| Summary of significant accounting policies | Summary of significant accounting policies Basis of presentation and fiscal year end change During December 2018, the board of directors approved a change in fiscal year end from December 31 st to March 31 st . Accordingly, this document reflects the Company's fiscal year ended March 31, 2021, covering the period April 1, 2020 through March 31, 2021. All references to the periods ended March 31, 2021, March 31, 2020 and December 31, 2018 relate to the years ended March 31, 2021, March 31, 2020 and December 31, 2018, respectively. All references to the period ended March 2019 relate to the three-month transition period ended March 31, 2019. The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and all intercompany balances and transactions have been eliminated in consolidation. Use of estimates The preparation of financial statements in conformity with U.S. GAAP requires management 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. Cash and cash equivalents Cash and cash equivalents include all cash balances and highly liquid investments purchased with maturities of three months or less. Accounts receivable Trade receivables consist of uncollateralized, non-interest bearing customer obligations from transactions with retail customers, reduced by an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make payments. The allowance is based on the evaluation and aging of past due balances, specific exposures, historical trends and economic conditions. The Company maintains allowances for doubtful accounts for uncollectible accounts receivable. Management estimates anticipated losses from doubtful accounts based on days past due, collection history and the financial health of customers. The Company writes off accounts receivable against the allowance when a balance is determined to be uncollectible. Recoveries of receivables previously written off are recorded when received. The Company recorded an allowance for doubtful accounts of $0.2 million and $1.0 million as of March 31, 2021 and March 31, 2020, respectively. The Company recorded a reserve for sales adjustments of $11.9 million and $7.6 million as of March 31, 2021 and March 31, 2020, respectively, which is also presented as a reduction to accounts receivable. The Company grants credit terms in the normal course of business to its customers. Trade credit is extended based upon an evaluation of each customer’s ability to perform its payment obligations. Concentrations of credit risk Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash and cash equivalents including money market funds. Although the Company deposits its cash with creditworthy financial institutions, its deposits, at times, may exceed federally insured limits. To date, the Company has not experienced any losses on its cash deposits. The Company performs credit evaluations of its customers, and the risk with respect to trade receivables is further mitigated by the short duration of customer payment terms and the pedigree of the customer base. During the years ended March 31, 2021, March 31, 2020, December 31, 2018 and the three-month transition period ended March 31, 2019, two customers individually accounted for greater than 10% of the Company’s net sales as disclosed below: Year ended March 31, Three months ended March 31, Year ended 2021 2020 2019 2018 Walmart 26 % 31 % 36 % 30 % Target 22 % 22 % 17 % 21 % Customers that individually accounted for greater than 10% of the Company’s accounts receivable at the end of the periods as of March 31, 2021 and March 31, 2020, respectively, are as presented : March 31, 2021 March 31, 2020 Walmart 33 % 20 % Target 17 % 22 % Ulta Beauty 11 % * * Customer comprised less than 10% accounts receivable in the periods. Inventory Inventory, consisting principally of finished goods, is stated at the lower of cost or market. Cost is principally determined by the first-in, first-out method. The Company also records a reserve for excess and obsolete inventory, which represents the excess of the cost of the inventory over its estimated market value. This reserve is based upon an assessment of historical trends, current market conditions and forecasted product demand. The Company recorded an adjustment for excess and obsolete inventory, which is presented as a reduction to inventory of $3.6 million and $1.4 million as of March 31, 2021 and March 31, 2020, respectively. Property and equipment and other assets Property and equipment is stated at cost and is depreciated on a straight-line basis over the estimated useful lives of the assets. Leasehold improvements are amortized on a straight-line basis over the shorter of the lease term or the useful lives of the assets. Repairs and maintenance expenditures are expensed as incurred. Useful lives by major asset class are as follows: Estimated Machinery, equipment and software 3 - 5 years Leasehold improvements 5 years Furniture and fixtures 2 - 5 years Store fixtures 1 - 3 years As of March 31, 2021 and March 31, 2020, included in other assets are retail product displays, net, of $9.7 million and $10.1 million, respectively, that are generally amortized over a period of three years. Amortization expense for retail product displays was $5.2 million, $6.0 million, $3.1 million and $1.5 million for the years ended March 31, 2021, March 31, 2020, December 31, 2018 and the three-month transition period ended March 31, 2019, respectively. The Company evaluates events and changes in circumstances that could indicate carrying amounts of long-lived assets, including property and equipment, may not be recoverable. When such events or changes in circumstances occur, the Company assesses the recoverability of long-lived assets by determining whether or not the carrying value of such assets will be recovered through undiscounted future cash flows derived from their use and eventual disposition. For purposes of this assessment, long-lived assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. The Company’s long-lived assets are grouped on an entity-wide basis. This is due, in part, to the integrated nature of the Company’s various distribution channels and the extent of shared costs across those channels. If the sum of the undiscounted future cash flows is less than the carrying amount of an asset, the Company records an impairment loss for the amount by which the carrying amount of the assets exceeds its fair value. There were no impairment charges recorded on long-lived assets during the years ended March 31, 2021, March 31, 2020, December 31, 2018 or the three-month transition period ended March 31, 2019, respectively. Goodwill and intangible assets Goodwill represents the excess of the purchase price for an acquisition over the fair value of the net assets acquired. In addition, the Company has acquired finite-lived intangible assets and an indefinite-lived intangible asset. Goodwill is not amortized but rather is reviewed annually for impairment, at the reporting unit level, or when there is evidence that events or changes in circumstances indicate that the Company’s carrying amount may not be recovered. When testing goodwill for impairment, the Company first performs an assessment of qualitative factors. If qualitative factors indicate that it is more likely than not that the fair value of the relevant reporting unit is less than its carrying amount, the Company tests goodwill for impairment at the reporting unit level using a two-step approach. In step one, the Company determines if the fair value of the reporting unit exceeds the unit’s carrying value. If step one indicates that the fair value of the reporting unit is less than its carrying value, the Company performs step two, determining the fair value of goodwill and, if the carrying value of goodwill exceeds its implied fair value, an impairment charge is recorded. The Company has identified a single reporting unit for purposes of impairment testing due, in part, to the integrated nature of the Company’s various distribution channels and the extent of shared costs across those channels. Indefinite-lived intangible assets are not amortized but rather are tested for impairment annually, and impairment is recognized if the carrying amount exceeds the fair value of the intangible asset. The Company evaluates its indefinite-lived intangible asset to determine whether current events and circumstances continue to support an indefinite useful life. Amortization of intangible assets with finite useful lives is computed on a straight-line basis over periods of 3 years to 10 years. The determination of the estimated period of benefit is dependent upon the use and underlying characteristics of the intangible asset. The Company evaluates the recoverability of its intangible assets subject to amortization when facts and circumstances indicate that the carrying value of the asset may not be recoverable. If the carrying value of an intangible asset is not recoverable, impairment loss is measured as the amount by which the carrying value exceeds its estimated fair value. 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 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 our 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. Debt issuance costs Debt issuance costs and lender fees were incurred for arranging the credit facilities from various financial institutions. For credit facilities consisting of both term and revolving debt, such costs are allocated to each sub-facility based upon the total borrowing capacity. For term debt, issuance costs are presented within the related long-term debt liability on the consolidated balance sheet and lender fees are presented as a direct deduction from the carrying amount. Both debt issuance costs and lender fees are amortized over the term of the related debt using the effective interest rate method. For revolving debt, issuance costs and lender fees are presented as a noncurrent asset and amortized over the term of the related debt on a straight-line basis. Fair value of financial instruments The carrying amounts of cash and cash equivalents, accounts receivable, and accounts payable and accrued expenses approximate their fair values due to the short-term nature of these items. The carrying amounts of bank debt approximate their fair values as the stated interest rates approximate market rates currently available to the Company for loans with similar terms. See Note 9 Fair value of financial instruments to consolidated financial statements in Part IV, Item 15 “Exhibits, financial statement schedules”. 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. During the years ended March 31, 2021, March 31, 2020, December 31, 2018 and the three-month transition period ended March 31, 2019, net sales in the United States and outside of the United States were as follows (in thousands): Year ended March 31, Three months ended March 31, Year ended 2021 2020 2019 2018 United States $ 284,203 $ 255,284 $ 59,797 $ 241,159 International 33,907 27,567 6,344 26,276 Total net sales $ 318,110 $ 282,851 $ 66,141 $ 267,435 As of March 31, 2021 and March 31, 2020, the Company had property and equipment in the United States and outside of the United States as follows (in thousands) : March 31, 2021 March 31, 2020 United States $ 13,524 $ 16,845 International 246 326 Total property and equipment, net $ 13,770 $ 17,171 Revenue recognition Revenue is recognized when control of promised goods or services is transferred to a customer in an amount that reflects the consideration that the Company expects to receive in exchange for those goods or services. For the Company's retail customer transactions, a contract exists when a written purchase order is received, and control transfers at the time of shipment or the time of delivery, depending upon the specific terms of the customer arrangement. For the Company's direct-to-consumer transactions, a contract exists when an order is placed online, and control transfers at the time of delivery of merchandise to the customer. Nearly all of the Company’s transactions with its customers include a single performance obligation delivered at a point in time. The transaction price can include both fixed and variable consideration. In most cases, it is entirely comprised of variable consideration with the variability driven by expected sales discounts, markdown support, and other incentives and allowances offered to customers. These incentives may be explicit or implied by the Company's historical business practices. Generally, these commitments represent cash consideration paid to a customer and do not constitute a promised good or service. The amount of variable consideration is estimated at the time of sale based on either the expected amount or the most likely amount, depending on the nature of the variability. The Company regularly reviews and revises, when deemed necessary, its estimates of variable consideration, based on both customer-specific expectations as well as historical rates of realization. A provision for customer incentives and allowances is included on the consolidated balance sheet, net against accounts receivable. Disaggregated revenue The Company distributes product both through national and international retailers as well as direct-to-consumers through its e-commerce and e.l.f. stores channels (prior to February 2019). The marketing and consumer engagement benefits that the direct channels provide 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. See Segment Reporting section above for the table providing 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. Contract assets and liabilities The Company extends credit to retail customers based upon an evaluation of their credit quality. The majority of retail customers obtain payment terms between 30-60 days, and a contract asset is recognized for the related accounts receivable. Additionally, shipping terms can vary, giving rise to contract liabilities for contracts where payment has been received in advance of delivery. The contract liability balance can vary significantly depending on the timing of when an order is placed and when shipment or delivery occurs. As of March 31, 2021, other than accounts receivable, the Company had no material contract assets, contract liabilities or deferred contract costs recorded on its consolidated balance sheet. Practical expedients The Company elected to record revenue net of taxes collected from customers and exclude the amounts from the transaction price. The Company includes in revenue any taxes assessed on the Company's total gross receipts for which it has the primary responsibility to pay the tax. The Company elected not to disclose revenues related to remaining performance obligations for partially completed or unfulfilled contracts that are expected to be fulfilled within one year as such amounts were insignificant. A reconciliation of the beginning and ending amounts of the reserve for sales adjustments for the years ended March 31, 2021, March 31, 2020, December 31, 2018 and the three-month transition period ended March 31, 2019 is as follows (in thousands): Balance as of December 31, 2017 $ 8,458 Charges 26,971 Deductions (27,655) Balance as of December 31, 2018 7,774 Charges 6,787 Deductions (8,016) Balance as of March 31, 2019 6,545 Charges 29,576 Deductions (28,508) Balance as of March 31, 2020 7,613 Charges 41,027 Deductions (36,727) Balance as of March 31, 2021 $ 11,913 In the years ended March 31, 2021, March 31, 2020, December 31, 2018 and the three-month transition period ended March 31, 2019, the Company recorded $0.8 million, $0.7 million, $0.5 million and $0.2 million, respectively, of reimbursed shipping expenses from customers within revenues. The shipping and handling costs associated with product distribution were $26.4 million, $19.8 million, $20.9 million and $4.9 million, in the years ended March 31, 2021, March 31, 2020, December 31, 2018 and the three-month transition period ended March 31, 2019, respectively, and are included in selling, general and administrative expenses in the consolidated statements of operations. Income taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. Future income tax benefits are recognized to the extent that realization of such benefits is more likely than not. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in its income tax provision. Leases The Company has entered into operating lease agreements for office space, warehouse and a retail store location, equipment and software. Lease assets and liabilities are recognized at the present value of the minimum rental payments (excluding executory costs) and expected payment under any residual value guarantee at the lease commencement date. The Company uses its incremental borrowing rate to determine the present value of lease payments. Non-lease components primarily include payments for maintenance and utilities. The Company accounts for the non-lease components in a contract (e.g., common area maintenance) as part of the lease component by electing practical expedient for all leases of commercial office and warehouse space, as the non-lease components are not a significant portion of the total consideration in those agreements. The Company's lease terms include periods under options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Operating lease assets and liabilities are included on the Company's consolidated balance sheet beginning January 1, 2019. The current portion of the Company's operating lease liabilities is included in accrued expenses and other current liabilities, and the long-term portion is included in long-term operating lease liabilities. Finance lease assets are included in other assets. Finance lease liabilities are included in long-term debt and finance lease obligations. Operating lease expense is recognized on a straight-line basis over the lease term. Foreign currency The functional currency of the Company’s foreign subsidiaries is the U.S. dollar. Transactions denominated in currencies other than the functional currency are recorded at exchange rates in effect on the date of the transaction. At the end of each reporting period, monetary assets and liabilities are remeasured to the functional currency using exchange rates in effect at the balance sheet date. Non-monetary assets and liabilities are remeasured at historical exchange rates. Transaction gains or losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in other income (expense), net in the consolidated statements of operations. Stock-based compensation Stock-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized on a straight-line basis over the requisite service period, which is generally the award’s vesting period. The Company estimates the fair value of employee stock-based payment awards subject to only a service condition on the date of grant using the Black-Scholes valuation model. The Black-Scholes model requires the use of highly subjective and complex assumptions, including the option’s expected term and the price volatility of the underlying stock. The Company estimates the fair value of employee stock-based payment awards subject to market conditions using a Monte Carlo simulation model. Compensation expense for employee stock-based awards whose vesting is subject to the fulfillment of both a market condition and the occurrence of a performance condition is recognized on a graded-vesting basis at the time the achievement of the performance condition becomes probable. Forfeitures are recognized and accounted for as they occur. Advertising costs Advertising costs, including promotions and print, are expensed as incurred or distributed. Advertising costs are included in selling, general, and administrative expenses in the accompanying consolidated statements of operations and amounted to approximately $30.3 million, $26.0 million, $10.2 million and $2.6 million in the years ended March 31, 2021, March 31, 2020, December 31, 2018 and the three-month transition period ended March 31, 2019, respectively. Net income (loss) per share Basic net income (loss) per share is computed using net income (loss) available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share reflects the dilutive effects of stock options and restricted stock outstanding during the period, to the extent such securities would not be anti-dilutive and is determined using the treasury stock method. Recent accounting pronouncements The following table provides a brief description of recent accounting pronouncements that could have a material effect on the Company’s financial statements: Recently adopted accounting standards Standard Description Date of expected adoption/adoption Effect on the financial statements or other significant matters ASU 2018-15, Intangibles-Goodwill and Other- Internal-Use Software (Subtopic 350-40) The standard will require customers in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in ASC 350-40 to determine which implementation costs to capitalize as assets or expense as incurred. Certain implementation costs incurred during the application development stage would be deferred and capitalized (e.g., costs of integration with on-premises software, coding, configuration, customization). Other costs incurred during the preliminary project and post-implementation stages would be expensed (e.g., planning the project, training, maintenance after implementation, data conversion). The amendments in the ASU can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. April 1, 2020 The Company adopted ASU 2018-15 prospectively, and the adoption of the standard did not have a material impact on the Company’s consolidated financial statements. ASU 2019-12—Income Taxes (TOPIC 740): Simplifying the Accounting for Income Taxes The guidance eliminates certain exceptions related to intraperiod tax allocations, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences related to changes in ownership of equity method investments and foreign subsidiaries. The guidance also simplifies aspects of accounting for franchise taxes and enacted changes in tax laws, and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The new standard is effective for interim and annual periods beginning after December 15, 2020, and early adoption is permitted. January 1, 2021 The adoption of the standard had no impact on the Company’s consolidated financial statements. |
