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EX-32.1 - EX-32.1 - Stitch Fix, Inc.sfix-ex321_8.htm
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EX-31.1 - EX-31.1 - Stitch Fix, Inc.sfix-ex311_7.htm
EX-10.2 - EX-10.2 - Stitch Fix, Inc.sfix-ex102_189.htm
EX-10.1 - EX-10.1 - Stitch Fix, Inc.sfix-ex101_190.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 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 January 27, 2018

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: 001-38291

 

Stitch Fix, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

 

27-5026540

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

1 Montgomery Street, Suite 1500

San Francisco, CA

 

94104

(Address of Principal Executive Offices)

 

(Zip Code)

 

(415) 882-7765

(Registrant’s Telephone Number, Including Area Code)

 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post 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. (Check one):

 

Large accelerated filer

 

  

Accelerated filer

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

Emerging growth company

 

  

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 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  

As of March 9, 2018 the number of outstanding shares of the registrant’s Class A common stock, par value $0.00002 per share, was 17,256,799, and the number of outstanding shares of the registrant’s Class B common stock, par value $0.00002 per share, was 79,931,282.

 

 

 

 


 

STITCH FIX, INC.

TABLE OF CONTENTS

 

 

 

Page No.

PART I. FINANCIAL INFORMATION

  

 

Item 1. Financial Statements:

  

3

Condensed Consolidated Balance Sheets as of January 27, 2018 and July 29, 2017

  

3

Condensed Consolidated Statements of Operations and Comprehensive Income for the three and six months ended January 27, 2018 and January 28, 2017

  

4

Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity as of January 27, 2018

 

5

Condensed Consolidated Statements of Cash Flows for the six months ended January 27, 2018 and January 28, 2017

  

6

Notes to the Condensed Consolidated Financial Statements

  

7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

15

Item 3. Quantitative and Qualitative Disclosures About Market Risk

  

24

Item 4. Controls and Procedures

  

24

 

 

 

PART II. OTHER INFORMATION

  

26

Item 1. Legal Proceedings

  

26

Item 1A. Risk Factors

  

26

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

  

42

Item 3. Defaults Upon Senior Securities

  

42

Item 4. Mine Safety Disclosures

  

43

Item 5. Other Information

  

43

Item 6. Exhibits

  

43

Signatures

  

45

 

In this Quarterly Report on Form 10-Q, “we,” “our,” “us,” “Stitch Fix,” and “the Company” refer to Stitch Fix, Inc. The Stitch Fix logo and other trade names, trademarks or service marks of Stitch Fix are the property of Stitch Fix, Inc. This Quarterly Report on Form 10-Q contains references to our trademarks and to trademarks belonging to other entities. Trade names, trademarks and service marks of other companies appearing in this Quarterly Report on Form 10-Q are the property of their respective holders. We do not intend our use or display of other companies’ trade names or trademarks to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

 

 

 

 


 

PART I. FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

Stitch Fix, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

(In thousands, except share and per share amounts)

 

 

 

January 27, 2018

 

 

July 29, 2017

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash

 

$

266,374

 

 

$

110,608

 

Restricted cash

 

 

 

 

 

250

 

Inventory, net

 

 

80,094

 

 

 

67,592

 

Prepaid expenses and other current assets

 

 

11,653

 

 

 

19,312

 

Total current assets

 

 

358,121

 

 

 

197,762

 

Property and equipment, net

 

 

30,875

 

 

 

26,733

 

Deferred tax assets

 

 

14,493

 

 

 

19,991

 

Restricted cash, net of current portion

 

 

9,100

 

 

 

9,100

 

Other long-term assets

 

 

3,813

 

 

 

3,619

 

Total assets

 

$

416,402

 

 

$

257,205

 

Liabilities, Convertible Preferred Stock and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

55,145

 

 

$

44,238

 

Accrued liabilities

 

 

51,077

 

 

 

46,363

 

Preferred stock warrant liability

 

 

 

 

 

26,679

 

Gift card liability

 

 

8,151

 

 

 

5,190

 

Deferred revenue

 

 

10,433

 

 

 

7,150

 

Other current liabilities

 

 

4,953

 

 

 

4,298

 

Total current liabilities

 

 

129,759

 

 

 

133,918

 

Deferred rent, net of current portion

 

 

10,752

 

 

 

11,781

 

Other long-term liabilities

 

 

4,794

 

 

 

7,423

 

Total liabilities

 

 

145,305

 

 

 

153,122

 

Commitments and contingencies (Note 6)

 

 

 

 

 

 

 

 

Convertible preferred stock, $0.00002 par value – zero and 60,577,280 shares authorized as of

   January 27, 2018 and July 29, 2017, respectively; zero and 59,511,055 shares issued and

outstanding as of January 27, 2018 and July 29, 2017, respectively; aggregate liquidation preference of $42,389 as of July 29, 2017

 

 

 

 

 

42,222

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.00002 par value – 20,000,000 and zero shares authorized as of

   January 27, 2018 and July 29, 2017, respectively; zero shares issued and outstanding

  as of January 27, 2018 and July 29, 2017

 

 

 

 

 

 

Class A common stock, $0.00002 par value – 2,000,000,000 and zero shares authorized as of

  January 27, 2018 and July 29, 2017, respectively; 9,175,557 and zero shares issued

   and outstanding as of January 27, 2018 and July 29, 2017, respectively

 

 

 

 

 

 

Class B common stock, $0.00002 par value – 100,000,000 shares authorized as of

  January 27, 2018 and July 29, 2017; 87,885,193 and 26,834,535 shares issued

   and outstanding as of January 27, 2018 and July 29, 2017, respectively (1)

 

 

2

 

 

 

1

 

Additional paid-in capital

 

 

219,108

 

 

 

27,002

 

Retained earnings

 

 

51,987

 

 

 

34,858

 

Total stockholders’ equity

 

 

271,097

 

 

 

61,861

 

Total liabilities, convertible preferred stock and stockholders’ equity

 

$

416,402

 

 

$

257,205

 

(1) Shares authorized, issued and outstanding as of July 29, 2017 includes common stock prior to our initial public offering. Please see Note 1 for additional details.

 

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

3

 


 

Stitch Fix, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Income

(Unaudited)

(In thousands, except share and per share amounts)

 

 

 

For the Three Months Ended

 

 

For the Six Months Ended

 

 

 

January 27, 2018

 

 

January 28, 2017

 

 

January 27, 2018

 

 

January 28, 2017

 

Revenue, net

 

$

295,906

 

 

$

237,775

 

 

$

591,469

 

 

$

473,779

 

Cost of goods sold

 

 

168,523

 

 

 

131,053

 

 

 

335,071

 

 

 

256,979

 

Gross profit

 

 

127,383

 

 

 

106,722

 

 

 

256,398

 

 

 

216,800

 

Selling, general and administrative expenses

 

 

111,771

 

 

 

105,835

 

 

 

231,242

 

 

 

189,385

 

Operating income

 

 

15,612

 

 

 

887

 

 

 

25,156

 

 

 

27,415

 

Remeasurement of preferred stock warrant liability

 

 

(1,614

)

 

 

1,146

 

 

 

(10,685

)

 

 

2,649

 

Other income, net

 

 

(18

)

 

 

(6

)

 

 

(35

)

 

 

(13

)

Income (loss) before income taxes

 

 

17,244

 

 

 

(253

)

 

 

35,876

 

 

 

24,779

 

Provision for (benefit from) income taxes

 

 

13,603

 

 

 

(486

)

 

 

18,747

 

 

 

11,303

 

Net income and comprehensive income

 

$

3,641

 

 

$

233

 

 

$

17,129

 

 

$

13,476

 

Earnings per share attributable to common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.04

 

 

$

 

 

$

0.18

 

 

$

0.14

 

Diluted

 

$

0.02

 

 

$

 

 

$

0.06

 

 

$

0.14

 

Weighted-average shares used to compute earnings per share attributable to common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

82,439,351

 

 

 

 

 

 

54,377,466

 

 

 

24,546,556

 

Diluted

 

 

87,954,656

 

 

 

 

 

 

60,599,568

 

 

 

29,134,729

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

4

 


 

Stitch Fix, Inc.

Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity

(Unaudited)

(In thousands, except share amounts)

 

 

 

Convertible

Preferred Stock

 

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Retained

 

 

Total

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Equity

 

Balance as of July 29, 2017

 

 

59,511,055

 

 

$

42,222

 

 

 

 

26,834,535

 

 

$

1

 

 

$

27,002

 

 

$

34,858

 

 

$

61,861

 

Issuance of Class A common stock upon initial public offering, net of offering costs

 

 

 

 

 

 

 

 

 

9,175,557

 

 

 

 

 

 

127,033

 

 

 

 

 

 

127,033

 

Issuance of Class B common stock upon conversion of convertible preferred stock

 

 

(59,511,055

)

 

 

(42,222

)

 

 

 

59,511,055

 

 

 

1

 

 

 

42,221

 

 

 

 

 

 

42,222

 

Reclassification of warrant liability to additional paid-in capital upon the initial public offering

 

 

 

 

 

 

 

 

 

1,066,225

 

 

 

 

 

 

15,994

 

 

 

 

 

 

15,994

 

Issuance of Class B common stock upon exercise of stock options

 

 

 

 

 

 

 

 

 

492,857

 

 

 

 

 

 

1,006

 

 

 

 

 

 

1,006

 

Repurchase of Class B common stock related to early exercised options

 

 

 

 

 

 

 

 

 

(19,479

)

 

 

 

 

 

 

 

 

 

 

 

 

Vesting of early exercised options

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

456

 

 

 

 

 

 

456

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,396

 

 

 

 

 

 

5,396

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

17,129

 

 

 

17,129

 

Balance as of January 27, 2018

 

 

 

 

$

 

 

 

 

97,060,750

 

 

$

2

 

 

$

219,108

 

 

$

51,987

 

 

$

271,097

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

5

 


 

Stitch Fix, Inc.

Condensed Consolidated Statements of Cash Flow

(Unaudited)

(In thousands)

 

 

 

For the Six Months Ended

 

 

 

January 27, 2018

 

 

January 28, 2017

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

 

Net income

 

$

17,129

 

 

$

13,476

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Deferred income taxes

 

 

5,498

 

 

 

(847

)

Remeasurement of preferred stock warrant liability

 

 

(10,685

)

 

 

2,649

 

Inventory reserves

 

 

7,027

 

 

 

3,177

 

Compensation expense related to certain stock sales by current and former employees

 

 

 

 

 

9,699

 

Stock-based compensation expense

 

 

5,135

 

 

 

1,362

 

Depreciation and amortization

 

 

4,888

 

 

 

3,385

 

Loss on disposal of property and equipment

 

 

131

 

 

 

(7

)

Change in operating assets and liabilities:

 

 

 

 

 

 

 

 

Inventory

 

 

(19,529

)

 

 

(10,470

)

Prepaid expenses and other assets

 

 

5,078

 

 

 

(9,417

)

Accounts payable

 

 

10,843

 

 

 

13,629

 

Accrued liabilities

 

 

4,484

 

 

 

14,914

 

Deferred revenue

 

 

3,283

 

 

 

1,321

 

Gift card liability

 

 

2,961

 

 

 

3,588

 

Other liabilities

 

 

(2,508

)

 

 

3,073

 

Net cash provided by operating activities

 

 

33,735

 

 

 

49,532

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(8,232

)

 

 

(11,367

)

Net cash used in investing activities

 

 

(8,232

)

 

 

(11,367

)

Cash Flows from Financing Activities

 

 

 

 

 

 

 

 

Proceeds from initial public offering, net of underwriting discounts paid

 

 

129,046

 

 

 

 

Proceeds from the exercise of stock options

 

 

1,006

 

 

 

922

 

Repurchase of Class B common stock related to early exercised options

 

 

(39

)

 

 

(3,557

)

Net cash provided by (used in) financing activities

 

 

130,013

 

 

 

(2,635

)

Net increase in cash and restricted cash

 

 

155,516

 

 

 

35,530

 

Cash and restricted cash at beginning of period

 

 

119,958

 

 

 

101,492

 

Cash and restricted cash at end of period

 

$

275,474

 

 

$

137,022

 

Components of cash and restricted cash

 

 

 

 

 

 

 

 

Cash

 

$

266,374

 

 

$

127,672

 

Restricted cash – current portion

 

 

 

 

 

 

Restricted cash – long-term portion

 

 

9,100

 

 

 

9,350

 

Total cash and restricted cash

 

$

275,474

 

 

$

137,022

 

Supplemental Disclosure

 

 

 

 

 

 

 

 

Cash paid for income taxes

 

$

3,091

 

 

$

18,517

 

Supplemental Disclosure of Non-Cash Investing and Financing Activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment included in

   accounts payable and accrued liabilities

 

$

780

 

 

$

208

 

Capitalized stock-based compensation

 

$

261

 

 

$

45

 

Vesting of early exercised options

 

$

456

 

 

$

488

 

Deferred offering costs included in accounts payable and accrued liabilities

 

$

134

 

 

$

 

Conversion of preferred stock upon initial public offering

 

$

42,222

 

 

$

 

Reclassification of preferred stock warrant liability upon initial public offering

 

$

15,994

 

 

$

 

Deferred offering costs paid in prior year

 

$

1,879

 

 

$

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

6

 


 

Stitch Fix, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

1.

Description of Business

Stitch Fix, Inc. (“we,” “our,” “us” or “the Company”) delivers one-to-one personalization to our clients through the combination of data science and human judgment. Our stylists hand select items from a broad selection of merchandise. Stylists pair their own judgment with our analysis of client and merchandise data to provide a personalized shipment of apparel, shoes and accessories suited to each client’s needs. We call each of these unique shipments a Fix. After receiving a Fix, our clients purchase the items they want to keep and return the other items. We are incorporated in Delaware and operate in the United States.

Initial Public Offering

On November 16, 2017, we completed an initial public offering (“IPO”). In connection with the IPO, we authorized two new classes of 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 with respect to voting, conversion and transfer rights. Each share of Class A common stock is entitled to one vote per share and each share of Class B common stock is entitled to ten votes per share. Each share of Class B common stock is convertible at any time at the option of the stockholder into one share of Class A common stock and has no expiration date. The Class B common stock automatically converts to Class A common stock upon transfers or any sale. In our IPO, we issued and sold 8,000,000 shares of our Class A common stock at a public offering price of $15.00 per share. We received $110.4 million in net proceeds after deducting $6.2 million of underwriting discounts and $3.4 million in offering costs. Upon the closing of the IPO, all of the then outstanding shares of common stock were reclassified into Class B common stock, all of the outstanding shares of convertible preferred stock automatically converted into 59,511,055 shares of Class B common stock and all of the outstanding preferred stock warrants were automatically exercised into 1,066,225 shares of Class B common stock. Subsequent to the closing of the IPO, there were no shares of preferred stock or preferred stock warrants outstanding.

In December 2017, we issued an additional 1,175,557 shares of Class A common stock at a price of $15.00 per share following the underwriters’ exercise of their option to purchase additional shares and received $16.7 million in net proceeds after deducting underwriting discounts and expenses.

2.

Summary of Significant Accounting Policies

Basis of Presentation

Our fiscal year is a 52-week or 53-week period ending on the Saturday closest to July 31. The fiscal years ended July 29, 2017 (“2017”) and July 28, 2018 (“2018”) each consist of 52 weeks.

The unaudited condensed consolidated financial statements include the accounts of Stitch Fix, Inc. and our wholly owned subsidiaries, and have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and following the requirements of the Securities and Exchange Commission (“SEC”) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by 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 July 28, 2018 or for any other interim period or for any other future year. All intercompany balances and transactions have been eliminated in consolidation.

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 July 29, 2017 contained in our prospectus filed pursuant to Rule 424(b) under the Securities Act of 1933, as amended, with the SEC on November 17, 2017.

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 in our condensed consolidated financial statements and accompanying footnotes.

7

 


 

Significant estimates and assumptions are used for inventory, stock-based compensation expense, common stock valuation preceding our IPO, remeasurement of preferred stock warrant liability preceding our IPO, revenue recognition and income taxes. Actual results could differ from those estimates and such differences may be material to the condensed consolidated financial statements.

Restricted Cash

Restricted cash represents cash balances held in segregated accounts collateralizing letters of credit for our leased properties as of January 27, 2018 and July 29, 2017.

Deferred Offering Costs

Deferred offering costs, which consist of direct incremental legal, consulting, banking and accounting fees relating to the IPO were capitalized and offset against proceeds upon the consummation of the IPO, which became effective on November 16, 2017 (See Note 1).

Concentration of Credit Risks

The majority of our cash is held by three financial institutions within the United States. Our cash balances held by these institutions may exceed federally insured limits. The associated risk of concentration for cash is mitigated by banking with credit-worthy institutions. No client accounted for greater than 10% of total revenue, net for the three and six months ended January 27, 2018 and January 28, 2017.

Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), or ASU 2014-09, which amended the existing FASB Accounting Standards Codification. ASU 2014-09 establishes a principle for recognizing revenue upon the transfer of promised goods or services to customers, in an amount that reflects the expected consideration received in exchange for those goods or services and also provides guidance on the recognition of costs related to obtaining and fulfilling customer contracts. The new guidance may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption (“modified retrospective method”). We plan to apply the modified retrospective method upon adoption in our first quarter of fiscal 2019. We do not anticipate the impact to be material to our consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), or ASU 2016-02, which requires lessees to record most leases on their balance sheets but recognize the expenses on their income statements in a manner similar to current practice. ASU 2016-02 states that a lessee would recognize a lease liability for the obligation to make lease payments and a right-to-use asset for the right to use the underlying asset for the lease term. We expect to adopt this standard in our first quarter of fiscal 2020. We are currently evaluating the impact that this standard will have on our consolidated financial statements but we expect that it will result in a substantial increase in our long-term assets and liabilities.

In October 2016, the FASB issued ASU No. 2016-16, Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory (Topic 740), which amends existing guidance on the recognition of current and deferred income tax impacts for intra-entity asset transfers other than inventory. This amendment should be applied on a modified retrospective basis. We expect to adopt this standard in fiscal 2019 and are currently evaluating the impact that it will have on our consolidated financial statements.

3.

Fair Value Measurements

We disclose and recognize the fair value of our assets and liabilities using a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. The guidance establishes three levels of the fair value hierarchy as follows:

Level 1: Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;

Level 2: Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and

8

 


 

Level 3: Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data.

Our financial instruments consist of cash, accounts payable, accrued liabilities and the preferred stock warrant liability. At January 27, 2018 and July 29, 2017, the carrying values of cash, accounts payable and accrued liabilities approximated fair value due to their short-term maturities. In November 2017, in connection with our IPO, all outstanding preferred stock warrants were automatically exercised into Class B common stock. As a result, we remeasured and reclassified the preferred stock warrant liability to additional paid-in capital upon the closing of the IPO. As of January 27, 2018, the Company did not have any financial instruments measured at fair value.

The following table sets forth our financial instruments that were measured at fair value on a recurring basis based on the fair value hierarchy as of July 29, 2017 (in thousands):

 

 

 

July 29, 2017

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock warrant liability

 

$

 

 

$

 

 

$

26,679

 

 

$

26,679

 

Total

 

$

 

 

$

 

 

$

26,679

 

 

$

26,679

 

 

There were no transfers of financial assets or liabilities into or out of Level 1, Level 2 or Level 3 for the three and six months ended January 27, 2018 and January 28, 2017. The key assumptions used in the Black-Scholes option-pricing model for the valuation of the preferred stock warrant liability upon remeasurement were as follows as of July 29, 2017:

 

 

 

July 29, 2017

 

Expected term (in years)

 

 

2.0

 

Fair value of underlying shares

 

$

25.09

 

Volatility

 

 

43.8

%

Risk free interest rate

 

 

1.3

%

Dividend yield

 

 

%

 

The following table sets forth a summary of the changes in the fair value of the preferred stock warrant liability (in thousands):

 

 

 

For the Six Months Ended

January 27, 2018

 

Balance at July 29, 2017

 

$

26,679

 

Change in fair value

 

 

(10,685

)

Reclassification of warrant liability to additional paid-in capital upon the initial public offering

 

 

(15,994

)

Ending Balance at January 27, 2018

 

$

 

 

4.

Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):

 

 

 

January 27, 2018

 

 

July 29, 2017

 

Inventory purchases

 

$

12,633

 

 

$

11,186

 

Compensation and related benefits

 

 

9,615

 

 

 

9,632

 

Advertising

 

 

7,857

 

 

 

9,995

 

Shipping and freight

 

 

5,873

 

 

 

3,390

 

Sales taxes

 

 

4,786

 

 

 

3,702

 

Other

 

 

10,313

 

 

 

8,458

 

Total accrued liabilities

 

$

51,077

 

 

$

46,363

 

 

5.

Preferred Stock Warrant Liability

In 2012 and 2013, in connection with financing arrangements, we issued warrants to purchase shares of our convertible preferred stock. For one of the financing arrangements, we issued warrants to purchase 375,230 shares of Series Seed convertible preferred

9

 


 

stock at an exercise price of $0.1066 per share and 66,265 shares of Series A convertible preferred stock at an exercise price of $0.22636 per share. For the second financing arrangement, we issued warrants for the purchase of, at the warrant holder’s option, either (a) 624,730 shares of Series A-1 convertible preferred stock at an exercise price of $0.2401 per share or (b) 308,315 shares of Series B convertible preferred stock at an exercise price of $0.486516 per share. Prior to their automatic exercise in connection with the IPO, as described below, the warrants were exercisable for and expired ten years from the date of issuance. In November 2017, in connection with our IPO, the preferred stock warrants were automatically exercised into Class B common stock and the preferred stock warrant liability was reclassified to additional paid-in capital.

6.

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.

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.

7.

Stock-Based Compensation

2011 Equity Incentive Plan

In 2011, we adopted the 2011 Equity Incentive Plan (the “2011 Plan”). The 2011 Plan provided for the granting of stock-based awards to employees, including directors and non-employees under terms and provisions established by the board of directors.

The 2011 Plan allowed for the grant of incentive stock options or nonqualified stock options as well as restricted stock units, restricted stock and stock appreciation rights. As of January 27, 2018, we had only granted incentive and nonqualified stock options under the 2011 Plan. Employee stock options generally vest 25% on the first anniversary of the grant date with the remaining vesting ratably over the next three years. Options generally expire after 10 years. Effective upon our IPO, the 2011 Equity Incentive Plan has been replaced by the 2017 Incentive Plan.

10

 


 

2017 Incentive Plan

In November 2017, our board of directors and stockholders adopted our 2017 Incentive Plan (the “2017 Plan”). The remaining shares available for issuance under the 2011 Plan became reserved for issuance under the 2017 Plan. Our 2017 Plan provides for the grant of Class A incentive stock options to employees, including employees of any parent or subsidiary, and for the grant of nonstatutory stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance stock awards, performance cash awards and other forms of stock awards to employees, directors and consultants, including employees and consultants of our subsidiaries. The number of shares authorized for issuance under the 2017 Plan was 28,423,374 as of January 27, 2018, of which 6,038,778 were available for grant.

Stock option activity under the 2011 and 2017 Plans is as follows:

 

 

 

Options Outstanding

 

 

 

Number of

Options

 

 

Weighted-

Average

Exercise

Price

 

 

Weighted-

Average

Remaining

Contractual

Life (in Years)

 

 

Aggregate

Intrinsic

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

 

Balance – July 29, 2017

 

 

10,218,912

 

 

$

7.12

 

 

 

8.53

 

 

$

166,670

 

Granted

 

 

1,608,698

 

 

$

20.81

 

 

 

 

 

 

 

 

 

Exercised

 

 

(492,857

)

 

$

2.04

 

 

 

 

 

 

 

 

 

Cancelled

 

 

(824,629

)

 

$

4.90

 

 

 

 

 

 

 

 

 

Balance – January 27, 2018

 

 

10,510,124

 

 

$

9.63

 

 

 

8.35

 

 

$

128,355

 

 

The aggregate intrinsic value is the difference between the current fair value of the underlying common stock and the exercise price for in-the-money stock options.

The following table summarizes the restricted stock unit (RSU) award activity under the 2017 Incentive Plan:

 

 

 

Class A Common Stock

 

 

Weighted-

Average

Grant Date

Fair Value

 

 

Unvested at July 29, 2017

 

$

 

 

$

 

 

Granted

 

 

426,056

 

 

$

18.87

 

 

Forfeited

 

 

(6,000

)

 

$

15.00

 

 

Unvested at January 27, 2018

 

$

420,056

 

 

$

18.92

 

 

Stock-Based Compensation Expense

Stock-based compensation expense for employees was $3.1 million and $5.1 million for the three and six months ended January 27, 2018, respectively and $0.7 million and $1.2 million for the three and six months ended January 28, 2017, respectively. Stock-based compensation expense is included in selling, general and administrative expenses in our condensed consolidated statements of operations.

The weighted-average grant date fair value of options granted during the six months ended January 27, 2018 was $7.65 per share. The weighted-average grant date fair value of options granted during the six months ended January 28, 2017 was $2.84 per share. As of January 27, 2018, the total unrecognized compensation expense related to unvested options and RSU’s, net of estimated forfeitures, was $40.8 million which we expect to recognize over an estimated weighted average period of 3.49 years.

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We record stock-based compensation of stock options granted to employees by estimating the fair value of stock-based awards using the Black-Scholes option pricing model and amortizing the fair value of the stock-based awards granted over the applicable vesting period of the awards on a straight-line basis. The fair value of stock options granted to employees was estimated at the grant date using the Black- Scholes option-pricing model with the following assumptions:

 

 

 

For the Three Months Ended

 

 

For the Six Months Ended

 

 

 

January 27, 2018

 

 

January 28, 2017

 

 

January 27, 2018

 

 

January 28, 2017

 

Expected term (in years)

 

5.4 - 6.6

 

 

5.5 - 6.1

 

 

5.4 - 6.6

 

 

5.4 - 6.5

 

Volatility

 

41.4 - 43.5%

 

 

42.7 - 42.8%

 

 

41.4 - 43.5%

 

 

44.4 - 46.0%

 

Risk free interest rate

 

2.1 - 2.5%

 

 

2.2 - 2.3%

 

 

1.9 - 2.5%

 

 

1.3 - 2.3%

 

Dividend yield

 

 

—%

 

 

 

—%

 

 

 

—%

 

 

 

—%

 

 

In July 2017, we granted options to certain members of our executive management team to purchase an aggregate of 1,097,463 shares of Class B common stock which had both a service-based condition and a liquidity event-related performance condition. Such options vest ratably over the 24-month period following the fourth anniversary of the grant date, subject to an IPO occurring within 12 months of the grant date and the option holder’s continuous service through each vesting date. The aggregate grant-date fair value of such option awards was $14.0 million.

Since an IPO is not deemed probable until such event occurs, no compensation cost related to the performance condition was recognized prior to the consummation of our IPO in November 2017. Subsequently, we recorded stock based compensation expense of $0.5 million related to periods prior to the IPO.

8.Income Taxes

The following table summarizes our effective tax rate from income for the periods presented (in thousands):

 

 

 

For the Three Months Ended

 

 

For the Six Months Ended

 

 

 

January 27, 2018

 

 

January 28, 2017

 

 

January 27, 2018

 

 

January 28, 2017

 

Income before income taxes

 

$

17,244

 

 

$

(253

)

 

$

35,876

 

 

$

24,779

 

Provisions for income taxes

 

 

13,603

 

 

 

(486

)

 

 

18,747

 

 

 

11,303

 

Effective tax rate

 

 

78.9

%

 

 

192.1

%

 

 

52.3

%

 

 

45.6

%

 

On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (“Tax Act”), which significantly changed U.S. tax law. The Tax Act contains several key tax provisions including the reduction of the corporate income tax rate from 35% to 21%, as well as a variety of other changes including the acceleration of expensing of certain business assets and reductions in the amount of executive pay that could qualify as a tax deduction.  The Federal statutory tax rate reduction is effective January 1, 2018. The Company has a fiscal year end which subjects us to transitional tax rate rules.  In the three months ended January 27, 2018, we revised our estimated annual effective rate and applied a blended U.S. statutory rate of 26.96% due to the tax rate reduction.  Additionally, income tax expense for the three and six months ended January 28, 2017 was adjusted to reflect the discrete effects of the Tax Act and resulted in an increase in income tax expense of $4.7 million, related to the remeasurement of existing deferred tax balances.  This discrete impact was considered a provisional amount under the U.S. Securities and Exchange Commission Staff Accounting Bulletin No. 118.  

The Company remeasured the deferred tax balances based on the tax rates at which they are expected to reverse in the future. The Company will continue to refine provisional balances and adjustments may be made under SAB 118 during the measurement period as a result of future changes in interpretation, information available, assumptions made by the Company and/or issuance of additional guidance.

We continue to monitor the progress of ongoing discussions with tax authorities and the impact, if any, of the expected expiration of the statute of limitations in various taxing jurisdictions.

9.

Earnings (Loss) Per Share Attributable to Common Stockholders  

Basic and diluted net income per share attributable to common stockholders is presented in conformity with the two-class method required for participating securities. We consider convertible preferred stock and early exercised share options to be participating securities. In connection with the IPO, we established two classes of authorized common stock: Class A common stock and Class B common stock. As a result, all then-outstanding shares of common stock were converted into shares of Class B common stock. The rights of the holders of Class A and Class B common stock are identical, except with respect to voting, conversion and transfer rights. Each

12

 


 

share of Class A common stock is entitled to one vote per share and each share of Class B common stock is entitled to ten votes per share. Each share of Class B common stock is convertible at any time at the option of the stockholder into one share of Class A common stock.

Undistributed earnings allocated to participating securities are subtracted from net income in determining net income attributable to common stockholders. Basic net income per share attributable to common stockholders is computed by dividing the net income attributable to common stockholders by the weighted-average number of common shares outstanding during the period. All participating securities are excluded from basic weighted-average common shares outstanding.

For the calculation of diluted earnings per share (“EPS”), net income attributable to common stockholders for basic EPS is adjusted by the effect of dilutive securities. Diluted net income per share attributable to common stockholders is computed by dividing the net income attributable to common stockholders by the weighted-average number of common shares outstanding, including all potentially dilutive common shares. The undistributed earnings are allocated based on the contractual participation rights of the Class A and Class B common shares as if the earnings for the year have been distributed. As the liquidation and dividend rights are identical, the undistributed earnings are allocated on a proportionate basis. The computation of the diluted net income per share of Class A common stock assumes the conversion of Class B common stock, while diluted net income 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.

A reconciliation of the numerator and denominator used in the calculation of the basic and diluted EPS attributable to common stockholders is as follows (in thousands except share and per share amounts):

 

 

 

For the Three Months Ended

 

 

For the Six Months Ended

 

 

 

January 27, 2018

 

 

January 28, 2017

 

 

January 27, 2018

 

 

January 28, 2017

 

 

 

Class A

 

 

Class B

 

 

Class B

 

 

Class A

 

 

Class B

 

 

Class B

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

312

 

 

$

3,329

 

 

$

233

 

 

$

1,114

 

 

$

16,015

 

 

$

13,476

 

Less: noncumulative dividends to preferred stockholders

 

 

(11

)

 

 

(122

)

 

 

(233

)

 

 

(50

)

 

 

(718

)

 

 

(1,270

)

Less: undistributed earnings to participating securities

 

 

(41

)

 

 

(431

)

 

 

 

 

 

(427

)

 

 

(6,140

)

 

 

(8,701

)

Net income attributable to common stockholders - basic

 

 

260

 

 

 

2,776

 

 

 

 

 

 

637

 

 

 

9,157

 

 

 

3,505

 

Less: change in fair value of preferred stock warrant liability

   (net of tax)

 

 

(1,614

)

 

 

(1,614

)

 

 

 

 

 

(10,685

)

 

 

(10,685

)

 

 

 

Add: adjustments to undistributed earnings to participating securities

 

 

231

 

 

 

211

 

 

 

 

 

 

4,421

 

 

 

4,133

 

 

 

443

 

Reallocation of undistributed earnings as a result of conversion of Class B to Class A shares

 

 

2,776

 

 

 

 

 

 

 

 

 

9,157

 

 

 

 

 

 

 

Reallocation of undistributed earnings to Class B shares

 

 

 

 

 

147

 

 

 

 

 

 

 

 

 

719

 

 

 

 

Net income attributable to common stockholders - diluted

 

 

1,653

 

 

 

1,520

 

 

 

 

 

 

3,530

 

 

 

3,324

 

 

 

3,948

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares of common stock - basic

 

 

7,075,605

 

 

 

75,363,746

 

 

 

24,742,682

 

 

 

3,537,803

 

 

 

50,839,664

 

 

 

24,546,556

 

Conversion of Class B to Class A common shares outstanding

 

 

75,363,746