Revolve Group, Inc. 10-Q

Item 1. Financial Statements REVOLVE GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) ( In thousands, except share and per share data) June 30, December 31, 2020 2019 Assets Current assets: Cash and cash equivalents $ 150,772 $ 65,418 Accounts receivable, net 4,849 4,751 Inventory 64,510 104,257 Income taxes receivable — 761 Prepaid expenses and other current assets 19,585 24,155 Total current assets 239,716 199,342 Property and equipment, net 12,673 13,517 Intangible assets, net 1,287 1,457 Goodwill 2,042 2,042 Other assets 592 642 Deferred income taxes 15,924 15,290 Total assets $ 272,234 $ 232,290 Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 25,893 $ 29,813 Line of credit 24,000 — Income taxes payable 4,448 470 Accrued expenses 20,720 19,399 Returns reserve 28,336 35,104 Other current liabilities 17,400 16,740 Total current liabilities 120,797 101,526 Stockholders' equity: Class A common stock, $0.001 par value; 1,000,000,000 shares authorized as of June 30, 2020 and December 31, 2019; 15,930,974 and 14,009,859 shares issued and outstanding as of June 30, 2020 and December 31, 2019 respectively. 16 14 Class B common stock, $0.001 par value; 125,000,000 shares authorized as of June 30, 2020 and December 31, 2019; 53,568,912 and 55,069,124 shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively. 54 55 Additional paid-in capital 76,765 74,018 Retained earnings 74,602 56,677 Total stockholders' equity 151,437 130,764 Total liabilities and stockholders’ equity $ 272,234 $ 232,290 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 3 REVOLVE GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) ( In thousands, except per share data ) Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Net sales $ 142,784 $ 161,897 $ 288,859 $ 299,240 Cost of sales 70,713 71,479 145,838 138,068 Gross profit 72,071 90,418 143,021 161,172 Operating expenses: Fulfillment 3,799 5,301 8,292 9,796 Selling and distribution 19,054 23,639 40,833 44,230 Marketing 14,638 24,914 36,588 44,412 General and administrative 15,776 18,836 34,650 38,105 Total operating expenses 53,267 72,690 120,363 136,543 Income from operations 18,804 17,728 22,658 24,629 Other expense, net 174 444 47 660 Income before income taxes 18,630 17,284 22,611 23,969 Provision for income taxes 4,394 4,543 4,219 6,266 Net income 14,236 12,741 18,392 17,703 Less: Repurchase of Class B common stock upon corporate conversion — (40,816 ) — (40,816 ) Net income (loss) attributable to common stockholders $ 14,236 $ (28,075 ) $ 18,392 $ (23,113 ) Earnings (net loss) per share of Class A and Class B common stock: Basic $ 0.21 $ (0.57 ) $ 0.27 $ (0.51 ) Diluted $ 0.20 $ (0.57 ) $ 0.26 $ (0.51 ) Weighted average Class A and Class B common shares outstanding: Basic 69,415 49,025 69,367 45,481 Diluted 71,659 49,025 71,781 45,481 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 4 REVOLVE GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (In thousands) Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Net income $ 14,236 $ 12,741 $ 18,392 $ 17,703 Other comprehensive (loss) income: Cumulative translation adjustment (123 ) (130 ) (467 ) 13 Total other comprehensive (loss) income (123 ) (130 ) (467 ) 13 Total comprehensive income $ 14,113 $ 12,611 $ 17,925 $ 17,716 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 5 REVOLVE GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) Six Months Ended June 30, 2020 2019 Operating activities: Net income $ 18,392 $ 17,703 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,396 1,584 Equity-based compensation 1,432 1,032 Deferred income taxes (634 ) (2,241 ) Changes in operating assets and liabilities: Accounts receivable (98 ) (3,036 ) Inventories 39,747 (13,184 ) Income taxes receivable 761 (1,142 ) Prepaid expenses and other current assets 4,570 (271 ) Other assets 50 36 Accounts payable (3,920 ) 9,468 Income taxes payable 3,978 (36 ) Accrued expenses 1,321 3,137 Returns reserve (6,768 ) 7,171 Other current liabilities 660 2,462 Net cash provided by operating activities 61,887 22,683 Investing activities: Purchases of property, equipment and other (1,381 ) (9,755 ) Net cash used in investing activities (1,381 ) (9,755 ) Financing activities: Proceeds from initial public offering, net of underwriting discounts paid — 57,077 Repurchase of Class B common stock upon corporate conversion — (40,816 ) Proceeds from borrowings on line of credit 30,000 — Repayment of borrowings on line of credit (6,000 ) Payment of deferred offering costs (41 ) (726 ) Proceeds from the exercise of stock options, net 1,356 — Net cash provided by financing activities 25,315 15,535 Effect of exchange rate changes on cash and cash equivalents (467 ) 13 Net increase in cash and cash equivalents 85,354 28,476 Cash and cash equivalents, beginning of period 65,418 16,369 Cash and cash equivalents, end of period $ 150,772 $ 44,845 Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 190 $ — Income taxes, net of refund $ 102 $ 9,674 Supplemental disclosure of non-cash activities: Deferred offering costs accrued, unpaid $ — $ 603 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 6 REVOLVE GROUP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1. Description of Business Revolve Group, Inc., or REVOLVE, is an online fashion retailer for Millennial and Generation Z consumers. Through our websites and mobile apps we deliver an aspirational customer experience from a vast, yet curated offering. Our dynamic platform connects a deeply engaged community of consumers, global fashion influencers, and emerging, established and owned brands. We are headquartered in Los Angeles County, California. Note 2. Significant Accounting Policies Basis of Presentation Our unaudited condensed consolidated interim financial information has been prepared in accordance with Article 10 of the Securities and Exchange Commission’s, or the SEC, Regulation S-X. As permitted under those rules, certain footnotes or other financial information that are normally required by generally accepted accounting principles in the United States, or GAAP, can be condensed or omitted. These financial statements have been prepared on the same basis as our annual financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for the fair statement of our financial information. These interim results are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2020 or for any other interim period or for any other future year. All intercompany transactions and balances have been eliminated in consolidation. Certain prior period amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported results of operations. Our fiscal year ends on December 31 of each year. The accompanying unaudited condensed consolidated financial statements and related financial information should be read in conjunction with the audited consolidated financial statements and the related notes thereto for the fiscal year ended December 31, 2019 contained in our Annual Report on Form 10-K filed with the SEC on February 26, 2020. Impact of COVID-19 on Our Business The COVID-19 pandemic had a material adverse impact on our business operations and operating results for the three and six months ended June 30, 2020. While the length and severity of the reduction and shift in consumer demand related to COVID-19 remains uncertain, we expect that our business operations and results of operations, including our net sales, will be materially impacted through the remainder of 2020. In April 2020 we took aggressive actions to mitigate the effect of COVID-19 on our business by reducing non-payroll related operating costs and reducing payroll costs through a combination of pay cuts, employee furloughs and, to a lesser extent, layoffs. We also eliminated or deferred non-essential capital expenditures, significantly reduced planned inventory receipts by canceling or delaying orders, in addition to extending payment terms for both merchandise and non-merchandise vendor invoices. As our business operations and operating results improved throughout the second quarter of 2020, in part due to the easing of stay-at-home orders and other state-imposed restrictions on businesses, we began the process of bringing back certain furloughed employees and returned the majority of our corporate employees, except for executives and senior management, to their pre-COVID-19 salaries and wages. In addition, we accrued for discretionary bonuses related to second quarter performance with payment subject to full year performance. We also began to sequentially increase our inventory purchases and incur certain operating expenses to support the improving trends in consumer demand. Through our aggressive cost control and purchase commitment reductions, we were able to increase the balance of our cash and cash equivalents during the three months ended June 30, 2020. We believe that our existing cash and cash equivalents and cash flows from operations will be sufficient to meet our anticipated cash needs for at least the next 12 months, including the repayment of outstanding borrowings upon the expiration of our line of credit . However, our liquidity assumptions may prove to be incorrect given the uncertainty of the COVID-19 pandemic, and we could exhaust our available financial resources sooner than we currently expect. 7 Reverse Split On May 24, 2019, we effected a one-for-22.31 reverse split of all of our issued and outstanding Class T units and Class A units. All figures have been presented on the basis of the reverse split wherever applicable for all the periods presented in these condensed consolidated financial statements. Corporate Conversion Prior to our initial public offering, or IPO, we operated as a Delaware limited liability company under the name Revolve Group, LLC. In connection with the IPO, Revolve Group, LLC converted into a Delaware corporation and changed its name to Revolve Group, Inc. so that the top-tier entity in our corporate structure was a corporation rather than a limited liability company, which we refer to as the Corporate Conversion. In conjunction with the Corporate Conversion, all of the outstanding Class T and Class A units of Revolve Group, LLC were converted into an aggregate of 67,889,013 shares of our Class B common stock. The holders of Class T units received an aggregate of 2,400,960 shares, representing the total preference amount for the Class T units. The remaining 65,488,053 shares of our Class B common stock were allocated on a pro rata basis to the Class T and Class A unitholders based on the number of units held by each holder. In connection with the Corporate Conversion, Revolve Group, Inc. holds all property and assets of Revolve Group, LLC and assumed all of the debts and obligations of Revolve Group, LLC. The members of the board of managers and the officers of Revolve Group, LLC became the members of the board of directors and the officers of Revolve Group, Inc. Initial Public Offering On June 7, 2019, we completed an IPO, in which we issued and sold 2,941,176 shares of our Class A common stock at a public offering price of $18.00 per share. We received approximately $45.8 million in net proceeds after deducting $3.3 million of underwriting discounts and approximately $3.8 million in offering costs. Upon the closing of the IPO, we used $40.8 million of the net proceeds from the offering to repurchase an aggregate of 2,400,960 shares of Class B common stock held by TSG6 L.P. and certain of its affiliates, or TSG, and Capretto, LLC. In June 2019, we issued and sold an additional 441,176 shares of Class A common stock at a price of $18.00 per share following the underwriters’ exercise of their option to purchase additional shares and received proceeds of $7.5 million, net of underwriting discounts and commissions of $0.5 million. In connection with the IPO, 10,147,059 Class B shares were converted into Class A shares by the selling stockholders. Use of Estimates The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include: the allowance for sales returns, the valuation of deferred tax assets, inventory, equity‑based compensation, and goodwill, reserves for income tax uncertainties and other contingencies, and breakage of store credit and gift cards. Net Sales Revenue is primarily derived from the sale of apparel merchandise through our sites and, when applicable, shipping revenue. We recognize revenue through the following steps: (1) identification of the contract, or contracts, with the customer; (2) identification of the performance obligations in the contract; (3) determination of the transaction price; (4) allocation of the transaction price to the performance obligations in the contract; and (5) recognition of revenue when, or as, we satisfy a performance obligation. A contract is created with our customer at the time the order is placed by the customer, which creates a single performance obligation to deliver the product to the customer. We recognize revenue for our single performance obligation at the time control of the merchandise 8 passes to the c ustomer, which is at the time of shipment. In addition, we have elected to treat shipping and handling as fulfillment activities and not a separate performance obligation. In March 2020 we launched the REVOLVE Loyalty Club within the REVOLVE segment. Eligible customers who enroll in the program will generally earn points for every dollar spent and will automatically receive a $20 REVOLVE Reward once they earn 2,000 points. We defer revenue based on an allocation of the price of the customer purchase and the standalone selling price of the points earned. Revenue is recognized once the reward is redeemed or expires or once unconverted points expire. REVOLVE Rewards generally expire three months after they are issued and unconverted points generally expire if a customer is inactive for a period of 12 months. In accordance with our policy on returns and exchanges, merchandise returns are accepted for full refund if returned within 30 days of the original purchase date and may be exchanged up to 60 days from the original purchase date. We modify our policy during the holiday season to extend the return and exchange period. In addition, to provide our customers with more flexibility to return or exchange during this time of increased social distancing as a result of the COVID-19 pandemic, merchandise returns for purchases made starting in March 2020 will be accepted for full refund if returned within 60 days of the original purchase date and may be exchanged up to 90 days from the original purchase date. At the time of sale, we establish a reserve for merchandise returns, based on historical experience and expected future returns, which is recorded as a reduction of sales and cost of sales. The following table presents a rollforward of our sales return reserve for the three and six months ended June 30, 2020 and 2019 (in thousands): Three months ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Beginning balance $ 20,975 $ 37,153 $ 35,104 $ 29,184 Returns (85,652 ) (196,180 ) (259,174 ) (343,798 ) Provisions 93,013 195,382 252,406 350,969 Ending balance $ 28,336 $ 36,355 $ 28,336 $ 36,355 We may also issue store credit in lieu of cash refunds and sell gift cards without expiration dates to our customers. Store credits issued and proceeds from the issuance of gift cards are recorded as deferred revenue and recognized as revenue when the store credit or gift cards are redeemed or upon inclusion in our store credit and gift card breakage estimates. Revenue recognized in net sales on breakage on store credit and gift cards for the three and six months ended June 30, 2020 was $0.2 million and $1.0 million, respectively and $0.2 million and $0.4 million for the three and six months ended June 30, 2019, respectively. Sales taxes and duties collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from net sales. We currently collect sales taxes in all states that have adopted laws imposing sales tax collection obligations on out-of-state retailers and are subject to audits by state governments of sales tax collection obligations on out-of-state retailers in jurisdictions where we do not currently collect sales taxes, whether for prior years or prospectively. No significant interest or penalties related to sales taxes are recognized in the accompanying condensed consolidated financial statements. We have exposure to losses from fraudulent credit card charges. We record losses when incurred related to these fraudulent charges as amounts have historically been insignificant. See Note 9, Segment Information , for disaggregation of revenue by reportable segment and by geographic area. 9 Accounting Pronouncements Not Yet Effective Under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, we meet the definition of an emerging growth company. We have elected to use this extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act and as a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates. We will remain an emerging growth company until the earliest of (1) the end of the fiscal year in which the market value of our common stock that is held by non-affiliates is at least $700 million as of the last business day of our most recently completed second fiscal quarter, (2) the end of the fiscal year in which we have total annual gross revenues of $1.07 billion or more during such fiscal year, (3) the date on which we issue more than $1.0 billion in non-convertible debt in a three-year period, or (4) the end of the fiscal year in which the fifth anniversary of our IPO occurs. In December 2019, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes , which is intended to simplify various aspects related to the accounting for income taxes. ASU 2019-12 is effective for us for annual periods beginning after December 15, 2021 and interim periods within fiscal years beginning after December 15, 2022, with early adoption permitted. We are currently in the process of evaluating the effects of this pronouncement on our consolidated financial statements and related disclosures. In January 2017, the FASB issued ASU No. 2017-04 , Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment , which simplifies the accounting for goodwill impairment by removing step two from the goodwill impairment test. Under this new guidance, if the carrying amount of a reporting unit exceeds its estimated fair value, an impairment charge shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. The update also eliminates the requirement for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment. This guidance is effective for us for annual or interim goodwill impairment tests in fiscal years beginning December 15, 2021 with early adoption permitted. We do not expect that this ASU will have a significant impact on our consolidated financial statements and related disclosures. In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) . Under this ASU, a lessee is generally required to recognize the lessee’s rights and obligations resulting from leases on the balance sheet by recording a right-of-use asset and a lease liability. The new standard requires lessees to classify leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. In November 2019, the FASB issued ASU No. 2019-10 extending the effective date of this new lease standard by one year. In June 2020, the FASB issued ASU No. 2020-05, further extending the effective date by one year making it effective for us for annual periods beginning after December 15, 2021 and interim periods within fiscal years beginning after December 15, 2022, with early adoption permitted. The standard requires recognizing and measuring leases using a modified retrospective approach or allowing for application of the guidance at the beginning of the period in which it is adopted by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption rather than at the beginning of the earliest comparative period presented. We plan to elect the package of practical expedients permitted under the transition guidance within the new standard, which among other things, will allow us to carry forward the historical lease classification of our existing leases. However, we are still evaluating the potential impact of this ASU on our consolidated financial statements and related disclosures. 10 Note 3 . Li ne of Credit On March 23, 2016, we entered into a line of credit agreement with Bank of America, N.A, with an expiration date of March 23, 2021. The line of credit provides us with up to $75.0 million aggregate principal in revolver borrowings, based on eligible inventory and accounts receivable less reserves. Borrowings under the credit agreement accrue interest, at our option, at (1) a base rate equal to the highest of (a) the federal funds rate plus 0.50%, (b) the prime rate and (c) the LIBOR rate plus 1.00%, in each case plus a margin ranging from 0.25% to 0.75%, or (2) an adjusted LIBOR rate plus a margin ranging from 1.25% to 1.75%. As of June 30, 2020, we had $24.0 million outstanding on the line of credit. The weighted-average interest rate of debt outstanding at June 30, 2020 was 2.2 %. No borrowings were outstanding as of December 31, 2019. We are also obligated to pay other customary fees for a credit facility of this size and type, including an unused commitment fee. The credit agreement also permits us, in certain circumstances, to request an increase in the facility by an additional amount of up to $25.0 million (in an initial minimum amount of $10 million and in increments of $5 million thereafter) at the same maturity, pricing and other terms. Our obligations under the credit agreement are secured by substantially all of our assets. The credit agreement also contains customary covenants restricting our activities, including limitations on our ability to sell assets, engage in mergers and acquisitions, enter in transactions involving related parties, obtain letters of credit, incur indebtedness or grant liens or negative pledges on our assets, make loans or make other investments. Under the covenants, we are prohibited from paying cash dividends with respect to our capital stock. We were in compliance with all covenants as of June 30, 2020 and December 31, 2019. Note 4. Equity-based Compensation In 2013, Twist Holdings, LLC and Advance Holdings, LLC adopted equity incentive plans, which we refer to collectively as the 2013 Plan, pursuant to which the board of managers could grant options to purchase Class A units to officers and employees. Options could be granted with an exercise price equal to or greater than the unit’s fair value at the date of grant. All issued awards have 10-year terms and generally vest and become fully exercisable annually over five years of service from the date of grant. Awards will become fully vested upon the sale of the company. In March 2018, the 2013 Plan was amended to increase the maximum number of Class A units to 6,207,978. Upon the effectiveness of the Corporate Conversion on June 6, 2019, as discussed in Note 2, Significant Accounting Policies , the options to purchase Class A units of Revolve Group, LLC were converted into options to purchase Class B common stock of Revolve Group, Inc. on a 1:1 basis and in a manner that did not result in an increase to the intrinsic value of the converted option. In September 2018, the board of directors adopted the 2019 Equity Incentive Plan, or the 2019 Plan, which became effective in June 2019. Under the 2019 Plan, a total of 4,500,000 shares of our Class A common stock are reserved for issuance as options, stock appreciation rights, restricted stock, restricted stock units, or RSUs, performance units or performance shares. Upon the completion of our IPO, the 2019 Plan replaced the 2013 Plan, however, the 2013 Plan will continue to govern the terms and conditions of the outstanding awards previously granted under that plan. The number of shares that will be available for issuance under our 2019 Plan also will increase annually on the first day of each year beginning in 2020, in an amount equal to the least of: (a) 6,900,000 shares, (b) 5% of the outstanding shares of all classes of our common stock as of the last day of the immediately preceding year and (c) such other amount as our board of directors may determine. All future grants going forward will be issued under the 2019 Plan. As of June 30, 2020, approximately 2.9 million common shares remain available for future issuance under the 2019 Plan. All historical data presented in the tables within this footnote have been recast to retroactively reflect all share and per share data of options as if they had been issued by Revolve Group, Inc. and that both the reverse split and Corporate Conversion had occurred. See Note 2, Significant Accounting Policies, for further information regarding the reverse split and Corporate Conversion. 11 Option activity for the six months ended June 30 , 2020 under the 2013 and 2019 Plan s is as follows: Number of Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Term Aggregate Intrinsic Value (000's) Balance at January 1, 2020 4,916,074 $ 6.30 5.6 $ 59,368 Granted 1,613,980 9.69 9.7 Exercised (420,903 ) 3.22 — Forfeited (34,864 ) 14.54 — Expired (3,680 ) 15.62 — Balance at June 30, 2020 6,070,607 7.36 6.3 46,131 Exercisable at June 30, 2020 3,301,090 4.72 4.4 33,679 Vested and expected to vest 5,960,056 7.38 6.4 45,151 RSU award activity for the six months ended June 30, 2020 under the 2019 Plan is as follows: Class A Common Stock Weighted Average Grant Date Fair Value Weighted Average Remaining Contractual Term Aggregate Intrinsic Value (000's) Unvested at January 1, 2020 13,130 $ 19.04 3.6 $ 242 Granted 6,618 15.11 1.0 Released (3,883 ) 25.75 — Forfeited — — — Unvested at June 30, 2020 15,865 15.76 1.8 236 There were 990,700 options and 6,618 RSUs granted during the three months ended June 30, 2020 and 1,613,980 options and 6,618 RSUs granted during the six months ended June 30, 2020. The weighted average grant-date fair value of options granted during the three and six months ended June 30, 2020 was $4.18 per share and $5.29 per share, respectively. As of June 30, 2020, there was $12.8 million of total unrecognized compensation cost related to unvested options and RSUs granted under the 2013 Plan and 2019 Plan, which is expected to be recognized over a weighted average service period of 4.0 years. Equity‑based compensation cost that has been included in general and administrative expense in the accompanying condensed consolidated statements of income amounted to $0.9 million and $0.5 million for the three months ended June 30, 2020 and 2019, respectively, and $1.4 million and $1.0 million for the six months ended June 30, 2020 and 2019, respectively. There was an excess income tax benefit of $0.5 million and $0 recognized in the condensed consolidated statements of income for equity‑based compensation arrangements for the three months ended June 30, 2020 and 2019, respectively, and $1.7 million and $0 for the six months ended June 30, 2020 and 2019, respectively. Note 5. Commitments and Contingencies Contingencies We record a loss contingency when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. We also disclose material contingencies when we believe a loss is not probable but reasonably possible. Accounting for contingencies requires us to use judgment related to both the likelihood of a loss and the estimate of the amount or range of loss. Although we cannot predict with assurance the outcome of any litigation or tax matters, we do not believe there are currently any such actions that, if resolved unfavorably, would have a material impact on our operating results, financial position and cash flows. 12 Indemnifications In the ordinary course of business, we may provide indemnifications of varying scope and terms to vendors, directors, officers and other parties with respect to certain matters. We have not incurred any material costs as a result of such indemnifications and have not accrued any liabilities related to such obligations in our condensed consolidated financial statements. Tax Contingencies We are subject to income taxes in the United States and U.K. Significant judgment is required in evaluating our tax positions and determining our provision for income taxes. During the ordinary course of business, there are transactions and calculations for which the ultimate tax determination is uncertain. We establish reserves for tax-related uncertainties based on estimates or whether, and the extent to which, additional taxes will be due. These reserves are established when we believe that certain positions might be challenged despite our belief that our tax return positions are fully supportable. We adjust these reserves in light of changing facts and circumstances, such as the outcome of tax audits. Our provision for income taxes does not include any reserve provision because we believe that all of our tax positions are highly certain. Legal Proceedings We are a defendant in a purported class action lawsuit filed in the Superior Court of California, Los Angeles County, which was filed in May 2019, arising from employee wage-and-hour claims under California law for alleged meal period, rest period, payment of wages at separation, wage statement violations, and unfair business practices. On January 6, 2020, we and the individual defendant in the case entered into a binding memorandum of understanding to settle the case which will need to be submitted for court approval prior to becoming final. Due to court closures and logistical complications related to the COVID-19 pandemic, resolution of this matter has not moved forward. In December 2019, we accrued approximately $1.0 million to general and administrative expenses which as of June 30, 2020, still remained accrued within accrued expenses on the accompanying condensed consolidated balance sheet. Note 6. Income Taxes The following table summarizes our effective tax rate for the periods presented (in thousands): Three months ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Income before income taxes $ 18,630 $ 17,284 $ 22,611 $ 23,969 Provision for income taxes 4,394 4,543 4,219 6,266 Effective tax rate 23.6 % 26.3 % 18.7 % 26.1 % The decrease in the effective tax rate for the three and six months ended June 30, 2020, as compared to the same period in 2019, was primarily due to an excess tax benefit related to the exercise of non-qualified stock options during the first and second quarters of 2020. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, was enacted and signed into law. The CARES Act includes a number of corporate tax related provisions including increasing the amount of tax deductible interest, allowing companies an extended carry-back period for certain net operating losses, or NOLs, and increasing the amount of NOLs that corporations can use to offset taxable income. The CARES Act did not materially affect our income tax provision, deferred tax assets and liabilities, and related taxes payable for three and six months ended June 30, 2020. Although we currently do not expect the impact to be material, we will continue to assess the future implications of these provisions within the CARES Act on our condensed consolidated financial statements. 13 Note 7 . Members’ /Stockholders’ Equity Changes in members’/stockholders’ equity for the three and six months ended June 30, 2020 and 2019 were as follows: Three Months Ended June 30, 2020 Common Stock Additional Paid-in Retained Total Stockholders' Number Amount Capital Earnings Equity (in thousands, except share data) Beginning balance 69,381,475 $ 70 $ 75,556 $ 60,489 $ 136,115 Issuance of Class A common stock from exercise of stock options 118,411 — 382 — 382 Equity-based compensation — — 868 — 868 Cumulative translation adjustment — — — (123 ) (123 ) Other — — (41 ) — (41 ) Net income — — — 14,236 14,236 Ending balance 69,499,886 $ 70 $ 76,765 $ 74,602 $ 151,437 Three Months Ended June 30, 2019 Class T Preferred Units Class A Common Units Common Stock Additional Paid-in Accumulated Members' Equity/ Total Members'/ Stockholders' Number Amount Number Amount Number Amount Capital Retained Earnings Equity (in thousands, except unit and share data) Beginning balance 23,551,834 $ 15,000 41,936,219 $ 4,059 — $ — $ — $ 66,661 $ 85,720 Corporate conversion (23,551,834 ) (15,000 ) (41,936,219 ) (4,059 ) 67,889,013 68 18,991 — — Repurchase of Class B common stock — — — — (2,400,960 ) (2 ) — (40,814 ) (40,816 ) Issuance of Class A common stock upon initial public offering, net of offering costs — — — — 3,382,352 3 53,224 — 53,227 Equity-based compensation — — — — — — 521 — 521 Cumulative translation adjustment — — — — — — — (130 ) (130 ) Net income — — — — — — — 12,741 12,741 Ending balance — $ — — $ — 68,870,405 $ 69 $ 72,736 $ 38,458 $ 111,263 Six Months Ended June 30, 2020 Common Stock Additional Paid-in Retained Total Stockholders' Number Amount Capital Earnings Equity (in thousands, except share data) Beginning balance 69,078,983 $ 69 $ 74,018 $ 56,677 $ 130,764 Issuance of Class A common stock from exercise of stock options 420,903 1 1,356 — 1,357 Equity-based compensation — — 1,432 — 1,432 Cumulative translation adjustment — — — (467 ) (467 ) Other — — (41 ) — (41 ) Net income — — — 18,392 18,392 Ending balance 69,499,886 $ 70 $ 76,765 $ 74,602 $ 151,437 14 Six Months Ended June 30, 2019 Class T Preferred Units Class A Common Units Common Stock Additional Paid-in Accumulated Members' Equity/ Total Members'/ Stockholders' Number Amount Number Amount Number Amount Capital Retained Earnings Equity (in thousands, except unit and share data) Beginning balance 23,551,834 $ 15,000 41,936,219 $ 3,548 — $ — $ — $ 61,270 $ 79,818 Corporate conversion (23,551,834 ) (15,000 ) (41,936,219 ) (3,548 ) 67,889,013 68 18,480 — — Repurchase of Class B common stock — — — — (2,400,960 ) (2 ) — (40,814 ) (40,816 ) Issuance of Class A common stock upon initial public offering, net of offering costs — — — — 3,382,352 3 53,224 — 53,227 Equity-based compensation — — — — — — 1,032 — 1,032 Cumulative effect of adoption of ASC 606 — — — — — — — 286 286 Cumulative translation adjustment — — — — — — — 13 13 Net income — — — — — — — 17,703 17,703 Ending balance — $ — — $ — 68,870,405 $ 69 $ 72,736 $ 38,458 $ 111,263 Note 8. Earnings (Net Loss) per Share Basic and diluted earnings (net loss) per share is presented in conformity with the two-class method required for participating securities and multiple classes of common stock. We consider the Class T preferred units, which were outstanding prior to the Corporate Conversion, to be a participating security. In connection with our IPO, we established two classes of authorized common stock: Class A common stock and Class B common stock. The rights of the holders of Class A and Class B common stock are identical, except for voting and conversion rights. Each share of Class A common stock is entitled to one vote per share. Each share of Class B common stock is entitled to ten votes per share and is convertible at any time into one share of Class A common stock. Basic earnings (net loss) per share is computed by dividing the net income (loss) attributable to common stockholders by the weighted-average number of common shares outstanding during the period. As a participating security, the Class T preferred units are excluded from basic weighted-average common shares outstanding. Diluted earnings (net loss) per share represents net income (loss) divided by the weighted-average number of common shares outstanding, inclusive of the effect of dilutive stock options and RSUs. The undistributed earnings (net losses ) are allocated based on the participation rights of Class A and Class B common shares as if the earnings for the year have been distributed and losses allocated. As the liquidation and dividend rights are identical for both classes, the undistributed earnings are allocated on a proportionate basis. For the three and six months ended June 30, 2020, the calculation of diluted earnings (net loss) per share for Class A common stock assumes the conversion of Class B common stock, while diluted earnings (net loss) per share of Class B common stock does not assume the conversion of Class A common stock as Class A common stock is not convertible into Class B common stock. Similarly, outstanding options to purchase Class B common stock and RSUs that are dilutive are included in the calculation of diluted earnings (net loss) for both Class A and Class B common stock. For the purpose of calculating basic and diluted earnings (net loss) per share for the three and six months ended June 30, 2019, the $40.8 million of Class B shares issued and subsequently repurchased in connection with our IPO to satisfy the total preference amount for the Class T Units is treated as a dividend and subtracted from net income available to common stockholders on a proportionate basis. In addition, the net losses for the three and six months ended June 30, 2019 were not allocated to our participating security as the Class T preferred units were not contractually obligated to share in our losses. Basic and diluted earnings (net loss) per share and the weighted-average shares outstanding have been computed for all periods shown below to give effect to the reverse split, the Corporate Conversion that occurred in 15 connection with our IPO , and the repurchase of Class B shares . See Note 2, Significant Accounting Policies , for fur ther information regarding the reverse s plit and Corporate Conversion. The following table presents the calculation of basic and diluted earnings (net loss) per share: Three months ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Class A Class B Class A Class B Class A Class B Class A Class B (in thousands, except per share data) Numerator Net income $ 3,251 $ 10,985 $ 912 $ 11,829 $ 4,156 $ 14,236 $ 683 $ 17,020 Repurchase of Class B common stock — — (2,922 ) (37,894 ) — — (1,575 ) (39,241 ) Net income (loss) attributable to common stockholders — basic $ 3,251 $ 10,985 $ (2,010 ) $ (26,065 ) $ 4,156 $ 14,236 $ (892 ) $ (22,221 ) Reallocation of undistributed earnings as a result of conversion of Class B to Class A shares 10,985 — — — 14,236 — — — Reallocation of undistributed earnings to Class B shares — 102 — — — 140 — — Net income (loss) attributable to common stockholders — diluted $ 14,236 $ 11,087 $ (2,010 ) $ (26,065 ) $ 18,392 $ 14,376 $ (892 ) $ (22,221 ) Denominator Weighted average shares used to compute earnings (net loss) per share — basic 15,846 53,569 3,510 45,515 15,673 53,694 1,755 43,726 Conversion of Class B to Class A common shares outstanding 53,569 — — — 53,694 — — — Effect of dilutive stock options and RSUs 2,244 2,244 — — 2,414 2,414 — — Weighted average number of shares used to compute earnings (net loss) per share — diluted 71,659 55,813 3,510 45,515 71,781 56,108 1,755 43,726 Earnings (net loss) per share: Basic $ 0.21 $ 0.21 $ (0.57 ) $ (0.57 ) $ 0.27 $ 0.27 $ (0.51 ) $ (0.51 ) Diluted $ 0.20 $ 0.20 $ (0.57 ) $ (0.57 ) $ 0.26 $ 0.26 $ (0.51 ) $ (0.51 ) The following have been excluded from the computation of basic and diluted earnings (net loss) per share as their effect would have been anti-dilutive (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Stock options to purchase Class B shares and RSUs 2,676 4,001 3,337 3,665 Note 9. Segment Information We have two reportable segments, REVOLVE and FORWARD, each offering clothing, shoes, accessories, and beauty products available for sale to customers through their respective websites. Our reportable segments have been identified based on how our chief operating decision makers manage our business, make operating decisions, and evaluate operating performance. Our chief operating decision makers are our co-chief executive officers. We evaluate the performance of our reportable segments based on net sales and gross profit. Management does not evaluate the performance of our reportable segments using asset measures. 16 Revenue from external customers for each group of sim ilar products and services is not reported to our chief operating decision makers. The separate identification for purposes of segment disclosure is impracticable, as it is not readily available and the cost to develop would be excessive. During the three and six months ended June 30 , 20 20 and 20 19 , no customer represented over 10% of net sales. The following table summarizes our net sales and gross profit for each of our reportable segments (in thousands): Three Months Ended June 30, Six Months Ended June 30, Net sales 2020 2019 2020 2019 REVOLVE $ 126,921 $ 143,944 $ 251,393 $ 266,595 FORWARD 15,863 17,953 37,466 32,645 Total $ 142,784 $ 161,897 $ 288,859 $ 299,240 Gross profit REVOLVE $ 66,233 $ 82,837 $ 128,613 $ 148,100 FORWARD 5,838 7,581 14,408 13,072 Total $ 72,071 $ 90,418 $ 143,021 $ 161,172 The following table lists net sales by geographic area (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 United States $ 116,270 $ 136,055 $ 236,600 $ 251,460 Rest of the world (1) 26,514 25,842 52,259 47,780 Total $ 142,784 $ 161,897 $ 288,859 $ 299,240 (1) No individual country exceeded 10% of total net sales for any period presented. Note 10. Fair Value Measurements We utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible pursuant to the provisions of FASB Accounting Standards Codification, or ASC, Topic 820, Fair Value Measurements and Disclosures, or ASC 820. We determine fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. The carrying amounts for our cash and cash equivalents, accounts receivable, accounts payable, line of credit to the extent borrowings are outstanding and accrued expenses approximate fair value due to their short-term maturities. When considering market participant assumptions in fair value measurements, the following fair value hierarchy as established under ASC 820 distinguishes between observable and unobservable inputs, which are categorized in one of the following levels: Level 1: Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2: Inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and inputs that are derived principally from or corroborated by observable market data by correlation or other means. Level 3: Inputs are unobservable inputs for the asset or liability. We consider all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. Our cash equivalents are comprised of money market funds, which are valued based on Level 1 inputs consisting of quoted prices in active markets. Our cash equivalents were $117.9 million and $37.6 million as of June 30, 2020 and December 31, 2019, respectively. 17 Note 1 1 . Detail of Ce rtain Balance Sheet Accounts Prepaid Expenses and Other Current Assets Prepaid expenses and other current assets consist of the following (in thousands): June 30, December 31, 2020 2019 Expected merchandise returns, net $ 11,171 $ 12,989 Advanced payments on inventory to be delivered from vendors 3,486 4,605 Prepaid insurance 1,031 1,858 Prepaid packaging 278 393 Prepaid rent 242 381 Other 3,377 3,929 Total prepaid expenses and other current assets $ 19,585 $ 24,155 Accrued Expenses Accrued expenses consist of the following (in thousands): June 30, December 31, 2020 2019 Marketing $ 7,085 $ 6,127 Salaries and related benefits 5,608 4,275 Selling and distribution 3,123 3,360 Sales taxes 2,247 3,023 Other 2,657 2,614 Total accrued expenses $ 20,720 $ 19,399 Other Current Liabilities Other current liabilities consist of the following (in thousands): June 30, December 31, 2020 2019 Store credit $ 10,221 $ 10,080 Gift cards 1,644 2,133 Other 5,535 4,527 Total other current liabilities $ 17,400 $ 16,740 18