpredictable, including the timing, acceptance and efficacy of vaccinations and possible achievement of herd immunity in various locations, the occurrence of virus mutations and variants, infection rates increasing or returning in various geographic areas, actions by government authorities to contain outbreaks or treat their impact, and any related impact on capital and financial markets and consumer behavior, including the impacts of any recession or inflationary pressures, all of which may vary across regions.
Adverse economic conditions in the United States or any of the other countries in which we conduct significant business could negatively affect our business, financial condition and results of operations.
Many of our products may be considered discretionary items for consumers. Consumer spending on beauty products is influenced by general economic conditions and the availability of discretionary income. Adverse economic conditions in the United States, Canada, the United Kingdom (the “UK”), China or any of the other countries in which we conduct significant business, such as the current inflationary economic environment, rising interest rates, financial distress caused by recent or
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potential bank failures and the associated banking crisis, an economic recession, depression or downturn, a tightening of the credit markets, high energy prices or higher unemployment levels, may lead to decreased consumer spending, reduced credit availability and a decline in consumer confidence and demand, each of which poses a risk to our business. As global economic conditions continue to be volatile and economic uncertainty remains, trends in consumer discretionary spending also remain unpredictable and subject to reductions due to credit constraints and uncertainties about the future.
A decrease in consumer spending or in retailer and consumer confidence and demand for our products could have a significant negative impact on our net sales and profitability, including our operating margins and return on invested capital. These economic conditions could cause some of our retail customers or suppliers to experience cash flow or credit problems and impair their financial condition, which could disrupt our business and adversely affect product orders, payment patterns and default rates and increase our bad debt expense.
Volatility in the financial markets could have a material adverse effect on our business, financial condition and results of operations.
While we currently generate cash flows from our ongoing operations and have had access to credit markets through our various financing activities, credit markets may experience significant disruptions. Deterioration in global financial markets, rising interest rates and concerns over potential recessions could make future financing difficult or more expensive. If any financial institution party to our credit facilities or other financing arrangements were to declare bankruptcy or become insolvent, they may be unable to perform under their agreements with us. This could leave us with reduced borrowing capacity, which could have a material adverse effect on our business, financial condition and results of operations.
We regularly maintain cash balances at third-party financial institutions in excess of the Federal Deposit Insurance Corporation (the “FDIC”) insurance limit. In 2023, the FDIC took control and was appointed receiver of Silicon Valley Bank (“SVB”), Signature Bank and First Republic Bank, after each bank was unable to continue its operations. Although the Company did not have any cash or cash equivalent balances on deposit with SVB, Signature Bank or First Republic Bank and, therefore, did not experience any direct risk of loss, we are unable to predict the extent or nature of the impacts of the failures of these banks and related circumstances at this time. Similarly, we cannot predict the impact that the high market volatility and instability of the banking sector more broadly could have on economic activity and our business in particular. The failure of other banks and financial institutions and measures taken, or not taken, by governments, businesses and other organizations in response to these events could adversely impact our business, financial condition and results of operations.
If the financial institutions with which we do business enter receivership or become insolvent in the future, there is no guarantee that the Department of the Treasury, the Federal Reserve and the FDIC will intercede to provide us and other depositors with access to balances in excess of the $250,000 FDIC insurance limit or that we would be able to: (i) access our existing cash, cash equivalents and investments; (ii) maintain any required letters of credit or other credit support arrangements; or (iii) adequately fund our business for a prolonged period of time or at all. Any of such events could have a material adverse effect on our current or projected business operations and results of operations and financial condition. In addition, if any parties with which we conduct business are unable to access funds pursuant to such instruments or lending arrangements with such a financial institution, such parties’ ability to continue to fund their business and perform their obligations to us could be adversely affected, which, in turn, could have a material adverse effect on our business, financial condition and results of operations.
Risk factors related to our financial condition
Our indebtedness may have a material adverse effect on our business, financial condition and results of operations.
As of December 31, 2023, we had a total of $265.7 million of indebtedness, consisting of amounts outstanding under our credit facilities and finance lease obligations, and a total availability of $10.5 million under our Amended Revolving Credit Facility. Our primary cash needs are for working capital, fixturing, retail product displays and digital investments. Cash needs typically vary depending on strategic initiatives selected for the fiscal year, including investments in infrastructure, digital capabilities expansion within or to additional retailer store locations, and acquisitions. On August 28, 2023, we entered into the Second Amendment to the Amended and Restated Credit Agreement, pursuant to which we borrowed an incremental term loan in a principal amount equal to $115.0 million (the “Incremental Term Loan”), together with available cash from our balance sheet and additional borrowings under our Amended Revolving Credit Facility, to consummate and pay related fees and expenses in connection with our acquisition of Naturium.
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Our indebtedness could have significant consequences, including:
requiring a substantial portion of our cash flows to be dedicated to debt service payments instead of funding growth, working capital, capital expenditures, investments or other cash requirements;
reducing our flexibility to adjust to changing business conditions or obtain additional financing;
exposing us to the risk of increased interest rates as our borrowings are at variable rates;
making it more difficult for us to make payments on our indebtedness;
subjecting us to restrictive covenants that may limit our flexibility in operating our business, including our ability to take certain actions with respect to indebtedness, liens, sales of assets, consolidations and mergers, affiliate transactions, dividends and other distributions and changes of control;
subjecting us to maintenance covenants which require us to maintain specific financial ratios; and
limiting our ability to obtain additional financing for working capital, capital expenditures, debt service requirements and general corporate or other purposes.
If our cash from operations is not sufficient to meet our current or future operating needs, expenditures and debt service obligations, our business, financial condition and results of operations may be materially and adversely affected.
We may require additional cash resources due to changed business conditions or other future developments, including any marketing initiatives, investments or additional acquisitions we may decide to pursue. To the extent we are unable to generate sufficient cash flow, we may be forced to cancel, reduce or delay these activities. Alternatively, if our sources of funding are insufficient to satisfy our cash requirements, we may seek to obtain an additional credit facility or sell equity or debt securities. The sale of equity securities would result in dilution of our existing stockholders. The incurrence of additional indebtedness would result in increased debt service obligations and operating and financing covenants that could restrict our operations.
Our ability to generate cash to meet our operating needs, expenditures and debt service obligations will depend on our future performance and financial condition, which will be affected by financial, business, economic, legislative, regulatory and other factors, including potential changes in costs, pricing, the success of product innovation and marketing, competitive pressure and consumer preferences. If our cash flows and capital resources are insufficient to fund our debt service obligations and other cash needs, we could face substantial liquidity problems and could be forced to reduce or delay investments and capital expenditures or to dispose of material assets or operations, seek additional debt or equity capital or restructure or refinance our indebtedness. Our credit facilities may restrict our ability to take these actions, and we may not be able to affect any such alternative measures on commercially reasonable terms, or at all. If we cannot make scheduled payments on our debt, the lenders under the Amended Credit Agreement can terminate their commitments to loan money under the Amended Revolving Credit Facility, and our lenders under the Amended Credit Agreement can declare all outstanding principal and interest to be due and payable and foreclose against the assets securing their borrowings, and we could be forced into bankruptcy or liquidation.
Furthermore, it is uncertain whether financing will be available in amounts or on terms acceptable to us, if at all, which could materially and adversely affect our business, financial condition and results of operations.
Changes in tax law, in our tax rates or in exposure to additional income tax liabilities or assessments could materially and adversely affect our business, financial condition and results of operations.
We are subject to the income tax laws of the United States and several international jurisdictions. Changes in law and policy relating to taxes, including changes in administrative interpretations and legal precedence, could materially and adversely affect our business, financial condition and results of operations.
In addition, as we continue to expand our business internationally, the application and implementation of existing, new or future international laws could materially and adversely affect our business, financial condition and results of operations. Current economic and political conditions make tax rules in any jurisdiction, including those in which we operate, subject to significant change.
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Fluctuations in currency exchange rates may negatively affect our financial condition and results of operations.
Exchange rate fluctuations may affect the costs that we incur in our operations. The main currencies to which we are exposed are the Euro, British pound, Chinese Renminbi and Canadian dollar. The exchange rates between these currencies and the US dollar in recent years have fluctuated significantly and may continue to do so in the future. A depreciation of these currencies against the US dollar will decrease the US dollar equivalent of the amounts derived from foreign operations reported in our consolidated financial statements, and an appreciation of these currencies will result in a corresponding increase in such amounts. The cost of certain items, such as raw materials, manufacturing, employee compensation and benefits and transportation and freight, required by our operations may be affected by changes in the value of the relevant currencies.
To the extent that we are required to pay for goods or services in foreign currencies, the appreciation of such currencies against the US dollar will tend to negatively affect our business. There can be no assurance that foreign currency fluctuations will not have a material adverse effect on our business, financial condition and results of operations.
Risk factors related to our retail customers, consumers and the seasonality of our business
We depend on a limited number of retailers for a large portion of our net sales, and the loss of one or more of these retailers, or business challenges at one or more of these retailers, could adversely affect our results of operations.
A limited number of our retail customers account for a large percentage of our net sales. We expect a small number of retailers will, in the aggregate, continue to account for the majority of our net sales for foreseeable future periods. Any changes in the policies or our ability to meet the demands of our retail customers relating to service levels, inventory de-stocking, pricing and promotional strategies or limitations on access to display space could have a material adverse effect on our business, financial condition and results of operations.
As is typical in our industry, our business with retailers is based primarily upon discrete sales orders, and we do not have contracts requiring retailers to make firm purchases from us. Accordingly, retailers could reduce their purchasing levels or cease buying products from us at any time and for any reason. If we lose a significant retail customer or if sales of our products to a significant retailer materially decrease, it could have a material adverse effect on our business, financial condition and results of operations.
Because a high percentage of our sales are made through our retail customers, our results are subject to risks relating to the general business performance of our key retail customers. Factors that adversely affect our retail customers’ businesses may also have a material adverse effect on our business, financial condition and results of operations. These factors may include:
any reduction in consumer traffic and demand at our retail customers as a result of economic downturns, pandemics or other health crises, changes in consumer preferences or reputational damage as a result of, among other developments, data privacy breaches, regulatory investigations or employee misconduct;
any credit risks associated with the financial condition of our retail customers;
the effect of consolidation or weakness in the retail industry or at certain retail customers, including store closures and the resulting uncertainty; and
inventory reduction initiatives and other factors affecting retail customer buying patterns, including any reduction in retail space committed to beauty products and retailer practices used to control inventory shrinkage.
Our quarterly results of operations fluctuate due to seasonality, order patterns from key retail customers and other factors, and we may not have sufficient liquidity to meet our seasonal working capital requirements.
Our results of operations are subject to seasonal fluctuations, with net sales in the third and fourth fiscal quarters typically being higher than in the first and second fiscal quarters. The higher net sales in our third and fourth fiscal quarters are largely attributable to the increased levels of purchasing by retailers for the holiday season and customer shelf reset activity, respectively. Adverse events that occur during either the third or fourth fiscal quarter could have a disproportionate effect on our results of operations for the entire fiscal year. To support anticipated higher sales during the third and fourth fiscal quarters, we make investments in working capital to ensure inventory levels can support demand.
Fluctuations throughout the year are also driven by the timing of product restocking or rearrangement by our major customers as well as our expansion into new customers. Because a limited number of our retail customers account for a large
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percentage of our net sales, a change in the order pattern of one or more of our large retail customers could cause a significant fluctuation of our quarterly results or reduce our liquidity.
Furthermore, product orders from our large retail customers may vary over time due to changes in their inventory or out-of-stock policies. If we were to experience a significant shortfall in sales or profitability, we may not have sufficient liquidity to fund our business. As a result of quarterly fluctuations caused by these and other factors, comparisons of our operating results across different fiscal quarters may not be accurate indicators of our future performance. Any quarterly fluctuations that we report in the future may differ from the expectations of market analysts and investors, which could cause the price of our common stock to fluctuate significantly.
Risk factors related to information technology and cybersecurity
We are increasingly dependent on information technology, and if we are unable to protect against service interruptions, data corruption, cyber-based attacks or network security breaches, our operations could be disrupted.
We rely on information technology networks and systems to market and sell our products, to process electronic and financial information, to assist with sales tracking and reporting, to manage a variety of business processes and activities and to comply with regulatory, legal and tax requirements. We are increasingly dependent on a variety of secure information systems to effectively process retail customer orders and fulfill consumer orders from our e-commerce business. We depend on our information technology infrastructure for digital marketing activities and for electronic communications among our personnel, retail customers, consumers, manufacturers and suppliers around the world. These information technology systems, some of which are managed by third parties, may be susceptible to damage, disruptions or shutdowns due to failures during the process of upgrading or replacing software, databases or components, power outages, hardware failures, computer viruses, telecommunication failures, user errors, catastrophic events and data security and privacy threats, cyber and otherwise. If our information technology systems suffer damage, disruption or shutdown, we may incur substantial cost in repairing or replacing these systems, and if we do not effectively resolve the issues in a timely manner, our business, financial condition and results of operations may be materially and adversely affected, and we could experience delays in reporting our financial results.
Data security and privacy threats are becoming increasingly difficult to detect and come from a variety of sources, including traditional computer “hackers,” threat actors, “hacktivists,” personnel (such as through theft or misuse), organized criminal threat actors, sophisticated nation states and nation-state supported actors. Some threat actors now engage and are expected to continue to engage in cyberattacks, including without limitation nation-state actors for geopolitical reasons and in conjunction with military conflicts and defense activities. During times of war and other major conflicts, we and the third parties upon which we rely may be vulnerable to a heightened risk of these attacks, including retaliatory cyberattacks that could materially disrupt our systems and operations. Any material disruption of our systems, or the systems of our third-party service providers, could disrupt our ability to track, record and analyze the products that we sell and could negatively impact our operations, shipment of goods, ability to process financial information and transactions and our ability to receive and process retail customer and e-commerce orders or engage in normal business activities.
Our e-commerce operations are important to our business. Our e-commerce websites and mobile applications serve as an extension of our marketing strategies by introducing potential new consumers to our brand, product offerings and enhanced content. Due to the importance of our e-commerce operations, we are vulnerable to website downtime and other technical failures. Our failure to successfully respond to these risks in a timely manner could reduce e-commerce sales and damage our brands' reputation.
The risks described here are heightened due to the increase in remote working. A portion of our personnel is currently working under our hybrid model of three days in the office and two days remote, while others work remote entirely. It is possible with this model that the execution of our business plans and operations could be negatively impacted. If a natural disaster, power outage, connectivity issue, or other event occurs that impacts our employees’ ability to work remotely, it may be difficult or, in certain cases, impossible, for us to continue our business for a substantial period of time. The increase in remote working may also result in heightened consumer privacy, IT security and fraud concerns, potentially disrupting our operations.
We must continue to maintain and make requisite or critical upgrades to our information technology systems, and our failure to do so could have a material adverse effect on our business, financial condition and results of operations.
We conduct annual penetration testing and vulnerability assessments to identify and address potential security weaknesses in our systems and third-party vendor environments to support expected future growth. As such, we will continue to invest in
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and implement modifications and upgrades to our information technology systems and procedures, including replacing legacy systems with successor systems, making changes to legacy systems or acquiring new systems with new functionality, hiring employees with information technology expertise and building new policies, procedures, training programs and monitoring tools. We are currently undertaking various technology upgrades and enhancements to support our business growth, including an implementation of SAP software to upgrade our platforms and systems worldwide. These types of activities subject us to inherent costs and risks associated with replacing and changing these systems, including impairment of our ability to leverage our e-commerce channels, fulfill customer orders, potential disruption of our internal control structure, substantial capital expenditures, additional administration and operating expenses, acquisition and retention of sufficiently skilled personnel to implement and operate the new systems, demands on management time and other risks and costs of delays or difficulties in transitioning to or integrating new systems into our current systems.
The implementation of new information technology systems, such as our implementation of SAP software, or any modification of our key information systems may not result in productivity improvements at a level that outweighs the costs of implementation, or at all. In addition, difficulties with implementing new technology systems, delays in our timeline for planned improvements, significant system failures, or our inability to successfully modify our information systems to respond to changes in our business needs may cause disruptions in our business operations and have a material adverse effect on our business, financial condition and results of operations.
If we fail to adopt new technologies or adapt our e-commerce websites and systems to changing consumer requirements or emerging industry standards, our business may be materially and adversely affected.
To remain competitive, we must continue to enhance and improve the responsiveness, functionality and features of our information technology, including our e-commerce websites and mobile applications. Our competitors are continually innovating and introducing new products to increase their consumer base and enhance user experience. As a result, in order to attract and retain consumers and compete against our competitors, we must continue to invest resources to enhance our information technology and improve our existing products and services for our consumers. The Internet and the online retail industry are characterized by rapid technological evolution, changes in consumer requirements and preferences, frequent introductions of new products and services embodying new technologies and the emergence of new industry standards and practices, any of which could render our existing technologies and systems obsolete. Our success will depend, in part, on our ability to identify, develop, acquire or license leading technologies useful in our business, and respond to technological advances and emerging industry standards and practices in a cost-effective and timely way. The development of our e-commerce websites, mobile applications and other proprietary technology entails significant technical and business risks. There can be no assurance that we will be able to properly implement or use new technologies effectively or adapt our e-commerce websites, mobile applications and systems to meet consumer requirements or emerging industry standards. If we are unable to adapt in a cost-effective and timely manner in response to changing market conditions or consumer requirements, whether for technical, legal, financial or other reasons, our business, financial condition and results of operations may be materially and adversely affected.
Failure to protect sensitive information of our consumers and information technology systems against security breaches could damage our reputation and brand and substantially harm our business, financial condition and results of operations.
We collect, maintain, transmit, store and otherwise process data about our consumers, suppliers, prospective and current employees and others, including personal data, financial information, including consumer payment information, as well as other confidential and proprietary information important to our business. We also employ third-party service providers that collect, store, process and transmit personal data, and confidential, proprietary and financial information on our behalf.
We have in place technical and organizational measures to maintain the security and safety of critical proprietary, personal, employee, customer and financial data which we continue to maintain and upgrade to industry standards. However, advances in technology, the pernicious ingenuity of criminals, new exposures via cryptography, acts or omissions by our employees, contractors or service providers or other events or developments could result in a compromise or breach in the security of confidential or personal data. We and our service providers may not be able to prevent third parties, including criminals, competitors or others, from breaking into or altering our systems, disrupting business operations or communications infrastructure through denial-of-service attacks, attempting to gain access to our systems, information or monetary funds through phishing or social engineering campaigns, installing viruses or malicious software on our e-commerce websites or mobile applications or devices used by our employees or contractors, or carrying out other activity intended to disrupt our systems or gain access to confidential or sensitive information in our or our service providers’ systems.
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We are not aware of any material breach or compromise of the personal data of consumers, but we have been subject to attacks (e.g., phishing, denial of service) in the past and cannot guarantee that our security measures will be sufficient to prevent a material breach or compromise in the future.
Furthermore, such third parties may engage in various other illegal activities using such information, including credit card fraud or identity theft, which may cause additional harm to us, our consumers and our brands. We also may be vulnerable to error or malfeasance by our own employees or other insiders. Third parties may attempt to fraudulently induce our or our service providers’ employees to misdirect funds or to disclose information in order to gain access to personal data we maintain about our consumers or website users. In addition, we have limited control or influence over the security policies or measures adopted by third-party providers of online payment services through which some of our consumers may elect to make payment for purchases at our e-commerce websites and mobile applications. Contracted third-party delivery service providers may also violate their confidentiality or data processing obligations and disclose or use information about our consumers inadvertently or illegally.
If a material security breach were to occur, our reputation and brands could be damaged, and we could be required to expend significant capital and other resources to alleviate problems caused by such breaches including exposure of litigation or regulatory action and a risk of loss and possible liability. Actual or anticipated attacks may cause us to incur increasing costs, including costs to deploy additional personnel and protection technologies, train employees and engage third-party experts and consultants. In addition, any party who is able to illicitly obtain a subscriber’s password could access the subscriber’s financial, transaction or personal information. Any compromise or breach of our security measures, or those of our third-party service providers, may violate applicable privacy, data security, financial, cyber and other laws and cause significant legal and financial exposure, adverse publicity and a loss of confidence in our security measures, all of which could have a material adverse effect on our business, financial condition and results of operations. We may be subject to post-breach review of the adequacy of our privacy and security controls by regulators and other third parties, which could result in post-breach regulatory investigation, fines and consumer litigation as well as regulatory oversight, at significant expense and risking reputational harm.
Furthermore, we are subject to diverse laws and regulations in the United States, the European Union (the “EU”) and other international jurisdictions that require notification to affected individuals in the event of a breach involving personal information. These required notifications can be time-consuming and costly. Furthermore, failure to comply with these laws and regulations could subject us to regulatory scrutiny and additional liability. Although we maintain relevant insurance, we cannot be certain that our insurance coverage will be adequate for all breach related liabilities, that insurance will continue to be available to us on economically reasonable terms, or at all, or that the insurer will not deny coverage as to any future claim. The successful assertion of one or more large claims against us that exceed available insurance coverage, or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could adversely affect our reputation, business, financial condition and results of operations. We may need to devote significant resources to protect against security breaches or to address problems caused by breaches, diverting resources from the growth and expansion of our business.
Payment methods used on our e-commerce websites subject us to third-party payment processing-related risks.
We accept payments from our consumers using a variety of methods, including online payments with credit cards and debit cards issued by major banks, payments made with gift cards processed by third-party providers and payment through third-party online payment platforms such as PayPal, Afterpay and Apple Pay. We also rely on third parties to provide payment processing services. For certain payment methods, including credit and debit cards, we pay interchange and other fees, which may increase over time and raise our operating costs and lower our profit margins. We may also be subject to fraud and other illegal activities in connection with the various payment methods we offer, including online payment options and gift cards. Transactions on our e-commerce websites and mobile applications are card-not-present transactions, so they present a greater risk of fraud. Criminals are using increasingly sophisticated methods to engage in illegal activities such as unauthorized use of credit or debit cards and bank account information. Requirements relating to consumer authentication and fraud detection with respect to online sales are complex. We may ultimately be held liable for the unauthorized use of a cardholder’s card number in an illegal activity and be required by card issuers to pay charge-back fees. Charge-backs result not only in our loss of fees earned with respect to the payment, but also leave us liable for the underlying money transfer amount. If our charge-back rate becomes excessive, card associations also may require us to pay fines or refuse to process our transactions. In addition, we may be subject to additional fraud risk if third-party service providers or our employees
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fraudulently use consumer information for their own gain or facilitate the fraudulent use of such information. Overall, we may have little recourse if we process a criminally fraudulent transaction.
We are subject to payment card association operating rules, certification requirements and various rules, regulations and requirements governing electronic funds transfers, which could change or be reinterpreted to make it difficult or impossible for us to comply. As our business changes, we may also 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, or 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, among other things, we may be subject to fines and higher transaction fees and lose our ability to accept credit and debit card payments from our consumers, process electronic funds transfers or facilitate other types of online payments, and our reputation and our business, financial condition and results of operations could be materially and adversely affected.
Risk factors related to conducting business internationally
We have significant operations in China, which exposes us to risks inherent in doing business in that country.
We currently source and manufacture a substantial number of our products from third-party suppliers and manufacturers in China. As of December 31, 2023, we had 94 employees in China. With the rapid development of the Chinese economy, the cost of labor has increased and may continue to increase in the future. Our results of operations will be materially and adversely affected if our labor costs, or the labor costs of our suppliers and manufacturers, increase significantly. In addition, we and our manufacturers and suppliers may not be able to find a sufficient number of qualified workers due to the intensely competitive and fluid market for skilled labor in China. Furthermore, pursuant to Chinese labor laws, employers in China are subject to various requirements when signing labor contracts, paying remuneration, determining the term of employees’ probation and unilaterally terminating labor contracts. These labor laws and related regulations impose liabilities on employers and may significantly increase the costs of workforce reductions. If we decide to change or reduce our workforce, these labor laws could limit or restrict our ability to make such changes in a timely, favorable and effective manner. Any of these events may materially and adversely affect our business, financial condition and results of operations.
Operating in China exposes us to political, legal and economic risks. In particular, the political, legal and economic climate in China, both nationally and regionally, is fluid and unpredictable. Our ability to operate in China may be adversely affected by changes in the United States and Chinese laws and regulations such as those related to, among other things, taxation, import and export tariffs, environmental regulations, land use rights, intellectual property, currency controls, network security, employee benefits, privacy, hygiene supervision and other matters. For example, in December 2021, the US Congress enacted the Uyghur Forced Labor Prevention Act in an effort to prevent what it views as forced labor and human rights abuses in the Xinjiang Uyghur Autonomous Region (“XUAR”). If it is determined that our third-party suppliers and manufacturers mine, produce or manufacture our products wholly or in part from the XUAR, then we could be prohibited from importing such products into the United States. In addition, we may not obtain or retain the requisite legal permits to continue to operate in China, and costs or operational limitations may be imposed in connection with obtaining and complying with such permits. In addition, Chinese trade regulations are in a state of flux, and we may become subject to other forms of taxation, tariffs and duties in China. Furthermore, the third parties we rely on in China may disclose our confidential information or intellectual property to competitors or third parties, which could result in the illegal distribution and sale of counterfeit versions of our products. If any of these events occur, our business, financial condition and results of operations could be materially and adversely affected.
We are subject to international business uncertainties.
We sell many of our products to customers located outside the United States. In addition, substantially all of our third-party suppliers and manufacturers are located in China and certain other foreign countries. We intend to continue to sell to customers outside the United States and maintain our relationships in China and other foreign countries where we have suppliers and manufacturers. Further, we recently opened an office in the UK and hired a team of employees to support our international expansion, and we are establishing additional relationships in other countries to grow our operations. The substantial up-front investment required, the lack of consumer awareness of our products in jurisdictions outside of the United States, differences in consumer preferences and trends between the United States and other jurisdictions, the risk of inadequate intellectual property protections and differences in packaging, labeling and related laws, rules and regulations are all substantial matters that need to be evaluated prior to doing business in new territories. We cannot be assured that our international efforts will be successful.
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International sales and increased international operations may be subject to risks such as:
difficulties in staffing and managing foreign operations;
burdens of complying with a wide variety of laws and regulations, including more stringent regulations relating to data privacy and security, particularly in the UK and the EU;
adverse tax effects and foreign exchange controls making it difficult to repatriate earnings and cash;
political and economic instability;
terrorist activities and natural disasters;
trade restrictions;
disruptions or delays in shipments whether due to port congestion, container shortages, labor disputes, product regulations and/or inspections or other factors, natural disasters or health pandemics, or other transportation disruptions;
differing employment practices and laws and labor disruptions;
the imposition of government controls;
an inability to use or to obtain adequate intellectual property protection for our key brands and products;
tariffs and customs duties and the classifications of our goods by applicable governmental bodies;
a legal system subject to undue influence or corruption;
a business culture in which illegal sales practices may be prevalent;
logistics and sourcing; and
military conflicts.
The occurrence of any of these risks could negatively affect our international business and consequently our overall business, financial condition and results of operations.
In addition, the ultimate effects of the UK's withdrawal from the EU (“Brexit”) are still difficult to predict as there remains considerable uncertainty around the impact of post-Brexit regulations as the various agencies interpret the regulations and develop enforcement practices. Changes related to Brexit could subject us to heightened risks in that region, including disruptions to trade and free movement of goods, services and people to and from the UK, disruptions to our employees in the UK and the workforce of our business partners, increased foreign exchange volatility with respect to the British pound and additional legal, political and economic uncertainty. If these actions impacting our international distribution and sales channels result in increased costs for us or our international partners, such changes could result in higher costs to us, adversely affecting our operations, particularly as we expand our international presence in the UK.
The ongoing conflict between Russia and Ukraine has caused, and may continue to cause, negative effects on geopolitical conditions and the global economy, including financial markets, inflation and the global supply chain, which could have an adverse impact on our business, financial condition and results of operations.
In February 2022, Russian military forces launched a full-scale military invasion of Ukraine that has resulted in an ongoing military conflict between the two countries. The length, impact and outcome of the ongoing military conflict in Ukraine is highly unpredictable, and the conflict has caused, and may continue to cause, global political, economic and social instability, and disruptions to the global economy, financial systems, international trade, the global supply chain and the transportation and energy sectors, among others.
Russia’s recognition of two separatist republics in the Donetsk and Luhansk regions of Ukraine and subsequent military action against Ukraine have led to an unprecedented expansion of sanction programs imposed by the United States, the EU, the UK,
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Canada, Switzerland, Japan and other countries against Russia, Belarus, the Crimea Region of Ukraine, the so-called Donetsk People’s Republic and the so-called Luhansk People’s Republic. In retaliation against new international sanctions and as part of measures to stabilize and support the volatile Russian financial and currency markets, Russian authorities imposed significant currency control measures aimed at restricting the outflow of foreign currency and capital from Russia, imposed various restrictions on transacting with non-Russian parties, banned exports of various products and other economic and financial restrictions. The situation is rapidly evolving as a result of the conflict in Ukraine, and the United States, the EU, the UK and other countries may implement additional sanctions, export controls or other measures against Russia, Belarus and other countries, regions, officials, individuals or industries in the respective territories. Such sanctions and other measures, as well as the existing and potential further responses from Russia or other countries to such sanctions, tensions and military actions, could adversely affect the global economy and financial markets and could adversely affect our business, financial condition and results of operations. In addition, it is possible that the conflict could expand beyond its current scope and involve additional countries and regions.
We continue to monitor the situation in Ukraine and are assessing its impact on our business, including our business partners and customers. We do not sell our products in Russia and, to date, we have not experienced any material interruptions in our infrastructure, supplies, technology systems or networks needed to support our operations. We have no way to predict the progress or outcome of the conflict in Ukraine, whether it will expand or its impacts in Ukraine, Russia, Europe, the United States or the rest of the world as the conflict, and any resulting government reactions, are rapidly developing and beyond our control. The extent and duration of the military action, sanctions and resulting market disruptions could be significant and could potentially have substantial impact on the global economy and our business for an unknown period of time. Any of the above-mentioned factors could affect our business, financial condition and results of operations.
Risk factors related to evolving laws and regulations and compliance with laws and regulatio