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As filed with the Securities and Exchange Commission on September 12, 2016.

Registration No. 333-213333

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

AMENDMENT NO. 1

TO

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

e.l.f. Beauty, Inc.

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware   2844   46-4464131

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

570 10 th Street

Oakland, CA 94607

(510) 778-7787

 

 

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

 

 

Tarang P. Amin

Chairman and Chief Executive Officer

e.l.f. Beauty, Inc.

570 10 th Street

Oakland, CA 94607

(510) 778-7787

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

 

 

Copies to:

 

Tad J. Freese, Esq.

Kathleen M. Wells, Esq.

Latham & Watkins LLP

140 Scott Drive

Menlo Park, CA 94025

Telephone: (650) 328-4600

Facsimile: (650) 463-2600

 

Thomas Holden, Esq.

Ropes & Gray LLP

Three Embarcadero Center

San Francisco, CA 94111

Telephone: (415) 315-6300

Facsimile: (415) 315-6350

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

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

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.   ¨

 

Large accelerated filer      ¨      Accelerated filer      ¨
Non-accelerated filer      x   (Do not check if a smaller reporting company)    Smaller reporting company      ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

 

Amount to be

Registered(1)

 

Proposed

Maximum

Offering Price

per Share

 

Proposed

Maximum

Aggregate

Offering Price(2)

  Amount of
Registration Fee(3)

Common Stock, $ 0.01 par value per share

  9,583,333   $ 16.00   $ 153,333,328.00   $ 15,440.67

 

 

(1)   Includes 1,250,000 shares that the underwriters have the option to purchase to cover overallotments, if any.
(2)   Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(a) under the Securities Act of 1933, as amended.
(3)   The Registrant previously paid $ 10,070.00 in connection with a prior filing of this Registration Statement on August 26, 2016.

 

 

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


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

 

Subject to completion, dated September 12, 2016

Preliminary prospectus

 

LOGO

e.l.f. Beauty, Inc.

8,333,333 Shares

This is an initial public offering of common stock of e.l.f. Beauty, Inc. The selling stockholders are selling 4,333,333 shares of common stock, and we are selling 4,000,000 shares of our common stock in this offering. We will not receive any proceeds from the sale of shares by the selling stockholders. The estimated initial public offering price is between $ 14.00 and $ 16.00 per share. Currently, no public market exists for the shares.

We have been approved to list our common stock on the New York Stock Exchange under the symbol “ELF.”

We are an “emerging growth company” as defined by the Jumpstart Our Business Startups Act of 2012, and we have elected to comply with certain reduced public company reporting requirements for this prospectus and future filings.

 

        Per share        Total  

Initial public offering price

     $                      $                

Underwriting discounts and commissions(1)

     $           $     

Proceeds to us, before expenses

     $           $     

Proceeds to selling stockholders, before expenses

     $           $     

 

 

 

(1)   See “Underwriting” for additional information regarding underwriting compensation.

The underwriters may also purchase up to an additional 1,250,000 shares from the selling stockholders, at the initial public offering price, less the underwriting discount for 30 days from the date of this prospectus.

Investing in our common stock involves a high degree of risk. See “ Risk factors ” beginning on page 12.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares to purchasers on or about                     , 2016.

 

J.P. Morgan   Morgan Stanley

 

Piper Jaffray   Wells Fargo Securities

 

William Blair   Cowen and Company   BMO Capital Markets   Stifel   SunTrust Robinson Humphrey

The date of this prospectus is                     , 2016


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LOGO


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LOGO

HIGH QUALITY COSMETICS
at an extraordinary value
e.l.f.


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LOGO

Ability to engage YOUNG, DIVERSE MAKEUP ENTHUSIASTS
@glambyzana @makeupwithjojo @lorenaurrea_makeup @beautybylex_19 @ashleyvera @stylewidsus @>courtney_laoexo @bellabriellc @melissajoy1987 @khirascottbouch @dardynraemura @kmkmakeup @blushandberries @alexiistherese @_tenaquin @readysetglamour @makemeupzo @yooyuliya


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LOGO

e.l.f.
Our Mission
We make luxurious beauty accessible for all women to play beautifully®.


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LOGO


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Table of contents

 

     Page  

Industry and market data

     ii   

Prospectus summary

     1   

The offering

     7   

Summary consolidated financial data

     9   

Risk factors

     12   

Special note regarding forward-looking statements

     39   

Trademarks, trade names and service marks

     40   

Use of proceeds

     41   

Dividend policy

     42   

Capitalization

     43   

Dilution

     44   

Unaudited pro forma condensed financial information

     46   

Selected consolidated financial data

     53   

Management’s discussion and analysis of financial condition and results of operations

     56   

Business

     71   

Management

     92   

Executive compensation

     99   

Certain relationships and related party transactions

     113   

Principal and selling stockholders

     116   

Description of capital stock

     119   

Description of certain indebtedness

     124   

Shares eligible for future sale

     128   

Material U.S. federal income tax consequences to non-U.S. holders

     130   

Underwriting

     133   

Legal matters

     137   

Experts

     137   

Where you can find additional information

     137   

Index to financial statements

     F-1   

You should rely only on the information contained in this prospectus or in any free writing prospectus we may authorize to be delivered or made available to you. Neither we, the selling stockholders nor the underwriters have authorized anyone to provide you with different information. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus, or any free writing prospectus, as the case may be, or any sale of shares of our common stock.

Through and including                 , 2016 (the 25th day after the date of this prospectus), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

For investors outside the United States: e.l.f. Beauty, Inc. (the “Company”), the selling stockholders and the underwriters are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. Neither we, the selling stockholders nor the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of common stock and the distribution of this prospectus outside the United States.

Numerical figures included in this prospectus have been subject to rounding adjustments. Accordingly, numerical figures shown as totals in various tables may not be arithmetic aggregations of the figures that precede them.

 

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Industry and market data

Certain of the market data and other statistical information contained in this prospectus, such as the size, growth and share of the cosmetics industry and its constituent market segments, are based on information from independent industry organizations and other third-party sources, industry publications, surveys and forecasts. Some market data and statistical information contained in this prospectus are also based on management’s estimates and calculations, which are derived from our review and interpretation of the independent sources, our internal market and brand research and our knowledge of the cosmetics industry. Information that is based on estimates, forecasts, projections or similar methodologies is inherently subject to uncertainties, and actual events or circumstances may differ materially from events and circumstances that are assumed in this information.

References to e.l.f.’s share of the U.S. mass cosmetics market and top 10 U.S. cosmetics brands and the size and growth rates of the global and U.S. cosmetics category, segment, product and channel and skin care categories refer to retail sales in absolute dollar terms as tracked by Euromonitor International Limited’s Beauty and Personal Care 2016 edition system, published in March 2016 as part of its annual multi-client Passport research program, which includes food, drug and mass (“FDM”), department stores, direct and specialty channels; data reflects current prices and 2015 exchange rates fixed by Euromonitor. References to our retail sales from products launched in the last three years refer to U.S. retail sales across categories as tracked by Nielsen’s XAOC, including C-store database for the 52 weeks ended January 2, 2016 and prior years downloaded in April 2016, which includes the FDM channel. Other statements in this prospectus regarding market data, unless otherwise noted, are based on studies conducted by Calimesa Consulting Partners, LLC and MetrixLab, which we commissioned. These studies were based on surveys of a broad sampling of cosmetics consumers.

For the purposes of this prospectus:

 

  “aided awareness” is a measure of the number of people who express knowledge of a brand or product when prompted;

 

  “cosmetics” market segment refers to the market segment defined as Color Cosmetics by Euromonitor International Limited and consists of face makeup, eye makeup, lip products, nail products and color cosmetics sets/kits;

 

  “e-commerce” channel refers to the channel defined as Internet Retailing by Euromonitor International Limited; and FDM and specialty channels are per Company definitions based on Euromonitor International Limited data;

 

  “heaviest” purchasers or users refers to consumers who identified themselves as professional, expert or enthusiast in the study conducted by MetrixLab;

 

  “incremental sales” refer to consumers buying e.l.f. products as additional cosmetics purchases at retail stores as opposed to diverting sales from another brand;

 

  “prestige” market segment refers to the market segment defined as Premium by Euromonitor International Limited;

 

  “retail sales” refers to the purchase price paid by the end consumer;

 

  “share” refers to e.l.f.’s market share based on e.l.f.’s net sales in comparison to retail sales in absolute dollar terms; and

 

  “unaided awareness” is a measure of the number of people who express knowledge of a brand or product without prompting.

 

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Prospectus summary

This summary highlights selected information contained elsewhere in this prospectus. This summary does not contain all the information that you should consider before deciding to invest in our common stock. You should read the entire prospectus carefully, including “Risk factors” and our consolidated financial statements and related notes included elsewhere in this prospectus, before making an investment decision. In this prospectus, the terms “e.l.f.,” “we,” “us,” “our” and the “Company” refer to e.l.f. Beauty, Inc. and its consolidated subsidiaries.

e.l.f.: Changing the face of beauty

We are one of the fastest growing, most innovative cosmetics companies in the United States. Driven by our mission to make luxurious beauty accessible for all women to play beautifully ® , we have challenged the traditional belief that quality cosmetics are only available at high prices in select channels. e.l.f. offers high-quality, prestige-inspired beauty products for e yes, l ips and f ace at extraordinary value, with the majority of our items retailing for $ 6 or less. Our price points encourage trial and experimentation, while our commitment to quality and a differentiated consumer engagement model engender loyalty among a passionate and vocal group of consumers. We have built an authentic brand and a company with strong growth, margins and cash flow from operations.

We believe our success is rooted in our innovation process and ability to build direct consumer relationships. Born as an e-commerce company over a decade ago, we have created a modern consumer engagement and responsive innovation model that keeps our products on-trend and our consumers engaged as brand ambassadors. Our consumers provide us with real-time feedback through reviews and social media, which enables us to refine and augment our product portfolio in response to their needs. We leverage our fast-cycle product development and asset-light supply chain to launch high-quality products in as few as 20 weeks from concept, and 27 weeks on average. Our products are first launched on elfcosmetics.com, and distribution is generally only broadened to our retail customers after we receive strong consumer validation online. We believe this has led to our consistently strong retail sales per linear foot of shelf space, which we refer to as “productivity.” We are one of the fastest growing cosmetics brands at Target, Walmart and CVS.

Our brand appeals to some of the most sought after consumers in the category. We believe the combination of our affordable price points and on-trend, innovative product assortment encourages trial, offers a strong value proposition and appeals to a broad base of consumers. Relative to the overall cosmetics category, our brand over-indexes with Millennials, multi-cultural consumers and some of the heaviest users in the category. This attractive and loyal consumer base supports high sales per linear foot and higher category sales for our retail customers. By combining our strong relationships with leading retailers with integrated consumer engagement across our e.l.f. stores, e-commerce and social media, we are a true multi-channel brand.

Our net sales growth in the United States over the last three years was 20 times that of the mass cosmetics category on average. Our net sales still only represented 2.3% of the $ 8 billion U.S. mass cosmetics category in 2015. Our net sales grew from $ 144.9 million in the Unaudited Pro Forma Combined 2014 Period (as defined in “Management’s discussion and analysis of financial condition and results of operations”) to $ 191.4 million in the year ended December 31, 2015, and, over the same period, our Adjusted EBITDA grew from $ 28.1 million to $ 46.2 million, representing an increase of 32% and 64%, respectively. Over the same period, net income grew from an unaudited pro forma combined net loss of $ 2.9 million to a net profit of $ 4.4 million. In 2015, our Adjusted EBITDA margin was 24% and our net income margin was 2%. 1

 

LOGO

 

1     Adjusted EBITDA and Adjusted EBITDA margin are not measurements of financial performance under generally accepted accounting principles in the United States (“GAAP”). See “Summary consolidated financial data” for a discussion of Adjusted EBITDA, Adjusted EBITDA margin and their respective limitations and reconciliations to GAAP measures.

 

 

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The cosmetics industry is large and attractive

We believe that the cosmetics category is highly attractive given its scale, growth dynamics and consumer demand trends. The U.S. and global cosmetics markets generated $ 14 billion and $ 57 billion, respectively, of retail sales in 2015. The cosmetics category primarily consists of face makeup, eye makeup, lip products, nail products and cosmetics sets/kits and excludes beauty tools and accessories such as brushes and applicators. The cosmetics category has experienced strong growth both in the United States and globally. In the United States, retail sales increased from $ 11 billion in 2010 to $ 14 billion in 2015, representing a compound annual growth rate (“CAGR”) of 5% with each product category driving growth. Globally, retail sales increased from $ 43 billion in 2010 to $ 57 billion in 2015, representing a CAGR of 5%. Drivers of growth include innovation and new product launches, which span from new formulations that enhance performance, feel and fragrance, to new colors, delivery forms and packaging.

In the United States, the cosmetics category traditionally has been separated into two discrete segments—prestige and mass. Prestige products, which accounted for 42% of U.S. cosmetics retail sales in 2015, are characterized by higher price points and are typically sold in department stores and in high-end specialty stores such as Sephora. They have historically been at the forefront of quality and innovation in the category but remain too expensive for many consumers in the United States, where the average disposable personal income is less than $ 15,000. Mass products, which generated 58% of 2015 U.S. cosmetics retail sales, are more affordable than their prestige counterparts but generally have not delivered the same level of quality or innovation. They are more broadly available than prestige products given their presence in the food, drug and mass (“FDM”) channel. As observed in recent years, consumers are increasingly purchasing both prestige and mass cosmetics products, and consistent with many other consumer categories, are purchasing online. e-commerce accounted for 10% of U.S. cosmetics retail sales in 2015 and grew at three times the rate of the broader category from 2010 to 2015.

We believe that a paradigm shift has occurred in cosmetics: today’s cosmetics consumer is increasingly connected and informed, and purchasing decisions are often influenced by friends, beauty bloggers, social media and other online content. These sources provide consumers easy access to a breadth and depth of information formerly only available from beauty experts in assisted sales environments.

While most women regularly use cosmetics, the heaviest purchasers drive the category. These consumers represent 36% of cosmetics purchasers, yet accounted for 54% of U.S. cosmetics sales in 2014. For these women, cosmetics is a passion. They enjoy learning about and trying new products, and shopping for and wearing makeup. The entire experience is fun and an integral part of their lifestyle. We seek to fulfill their needs by delighting them with the quality and innovation they desire at prices they can afford.

Our strategic differentiation: how e.l.f. helps women to play beautifully

We are driven by what today’s consumer wants—an assortment of high-quality, prestige-inspired cosmetics at extraordinary value. We do not define ourselves as strictly mass or prestige, or limit our product availability to select channels. Through our modern consumer engagement and responsive innovation model, we interact with our consumers instead of broadcasting at them. This allows us to stay in tune with their needs and build trust and loyalty. Our business model has multiple areas of competitive advantage:

Authentic brand that attracts some of the best consumers in the category.     e.l.f. was founded to fill the gap between high-priced prestige beauty products and less innovative mass products. For over a decade, we have prioritized getting to know our consumers, and they in turn have provided us with valuable feedback, enabling us to address this gap and build e.l.f. into an authentic and trusted brand. By providing a comprehensive experience—from integrated engagement online, through social media and in our stores to our differentiated product offerings—we have drawn a strong following among the most sought after and heaviest users of cosmetic products. We also have strong appeal with Millennials and Hispanics, two of the fastest growing demographic groups in the United States. Our consumers have also been our best advocates, growing the e.l.f. brand virally through strong word of mouth.

High-quality cosmetics at an extraordinary value enabled by flexible, asset-light operations.     e.l.f. consumers recognize our ability to provide a broad assortment of high-quality products at an extraordinary value. The majority of our items retail for $ 6 or less, providing a low-risk way for consumers to try new products. Examples of our high-quality and extraordinary value innovations include e.l.f. Mineral Infused Face Primer at $ 6 versus a prestige primer at $ 36, e.l.f. Baked Eyeshadow Trio at $ 4 versus a competitive baked eyeshadow trio at $ 28 and e.l.f. Lip Exfoliator at $ 3 versus a similar type of lip

 

 

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treatment at $ 24. Our low price points are supported by our ability to source low cost, high-quality cosmetics quickly. As of August 2016, we had 48 e.l.f. professionals involved in sourcing, quality and innovation. We have longtime relationships with strategic vendors that pair a strong quality orientation with the ability to execute rapidly. Our supply chain is built for growth with asset-light operations, ample capacity and low capital requirements. This capability and commitment to an agile supply chain allows us to introduce a stream of on-trend innovation. Our consumers’ love of our high-quality, innovative products is shown through the online reviews posted on elfcosmetics.com, where 66% of 2015 reviews were five stars, the highest rating.

Fast-cycle innovation and validation model.     We believe innovation is key to our success and that we are a leader in the industry in speed and new product introductions. We have built an innovation capability that can progress a new, high-quality e.l.f. product to online launch in as few as 20 weeks from concept, and 27 weeks on average. In 2015, we introduced over 50 new items across eyes, lips, face, tools, kits and skin care, and 40% of our retail sales came from products launched in the last three years (based on data from Nielsen). With 25 million visits per year and over 100,000 online reviews, elfcosmetics.com is a vehicle for refining products and determining best sellers. We are able to analyze sales results, reviews and feedback through social media to provide a quick indication of a product’s performance. Not only does this fast, high-output, testing methodology result in leading performance in retail, it also contributes to building our consumer relationships. We believe our active dialogue with our consumers provides us with a highly differentiated perspective on innovation and informs the continuous launch, validation and refinement of our products.

True multi-channel brand blurs the lines between mass and prestige.     We are a true multi-channel brand with strength across e-commerce, national retailers and our e.l.f. stores. Our ability to engage our consumers across multiple touch points differentiates e.l.f. from traditional mass brands, which typically focus on one channel. We also leverage insights gained from each channel to drive performance across the business.

 

  e-commerce .     elfcosmetics.com has the highest revenue, traffic, time spent on-site and units per transaction of any mass cosmetics brand website based on data from the Internet Retailer eCommerce 500 report and Alexa Internet Inc. Our e-commerce business serves as a strong source of sales and an important component of our engagement and innovation model. We have nurtured a loyal, highly active online community for over a decade.

 

  National retailers .     We currently sell our products in approximately 19,000 retail stores in the United States across mass, drug store, food and specialty retail channels. At Target, our longest-standing national retail customer and a key beauty destination for many consumers, we achieved double digit growth in retail sales from 2014 to 2015. We have also continued to expand with Walmart, the world’s largest retailer and an e.l.f. customer since 2012. We introduced e.l.f. at Old Navy in 2014 and at CVS in 2015 and expect to continue to grow distribution due to our compelling retailer value proposition.

 

  e.l.f. stores.     We were the first mass cosmetics brand with our own stores, which we believe serve as one of our most effective and efficient vehicles for marketing and consumer engagement. e.l.f. stores showcase a broad assortment of e.l.f. products, create an environment dedicated to play beautifully , and allow us to test and validate new products. As of August 2016, we had nine e.l.f. stores in the New York metro area located in high-traffic malls and urban areas.

High-performance team and culture.     Our CEO Tarang Amin joined us in January 2014, and under his leadership we have assembled a world-class management team that possesses an excellent track record of results and has successfully worked together for many years. During the team’s prior tenure at Schiff Nutrition International, Inc. (New York Stock Exchange: SHF) (“Schiff Nutrition”), the company grew in enterprise value from $ 190 million to $ 1.5 billion in less than two years and was acquired by Reckitt Benckiser (London Stock Exchange: RB). With strong backgrounds from The Clorox Company, The Procter & Gamble Company, L’Oreal S.A., Mary Kay Inc., TPG Global, LLC (together with its affiliates, “TPG”) and other leading companies, our team has demonstrated skills in building brands, leading innovation, expanding distribution, making acquisitions and driving world-class operations. We operate with a high-performance team culture. We communicate with great candor and transparency in the spirit of helping the team succeed, make quick decisions and drive executional excellence. The combination of a talented team, strong culture and values and disciplined execution forms the foundation of our success.

 

 

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The e.l.f. growth strategy

We believe e.l.f. is one of the most disruptive brands in the cosmetics industry. We are in the early stages of development, with significant room to grow by converting more consumers to the brand, making e.l.f. products more widely available and offering more innovative products to our consumers. We expect the United States to be the largest source of our growth over the next few years and also see an opportunity to expand in select international markets. We also believe we have an opportunity to improve our margins through greater operating leverage and efficiency.

We have made substantial investments over the last two years and believe we are well positioned for continued growth driven by four strategies.

 

1.   Build a great brand

Draw new consumers to the brand.     We have a loyal consumer following, as illustrated by our repeat purchase rates which are among the highest in the industry: 58% of our consumers purchase one or more additional products within 12 months of initial purchase. We believe we can significantly grow this following of passionate consumers from current levels. Increasing brand awareness is a major growth driver for our company, as it has historically led to strong trial and high repeat purchase rates. e.l.f. is still unknown to many women, with only 6% unaided and 58% aided awareness as of August 2015. In contrast, many traditional brands have unaided awareness close to 40% and aided awareness close to 100%. We plan to continue to drive awareness and draw consumers to the brand.

Encourage current consumers to use more e.l.f. products.     Our consumers’ loyalty to the e.l.f. brand drives growth through increased usage of our products across categories and advocacy of our brand to other potential consumers. Many of our consumers regularly visit elfcosmetics.com, where in 2015 they bought over nine units per transaction on average. We have designed our product assortment to encourage cross-category purchases across eyes, lips, face, tools and skin care. We find that consumers often enter the brand through one of our lower priced items and then purchase other e.l.f. products across categories once they understand our extraordinary value proposition. Our consumers also seek out our innovation, buying new products both online and in stores. We believe that through sustained innovation and efficient marketing, we will increase the number of e.l.f. items our consumers purchase.

 

2.   Lead innovation

Use innovation to drive sales and margin .    We have a track record of bringing prestige-inspired innovation quickly to the mass channel. We expect to continue to leverage our rapid innovation and flexible supply chain to introduce new products across the eyes, lips, face and tools categories. We believe our innovation has also led consumers to purchase products at higher price points while still delivering an extraordinary value. Many consumers who first tried a $ 1 item have now migrated to $ 3 to $ 8 items, which often have higher margins than our less expensive products.

Expand into skin care and relevant adjacencies .    We have successfully brought a prestige-like approach to mass cosmetics at extraordinary value. We believe there are opportunities to use this same approach in other beauty categories, leveraging our brand equity and relationship with e.l.f. enthusiasts to extend our brand into adjacent segments. One such category is skin care, which generated $ 16 billion in retail sales in the United States and $ 110 billion globally in 2015. We recently introduced a high-quality skin care line retailing for just $ 4 to $ 12 per product, a fraction of the price of prestige brands. We plan to capitalize on our innovation expertise to develop new products in other adjacent categories.

 

3.   Expand brand penetration

Grow space allocation with our existing national retailers.     We have significant potential upside in deepening distribution with our existing retailers by continuing to leverage our productivity, innovation and growth to win more shelf space. Even at our largest customers, e.l.f. is currently in less than 6% of the space allocated to cosmetics despite having among the highest productivity in the category. While certain legacy cosmetics brands have an average of 15 to 18 feet of inline space in major retailers, e.l.f.’s average is only five feet. We believe that our strong performance will enable our shelf presence in our current retailers to become larger over time.

Increase number of new customers.     We are one of the fastest growing cosmetics brands at Target, Walmart and CVS, and our growth rates and productivity are among the highest in the industry. We have major distribution whitespace, as

 

 

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we are currently in only approximately 19,000 national retail stores in the United States and believe there are thousands of additional stores available to us.

Grow our direct-to-consumer business.     We plan to grow elfcosmetics.com by driving traffic and conversion. In addition, our e.l.f. stores have been highly productive and profitable. As of August 2016, we operated nine stores in the New York metro area and we plan to selectively open more e.l.f. stores nationally in high-traffic areas.

Expand internationally.     We operate in a number of countries outside the United States, which accounted for 7% of our net sales in 2015. Given the portability of the e.l.f. brand, we believe that we have a significant opportunity in international markets over the long term.

 

4.   Drive world-class operations

Leverage high-performance team culture and execution capability .    We have made significant investments in our business over the past two years by hiring top talent and building functional capabilities. Our management team comes from leading consumer packaged goods companies and has experience implementing growth strategies and driving operational improvements. We believe what differentiates us from many traditional cosmetics companies is our ability to make fast decisions and execute with excellence. We believe we have a major speed-to-market advantage over many other companies and are highly responsive to retail customer and consumer needs. We will continue to leverage our executional excellence as we seek to become the preferred partner of our key customers.

Drive operating margins and efficiencies .    We have built a low-cost, quality-oriented supply chain with ample capacity to support future growth. We intend to grow our margins by pursuing additional cost savings opportunities and enhancing our product mix through innovation. We also expect to benefit from operating leverage as we scale the business.

Risks associated with our business

Investing in our stock involves a high degree of risk. You should carefully consider the risks described in “Risk factors” before making a decision to invest in our common stock. If any of these risks actually occurs, our business, financial condition and results of operations would likely be materially adversely affected. In such case, the trading price of our common stock would likely decline and you may lose part or all of your investment. Below is a summary of some of the principal risks we face:

 

  The cosmetics industry is highly competitive, and if we are unable to compete effectively our results will suffer.

 

  Our new product introductions may not be as successful as we anticipate.

 

  We depend on a limited number of retailers for a large portion of our net sales, and the loss of one or more of these retailers, or business challenges at one or more of these retailers, could adversely affect our results of operations.

 

  Our success depends, in part, on the quality, performance and safety of our products.

 

  We may not be able to successfully implement our growth strategy.

 

  Our growth and profitability are dependent on trends that may change or not continue, and our historical growth may not be indicative of our future growth.

 

  We may be unable to manage our growth effectively, which would harm our business, financial condition and results of operations.

 

  Any damage to our reputation or brand may materially and adversely affect our business, financial condition and results of operations.

 

  A disruption in our operations could materially and adversely affect our business.

 

  We are dependent on third-party suppliers, manufacturers, distributors and other vendors.

 

  We may not be able to adequately protect intellectual property and other proprietary rights in our products and may be subject to claims that we infringe or misappropriate the rights of others.

 

 

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  We have significant operations in China, which exposes us to risks inherent in doing business there.

 

  We will not be required to comply with certain provisions of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) for as long as we remain an “emerging growth company.”

Implications of being an emerging growth company

We qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). As a result, we are permitted to, and intend to, rely on exemptions from certain disclosure requirements that are applicable to other companies that are not emerging growth companies. Accordingly, we have included compensation information for only our four most highly compensated executive officers and have not included a compensation discussion and analysis of our executive compensation programs in this prospectus. In addition, for so long as we are an emerging growth company, we will not be required to:

 

  engage an independent registered public accounting firm to report on our internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act;

 

  comply with any requirement that may be adopted by the Public Company Accounting Oversight Board (the “PCAOB”) regarding mandatory audit firm rotation or a supplement to the independent registered public accounting firm’s report providing additional information about the audit and the financial statements (i.e., an auditor discussion and analysis);

 

  submit certain executive compensation matters to stockholder advisory votes, such as “say-on-pay,” “say-on-frequency” and “say-on-golden parachutes;” or

 

  disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of the chief executive officer’s compensation to median employee compensation.

We will remain an emerging growth company until the earliest to occur of:

 

  our reporting of $ 1.0 billion or more in annual gross revenue;

 

  our issuance, in any three-year period, of more than $ 1.0 billion in non-convertible debt;

 

  our becoming a “large accelerated filer;” and

 

  the end of fiscal 2021.

The JOBS Act permits an emerging growth company such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We are choosing to “opt out” of this provision, and, as a result, we will comply with new or revised accounting standards as required when they are adopted. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.

Our sponsor

TPG Growth II Management, LLC (“TPG Growth” or our “Sponsor”) has been our principal financial backer since its acquisition of the Company in January 2014. TPG Growth is the middle market and growth equity investment platform of TPG, a leading global private investment firm founded in 1992 with approximately $ 73 billion of assets under management as of June 30, 2016. With more than $ 7 billion in assets under management and committed capital, TPG Growth targets investments in a broad range of industries and geographies, with a significant focus on the United States and large, emerging markets such as China, India, Brazil, Turkey, Africa and Southeast Asia.

Our corporate information

We were incorporated in Delaware on December 20, 2013 under the name J.A. Cosmetics Holdings, Inc. In April 2016, we changed our name to e.l.f. Beauty, Inc. Our principal offices are located at 570 10 th Street, Oakland, California 94607. Our telephone number is (510) 778-7787. We maintain a website at www.elfcosmetics.com. The reference to our website is intended to be an inactive textual reference only. The information contained on, or that can be accessed through, our website is not part of this prospectus.

 

 

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The offering

 

Issuer

e.l.f. Beauty, Inc.

 

Common stock offered by us

4,000,000 shares.

 

Common stock offered by the selling stockholders

4,333,333 shares.

 

Common stock to be outstanding after this offering

44,379,833 shares.

 

Underwriters’ option to purchase additional shares

1,250,000 shares.

 

Use of proceeds

We estimate that the net proceeds from the sale of shares of common stock in this offering by us will be approximately $ 52.3 million at an assumed initial public offering price of $ 15.00 per share (the mid-point of the price range set forth on the cover page of this prospectus), after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

 

  We currently expect to use the net proceeds from the sale of shares of common stock in this offering by us to repay existing indebtedness and any proceeds remaining thereafter will be used for working capital and general corporate purposes. See “Use of proceeds” on page 41 for a more complete description of the intended use of proceeds from this offering. We will not receive any of the proceeds from the sale of shares by the selling stockholders.

 

Directed share program

At our request, the underwriters have reserved up to 5% of the shares of common stock offered by this prospectus for sale, at the initial public offering price, to our directors, officers and other individuals associated with them, and our employees, to the extent permitted by local securities laws and regulations. The sales will be made at our direction by Morgan Stanley & Co. LLC, an underwriter of this offering, and its affiliates through a directed share program. We do not know if these persons will choose to purchase all or any portion of these reserved shares, but any purchases they do make will reduce the number of shares available to the general public. Any reserved shares not so purchased will be offered by the underwriters to the general public on the same terms as the other shares of common stock offered by this prospectus. Any shares sold in the directed share program to our directors, executive officers or stockholders who have entered into lock-up agreements described in “Underwriting” shall be subject to the provisions of such lock-up agreements. Other participants in the directed share program shall be subject to substantially similar lock-up provisions with respect to any shares sold to them pursuant to the directed share program.

 

Risk factors

Investing in shares of our common stock involves a high degree of risk. See “Risk factors” beginning on page 12 of this prospectus for a discussion of factors you should carefully consider before investing in shares of our common stock.

 

Trading symbol

“ELF.”

In this prospectus, the number of shares of our common stock to be outstanding after this offering is based on the number of shares of our common stock outstanding as of June 30, 2016, and excludes:

 

  4,796,225 shares of common stock issuable upon exercise of stock options outstanding as of June 30, 2016 under our 2014 Equity Incentive Plan (the “2014 Equity Plan”) at a weighted average exercise price of $ 2.01 per share (as adjusted for the special dividend declared on June 7, 2016 as described under “Dividend policy”);

 

 

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  1,583,466 shares of common stock reserved as of June 30, 2016 for future issuance under our 2014 Equity Plan;

 

  5,430,690 shares of common stock reserved for issuance pursuant to future awards under our 2016 Equity Incentive Award Plan (the “2016 Plan”), from which we will grant 596,217 restricted stock units in the aggregate and options to purchase an aggregate of 1,250,517 shares of our common stock with an exercise price per share equal to the initial public offering price to certain officers, employees and directors upon the pricing of this offering, as well as any automatic increases in the number of shares of our common stock reserved for future issuance under this plan, which will become effective immediately prior to the effectiveness of the registration statement of which this prospectus forms a part;

 

  905,115 shares of common stock reserved for issuance pursuant to future awards under our 2016 Employee Stock Purchase Plan (the “ESPP”), as well as any automatic increases in the number of shares of our common stock reserved for future issuance under this plan, which will become effective immediately prior to the effectiveness of the registration statement of which this prospectus forms a part; and

 

  220,800 shares of common stock reserved for issuance pursuant to the settlement of phantom shares issued pursuant to our 2014 Phantom Equity Plan (as amended, the “Phantom Plan”) in shares of our common stock.

Unless otherwise indicated, this prospectus reflects and assumes:

 

  the conversion of all of our outstanding shares of convertible preferred stock as of June 30, 2016 into an aggregate of 37,271,375 shares of common stock immediately prior to the consummation of this offering;

 

  the filing of our amended and restated certificate of incorporation and the adoption of our amended and restated bylaws, which will occur immediately prior to the consummation of this offering;

 

  no exercise by the underwriters of their over-allotment option to purchase additional shares of common stock;

 

  a 2.76:1 forward stock split of our common stock to be effected prior to the effectiveness of the registration statement of which this prospectus forms a part; and

 

  no exercise of outstanding options after June 30, 2016.

 

 

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Summary consolidated financial data

The following table presents our summary consolidated financial data for the periods and as of the dates indicated. The periods prior to and including January 31, 2014 include all of the accounts of e.l.f. Cosmetics, Inc. (formerly known as J.A. Cosmetics US, Inc.) and its subsidiaries and are referred to in the following table as “Predecessor,” and all periods after January 31, 2014 include all of the accounts of e.l.f. Beauty, Inc. and its subsidiaries and are referred to in the following table as “Successor.” The summary consolidated financial data as of December 31, 2014 and 2015, and for the period from January 1, 2014 through January 31, 2014, the period from February 1, 2014 through December 31, 2014 and the year ended December 31, 2015, has been derived from the audited consolidated financial statements included elsewhere in this prospectus. The summary consolidated financial data as of June 30, 2016, and for the six months ended June 30, 2015 and 2016, has been derived from the unaudited condensed consolidated financial statements included elsewhere in this prospectus. Our unaudited condensed consolidated financial statements were prepared on a basis consistent with our audited consolidated financial statements and include, in management’s opinion, all normal recurring adjustments necessary for fair presentation of the financial information set forth in those statements. The summary consolidated financial data for the years ended December 31, 2012 and 2013 have been derived from the Predecessor’s audited consolidated financial statements which are not included in this prospectus and is presented in order to provide a reconciliation from net income to Adjusted EBITDA for these periods.

You should read the following financial information together with the information under “Capitalization,” “Selected consolidated financial data” and “Management’s discussion and analysis of financial condition and results of operations” and our consolidated financial statements and the related notes included elsewhere in this prospectus.

 

     Predecessor     Successor     Unaudited
pro forma
combined(1)
    Successor  
(dollars in thousands, except share
and per share amounts)
  Period from
January 1,
2014
through
January 31,
2014
    Period from
February 1,
2014
through
December 31,
2014
    Year ended
December 31,
2014
    Year ended
December 31,
2015
    Six
months
ended
June 30,
2015
    Six
months
ended
June 30,
2016
 
 

Statement of operations data:

             

Net sales

  $ 9,810      $ 135,134      $ 144,944      $ 191,413      $ 75,194      $ 96,820   

Gross profit

    4,772        61,450        67,496        100,329        39,298        54,437   

Operating income

    1,727        5,347        16,119        25,571        8,130        6,633   

Other income (expense), net

    36        (6,633     (6,597     (4,172     3,254        1,964   

Interest expense

    (128     (11,545     (12,546     (12,721     (6,281     (6,396

Income (loss) before provision for income taxes

    1,635        (12,831     (3,024     8,678        5,103        2,201   

(Provision) benefit for income taxes

    (542     3,545        143        (4,321     (2,425     (1,112

Net income (loss)

  $ 1,093      $ (9,286   $ (2,881   $ 4,357      $ 2,678      $ 1,089   

Net income (loss) per share—basic

  $ 1,093      $ (709   $ (512   $ (1,560   $ (116   $ (200

Net income (loss) per share—diluted

  $ 1,088      $ (709   $ (512   $ (1,560   $ (116   $ (200

Weighted average number of shares outstanding—basic

    1,000        27,593        27,593        30,523        27,593        651,268   

Weighted average number of shares outstanding—diluted

    1,005        27,593        27,593        30,523        27,593        651,268   
 

Other data:

             

EBITDA(2)

    1,804        6,658        18,190        31,688        15,980        14,827   

Adjusted EBITDA(2)

    2,087        26,013        28,100        46,178        16,300        19,964   

Adjusted EBITDA margin

    21.3%        19.2%        19.4%        24.1%        21.7%        20.6%   

Depreciation and amortization

    41        7,944        8,668        10,289        4,595        6,230   

Capital expenditures

    19        1,597        1,616        10,242        3,649        2,910   

 

 

 

(1)   For the purpose of performing a comparison to the Successor’s year ended December 31, 2015, we have prepared Unaudited Pro Forma Combined Supplemental Financial Information for the year ended December 31, 2014, which gives effect to the acquisition of 100% of the outstanding shares of capital stock of the Predecessor by the Successor, as if it had occurred on January 1, 2014 (the “Unaudited Pro Forma Combined 2014 Period”). The Unaudited Pro Forma Combined 2014 Period is being discussed herein for informational purposes only and does not reflect any operating efficiencies or potential cost savings that may result from the consolidation of operations. The amounts in the Predecessor and Successor columns do not total to the amounts in the unaudited pro forma combined column due to the adjustments made in preparing the Unaudited Pro Forma Combined 2014 Period, which are described in “Management’s discussion and analysis of financial conditions and results of operations—Recent transactions and basis of presentation.”

 

 

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(2)   EBITDA represents net income (loss) plus interest expense, provision (benefit) for income taxes and depreciation and amortization. Adjusted EBITDA represents EBITDA further adjusted to exclude the impact of other items that management does not believe are reflective of the Company’s ongoing operations (comprising transaction-related expenses incurred in connection with the acquisition of the Predecessor, the restructuring of our operations, including warehouse transition and reorganization of our operations in China, and the preparation for our initial public offering), stock-based compensation expense, management fees paid to our Sponsor, costs associated with e.l.f. stores incurred prior to the store opening (including legal-related costs, rent and occupancy expenses, marketing and other store operating supply expenses), costs associated with securing additional distribution space (including slotting expense, freight and certain costs related to installation of fixtures), costs related to the evaluation of an acquisition in 2014, certain non-cash losses and write-offs, and gains and losses on our foreign currency contracts as reflected in the reconciliation below.

We present EBITDA and Adjusted EBITDA because our management uses these as supplemental measures in assessing our operating performance, and we believe they are helpful to investors, securities analysts and other interested parties in evaluating the performance of companies in our industry. We also believe EBITDA and Adjusted EBITDA are useful to management and investors, securities analysts and other interested parties as measures of our comparative operating performance from period to period. EBITDA and Adjusted EBITDA are not measurements of financial performance under GAAP. They should not be considered as alternatives to cash flow from operating activities, as measures of liquidity, or as alternatives to net income as a measure of our operating performance or any other measures of performance derived in accordance with GAAP. In addition, EBITDA and Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. EBITDA and Adjusted EBITDA have limitations as analytical tools, and you should not consider such measures either in isolation or as substitutes for analyzing our results as reported under GAAP. Our definitions and calculations of EBITDA and Adjusted EBITDA are not necessarily comparable to other similarly titled measures used by other companies due to different methods of calculation.

The following table provides a reconciliation of EBITDA and Adjusted EBITDA to net income (loss):

 

     Predecessor            Successor     Unaudited
pro forma
combined
    Successor  
(dollars in thousands)   Year ended
December 31,
2012
    Year ended
December 31,
2013
    Period from
January 1,
2014
through
January 31,
2014
           Period from
February 1,
2014
through
December 31,
2014
    Year ended
December 31,
2014
    Year ended
December 31,
2015
    Six
months
ended
June 30,
2015
    Six
months
ended
June 30,
2016
 

Net income (loss)

  $ 9,897      $ 16,555      $ 1,093          $ (9,286   $ (2,881   $ 4,357      $ 2,678      $ 1,089   

Interest expense

    610        1,637        128            11,545        12,546        12,721        6,281        6,396   

Provision (benefit) for income taxes

    6,275        9,211        542            (3,545     (143     4,321        2,425        1,112   

Depreciation and amortization

    395        538        41            7,944        8,668        10,289        4,595        6,230   
 

 

 

       

 

 

 

EBITDA

  $ 17,177      $ 27,941      $ 1,804          $ 6,658      $ 18,190      $ 31,688      $ 15,980      $ 14,827   

Transaction-related expenses(a)

           194        63            9,759        94        705        579          

Cost related to “restructuring” of operations(b)

                             370        370        1,595        420        3,844   

Initial public offering preparation costs

                                           1,144        318        395   

Stock-based compensation

           26                   287        287        503        197        1,155   

Management fee(c)

    233        250                   775        775        854        350        475   

Pre-opening costs(d)

           118        15            180        195        64        59        229   

Customer expansion costs(e)

                                           1,191        879        350   

Other miscellaneous items(f)

                             1,104        1,104        530                 

Unrealized losses (gains) on foreign currency contracts(g)

                  205            6,880        7,085        7,904        (2,482     (1,311
 

 

 

       

 

 

 

Adjusted EBITDA

  $ 17,410      $ 28,529      $ 2,087          $ 26,013      $ 28,100      $ 46,178      $ 16,300      $ 19,964   
                                                                         

 

  (a)   Represents transaction-related expenses related to the acquisition of the Predecessor.

 

  (b)   Represents costs associated with the restructuring of our operations, including warehouse transition and reorganization of our operations in China.

 

  (c)   Represents management fees paid to our Sponsor.

 

  (d)   Represents costs associated with e.l.f. stores incurred prior to the store opening, including legal-related costs, rent and occupancy expenses, marketing and other store operating supply expenses.

 

 

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  (e)   Represents costs associated with securing additional distribution space, including slotting expense, freight and certain costs related to installation of fixtures.

 

  (f)   Represents costs related to evaluation of an acquisition in 2014 as well as other non-cash losses and write-offs.

 

  (g)   Represents non-cash (gains) / losses on our foreign currency contracts.

 

      Successor  
     As of December 31,     As of June 30,  
(dollars in thousands)    2014     2015     2016  

Balance sheet data:

      

Cash and cash equivalents

   $ 4,668      $ 14,004      $ 3,763   

Net working capital(3)

     23,218        10,860        16,007   

Property and equipment, net

     2,125        9,854        14,281   

Total assets

     354,178        361,072        358,989   

Total bank debt, including current maturities(4)

     148,424        144,919        203,657   

Total liabilities

     222,656        224,175        295,389   

Convertible preferred stock

     145,328        197,295        262,385   

Total stockholders’ deficit

     (13,806     (60,398     (198,785

 

 

 

(3)   Net working capital is defined as current assets, excluding cash and cash equivalents, minus current liabilities.

 

(4)   Total bank debt, including current maturities, is net of $ 4.3 million, $ 3.2 million and $ 2.7 million of debt issuance costs as of December 31, 2014, December 31, 2015 and June 30, 2016, respectively.

 

 

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Risk factors

Investing in our common stock involves a high degree of risk. You should carefully consider each of the following risk factors, as well as the other information in this prospectus, including our consolidated financial statements and the related notes, before deciding whether to invest in shares of our common stock. If any of the following risks actually occurs, our business, results of operations and financial condition may be materially and adversely affected. In that event, the trading price of our common stock could decline and you could lose all or part of your investment. Please also see the “Special note regarding forward-looking statements.”

Risks related to our business

The cosmetics industry is highly competitive, and if we are unable to compete effectively our results will suffer.

We face vigorous competition from companies throughout the world, including large multinational consumer products companies that have many cosmetics brands under ownership and standalone cosmetics brands, including those that may target the latest trends or specific distribution channels. Competition in the cosmetics industry is based on the introduction of new products, pricing of products, quality of products and packaging, brand awareness, perceived value and quality, innovation, in-store presence and visibility, promotional activities, advertising, editorials, e-commerce and mobile-commerce initiatives and other activities. We must compete with a high volume of new product introductions and existing products by diverse companies across several different distribution channels.

Many multinational consumer companies have greater financial, technical or marketing resources, longer operating histories, greater brand recognition or larger customer bases than we do and may be able to respond more effectively to changing business and economic conditions than we can. Many of these competitors’ products are sold in a wider selection or greater number of retail stores and possess a larger presence in these stores, typically having significantly more inline shelf space than we do. Given the finite space allocated to cosmetic products by retail stores, our ability to grow the number of retail stores in which our products are sold, and expand our space allocation once in these retail stores, may require the removal or reduction of the shelf space of these competitors. We may be unsuccessful in our growth strategy in the event retailers do not reallocate shelf space from our competitors to us. Our competitors may attempt to gain market share by offering products at prices at or below the prices at which our products are typically offered, including through the use of large percentage discounts and “buy one and get one free” offers. Competitive pricing may require us to reduce our prices, which would decrease our profitability or result in lost sales. Our competitors, many of whom have greater resources than we do, may be better able to withstand these price reductions and lost sales.

It is difficult for us to predict the timing and scale of our competitors’ activities in these areas or whether new competitors will emerge in the cosmetics business. In addition, further technological breakthroughs, including new and enhanced technologies which increase competition in the online retail market, new product offerings by competitors and the strength and success of our competitors’ marketing programs may impede our growth and the implementation of our business strategy.

Our ability to compete also depends on the continued strength of our brand and products, the success of our marketing, innovation and execution strategies, the continued diversity of our product offerings, the successful management of new product introductions and innovations, strong operational execution, including in order fulfillment, and our success in entering new markets and expanding our business in existing geographies. If we are unable to continue to compete effectively, it could have a material adverse effect on our business, results of operations and financial condition.

Our new product introductions may not be as successful as we anticipate.

The cosmetics industry is driven in part by fashion and beauty trends, which may shift quickly. Our continued success depends on our ability to anticipate, gauge and react in a timely and cost-effective manner to changes in consumer preferences for cosmetic products, consumer attitudes toward our industry and brand and where and how consumers shop for those products. We must continually work to develop, produce and market new products, maintain and enhance the recognition of our brand, maintain a favorable mix of products and develop our approach as to how and where we market and sell our products.

We have an established process for the development, evaluation and validation of our new product concepts. Nonetheless, each new product launch online, through our e.l.f. stores and through our retail customers involves risks, as well as the possibility of unexpected consequences. For example, the acceptance of new product launches and sales to our retail

 

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customers may not be as high as we anticipate, due to lack of acceptance of the products themselves or their price, or limited effectiveness of our marketing strategies. In addition, our ability to launch new products may be limited by delays or difficulties affecting the ability of our suppliers or manufacturers to timely manufacture, distribute and ship new products or displays for new products. Sales of new products may be affected by inventory management by our retail customers, and we may experience product shortages or limitations in retail display space by our retail customers. We may also experience a decrease in sales of certain existing products as a result of newly-launched products, the impact of which could be exacerbated by shelf space limitations or any shelf space loss. Any of these occurrences could delay or impede our ability to achieve our sales objectives, which could have a material adverse effect on our business, financial condition and results of operations.

As part of our ongoing business strategy we expect we will need to continue to introduce new products in our traditional product categories of eyes, lips, face and tools, while also expanding our product launches into adjacent categories in which we may have little to no operating experience. For example, we recently introduced a high-quality skin care assortment. The success of product launches in adjacent product categories could be hampered by our relative inexperience operating in such categories, the strength of our competitors or any of the other risks referred to above. Furthermore, any expansion into new product categories may prove to be an operational and financial constraint which inhibits our ability to successfully accomplish such expansion. Our inability to introduce successful products in our traditional categories or in adjacent categories could limit our future growth and have a material adverse effect on our business, financial condition and results of operations.

We depend on a limited number of retailers for a large portion of our net sales, and the loss of one or more of these retailers, or business challenges at one or more of these retailers, could adversely affect our results of operations.

A limited number of our retail customers account for a large percentage of our net sales. Target and Walmart accounted for 28% and 23%, respectively, of our net sales in 2015. We expect Target, Walmart and a small number of other retailers will, in the aggregate, continue to account for the majority of our net sales for foreseeable future periods. Any changes in the policies or our ability to meet the demands of our retail customers relating to service levels, inventory de-stocking, pricing and promotional strategies or limitations on access to display space could have a material adverse effect on our business, financial condition and results of operations.

As is typical in our industry, our business with retailers is based primarily upon discrete sales orders, and we do not have contracts requiring retailers to make firm purchases from us. Accordingly, retailers, including Target and Walmart, could reduce their purchasing levels or cease buying products from us at any time and for any reason. If we lose a significant retail customer or if sales of our products to a significant retailer materially decrease, it could have a material adverse effect on our business, financial condition and results of operations.

Because such a high percentage of our sales are made through our retail customers, our results are subject to risks relating to the general business performance of our key retail customers. Factors that adversely affect our retail customers’ businesses may also have a material adverse effect on our business, financial condition and results of operations. These factors may include:

 

  any reduction in consumer traffic and demand at our retail customers as a result of economic downturns, changes in consumer preferences or reputational damage as a result of, among other developments, data privacy breaches, regulatory investigations or employee misconduct;

 

  any credit risks associated with the financial condition of our retail customers;

 

  the effect of consolidation or weakness in the retail industry or at certain retail customers, including store closures and the resulting uncertainty; and

 

  inventory reduction initiatives and other factors affecting retail customer buying patterns, including any reduction in retail space committed to cosmetics and retailer practices used to control inventory shrinkage.

Our success depends, in part, on the quality, performance and safety of our products.

Any loss of confidence on the part of consumers in the ingredients used in our products, whether related to product contamination or product safety or quality failures, actual or perceived, or inclusion of prohibited ingredients, could tarnish the image of our brand and could cause consumers to choose other products. Allegations of contamination or other adverse

 

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effects on product safety or suitability for use by a particular consumer, even if untrue, may require us to expend significant time and resources responding to such allegations and could, from time to time, result in a recall of a product from any or all of the markets in which the affected product was distributed. Any such issues or recalls could negatively affect our profitability and brand image.

If our products are found to be, or perceived to be, defective or unsafe, or if they otherwise fail to meet our consumers’ expectations, our relationships with consumers could suffer, the appeal of our brand could be diminished, we may need to recall some of our products and/or become subject to regulatory action, and we could lose sales or market share or become subject to boycotts or liability claims. In addition, safety or other defects in our competitors’ products could reduce consumer demand for our own products if consumers view them to be similar. Any of these outcomes could result in a material adverse effect on our business, financial condition and results of operations.

We may not be able to successfully implement our growth strategy.

Our future growth, profitability and cash flows depend upon our ability to successfully implement our business strategy, which, in turn, is dependent upon a number of factors, including our ability to:

 

  build a great brand by attracting new consumers and encouraging our current consumers to use more e.l.f. products;

 

  continue to use innovation to drive sales and margin and expand into relevant adjacencies;

 

  expand brand penetration by growing our space allocations with our existing national retail customers, increasing the number of our retail customers, growing our direct-to-consumer business and expanding internationally; and

 

  leverage our high-performance team culture and executional capability to drive operating margins and efficiencies.

There can be no assurance that we can successfully achieve any or all of the above initiatives in the manner or time period that we expect. Further, achieving these objectives will require investments which may result in short-term costs without generating any current net sales and therefore may be dilutive to our earnings. We cannot provide any assurance that we will realize, in full or in part, the anticipated benefits we expect our strategy will achieve. The failure to realize those benefits could have a material adverse effect on our business, financial condition and results of operations.

Our growth and profitability are dependent on a number of factors, and our historical growth may not be indicative of our future growth.

Although our net sales and profitability have grown rapidly from 2012 through 2015, this should not be considered as indicative of our future performance. We may not be successful in executing our growth strategy, and even if we achieve our strategic plan, we may not be able to sustain profitability. In future periods, our revenue could decline or grow more slowly than we expect. We also may incur significant losses in the future for a number of reasons, including the following risks and the other risks described in this prospectus, and we may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors:

 

  we may lose one or more significant retail customers, or sales of our products through these retail customers may decrease;

 

  the ability of our third-party suppliers and manufacturers to produce our products and of our distributors to distribute our products could be disrupted;

 

  because all of our products are sourced and manufactured in China, our operations are susceptible to risks inherent in doing business there;

 

  our products may be the subject of regulatory actions, including but not limited to actions by the Food and Drug Administration (the “FDA”), the Federal Trade Commission (the “FTC”) and the Consumer Product Safety Commission (the “CPSC”) in the United States;

 

  we may be unable to introduce new products that appeal to consumers or otherwise successfully compete with our competitors in the cosmetics industry;

 

  we may be unsuccessful in enhancing the recognition and reputation of our brand, and our brand may be damaged as a result of, among other reasons, our failure, or alleged failure, to comply with applicable ethical, social, product, labor or environmental standards;

 

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  we may experience service interruptions, data corruption, cyber-based attacks or network security breaches which result in the disruption of our operating systems or the loss of confidential information of our consumers;

 

  we may be unable to retain key members of our senior management team or attract and retain other qualified personnel; and

 

  we may be affected by any adverse economic conditions in the United States or internationally.

We may be unable to manage our growth effectively, which would harm our business, financial condition and results of operations.

We have grown rapidly, with our net sales increasing from $ 82.9 million in the year ended December 31, 2012 to $ 191.4 million in the year ended December 31, 2015. Our growth has placed, and will continue to place, a strain on our management team, financial and information systems, supply chain and distribution capacity and other resources. To manage growth effectively, we must continue to enhance our operational, financial and management systems, including our warehouse management, inventory control and in-store point-of-sale systems; maintain and improve our internal controls and disclosure controls and procedures; maintain and improve our information technology systems and procedures; and expand, train and manage our employee base.

We may not be able to effectively manage this expansion in any one or more of these areas, and any failure to do so could significantly harm our business, financial condition and results of operations. Our rapid growth also makes it difficult for us to adequately predict the expenditures we will need to make in the future. If we do not make the necessary overhead expenditures to accommodate our future growth, we may not be successful in executing our growth strategy, and our results of operations would suffer.

Any damage to our reputation or brand may materially and adversely affect our business, financial condition and results of operations.

We believe that developing and maintaining our brand is critical and that our financial success is directly dependent on consumer perception of our brand. Furthermore, the importance of our brand recognition may become even greater as competitors offer more products similar to ours.

We have relatively low brand awareness among consumers when compared to other cosmetic brands, and maintaining and enhancing the recognition and reputation of our brand is critical to our business and future growth. Many factors, some of which are beyond our control, are important to maintaining our reputation and brand. These factors include our ability to comply with ethical, social, product, labor and environmental standards. Any actual or perceived failure in compliance with such standards could damage our reputation and brand.

The growth of our brand depends largely on our ability to provide a high-quality consumer experience, which in turn depends on our ability to bring innovative products to the market at competitive prices that respond to consumer demands and preferences. Additional factors affecting our consumer experience include our ability to provide appealing store sets in retail stores, the maintenance and stocking of those sets by our retail customers, the overall shopping experience provided by our retail customers, a reliable and user-friendly website interface and mobile applications for our consumers to browse and purchase products on elfcosmetics.com and an engaging environment in our e.l.f. stores. If we are unable to preserve our reputation, enhance our brand recognition or increase positive awareness of our products and in-store and Internet platforms, it may be difficult for us to maintain and grow our consumer base, and our business, financial condition and results of operations may be materially and adversely affected.

The success of our brand may also suffer if our marketing plans or product initiatives do not have the desired impact on our brand’s image or its ability to attract consumers. Further, our brand value could diminish significantly due to a number of factors, including consumer perception that we have acted in an irresponsible manner, adverse publicity about our products, our failure to maintain the quality of our products, product contamination, the failure of our products to deliver consistently positive consumer experiences, or the products becoming unavailable to consumers.

A disruption in our operations could materially and adversely affect our business.

As a company engaged in distribution on a global scale, our operations, including those of our third-party manufacturers, suppliers and delivery service providers, are subject to the risks inherent in such activities, including industrial accidents, environmental events, strikes and other labor disputes, disruptions in information systems, product quality control, safety,

 

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licensing requirements and other regulatory issues, as well as natural disasters, pandemics, border disputes, acts of terrorism and other external factors over which we and our third-party manufacturers, suppliers and delivery service providers have no control. The loss of, or damage to, the manufacturing facilities or distribution centers of our third-party manufacturers, suppliers and delivery service providers could have a material adverse effect on our business, financial condition and results of operations.

We depend heavily on ocean container delivery to receive shipments of our products from our third-party manufactures located in China and contracted third-party delivery service providers to deliver our products to a single distribution facility located in Ontario, California, and from there to our retail customers. Further, we rely on postal and parcel carriers for the delivery of products sold directly to consumers through elfcosmetics.com. Interruptions to or failures in these delivery services could prevent the timely or successful delivery of our products. These interruptions or failures may be due to unforeseen events that are beyond our control or the control of our third-party delivery service providers, such as inclement weather, natural disasters or labor unrest. For example, in the fall of 2014, longshoreman work stoppages created a significant backlog of cargo containers at ports. We experienced delays in the shipment of our products as a result of this backlog and were unable to meet our planned inventory allocations for a limited period of time. As another example, in December 2015, a parcel carrier returned five pallets of holiday shipments to us based on their service backlog, causing significant delays in our holiday shipments. If our products are not delivered on time or are delivered in a damaged state, retail customers and consumers may refuse to accept our products and have less confidence in our services. Furthermore, the delivery personnel of contracted third-party delivery service providers act on our behalf and interact with our consumers personally. Any failure to provide high-quality delivery services to our consumers may negatively affect the shopping experience of our consumers, damage our reputation and cause us to lose consumers.

Our ability to meet the needs of our consumers, retail customers and our e.l.f. stores depends on the proper operation of our Ontario, California distribution facility, where most of our inventory that is not in transit is housed. Although we currently insure our inventory, our insurance coverage may not be sufficient to cover the full extent of any loss or damage to our inventory or distribution facility, and any loss, damage or disruption of this facility, or loss or damage of the inventory stored there, could materially and adversely affect our business, financial condition and results of operations.

We rely on third-party suppliers, manufacturers, distributors and other vendors, and they may not continue to produce products or provide services that are consistent with our standards or applicable regulatory requirements, which could harm our brand, cause consumer dissatisfaction, and require us to find alternative suppliers of our products or services.

We do not own or operate any manufacturing facilities. We use multiple third-party suppliers and manufacturers based in China to source and manufacture all of our products. We engage our third-party suppliers and manufacturers on a purchase order basis and are not party to long-term contracts with any of them. The ability of these third parties to supply and manufacture our products may be affected by competing orders placed by other customers and the demands of those customers. If we experience significant increases in demand, or need to replace a significant number of existing suppliers or manufacturers, there can be no assurance that additional supply and manufacturing capacity will be available when required on terms that are acceptable to us, or at all, or that any supplier or manufacturer will allocate sufficient capacity to us in order to meet our requirements.

In addition, quality control problems, such as the use of ingredients and delivery of products that do not meet our quality control standards and specifications or comply with applicable laws or regulations, could harm our business. These quality control problems could result in regulatory action, such as restrictions on importation, products of inferior quality or product stock outages or shortages, harming our sales and creating inventory write-downs for unusable products.

We have also outsourced significant portions of our distribution process, as well as certain technology-related functions, to third-party service providers. Specifically, we rely on third-party distributors to sell our products in a number of foreign countries, our sole distribution center in California is managed and staffed by a third-party service provider, we are dependent on a single third-party vendor for credit card processing and we utilize a third-party hosting and networking provider to host our web services, including elfcosmetics.com. The failure of one or more of these entities to provide the expected services on a timely basis, or at all, or at the prices we expect, or the costs and disruption incurred in changing these outsourced functions to being performed under our management and direct control or that of a third-party, may have a material adverse effect on our business, financial condition and results of operations. We are not party to long-term contracts with some of our distributors, and upon expiration of these existing agreements, we may not be able to renegotiate the terms on a commercially reasonable basis, or at all.

 

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Further, our third-party manufacturers, suppliers and distributors may:

 

  have economic or business interests or goals that are inconsistent with ours;

 

  take actions contrary to our instructions, requests, policies or objectives;

 

  be unable or unwilling to fulfill their obligations under relevant purchase orders, including obligations to meet our production deadlines, quality standards, pricing guidelines and product specifications, and to comply with applicable regulations, including those regarding the safety and quality of products and ingredients;

 

  have financial difficulties;

 

  encounter raw material or labor shortages;

 

  encounter increases in raw material or labor costs which may affect our procurement costs;

 

  disclose our confidential information or intellectual property to competitors or third parties;

 

  engage in activities or employ practices that may harm our reputation; and

 

  work with, be acquired by, or come under control of, our competitors.

The occurrence of any of these events, alone or together, could have a material adverse effect on our business, financial condition and results of operations. In addition, such problems may require us to find new third-party suppliers, manufacturers or distributors, and there can be no assurance that we would be successful in finding third-party suppliers, manufacturers or distributors meeting our standards of innovation and quality.

The management and oversight of the engagement and activities of our third-party suppliers, manufacturers and distributors requires substantial time, effort and expense of our employees, and we may be unable to successfully manage and oversee the activities of our third-party manufacturers, suppliers and distributors. If we experience any supply chain disruptions caused by our manufacturing process or by our inability to locate suitable third-party manufacturers or suppliers, or if our manufacturers or raw material suppliers experience problems with product quality or disruptions or delays in the manufacturing process or delivery of the finished products or the raw materials or components used to make such products, our business, financial condition and results of operations could be materially and adversely affected.

If we fail to manage our inventory effectively, our results of operations, financial condition and liquidity may be materially and adversely affected.

Our business requires us to manage a large volume of inventory effectively. We depend on our forecasts of demand for and popularity of various products to make purchase decisions and to manage our inventory of stock-keeping units (“SKUs”). Demand for products, however, can change significantly between the time inventory or components are ordered and the date of sale. Demand may be affected by seasonality, new product launches, rapid changes in product cycles and pricing, product defects, promotions, changes in consumer spending patterns, changes in consumer tastes with respect to our products and other factors, and our consumers may not purchase products in the quantities that we expect. It may be difficult to accurately forecast demand and determine appropriate levels of product or componentry. We generally do not have the right to return unsold products to our suppliers. If we fail to manage our inventory effectively or negotiate favorable credit terms with third-party suppliers, we may be subject to a heightened risk of inventory obsolescence, a decline in inventory values, and significant inventory write-downs or write-offs. In addition, if we are required to lower sale prices in order to reduce inventory level or to pay higher prices to our suppliers, our profit margins might be negatively affected. Any of the above may materially and adversely affect our business, financial condition and results of operations. See also “—Our quarterly results of operations fluctuate due to seasonality, order patterns from key retail customers and other factors, and we may not have sufficient liquidity to meet our seasonal working capital requirements.”

Our substantial indebtedness may have a material adverse effect on our business, financial condition and results of operations.

As of June 30, 2016, we had a total of $ 206.4 million of indebtedness, consisting of amounts outstanding under our credit facilities and capital lease obligations, and a total availability of $ 22.8 million under our Revolving Credit Facility (as defined under “Description of certain indebtedness”). Our indebtedness could have significant consequences, including:

 

  requiring a substantial portion of our cash flows to be dedicated to debt service payments instead of funding growth, working capital, capital expenditures, investments or other cash requirements;

 

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  reducing our flexibility to adjust to changing business conditions or obtain additional financing;

 

  exposing us to the risk of increased interest rates as our borrowings are at variable rates;

 

  making it more difficult for us to make payments on our indebtedness;

 

  subjecting us to restrictive covenants that may limit our flexibility in operating our business, including our ability to take certain actions with respect to indebtedness, liens, sales of assets, consolidations and mergers, affiliate transactions, dividends and other distributions and changes of control;

 

  subjecting us to maintenance covenants which require us to maintain specific financial ratios; and

 

  limiting our ability to obtain additional financing for working capital, capital expenditures, debt service requirements and general corporate or other purposes.

Our quarterly results of operations fluctuate due to seasonality, order patterns from key retail customers and other factors, and we may not have sufficient liquidity to meet our seasonal working capital requirements.

We generate a significant portion of our net sales in the third and fourth quarters of our fiscal year as a result of higher sales during the holiday season, and adverse events that occur during the third or fourth quarter could have a disproportionate effect on our results of operations for the entire fiscal year. As a result of higher sales during the third and fourth quarters, our working capital needs are greater during the second and third quarters of the fiscal year. In addition to holiday seasonality, we may experience variability in net sales and net income throughout the year as a result of the size and timing of orders from our retail customers. Because a limited number of our retail customers account for a large percentage of our net sales, a change in the order pattern of one or more of our large retail customers could cause a significant fluctuation of our quarterly results or reduce our liquidity. Furthermore, product orders from our large retail customers may vary over time due to changes in their inventory or out-of-stock policies. If we were to experience a significant shortfall in sales or profitability or internally generated funds, we may not have sufficient liquidity to fund our business. As a result of quarterly fluctuations caused by these and other factors, comparisons of our operating results across different fiscal quarters may not be accurate indicators of our future performance. Any quarterly fluctuations that we report in the future may differ from the expectations of market analysts and investors, which could cause the price of our common stock to fluctuate significantly.

We are increasingly dependent on information technology, and if we are unable to protect against service interruptions, data corruption, cyber-based attacks or network security breaches, our operations could be disrupted.

We rely on information technology networks and systems to market and sell our products, to process, transmit and store electronic and financial information, to manage a variety of business processes and activities and to comply with regulatory, legal and tax requirements. We are increasingly dependent on a variety of information systems to effectively process retail customer orders, manage the operations of our e.l.f. store base and fulfill consumer orders from our e-commerce business. We depend on our information technology infrastructure for digital marketing activities and for electronic communications among our e.l.f. stores, personnel, retail customers, consumers, manufacturers and suppliers around the world. These information technology systems, some of which are managed by third parties, may be susceptible to damage, disruptions or shutdowns due to failures during the process of upgrading or replacing software, databases or components, power outages, hardware failures, computer viruses, attacks by computer hackers, telecommunication failures, user errors or catastrophic events. Any material disruption of our systems, or the systems of our third-party service providers, could disrupt our ability to track, record and analyze the products that we sell and could negatively impact our operations, shipment of goods, ability to process financial information and transactions, and our ability to receive and process retail customers and e-commerce orders or engage in normal business activities. If our information technology systems suffer damage, disruption or shutdown and we do not effectively resolve the issues in a timely manner, our business, financial condition and results of operations may be materially and adversely affected, and we could experience delays in reporting our financial results.

Our e-commerce operations are important to our business. Our website serves as an effective extension of our marketing strategies by exposing potential new consumers to our brand, product offerings and enhanced content. Due to the importance of our website and e-commerce operations, we are vulnerable to website downtime and other technical failures. Our failure to successfully respond to these risks could reduce e-commerce sales and damage our brand’s reputation.

 

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We must successfully maintain and upgrade our information technology systems, and our failure to do so could have a material adverse effect on our business, financial condition and results of operations.

We have identified the need to significantly expand and improve our information technology systems and personnel to support recent and expected future growth. As such, we are in process of implementing, and will continue to invest in and implement, significant modifications and upgrades to our information technology systems and procedures, including replacing legacy systems with successor systems, making changes to legacy systems or acquiring new systems with new functionality, hiring employees with information technology expertise and building new policies, procedures, training programs and monitoring tools. These types of activities subject us to inherent costs and risks associated with replacing and changing these systems, including impairment of our ability to leverage our e-commerce channels, fulfill customer orders, potential disruption of our internal control structure, substantial capital expenditures, additional administration and operating expenses, acquisition and retention of sufficiently skilled personnel to implement and operate the new systems, demands on management time and other risks and costs of delays or difficulties in transitioning to or integrating new systems into our current systems. These implementations, modifications and upgrades may not result in productivity improvements at a level that outweighs the costs of implementation, or at all. Additionally, difficulties with implementing new technology systems, delays in our timeline for planned improvements, significant system failures, or our inability to successfully modify our information systems to respond to changes in our business needs may cause disruptions in our business operations and have a material adverse effect on our business, financial condition and results of operations.

If we fail to adopt new technologies or adapt our website and systems to changing consumer requirements or emerging industry standards, our business may be materially and adversely affected.

To remain competitive, we must continue to enhance and improve the responsiveness, functionality and features of our Internet platform, including our e-commerce website and mobile applications. Our competitors are continually developing innovations and introducing new products to increase their consumer base and enhance user experience. As a result, in order to attract and retain consumers and compete against our competitors, we must continue to invest resources to enhance our information technology and improve our existing products and services for our consumers. The Internet and the online retail industry are characterized by rapid technological evolution, changes in consumer requirements and preferences, frequent introductions of new products and services embodying new technologies and the emergence of new industry standards and practices, any of which could render our existing technologies and systems obsolete. Our success will depend, in part, on our ability to identify, develop, acquire or license leading technologies useful in our business, and respond to technological advances and emerging industry standards and practices in a cost-effective and timely way. The development of our website and other proprietary technology entails significant technical and business risks. There can be no assurance that we will be able to properly implement or use new technologies effectively or adapt our website and systems to meet consumer requirements or emerging industry standards. If we are unable to adapt in a cost-effective and timely manner in response to changing market conditions or consumer requirements, whether for technical, legal, financial or other reasons, our business, financial condition and results of operations may be materially and adversely affected.

Failure to protect sensitive information of our consumers and information technology systems against security breaches could damage our reputation and brand and substantially harm our business, financial condition and results of operations.

We collect, maintain, transmit and store data about our consumers, suppliers and others, including personally identifiable and financial information, as well as other confidential and proprietary information. We also employ third-party service providers that collect, store, process and transmit proprietary, personal and confidential information, including credit card information, on our behalf.

Advances in technology, the expertise of criminals, new discoveries in the field of cryptography, acts or omissions by our employees, contractors or service providers or other events or developments could result in a compromise or breach in the security of confidential or sensitive information. We and our service providers may not be able to prevent third parties, including criminals, competitors or others, from breaking into or altering our systems, conducting denial-of-service attacks, attempting to gain access to our systems, information or monetary funds through phishing or social engineering campaigns, installing viruses or malicious software on our website or devices used by our employees or contractors, or carrying out other activity intended to disrupt our systems or gain access to confidential or sensitive information in our or our service providers’ systems. Furthermore, such third parties may further engage in various other illegal activities using such information, including credit card fraud, which may cause additional harm to us, our consumers and our brand. We also may be vulnerable to error or malfeasance by our own employees or other insiders. Third parties may attempt to fraudulently

 

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induce our or our service providers’ employees to misdirect funds or to disclose information in order to gain access to personal data we maintain about our consumers or website users. In addition, we have limited control or influence over the security policies or measures adopted by third-party providers of online payment services through which some of our consumers may elect to make payment for purchases at our website. Contracted third-party delivery service providers may also violate their confidentiality obligations and disclose or use information about our consumers inadvertently or illegally.

If any breach of information security were to occur, our reputation and brand could be damaged, our business may suffer, we could be required to expend significant capital and other resources to alleviate problems caused by such breaches, and we could be exposed to a risk of loss, litigation or regulatory action and possible liability. Actual or anticipated attacks may cause us to incur increasing costs, including costs to deploy additional personnel and protection technologies, train employees and engage third-party experts and consultants. In addition, any party who is able to illicitly obtain a subscriber’s password could access the subscriber’s financial, transaction or personal information. Any compromise or breach of our security measures, or those of our third-party service providers, may violate applicable privacy, data security and other laws, and cause significant legal and financial exposure, adverse publicity and a loss of confidence in our security measures, which could have a material adverse effect on our business, financial condition and results of operations. Although we maintain privacy, data breach and network security liability insurance, we cannot be certain that our coverage will be adequate for liabilities actually incurred or that insurance will continue to be available to us on economically reasonable terms, or at all. We may need to devote significant resources to protect against security breaches or to address problems caused by breaches, diverting resources from the growth and expansion of our business.

Payment methods used on our Internet platform subject us to third-party payment processing-related risks.

We accept payments from our consumers using a variety of methods, including online payments with credit cards and debit cards issued by major banks in the United States, and payment through third-party online payment platforms such as PayPal. We also rely on third parties to provide payment processing services. For certain payment methods, including credit and debit cards, we pay interchange and other fees, which may increase over time and raise our operating costs and lower our profit margins. We may also be subject to fraud and other illegal activities in connection with the various payment methods we offer, including online payment options. For online consumers, these are card-not-present transactions, so they present a greater risk of fraud. Criminals are using increasingly sophisticated methods to engage in illegal activities such as unauthorized use of credit or debit cards and bank account information. To the extent we are an online seller, requirements relating to consumer authentication and fraud detection are more complex. We may ultimately be held liable for the unauthorized use of a cardholder’s card number in an illegal activity and be required by card issuers to pay charge-back fees. Charge-backs result not only in our loss of fees earned with respect to the payment, but also leave us liable for the underlying money transfer amount. If our charge-back rate becomes excessive, card associations also may require us to pay fines or refuse to process our transactions. In addition, we may be subject to additional fraud risk if third-party service providers or our employees fraudulently use consumer information for their own gain or facilitate the fraudulent use of such information. Overall, we may have little recourse if we process a criminally fraudulent transaction.

We are subject to payment card association operating rules, certification requirements and various rules, regulations and requirements governing electronic funds transfers, which could change or be reinterpreted to make it difficult or impossible for us to comply. As our business changes we may also be subject to different rules under existing standards, which may require new assessments that involve costs above what we currently pay for compliance. If we fail to comply with the rules or requirements of any provider of a payment method we accept, or if the volume of fraud in our transactions limits or terminates our rights to use payment methods we currently accept, or if a data breach occurs relating to our payment systems, among other things, we may be subject to fines and higher transaction fees and lose our ability to accept credit and debit card payments from our consumers, process electronic funds transfers or facilitate other types of online payments, and our reputation and our business, financial condition and results of operations could be materially and adversely affected.

We have significant operations in China, which exposes us to risks inherent in doing business there.

We currently source and manufacture all of our products from third-party suppliers and manufacturers in China. As of August 2016, we had a team of 54 employees in China to manage our supply chain. With the rapid development of the Chinese economy, the cost of labor has increased and may continue to increase in the future. Our results of operations will be materially and adversely affected if our labor costs, or the labor costs of our suppliers and manufacturers, increase significantly. In addition, we and our manufacturers and suppliers may not be able to find a sufficient number of qualified workers due to the intensely competitive and fluid market for skilled labor in China. Furthermore, pursuant to Chinese labor laws, employers in China are subject to various requirements when signing labor contracts, paying remuneration,

 

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determining the term of employees’ probation and unilaterally terminating labor contracts. These labor laws and related regulations impose liabilities on employers and may significantly increase the costs of workforce reductions. If we decide to change or reduce our workforce, these labor laws could limit or restrict our ability to make such changes in a timely, favorable and effective manner. Any of these events may materially and adversely affect our business, financial condition and results of operations.

Operating in China exposes us to political, legal and economic risks. In particular, the political, legal and economic climate in China, both nationally and regionally, is fluid and unpredictable. Our ability to operate in China may be adversely affected by changes in Chinese laws and regulations such as those related to, among other things, taxation, import and export tariffs, environmental regulations, land use rights, intellectual property, currency controls, employee benefits and other matters. In addition, we may not obtain or retain the requisite legal permits to continue to operate in China, and costs or operational limitations may be imposed in connection with obtaining and complying with such permits. In addition, Chinese trade regulations are in a state of flux, and we may become subject to other forms of taxation, tariffs and duties in China. Furthermore, the third parties we rely on in China may disclose our confidential information or intellectual property to competitors or third parties, which could result in the illegal distribution and sale of counterfeit versions of our products. If any of these events occur, our business, financial condition and results of operations could be materially and adversely affected.

If our cash from operations is not sufficient to meet our current or future operating needs, expenditures and debt service obligations, our business, financial condition and results of operations may be materially and adversely affected.

We may require additional cash resources due to changed business conditions or other future developments, including any marketing initiatives, investments or acquisitions we may decide to pursue. To the extent we are unable to generate sufficient cash flow, we may be forced to cancel, reduce or delay these activities. Alternatively, if our sources of funding are insufficient to satisfy our cash requirements, we may seek to obtain an additional credit facility or sell additional equity or debt securities. The sale of additional equity securities would result in dilution of our existing stockholders. The incurrence of additional indebtedness would result in increased debt service obligations and operating and financing covenants that could restrict our operations.

Our ability to generate cash to meet our operating needs, expenditures and debt service obligations will depend on our future performance and financial condition, which will be affected by financial, business, economic, legislative, regulatory and other factors, including potential changes in costs, pricing, the success of product innovation and marketing, competitive pressure and consumer preferences. If our cash flows and capital resources are insufficient to fund our debt service obligations and other cash needs, we could face substantial liquidity problems and could be forced to reduce or delay investments and capital expenditures or to dispose of material assets or operations, seek additional debt or equity capital or restructure or refinance our indebtedness. Our credit facilities may restrict our ability to take these actions, and we may not be able to affect any such alternative measures on commercially reasonable terms, or at all. If we cannot make scheduled payments on our debt, the lenders under our Senior Credit Facility can terminate their commitments to loan money under our Revolving Credit Facility, and our lenders under our Senior Credit Facility and, subject to the terms of the intercreditor agreement, Second Lien Credit Facility (as such terms are defined under “Description of certain indebtedness”) can declare all outstanding principal and interest to be due and payable and foreclose against the assets securing their borrowings, and we could be forced into bankruptcy or liquidation.

Furthermore, it is uncertain whether financing will be available in amounts or on terms acceptable to us, if at all, which could have a material adverse effect on our business, financial condition and results of operations.

Our success depends, in part, on our retention of key members of our senior management team and ability to attract and retain qualified personnel.

Our success depends, in part, on our ability to retain our key employees, including our executive officers, senior management team and development, operations, finance, sales and marketing personnel. We are a small company that relies on a few key employees, any one of whom would be difficult to replace, and because we are a small company, we believe that the loss of key employees may be more disruptive to us than it would be to a large, international company. Our success also depends, in part, on our continuing ability to identify, hire, train and retain other highly qualified personnel. In addition, we may be unable to effectively plan for the succession of senior management, including our chief executive officer. The loss of key personnel or the failure to attract and retain qualified personnel may have a material adverse effect on our business, financial condition and results of operations.

 

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Increasing the number of e.l.f. stores may not be successful and will subject us to risks associated with long-term non-cancelable leases and increased capital requirements that may adversely affect our business, financial condition and results of operations.

Our growth strategy is dependent in part on our ability to open and operate new brick-and-mortar e.l.f. stores in high-traffic areas in the United States. The success of this strategy is dependent upon, among other factors, the identification of suitable markets and sites for store locations, the negotiation of acceptable lease terms, the hiring, training and retention of competent sales personnel, the successful integration of these stores into our existing operations and information technology systems and making capital expenditures for these stores.

As a result of our limited experience in operating direct-to-consumer retail stores, e.l.f. stores may be less successful than we expect. Our current strategy includes pursuing continued expansion of e.l.f. stores in the United States at a steady or increased pace. The effect of these stores, particularly in growing numbers, on our business and results of operations is uncertain and dependent on various factors. Falling short in our pursuit of expansion could potentially lead to a negative impact on our growth plan while incurring significant financial costs, expenses and investments.

All of our e.l.f. stores are located on leased premises, and we expect that any new e.l.f. stores will also be located on leased premises. The leases for our stores generally have initial terms of 10 years and typically provide for a single renewal option in five-year increments as well as for rent escalations. We generally cannot terminate these leases before the end of the initial lease term and our ability to assign or sublease is subject to certain conditions. Additional sites that we lease are likely to be subject to similar long-term, non-terminable leases. If we close a store, we nonetheless may be obligated to perform our monetary obligations under the applicable lease, including, among other things, payment of the base rent for the balance of the lease term. In addition, if we fail to negotiate renewals, either on commercially acceptable terms or at all, as each of our leases expires we could be forced to close stores in desirable locations.

We depend on cash flows from operations to pay our lease expenses and to fulfill our other cash needs. If our business does not generate sufficient cash flow from operating activities, and sufficient funds are not otherwise available to us from borrowings under our Revolving Credit Facility or other sources, we may not be able to service our lease expenses or fund our other liquidity and capital needs, which would materially affect our business.

We plan to make capital expenditures to open additional e.l.f. stores. Furthermore, the commitments associated with any expansion will increase our operating expenses and may be costly to terminate if we decide to close a store or change our strategy. We are likely to incur costs associated with these investments earlier than some of the anticipated financial and other benefits, and the return on these investments may be lower, or may develop more slowly, than we expect. As a result, the carrying value of the related assets may be subject to an impairment charge, which could materially and adversely affect our results of operations.

Adverse U.S. or international economic conditions could negatively affect our business, financial condition and results of operations.

Consumer spending on cosmetic products is influenced by general economic conditions and the availability of discretionary income. Adverse U.S. or international economic conditions or periods of inflation or high energy prices may contribute to higher unemployment levels, decreased consumer spending, reduced credit availability and declining consumer confidence and demand, each of which poses a risk to our business. A decrease in consumer spending or in retailer and consumer confidence and demand for our products could have a significant negative impact on our net sales and profitability, including our operating margins and return on invested capital. These economic conditions could cause some of our retail customers or suppliers to experience cash flow or credit problems and impair their financial condition, which could disrupt our business and adversely affect product orders, payment patterns and default rates and increase our bad debt expense.

The results of the United Kingdom’s referendum on withdrawal from the European Union may have a negative effect on global economic conditions, financial markets and our business.

In June 2016, a majority of voters in the United Kingdom elected to withdraw from the European Union in a national referendum. The referendum was advisory, and the terms of any withdrawal are subject to a negotiation period that could last at least two years after the government of the United Kingdom formally initiates a withdrawal process. Nevertheless, the referendum has created significant uncertainty about the future relationship between the United Kingdom and the European Union, including with respect to the laws and regulations that will apply as the United Kingdom determines which European Union laws to replace or replicate in the event of a withdrawal. The referendum has also given rise to calls for the

 

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governments of other European Union member states to consider withdrawal. These developments, or the perception that any of them could occur, have had and may continue to have a material adverse effect on global economic conditions and the stability of global financial markets, and may significantly reduce global market liquidity and restrict the ability of key market participants to operate in certain financial markets. Any of these factors could depress economic activity and restrict our access to capital, which could have a material adverse effect on our business, financial condition and results of operations.

We are subject to international business uncertainties.

Net sales from outside the United States comprised 9%, 7% and 6% of our net sales in the Unaudited Pro Forma Combined 2014 Period, the year ended December 31, 2015 and the six months ended June 30, 2016, respectively. Further, our third-party suppliers and manufacturers are located in China. We intend to maintain our relationships in China and may establish additional relationships in other countries to grow our operations. The substantial up-front investment required, the lack of consumer awareness of our products in jurisdictions outside of the United States, differences in consumer preferences and trends between the United States and other jurisdictions, the risk of inadequate intellectual property protections and differences in packaging, labeling, cosmetics and related laws, rules and regulations are all substantial matters that need to be evaluated prior to doing business in new territories. We cannot be assured that our international efforts will be successful. International sales and increased international operations may be subject to risks such as:

 

  difficulties in staffing and managing foreign operations;

 

  burdens of complying with a wide variety of laws and regulations, including more stringent regulations relating to data privacy and security, particularly in the European Union;

 

  adverse tax effects and foreign exchange controls making it difficult to repatriate earnings and cash;

 

  political and economic instability;

 

  terrorist activities and natural disasters;

 

  trade restrictions;

 

  differing employment practices and laws and labor disruptions;

 

  the imposition of government controls;

 

  an inability to use or to obtain adequate intellectual property protection for our key brands and products;

 

  tariffs and customs duties and the classifications of our goods by applicable governmental bodies;

 

  a legal system subject to undue influence or corruption;

 

  a business culture in which illegal sales practices may be prevalent;

 

  logistics and sourcing;

 

  military conflicts; and

 

  acts of terrorism.

The occurrence of any of these risks could negatively affect our international business and consequently our overall business, financial condition and results of operations.

New laws, regulations, enforcement trends or changes in existing regulations governing the introduction, marketing and sale of our products to consumers could harm our business.

There has been an increase in regulatory activity and activism in the United States, and the regulatory landscape is becoming more complex with increasingly strict requirements. If this trend continues, we may find it necessary to alter some of the ways we have traditionally manufactured and marketed our products in order to stay in compliance with a changing regulatory landscape, and this could add to the costs of our operations and have an adverse impact on our business. To the extent federal, state, local or foreign regulatory changes regarding consumer protection, or the ingredients, claims or safety of our products occur in the future, they could require us to reformulate or discontinue certain of our

 

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products, revise the product packaging or labeling, or adjust operations and systems, any of which could result in, among other things, increased costs, delays in product launches, product returns or recalls and lower net sales, and therefore could have a material adverse effect on our business, financial condition and results of operations. Noncompliance with applicable regulations could result in enforcement action by the FDA or other regulatory authorities, including but not limited to product seizures, injunctions, product recalls, and criminal or civil monetary penalties, all of which could have a material adverse effect on our business, financial condition and results of operations.

In the United States, the FDA does not currently require pre-market approval for products intended to be sold as cosmetics. However, the FDA may in the future require pre-market approval, clearance or registration/notification of cosmetic products, establishments or manufacturing facilities. Moreover, such products could also be regulated as both drugs and cosmetics simultaneously, as the categories are not mutually exclusive. The statutory and regulatory requirements applicable to drugs are extensive and require significant resources and time to ensure compliance. For example, if any of our products intended to be sold as cosmetics were to be regulated as drugs, we might be required to conduct, among other things, clinical trials to demonstrate the safety and efficacy of these products. We may not have sufficient resources to conduct any required clinical trials or to ensure compliance with the manufacturing requirements applicable to drugs. If the FDA determines that any of our products intended to be sold as cosmetics should be classified and regulated as drug products and we are unable to comply with applicable drug requirements, we may be unable to continue to market those products. Any inquiry into the regulatory status of our cosmetics and any related interruption in the marketing and sale of these products could damage our reputation and image in the marketplace.

In recent years, the FDA has issued warning letters to several cosmetic companies alleging improper claims regarding their cosmetic products. If the FDA determines that we have disseminated inappropriate drug claims for our products intended to be sold as cosmetics, we could receive a warning or untitled letter, be required to modify our product claims or take other actions to satisfy the FDA. In addition, plaintiffs’ lawyers have filed class action lawsuits against cosmetic companies after receipt of these types of FDA warning letters. There can be no assurance that we will not be subject to state and federal government actions or class action lawsuits, which could harm our business, financial condition and results of operations.

Additional state and federal requirements may be imposed on consumer products as well as cosmetics, cosmetic ingredients, or the labeling and packaging of products intended for use as cosmetics. For example, several lawmakers are currently focused on giving the FDA additional authority to regulate cosmetics and their ingredients. This increased authority could require the FDA to impose increased testing and manufacturing requirements on cosmetic manufacturers or cosmetics or their ingredients before they may be marketed. We are unable to ascertain what, if any, impact any increased statutory or regulatory requirements may have on our business.

We sell a number of products as over-the-counter (“OTC”) drug products, which are subject to the FDA OTC drug regulatory requirements because they are intended to be used as sunscreen or to treat acne. The FDA regulates the formulation, manufacturing, packaging and labeling of OTC drug products. Our sunscreen and acne drug products are regulated pursuant to FDA OTC drug monographs that specify acceptable active drug ingredients and acceptable product claims that are generally recognized as safe and effective for particular uses. If any of these products that are marketed as OTC drugs are not in compliance with the applicable FDA monograph, we may be required to reformulate the product, stop making claims relating to such product or stop selling the product until we are able to obtain costly and time-consuming FDA approvals. We are also required to submit adverse event reports to the FDA for our OTC drug products, and failure to comply with this requirement may subject us to FDA regulatory action.

We also sell a number of consumer products, which are subject to regulation by the CPSC in the United States under the provisions of the Consumer Product Safety Act, as amended by the Consumer Product Safety Improvement Act of 2008. These statutes and the related regulations ban from the market consumer products that fail to comply with applicable product safety laws, regulations, and standards. The CPSC has the authority to require the recall, repair, replacement or refund of any such banned products or products that otherwise create a substantial risk of injury and may seek penalties for regulatory noncompliance under certain circumstances. The CPSC also requires manufacturers of consumer products to report certain types of information to the CPSC regarding products that fail to comply with applicable regulations. Certain state laws also address the safety of consumer products, and mandate reporting requirements, and noncompliance may result in penalties or other regulatory action.

Our products are also subject to state laws and regulations, such as the California Safe Drinking Water and Toxic Enforcement Act, also known as “Prop 65”, and failure to comply with such laws may also result in lawsuits and regulatory enforcement that could have a material adverse effect on our business, financial condition and results of operations.

 

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Our facilities and those of our third-party manufacturers are subject to regulation under the Federal Food, Drug and Cosmetic Act (the “FDCA”) and FDA implementing regulations.

Our facilities and those of our third-party manufacturers are subject to regulation under the FDCA and FDA implementing regulations. The FDA may inspect all of our facilities and those of our third-party manufacturers periodically to determine if we and our third-party manufacturers are complying with provisions of the FDCA and FDA regulations. In addition, third-party manufacturer’s facilities for manufacturing OTC drug products are required to comply with FDA’s drug good manufacturing practices (“GMPs”) that require us and our manufacturers to maintain, among other things, good manufacturing processes, including stringent vendor qualifications, ingredient identification, manufacturing controls and record keeping.

Our operations could be harmed if regulatory authorities make determinations that we, or our vendors, are not in compliance with these regulations. If the FDA finds a violation of GMPs, it may enjoin our manufacturer’s operations, seize product, and impose administrative, civil or criminal penalties. If we or our third-party manufacturers fail to comply with applicable regulatory requirements, we could be required to take costly corrective actions, including suspending manufacturing operations, changing product formulations, suspending sales, or initiating product recalls. In addition, compliance with these regulations has increased and may further increase the cost of manufacturing certain of our products as we work with our vendors to assure they are qualified and in compliance. Any of these outcomes could have a material adverse effect on our business, financial condition and results of operations.

Government regulations and private party actions relating to the marketing and advertising of our products and services may restrict, inhibit or delay our ability to sell our products and harm our business, financial condition and results of operations.

Government authorities regulate advertising and product claims regarding the performance and benefits of our products. These regulatory authorities typically require a reasonable basis to support any marketing claims. What constitutes a reasonable basis for substantiation can vary widely from market to market, and there is no assurance that the efforts that we undertake to support our claims will be deemed adequate for any particular product or claim. The most significant area of risk for such activities relates to improper or unsubstantiated claims about our products and their use or safety. If we are unable to show adequate substantiation for our product claims, or our promotional materials make claims that exceed the scope of allowed claims for the classification of the specific product, whether cosmetics, OTC drug products or other consumer products that we offer, the FDA, the FTC or other regulatory authorities could take enforcement action or impose penalties, such as monetary consumer redress, requiring us to revise our marketing materials, amend our claims or stop selling certain products, all of which could harm our business, financial condition and results of operations. Any regulatory action or penalty could lead to private party actions, which could further harm our business, financial condition and results of operations.

Our business is subject to complex and evolving U.S. and foreign laws and regulations regarding privacy, data protection and other matters. Many of these laws and regulations are subject to change and uncertain interpretation, and could result in claims, changes to our business practices, monetary penalties, increased costs of operations or otherwise harm our business, financial condition and results of operations.

We are subject to a variety of laws and regulations in the United States and abroad that involve matters central to our business, including privacy and data protection, intellectual property, advertising, marketing, distribution, consumer protection and online payment services. The sale of products outside the U.S., the introduction of new products or expansion of our activities in certain jurisdictions may subject us to additional laws and regulations. These U.S. federal and state and foreign laws and regulations, which can be enforced by private parties or government entities, are constantly evolving and can be subject to significant change. For example, in 2015, the European Union High Court of Justice invalidated the U.S.-EU Safe Harbor regarding the transfer of personal information between the United States and the European Union. European and U.S. negotiators agreed in February 2016 on a new framework, the Privacy Shield, which would replace the Safe Harbor framework. However, it is not known whether the European Commission will accept the new, stricter requirements as adequate. Although we sell our products on a UK website, we do not have personnel or operations based in Europe. We have not historically relied on the former Safe Harbor framework to justify the collection, storage and processing of European consumer data on our servers in the United States. If we were to in the future it is already clear that under the new framework, companies which rely on the new Privacy Shield framework will face more stringent obligations and the sanctions for non-compliance with the principles of the framework will be more robust. In addition, the European Union is significantly amending its data protection laws in ways that may limit our ability to collect or use information or increase our

 

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potential liability for misuse, loss or a breach of security in data of EU residents. The application, interpretation and enforcement of these laws and regulations may be uncertain, and may be interpreted and applied inconsistently from jurisdiction to jurisdiction and inconsistently with our current policies and practices. Moreover, consumer data privacy remains a matter of interest to lawmakers and regulators, and a number of other proposals are pending before federal, state and foreign legislative and regulatory bodies that could significantly affect our business. These existing and proposed laws and regulations can be costly to comply with and can delay or impede our ability to market and sell our products, result in negative publicity, increase our operating costs, require significant management time and attention, and subject us to inquiries or investigations, claims or other remedies, including fines or demands that we modify or cease existing business practices.

Furthermore, foreign data protection, privacy and other laws and regulations are often more restrictive than those in the United States. The European Union, for example, traditionally has imposed stricter obligations under its laws and regulations relating to privacy, data protection and consumer protection than the United States. Under the present regime, individual EU member countries have discretion with respect to their interpretation and implementation of these laws and the penalties for breach and have their own regulators with differing attitudes towards enforcement, which results in varying privacy standards and enforcement risks from jurisdiction to jurisdiction. Legislation and regulation in the European Union and some EU member states require companies to give specific types of notice and in some cases seek consent from consumers before using their data for certain purposes, including some marketing activities. In the majority of EU member countries, consent must be obtained prior to setting cookies or other tracking technologies. Outside of the European Union, there are many countries with data protections laws, and new countries are adopting data protection legislation with increasing frequency. Many of these laws also require consent from consumers for the collection and use of data for various purposes, including marketing, which may reduce the ability to market our products. In particular, these laws may have an impact on our ability to conduct business through websites we and our partners may operate outside the U.S. There is no harmonized approach to these laws and regulations globally although several frameworks exist. Consequently, the potential risk of non-compliance with applicable foreign data protection laws and regulations will increase as we continue our international expansion. We may need to change and limit the way we use consumer information in operating our business and may have difficulty maintaining a single operating model that is compliant. Compliance with such laws and regulations will result in additional costs and may necessitate changes to our business practices and divergent operating models, which may adversely affect our business, financial condition and results of operations.

We are involved, and may become involved in the future, in disputes and other legal or regulatory proceedings that, if adversely decided or settled, could materially and adversely affect our business, financial condition and results of operations.

We are, and may in the future become, party to litigation, regulatory proceedings or other disputes. In general, claims made by or against us in disputes and other legal or regulatory proceedings can be expensive and time consuming to bring or defend against, requiring us to expend significant resources and divert the efforts and attention of our management and other personnel from our business operations. These potential claims include but are not limited to personal injury and class action lawsuits and regulatory investigations relating to the advertising and promotional claims about our products. Any adverse determination against us in these proceedings, or even the allegations contained in the claims, regardless of whether they are ultimately found to be without merit, may also result in settlements, injunctions or damages that could have a material adverse effect on our business, financial condition and results of operations.

We may be required to recall products and may face product liability claims, either of which could result in unexpected costs and damage our reputation.

We sell products for human use. Our products intended for use as cosmetics are not generally subject to pre-market approval or registration processes, so we cannot rely upon a government safety panel to qualify or approve our products for use. A product may be safe for the general population when used as directed but could cause an adverse reaction for a person who has a health condition or allergies, or who is taking a prescription medication. While we include what we believe are adequate instructions and warnings and we have historically had low numbers of reported adverse reactions, previously unknown adverse reactions could occur. If we discover that any of our products are causing adverse reactions, we could suffer further adverse publicity or regulatory/government sanctions.

Potential product liability risks may arise from the testing, manufacture and sale of our products, including that the products fail to meet quality or manufacturing specifications, contain contaminants, include inadequate instructions as to their proper use, include inadequate warnings concerning side effects and interactions with other substances or for persons

 

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with health conditions or allergies, or cause adverse reactions or side effects. Product liability claims could increase our costs, and adversely affect our business, financial condition and results of operations. As we continue to offer an increasing number of new products, our product liability risk may increase. It may be necessary for us to recall products that do not meet approved specifications or because of the side effects resulting from the use of our products, which would result in adverse publicity, potentially significant costs in connection with the recall and could have a material adverse effect on our business, financial condition and results of operations.

In addition, plaintiffs in the past have received substantial damage awards from other cosmetic and drug companies based upon claims for injuries allegedly caused by the use of their products. Although we currently maintain general liability insurance, any claims brought against us may exceed our existing or future insurance policy coverage or limits. Any judgment against us that is in excess of our policy coverage or limits would have to be paid from our cash reserves, which would reduce our capital resources. In addition, we may be required to pay higher premiums and accept higher deductibles in order to secure adequate insurance coverage in the future. Further, we may not have sufficient capital resources to pay a judgment, in which case our creditors could levy against our assets. Any product liability claim or series of claims brought against us could harm our business significantly, particularly if a claim were to result in adverse publicity or damage awards outside or in excess of our insurance policy limits.

If we are unable to protect our intellectual property the value of our brand and other intangible assets may be diminished, and our business may be adversely affected.

We rely on trademark, copyright, trade secret, patent and other laws protecting proprietary rights, nondisclosure and confidentiality agreements and other practices, to protect our brands and proprietary information, technologies and processes. Our principal intellectual property assets include the registered trademarks “e.l.f.,” “eyes lips face” and “play beautifully.” Our trademarks are valuable assets that support our brand and consumers’ perception of our products. Although we have existing and pending trademark registrations for our brands in the United States and in many of the foreign countries in which we operate, we may not be successful in asserting trademark or trade name protection in all jurisdictions. We also have not applied for trademark protection in all relevant foreign jurisdictions and cannot assure you that our pending trademark applications will be approved. Third parties may also oppose our trademark applications domestically or abroad, or otherwise challenge our use of the trademarks. In the event that our trademarks are successfully challenged, we could be forced to rebrand our products in some parts of the world, which could result in the loss of brand recognition and could require us to devote resources to advertising and marketing new brands.

We have limited patent protection, and currently own a United States design patent and have several United States utility and design patent applications pending. We may in the future pursue other patent protection. Limited patent protection for our products limits our ability to protect our products from competition. We primarily rely on know-how to protect our products. It is possible that others will independently develop the same or similar know-how, which may allow them to sell products similar to ours. If others obtain access to our know-how, our confidentiality agreements may not effectively prevent disclosure of our proprietary information, technologies and processes and may not provide an adequate remedy in the event of unauthorized use of such information, which could harm our competitive position.

The efforts we have taken to protect our proprietary rights may not be sufficient or effective. In addition, effective trademark, copyright, patent and trade secret protection may be unavailable or limited for certain of our intellectual property in some foreign countries. Other parties may infringe our intellectual property rights and may dilute our brands in the marketplace. We may need to engage in litigation or other activities to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of proprietary rights of others. Any such activities could require us to expend significant resources and divert the efforts and attention of our management and other personnel from our business operations. If we fail to protect our intellectual property or other proprietary rights, our business, financial condition and results of operations may be materially and adversely affected.

Our success depends on our ability to operate our business without infringing, misappropriating or otherwise violating the trademarks, patents, copyrights and other proprietary rights of third parties.

Our commercial success depends in part on our ability to operate without infringing, misappropriating or otherwise violating the trademarks, patents, copyrights, trade secrets and other proprietary rights of others. We cannot be certain that the conduct of our business does not and will not infringe, misappropriate or otherwise violate such rights. In addition, third parties may involve us in intellectual property disputes as part of a business model or strategy to gain competitive advantage. While we are not involved in any currently active intellectual property litigation, from time to time we receive allegations of trademark or patent infringement and third parties have filed claims against us with allegations of intellectual property infringement.

 

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To the extent we gain greater visibility and market exposure as a public company or otherwise, we may also face a greater risk of being the subject of such claims and litigation. For these and other reasons, third parties may allege that our products or activities infringe, misappropriate, dilute or otherwise violate their trademark, patent, copyright or other proprietary rights. Defending against allegations and litigation could be expensive, occupy significant amounts of time, divert management’s attention from other business concerns and have an adverse impact on our ability to bring products to market. In addition, if we are found to infringe, misappropriate, dilute or otherwise violate third-party trademark, patent, copyright or other proprietary rights, our ability to use brands to the fullest extent we plan may be limited, we may need to obtain a license, which may not be available on commercially reasonable terms, or at all, or we may need to redesign or rebrand our marketing strategies or products, which may not be possible. We may also be required to pay substantial damages or be subject to an order prohibiting us and our retail customers from importing or selling certain products or engaging in certain activities. Our inability to operate our business without infringing, misappropriating or otherwise violating the trademarks, patents, copyrights and proprietary rights of others could have a material adverse effect on our business, financial condition and results of operations.

Use of social media may materially and adversely affect our reputation or subject us to fines or other penalties.

We rely to a large extent on our online presence to reach consumers, and we offer consumers the opportunity to rate and comment on our products on our website. Negative commentary regarding us or our products may be posted on our website or social media platforms and may be adverse to our reputation or business. Our target consumers often value readily available information and often act on such information without further investigation and without regard to its accuracy. The harm may be immediate without affording us an opportunity for redress or correction. In addition, we may face claims relating to information that is published or made available through the interactive features of our website. For example, we may receive third-party complaints that the comments or other content posted by users on our platforms infringe third-party intellectual property rights or otherwise infringe the legal rights of others. While the Communications Decency Act (CDA) and Digital Millennium Copyright Act (DMCA) generally protect online service providers from claims of copyright infringement or other legal liability for the self-directed activities of its users, if it were determined that we did not meet the relevant safe harbor requirements under either law, we could be exposed to claims related to advertising practices, defamation, intellectual property rights, rights of publicity and privacy, and personal injury torts. We could incur significant costs investigating and defending such claims and, if we are found liable, significant damages. If any of these events occur, our business, financial condition and results of operations could be materially and adversely affected.

We also use third-party social media platforms as marketing tools. For example, we maintain Facebook, Twitter, Pinterest, Instagram, YouTube and Google+ accounts. As e-commerce and social media platforms continue to rapidly evolve, we must continue to maintain a presence on these platforms and establish presences on new or emerging popular social media platforms. If we are unable to cost-effectively use social media platforms as marketing tools, our ability to acquire new consumers and our financial condition may suffer. Furthermore, as laws and regulations rapidly evolve to govern the use of these platforms and devices, the failure by us, our employees or third parties acting at our direction to abide by applicable laws and regulations in the use of these platforms and devices could subject us to regulatory investigations, class action lawsuits, liability, fines or other penalties and have a material adverse effect on our business, financial condition and result of operations.

In addition, an increase in the use of social media for product promotion and marketing may cause an increase in the burden on us to monitor compliance of such materials, and increase the risk that such materials could contain problematic product or marketing claims in violation of applicable regulations.

Volatility in the financial markets could have a material adverse effect on our business.

While we currently generate significant cash flows from our ongoing operations and have had access to credit markets through our various financing activities, credit markets may experience significant disruptions. Deterioration in global financial markets could make future financing difficult or more expensive. If any financial institution party to our credit facilities or other financing arrangements were to declare bankruptcy or become insolvent, they may be unable to perform under their agreements with us. This could leave us with reduced borrowing capacity, which could have a material adverse effect on our business, financial condition and results of operations.

Fluctuations in currency exchange rates may negatively affect our financial condition and results of operations.

Exchange rate fluctuations may affect the costs that we incur in our operations. The main currencies to which we are exposed are the Chinese renminbi, the British pound and the Canadian dollar. The exchange rates between these currencies

 

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and the U.S. dollar in recent years have fluctuated significantly and may continue to do so in the future. A depreciation of these currencies against the U.S. dollar will decrease the U.S. dollar equivalent of the amounts derived from foreign operations reported in our consolidated financial statements, and an appreciation of these currencies will result in a corresponding increase in such amounts. The cost of certain items, such as raw materials, manufacturing, employee salaries and transportation and freight, required by our operations may be affected by changes in the value of the relevant currencies. To the extent that we are required to pay for goods or services in foreign currencies, the appreciation of such currencies against the U.S. dollar will tend to negatively affect our business. There can be no assurance that foreign currency fluctuations will not have a material adverse effect on our business, financial condition and results of operations.

Future acquisitions or investments could disrupt our business and harm our financial condition.

In the future we may pursue acquisitions or investments that we believe will help us achieve our strategic objectives. The process of integrating an acquired business, product or technology can create unforeseen operating difficulties, expenditures and other challenges such as:

 

  potentially increased regulatory and compliance requirements;

 

  implementation or remediation of controls, procedures and policies at the acquired company;

 

  diversion of management time and focus from operation of our then-existing business to acquisition integration challenges;

 

  coordination of product, sales, marketing and program and systems management functions;

 

  transition of the acquired company’s users and customers onto our systems;

 

  retention of employees from the acquired company;

 

  integration of employees from the acquired company into our organization;

 

  integration of the acquired company’s accounting, information management, human resources and other administrative systems and operations into our systems and operations;

 

  liability for activities of the acquired company prior to the acquisition, including violations of law, commercial disputes and tax and other known and unknown liabilities; and

 

  litigation or other claims in connection with the acquired company, including claims brought by terminated employees, customers, former stockholders or other third parties.

If we are unable to address these difficulties and challenges or other problems encountered in connection with any future acquisition or investment, we might not realize the anticipated benefits of that acquisition or investment and we might incur unanticipated liabilities or otherwise suffer harm to our business generally.

To the extent that we pay the consideration for any future acquisitions or investments in cash, it would reduce the amount of cash available to us for other purposes. Future acquisitions or investments could also result in dilutive issuances of our equity securities or the incurrence of debt, contingent liabilities, amortization expenses, increased interest expenses or impairment charges against goodwill on our consolidated balance sheet, any of which could have a material adverse effect on our business, results of operations and financial condition.

We have previously identified a material weakness in our internal control over financial reporting, and if we are unable to maintain effective internal controls, we may not be able to produce timely and accurate financial statements, and we or our independent registered public accounting firm may conclude that our internal control over financial reporting is not effective, which could adversely impact our investors’ confidence and our stock price.

Prior to our initial public offering, we were a private company and were not required to test our internal controls on a systematic basis. As an “emerging growth company” under the JOBS Act, our management will be required to report upon the effectiveness of our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act beginning with the annual report for our fiscal year ending December 31, 2017. Our independent registered public accounting firm is not required to formally attest to the effectiveness of our internal control over financial reporting until the date we are no longer an “emerging growth company” and reach accelerated filer status.

 

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In connection with the preparation of our financial statements for the year ended December 31, 2014, we, in conjunction with our independent registered public accounting firm, identified a material weakness in the design and operating effectiveness of our internal control over financial reporting. A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness was primarily related to a lack of adequate review processes and controls within our accounting and finance organization and a lack of sufficient financial reporting and accounting personnel with the technical expertise to appropriately account for complex, non-routine transactions including business combinations, foreign currency transactions and derivative contracts. The material weakness resulted in post-closing adjustments to our consolidated financial statements as of and for the eleven months ended December 31, 2014. During 2015, we took certain actions that remediated the material weakness, which included hiring management-level personnel with technical accounting expertise, designing adequate review procedures in our accounting and finance organization, and identifying and implementing improved processes and controls.

Further, we are in the process of designing and implementing the system of internal control over financial reporting required to comply with our future obligations and to strengthen our overall control environment. This initiative will be time consuming, costly, and might place significant demands on our financial and operational resources, as well as our information technology systems.

Our current efforts to design and implement an effective control environment may not be sufficient to remediate or prevent future material weaknesses or significant deficiencies from occurring. A control system, no matter how well designed and operated, can provide only reasonable assurance that the control system’s objectives will be met. Moreover, any such changes do not guarantee that we will be effective in maintaining the adequacy of our internal controls, and any failure to maintain that adequacy, or consequent inability to produce accurate financial statements on a timely basis, could increase our operating costs and harm our business. Furthermore, investors’ perceptions that our internal controls are inadequate or that we are unable to produce accurate financial statements on a timely basis may harm our stock price.

Failure to comply with the U.S. Foreign Corrupt Practices Act, other applicable anti-corruption and anti-bribery laws, and applicable trade control laws could subject us to penalties and other adverse consequences.

We currently manufacture our products in China and sell our products in several countries outside of the United States. Our operations are subject to the U.S. Foreign Corrupt Practices Act (the “FCPA”), as well as the anti-corruption and anti-bribery laws in the countries where we do business. The FCPA prohibits covered parties from offering, promising, authorizing or giving anything of value, directly or indirectly, to a “foreign government official” with the intent of improperly influencing the official’s act or decision, inducing the official to act or refrain from acting in violation of lawful duty, or obtaining or retaining an improper business advantage. The FCPA also requires publicly traded companies to maintain records that accurately and fairly represent their transactions, and to have an adequate system of internal accounting controls. In addition, other applicable anti-corruption laws prohibit bribery of domestic government officials, and some laws that may apply to our operations prohibit commercial bribery, including giving or receiving improper payments to or from non-government parties, as well as so-called “facilitation” payments. In addition, we are subject to U.S. and other applicable trade control regulations that restrict with whom we may transact business, including the trade sanctions enforced by the U.S. Treasury, Office of Foreign Assets Control (OFAC).

While we have implemented policies, internal controls and other measures reasonably designed to promote compliance with applicable anti-corruption and anti-bribery laws and regulations, and certain safeguards designed to ensure compliance with U.S. trade control laws, our employees or agents may engage in improper conduct for which we might be held responsible. Any violations of these anti-corruption or trade controls laws, or even allegations of such violations, can lead to an investigation and/or enforcement action, which could disrupt our operations, involve significant management distraction, and lead to significant costs and expenses, including legal fees. If we, or our employees or agents acting on our behalf, are found to have engaged in practices that violate these laws and regulations, we could suffer severe fines and penalties, profit disgorgement, injunctions on future conduct, securities litigation, bans on transacting government business, delisting from securities exchanges and other consequences that may have a material adverse effect on our business, financial condition and results of operations. In addition, our brand and reputation, our sales activities or our stock price could be adversely affected if we become the subject of any negative publicity related to actual or potential violations of anti-corruption, anti-bribery or trade control laws and regulations.

 

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Government regulation of the Internet and e-commerce is evolving, and unfavorable changes or failure by us to comply with these regulations could substantially harm our business, financial condition and results of operations.

We are subject to general business regulations and laws as well as regulations and laws specifically governing the Internet and e-commerce. Existing and future regulations and laws could impede the growth of the Internet, e-commerce or mobile commerce. These regulations and laws may involve taxes, tariffs, privacy and data security, anti-spam, content protection, electronic contracts and communications, consumer protection, social media marketing and gift cards. It is not clear how existing laws governing issues such as property ownership, sales and other taxes and consumer privacy apply to the Internet as the vast majority of these laws were adopted prior to the advent of the Internet and do not contemplate or address the unique issues raised by the Internet or e-commerce. It is possible that general business regulations and laws, or those specifically governing the Internet or e-commerce, may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or our practices. We cannot be sure that our practices have complied, comply or will comply fully with all such laws and regulations. Any failure, or perceived failure, by us to comply with any of these laws or regulations could result in damage to our reputation, a loss in business and proceedings or actions against us by governmental entities or others. Any such proceeding or action could hurt our reputation, force us to spend significant amounts in defense of these proceedings, distract our management, increase our costs of doing business and decrease the use of our sites by consumers and suppliers and may result in the imposition of monetary liability. We may also be contractually liable to indemnify and hold harmless third parties from the costs or consequences of non-compliance with any such laws or regulations. In addition, it is possible that governments of one or more countries may seek to censor content available on our sites or may even attempt to completely block access to our sites. Adverse legal or regulatory developments could substantially harm our business. In particular, in the event that we are restricted, in whole or in part, from operating in one or more countries, our ability to retain or increase our consumer base may be adversely affected, and we may not be able to maintain or grow our net sales and expand our business as anticipated.

Our business relies heavily on email and other messaging services, and any restrictions on the sending of emails or messages or an inability to timely deliver such communications could materially adversely affect our net revenue and business.

Our business is highly dependent upon email and other messaging services for promoting our brand, products and e-commerce platforms. We provide emails and “push” communications to inform consumers of new products, shipping specials and other promotions. We believe these messages are an important part of our consumer experience. If we are unable to successfully deliver emails or other messages to our subscribers, or if subscribers decline to open or read our messages, our net revenue and profitability would be materially adversely affected. Changes in how web and mail services block, organize and prioritize email may reduce the number of subscribers who receive or open our emails. For example, Google’s Gmail service has a feature that organizes incoming emails into categories (for example, primary, social and promotions). Such categorization or similar inbox organizational features may result in our emails being delivered in a less prominent location in a subscriber’s inbox or viewed as “spam” by our subscribers and may reduce the likelihood of that subscriber reading our emails. Actions by third parties to block, impose restrictions on or charge for the delivery of emails or other messages could also adversely impact our business. From time to time, Internet service providers or other third parties may block bulk email transmissions or otherwise experience technical difficulties that result in our inability to successfully deliver emails or other messages to consumers. Changes in the laws or regulations that limit our ability to send such communications or impose additional requirements upon us in connection with sending such communications would also materially adversely impact our business. Our use of email and other messaging services to send communications to consumers may also result in legal claims against us, which may cause us increased expenses, and if successful might result in fines and orders with costly reporting and compliance obligations or might limit or prohibit our ability to send emails or other messages. We also rely on social networking messaging services to send communications and to encourage consumers to send communications. Changes to the terms of these social networking services to limit promotional communications, any restrictions that would limit our ability or our consumers’ ability to send communications through their services, disruptions or downtime experienced by these social networking services or decline in the use of or engagement with social networking services by consumers could materially adversely affect our business, financial condition and operating results.

 

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Risks related to this offering and ownership of our common stock

Our Sponsor and J.A. Cosmetics Corp. will continue to have significant influence over us after this offering, including control over decisions that require the approval of stockholders, which could limit the ability of our other stockholders to influence matters requiring stockholder approval and could adversely affect our other stockholders.

Under our Amended Stockholders Agreement (as defined in “Certain relationships and related party transactions—Stockholders Agreement”), our Sponsor will have the right to designate up to three members of our board of directors so long as it holds at least 30% of our outstanding common stock, two members of our board of directors so long as it holds less than 30% but greater than or equal to 20% of our outstanding common stock, and one member of our board of directors so long as it holds less than 20% but greater than or equal to 5% of our outstanding common stock. Also under our Amended Stockholders Agreement, J.A. Cosmetics Corp. will have the right to designate one member of our board of directors so long as it holds at least 10% of our outstanding common stock. Together, our Sponsor’s and J.A. Cosmetics Corp.’s designees currently comprise half of our board of directors. In addition, our Sponsor and J.A. Cosmetics Corp. will hold approximately 62% of our common stock and may be deemed to beneficially own approximately 78% of our common stock after the completion of this offering. Accordingly, the Sponsor and J.A. Cosmetics Corp. will continue to exert a significant degree of influence or actual control over our management, business policies and affairs and over matters requiring stockholder approval.

In addition, the Amended Stockholders Agreement will provide that for as long as our Sponsor owns or holds, directly or indirectly, at least 30% of the shares of our outstanding common stock, we must obtain the consent of our Sponsor before we or our subsidiaries are permitted to take any of the following actions:

 

  authorize, issue or enter into any agreement providing for the issuance (contingent or otherwise) of (x) any notes or debt securities with options, warrants or other rights to acquire equity securities or otherwise containing profit participation features or (y) any equity securities other than equity securities issued to employees, directors, consultants or advisors pursuant to a plan, agreement or arrangement approved by our board of directors;

 

  liquidate, dissolve or effect a recapitalization or reorganization in any form of transaction or series of transactions;

 

  incur any indebtedness in an aggregate amount in excess of $ 50.0 million (other than indebtedness under the terms and provisions of the Senior Secured Credit Facility); and

 

  increase or decrease the size of our board of directors.

Until such time as our Sponsor and J.A. Cosmetics Corp. cease collectively to beneficially own more than 50% of the outstanding shares of common stock, our Sponsor will have the ability to call a special stockholder meeting, and our Sponsor and J.A. Cosmetics Corp. will have the ability to take stockholder action by written consent without calling a stockholder meeting.

Furthermore, for so long as they continue to collectively hold a majority of the outstanding voting power, our Sponsor and J.A. Cosmetics Corp. will have the ability to approve amendments to our amended and restated certificate of incorporation and bylaws and to take other actions without the vote of any other stockholder. Investors in this offering will not be able to affect the outcome of any stockholder vote during such time. As a result, our Sponsor and J.A. Cosmetics Corp. will have the ability to control all such matters affecting us, including:

 

  the composition of our board of directors and, through our board of directors, any determination with respect to our business plans and policies;

 

  any determinations with respect to mergers, acquisitions and other business combinations;

 

  our acquisition or disposition of assets;

 

  our financing activities, including the issuance of additional equity securities;

 

  determinations with respect to the enforcement of rights we may have against third parties;

 

  the payment of dividends on our common stock; and

 

  the number of shares available for issuance under our stock plans for our existing and prospective employees.

 

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This concentrated control will limit the ability of other stockholders to influence corporate matters and, as a result, we may take actions that our other stockholders do not view as beneficial. Our Sponsor and J.A. Cosmetics Corp.’s combined voting control may also discourage or block transactions involving a change of control of our company, including transactions in which you as a holder of our common stock might otherwise receive a premium for your shares over the then-current market price. For example, this concentration of ownership could have the effect of delaying or preventing a change in control or otherwise discouraging a potential acquirer from attempting to obtain control of us, which in turn could cause the market price of our common stock to decline or prevent our stockholders from realizing a premium over the market price for their common stock.

In addition, our amended and restated certificate of incorporation will provide that, until such time as our Sponsor and J.A. Cosmetics Corp. cease collectively to beneficially own more than 50% of the outstanding shares of common stock, we will not be subject to Section 203 of the Delaware General Corporation Law (the “DGCL”), which prohibits persons deemed to be interested stockholders from engaging in a business combination with a publicly-held Delaware corporation for three years following the date these persons become interested stockholders unless the business combination is, or the transaction in which the person became an interested stockholder was, approved in a prescribed manner or another prescribed exception applies. Generally, an interested stockholder is a person who, together with affiliates and associates, owns, or within three years prior to the determination of interested stockholder status did own, 15% or more of a corporation’s voting stock. Because we have elected to opt out of Section 203 of the DGCL until such time as our Sponsor and J.A. Cosmetics Corp. cease collectively to beneficially own more than 50% of the outstanding shares of common stock, generally any business combination transaction between our company and either our Sponsor or J.A. Cosmetics Corp. will not be subject to the statutory protection otherwise afforded under Section 203 of the DGCL subject to prescribed exceptions.

Moreover, our Sponsor and J.A. Cosmetics Corp. are not prohibited from selling a controlling interest in us to a third party and may do so without your approval and without providing for a purchase of your shares of common stock. Accordingly, your shares of common stock may be worth less than they would be if our Sponsor and J.A. Cosmetics Corp. did not maintain voting control over us.

For additional information about our relationship with our Sponsor and J.A. Cosmetics Corp., please see “Certain relationships and related party transactions” elsewhere in this prospectus.

Our amended and restated certificate of incorporation will contain provisions renouncing our interest and expectation to participate in certain corporate opportunities identified by or presented to our Sponsor.

Our Sponsor and its affiliates may engage in activities similar to our lines of business or have an interest in the same areas of corporate opportunities as we do. Our amended and restated certificate of incorporation will provide that our Sponsor and its affiliates will not have any duty to refrain from (i) engaging, directly or indirectly, in the same or similar business activities or lines of business as us, including those business activities or lines of business deemed to be competing with us or (ii) doing business with any of our clients, customers or vendors. In the event that our Sponsor or any of its affiliates acquires knowledge of a potential business opportunity which may be a corporate opportunity for us, they will have no duty to communicate or offer such corporate opportunity to us. Our amended and restated certificate of incorporation will also provide that, to the fullest extent permitted by law, neither our Sponsor nor any of its affiliates will be liable to us, for breach of any fiduciary duty or otherwise, by reason of the fact that our Sponsor or any of its affiliates direct such corporate opportunity to another person, or otherwise does not communicate information regarding such corporate opportunity to us, and we will waive and renounce any claim that such business opportunity constituted a corporate opportunity that should have been presented to us. In addition, any member of our board of directors designated by our Sponsor pursuant to the Amended Stockholders Agreement may consider both the interests of our Sponsor and our Sponsor’s obligations under the Amended Stockholders Agreement in exercising such board member’s powers, rights and duties as a director of our company. The Amended Stockholders Agreement will contain similar provisions with respect to corporate opportunities as the provisions in our amended and restated certificate of incorporation described above. These potential conflicts of interest could have a material adverse effect on our business, results of operations, financial condition and prospects if attractive business opportunities are allocated by our Sponsor to itself, its affiliates or third parties instead of to us. See “Description of capital stock—Corporate opportunities.”

 

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We will incur increased costs and become subject to additional regulations and requirements as a result of becoming a newly public company, and our management will be required to devote substantial time to new compliance matters.

As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. We will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which will require, among other things, that we file with the SEC annual, quarterly and current reports with respect to our business and financial condition. In addition, the Sarbanes-Oxley Act, as well as rules subsequently adopted by the SEC and the stock exchange on which our securities are listed to implement provisions of the Sarbanes-Oxley Act, impose significant requirements on public companies, including requiring establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. Further, pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the SEC has adopted additional rules and regulations in these areas, such as mandatory “say-on-pay” voting requirements that will apply to us when we cease to be an emerging growth company. Stockholder activism, the current political environment and the current high level of government intervention and regulatory reform may lead to substantial new regulations and disclosure obligations, which may lead to additional compliance costs and impact the manner in which we operate our business in ways we cannot currently anticipate.

We expect the rules and regulations applicable to public companies to substantially increase our legal and financial compliance costs and to make some activities more time-consuming and costly. If these requirements divert the attention of our management and personnel from other business concerns, they could have a material adverse effect on our business, financial condition and results of operations. The increased costs will decrease our net income or increase our net loss, and may require us to reduce costs in other areas of our business or increase the prices of our products or services. For example, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to incur substantial costs to maintain the same or similar coverage. We cannot predict or estimate the amount or timing of additional costs we may incur to respond to these requirements. The impact of these requirements could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our common stock, fines, sanctions and other regulatory action and potentially civil litigation.

There may not be an active trading market for shares of our common stock, which may cause shares of our common stock to trade at a discount from the initial offering price and make it difficult to sell the shares of common stock you purchase.

Prior to this offering, there has not been a public trading market for shares of our common stock. It is possible that after this offering an active trading market will not develop or continue. If an active trading market is developed, it may not be sustained, which would make it difficult for you to sell your shares of common stock at an attractive price or at all. The initial public offering price per share of common stock will be determined by agreement among us, the selling stockholders and the representatives of the underwriters and may not be indicative of the price at which shares of our common stock will trade in the public market after this offering. The market price of our common stock may decline below the initial offering price, and you may not be able to sell your shares of our common stock at or above the price you paid in this offering, or at all.

The market price of shares of our common stock may be volatile, which could cause the value of your investment to decline.

Even if a trading market develops, the market price of our common stock may be highly volatile and could be subject to wide fluctuations. Securities markets often experience significant price and volume fluctuations. This market volatility, as well as general economic, market or political conditions, could reduce the market price of shares of our common stock in spite of our operating performance. In addition, our results of operations could be below the expectations of public market analysts and investors due to a number of potential factors, including variations in our quarterly results of operations, additions or departures of key management personnel, changes in consumer preferences or cosmetic trends, announcements of new products or significant price reductions by our competitors, failure to meet analysts’ earnings estimates, publication of research reports about our industry, litigation and government investigations, changes or proposed changes in laws or regulations or differing interpretations or enforcement thereof affecting our business, adverse market reaction to any indebtedness we may incur or securities we may issue in the future, changes in market valuations of similar companies or speculation in the press or investment community, announcements by our competitors of significant contracts, acquisitions,

 

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dispositions, strategic partnerships, joint ventures or capital commitments, adverse publicity about our industry, the level of success of releases of new products and the number of stores we open, close or convert in any period, and in response the market price of shares of our common stock could decrease significantly. You may therefore be unable to resell your shares of common stock at or above the initial public offering price.

In the past, following periods of volatility in the overall market and the market price of a company’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.

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

We have no current plans to pay cash dividends on our common stock. The declaration, amount and payment of any future dividends will be at the sole discretion of our board of directors. Our board of directors may take into account general and economic conditions, our financial condition and results of operations, our available cash and current and anticipated cash needs, capital requirements, contractual, legal, tax and regulatory restrictions and implications on the payment of dividends by us to our stockholders or by our subsidiaries to us, including restrictions under the Senior Secured Credit Facility, the Second Lien Credit Facility and other indebtedness we may incur, and such other factors as our board of directors may deem relevant.

You may be diluted by the future issuance of additional common stock in connection with our incentive plans, acquisitions or otherwise.

After this offering we will have approximately 205.6 million shares of common stock authorized but unissued. Our amended and restated certificate of incorporation to become effective immediately prior to the consummation of this offering authorizes us to issue these shares of common stock and options relating to common stock for the consideration and on the terms and conditions established by our board of directors in its sole discretion, whether in connection with acquisitions or otherwise. We have reserved shares for issuance under the 2014 Plan, the 2016 Plan and the ESPP. See “Executive compensation.” Any common stock that we issue, including under the 2014 Plan, the 2016 Plan, the ESPP or other equity incentive plans that we may adopt in the future, would dilute the percentage ownership held by the investors who purchase common stock in this offering.

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

The sale of substantial amounts of shares of our common stock in the public market, or the perception that such sales could occur, including sales by our Sponsor, could harm the prevailing market price of shares of our common stock. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. Upon completion of this offering we will have a total of 44,379,833 shares of our common stock outstanding. Of the outstanding shares, the 8,333,333 shares sold or issued in this offering (or 9,583,333 shares if the underwriters exercise their over-allotment option to purchase additional shares) will be freely tradable without restriction or further registration under the Securities Act of 1933, as amended, or Securities Act, except that any shares held by our affiliates, as that term is defined under Rule 144 of the Securities Act, may be sold only in compliance with the limitations described in “Shares eligible for future sale.”

Approximately 36,046,500 shares of common stock held by our existing owners after this offering will be subject to certain restrictions on resale. We, our executive officers, directors and certain of our existing stockholders, including the selling stockholders, will sign lock-up agreements with the underwriters that will, subject to certain customary exceptions, restrict the sale of the shares of our common stock and certain other securities held by them for 180 days following the date of this prospectus. J.P. Morgan Securities LLC and Morgan Stanley & Co. LLC may, in their sole discretion and at any time without notice, release all or any portion of the shares or securities subject to any such lock-up agreements. See “Underwriting” for a description of these lock-up agreements.

Upon the expiration of the lock-up agreements described above, all of such 36,046,500 shares (or 34,796,500 shares if the underwriters exercise their over-allotment option to purchase additional shares in full) will be eligible for resale in a public market, subject, in the case of shares held by our affiliates, to volume, manner of sale and other limitations under Rule 144. We expect that our Sponsor will be considered an affiliate 180 days after this offering based on its expected share ownership (consisting of 20,228,152 shares), as well as their participation on our board of directors. Certain other of our stockholders will also be considered affiliates at that time.

 

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After giving effect to this offering, the holders of 31,969,252 shares of our common stock, or 72% of our outstanding common stock based on shares outstanding after the completion of this offering, will be entitled to rights with respect to registration of such shares under the Securities Act pursuant to a registration rights agreement. In addition, each of our Sponsor, J.A. Cosmetics Corp. and certain family trusts of our Chief Executive Officer Tarang Amin will have the right, subject to certain conditions, to require us to file registration statements covering its or their shares or to include its or their shares in other registration statements that we may file. Please see “Certain relationships and related party transactions—Registration rights.”

In addition, we intend to file one or more registration statements on Form S-8 under the Securities Act to register shares of our common stock or securities convertible into or exchangeable for shares of our common stock issued pursuant to the 2014 Plan, the 2016 Plan and the ESPP. Any such Form S-8 registration statements will automatically become effective upon filing. Accordingly, shares registered under such registration statements will be available for sale in the open market. We expect that the initial registration statement on Form S-8 will cover 11,839,600 shares of our common stock.

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

Anti-takeover provisions in our organizational documents and Delaware law might discourage or delay acquisition attempts for us that you might consider favorable.

Our amended and restated certificate of incorporation and amended and restated bylaws to become effective immediately prior to the consummation of this offering will contain provisions that may make the acquisition of our company more difficult without the approval of our board of directors. Among other things:

 

  although we do not have a stockholder rights plan, these provisions would allow us to authorize the issuance of undesignated preferred stock in connection with a stockholder rights plan or otherwise, the terms of which may be established and the shares of which may be issued without stockholder approval, and which may include super voting, special approval, dividend or other rights or preferences superior to the rights of the holders of common stock;

 

  these provisions provide for a classified board of directors with staggered three-year terms;

 

  these provisions require advance notice for nominations of directors by stockholders, subject to the Amended Stockholders Agreement, and for stockholders to include matters to be considered at our annual meetings;

 

  these provisions prohibit stockholder action by written consent after such time as our Sponsor and J.A. Cosmetics Corp. cease collectively to beneficially own (directly or indirectly) more than 50% of the voting power of the outstanding shares of our common stock (the “Trigger Event”);

 

  these provisions provide for the removal of directors only for cause and only upon affirmative vote of holders of at least 75% of the shares of common stock entitled to vote generally in the election of directors from and after the Trigger Event; and

 

  these provisions require the amendment of certain provisions only by the affirmative vote of at least 75% of the shares of common stock entitled to vote generally in the election of directors from and after the Trigger Event.

Further, as a Delaware corporation, we are also subject to provisions of Delaware law, which may impair a takeover attempt that our stockholders may find beneficial, provided that we will not be subject to Section 203 of the DGCL until after such time as the Trigger Event occurs. See “Description of capital stock—Delaware anti-takeover statute.” These anti-takeover provisions and other provisions under Delaware law could discourage, delay or prevent a transaction involving a change in control of our company, including actions that our stockholders may deem advantageous, or negatively affect the trading price of our common stock. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and to cause us to take other corporate actions you desire.

We are an emerging growth company, and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.

We qualify as an emerging growth company as defined in the JOBS Act. As a result, we are permitted to, and intend to, rely on exemptions from certain disclosure requirements that are applicable to other companies that are not emerging growth

 

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companies. Accordingly, we have included compensation information for only our four most highly compensated executive officers and have not included a compensation discussion and analysis of our executive compensation programs in this prospectus. In addition, for so long as we are an emerging growth company, we will not be required to:

 

  engage an independent registered public accounting firm to report on our internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act;

 

  comply with any requirement that may be adopted by the PCAOB, regarding mandatory audit firm rotation or a supplement to the independent registered public accounting firm’s report providing additional information about the audit and the financial statements (i.e., an auditor discussion and analysis);

 

  submit certain executive compensation matters to stockholder advisory votes, such as “say-on-pay,” “say-on-frequency” and “say-on-golden parachutes;” or

 

  disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of the chief executive officer’s compensation to median employee compensation.

We may remain an emerging growth company until the fiscal year-end following the fifth anniversary of the completion of this initial public offering, though we may cease to be an emerging growth company earlier under certain circumstances, including (i) if we become a large accelerated filer, (ii) if our gross revenue exceeds $ 1.0 billion in any fiscal year or (iii) if we issue more than $ 1.0 billion in non-convertible notes in any three-year period.

The exact implications of the JOBS Act are still subject to interpretations and guidance by the SEC and other regulatory agencies, and we cannot assure you that we will be able to take advantage of all of the benefits of the JOBS Act. In addition, investors may find our common stock less attractive if we rely on the exemptions and relief granted by the JOBS Act. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may decline and/or become more volatile.

Our board of directors is authorized to issue and designate shares of our preferred stock in additional series without stockholder approval.

Our amended and restated certificate of incorporation will authorize our board of directors, without the approval of our stockholders, to issue 30.0 million shares of our preferred stock, subject to limitations prescribed by applicable law, rules and regulations and the provisions of our amended and restated certificate of incorporation, as shares of preferred stock in series, to establish from time to time the number of shares to be included in each such series and to fix the designation, powers, preferences and rights of the shares of each such series and the qualifications, limitations or restrictions thereof. The powers, preferences and rights of these additional series of preferred stock may be senior to or on parity with our common stock, which may reduce its value.

Our management will have broad discretion over the use of the proceeds we receive in this offering and might not apply the proceeds in ways that increase the value of your investment.

We estimate that net proceeds of the sale of the common stock that we are offering will be approximately $ 52.3 million. Our management will have broad discretion to use our net proceeds from this offering, and you will be relying on the judgment of our management regarding the application of these proceeds. Our management might not apply the net proceeds of this offering in ways that increase the value of your investment. Our management might not be able to yield any return on the investment and use of these net proceeds. You will not have the opportunity to influence our decisions on how to use the proceeds.

If securities analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about us or our business. If one or more of the analysts who cover us downgrade our stock or publish inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, demand for our stock could decrease, which might cause our stock price and trading volume to decline.

 

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Our amended and restated certificate of incorporation and amended and restated bylaws will provide that the Court of Chancery of the State of Delaware will be the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.

Our amended and restated certificate of incorporation and amended and restated bylaws will provide that the Court of Chancery of the State of Delaware is the exclusive forum for any derivative action or proceeding brought on our behalf, any action asserting a breach of fiduciary duty, any action asserting a claim against us arising pursuant to the Delaware General Corporation Law, our amended and restated certificate of incorporation or our amended and restated bylaws, or any action asserting a claim against us that is governed by the internal affairs doctrine. This provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and other employees. Alternatively, if a court were to find this provision in our amended and restated certificate of incorporation and amended and restated bylaws to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect our business, financial condition and results of operations.

You will suffer immediate and substantial dilution in the net tangible book value of the common stock you purchase.

The initial public offering price of our common stock is substantially higher than the pro forma as adjusted net tangible book value per share of our outstanding common stock immediately after the completion of this offering. Purchasers of common stock in this offering will experience immediate dilution of approximately $ 18.59 per share, assuming an initial public offering price of $ 15.00 per share, the midpoint of the price range set forth on the cover of this prospectus. In the past, we issued options to acquire common stock at prices significantly below the initial public offering price. To the extent these outstanding options are ultimately exercised, investors purchasing common stock in this offering will sustain further dilution. For a further description of the dilution that you will experience immediately after this offering, see “Dilution.”

 

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Special note regarding forward-looking statements

This prospectus includes forward-looking statements that reflect our current views with respect to, among other things, our operations and financial performance. These forward-looking statements are included throughout this prospectus, including in the sections entitled “Prospectus summary,” “Risk factors,” “Management’s discussion and analysis of financial condition and results of operations” and “Business” and relate to matters such as our industry, business strategy, goals and expectations concerning our market position, future operations, margins, profitability, capital expenditures, liquidity and capital resources and other financial and operating information. We have used the words “anticipate,” “assume,” “believe,” “continue,” “could,” “estimate,” “expect,” “foreseeable,” “future,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “will” and similar terms and phrases to identify forward-looking statements in this prospectus.

The forward-looking statements contained in this prospectus are based on management’s current expectations and are subject to uncertainty and changes in circumstances. We cannot assure you that future developments affecting us will be those that we have anticipated. Actual results may differ materially from these expectations due to changes in global, regional or local economic, business, competitive, market, regulatory and other factors, many of which are beyond our control. We believe that these factors include but are not limited to those described under “Risk factors.” These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this prospectus. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, our actual results may vary in material respects from those projected in these forward-looking statements.

Any forward-looking statement made by us in this prospectus speaks only as of the date of this prospectus. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, investments or other strategic transactions we may make. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by any applicable securities laws.

 

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Trademarks, trade names and service marks

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

 

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Use of proceeds

We estimate that the net proceeds from the sale of 4,000,000 shares of common stock that we are selling in this offering will be approximately $ 52.3 million at an assumed initial public offering price of $ 15.00 per share (the midpoint of the range set forth on the cover of this prospectus), after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any proceeds from the sale of shares of our common stock by the selling stockholders in this offering.

Each $ 1.00 increase (decrease) in the assumed initial public offering price of $ 15.00 per share (the midpoint of the range set forth on the cover of this prospectus) would increase (decrease) the net proceeds to us from this offering, after deducting the estimated underwriting discounts and commissions, by approximately $ 3.7 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same. We may also increase or decrease the number of shares we are offering. An increase (decrease) of 1,000,000 in the number of shares we are offering would increase (decrease) the net proceeds to us from this offering, after deducting the estimated underwriting discounts and commissions, by approximately $ 14.0 million, assuming the assumed initial public offering price stays the same. The pro forma as adjusted information is illustrative only, and we will adjust this information based on the actual initial public offering price and other terms of this offering determined at pricing. We do not expect that a change in the offering price or the number of shares by these amounts would have a material effect on our intended uses of the net proceeds from this offering, although it may affect the amount of time prior to which we may need to seek additional capital.

We currently expect to use $ 40.4 million of our net proceeds from this offering to repay existing indebtedness (subject to our ability to obtain a requisite waiver from the lender to do so), including a related pre-payment penalty of 1%, and any proceeds remaining thereafter will be used for working capital and general corporate purposes. The interest rates on our existing indebtedness under the Term Loan Facility and the Second Lien Term Loan were 6.25% and 11%, respectively, as of June 30, 2016. The maturity date of each of the Term Loan Facility and the Revolving Credit Facility is January 31, 2019, and the maturity date of the Second Lien Term Loan is July 31, 2019. On June 7, 2016, we entered into an amendment to our Senior Secured Credit Facility, pursuant to which we incurred an additional $ 64.0 million of indebtedness under the Term Loan Facility to fund, in part, the $ 72.0 million special dividend to stockholders, as described under “Dividend policy.”

Our management will retain broad discretion over the use of the net proceeds from this offering. The amounts and timing of our expenditures will depend upon numerous factors.

Pending the use of the proceeds from this offering, we intend to invest the net proceeds in interest-bearing, investment-grade securities, certificates of deposit or government securities.

 

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Dividend policy

On June 7, 2016, our board of directors declared a special dividend to our preferred stockholders participating on an as-converted basis and our common stockholders in an amount equal to $ 1.79 per share of common stock (approximately $ 72.0 million in the aggregate). Holders of restricted common stock received a dividend of $ 4.1 million, which offset outstanding employee notes receivable. Prior to this dividend, we had never declared or paid cash dividends on our capital stock.

We intend to retain all available funds and any future earnings, if any, to fund the development and expansion of our business and we do not anticipate paying any additional cash dividends in the foreseeable future. In addition, our Senior Secured Credit Facility and Second Lien Credit Facility limit our ability to pay dividends to our stockholders.

Any future determination related to dividend policy will be made at the discretion of our board of directors and will depend on a number of factors, including future earnings, capital requirements, financial conditions, future prospects, contractual restrictions and covenants and other factors that our board of directors may deem relevant.

 

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Capitalization

The following table sets forth our cash and cash equivalents and capitalization as of June 30, 2016, on:

 

  an actual basis;

 

  on a pro forma basis to give effect to: (i) the conversion of all outstanding shares of our convertible preferred stock into an aggregate of 37,271,375 shares of common stock immediately prior to the consummation of this offering and (ii) the filing and effectiveness of our amended and restated certificate of incorporation, which will occur immediately prior to the consummation of this offering; and

 

  on a pro forma as adjusted basis to give further effect to: (i) the proceeds from the sale of 4,000,000 shares of common stock in this offering at an assumed initial public offering price of $15.00 per share (the midpoint of the range set forth on the cover of this prospectus), after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, (ii) the use of proceeds of this offering as further described in “Use of proceeds,” (iii) the acceleration of vesting on certain time-based vesting options that will become exercisable immediately prior to this offering and the acceleration of certain performance-based awards, for which the performance condition will have been met upon consummation of this offering, and may become exercisable shortly after completion of this offering, assuming achievement of a minimum rate of return, and (iv) the repayment of the 2016 Notes (as defined in note 8 to our unaudited condensed consolidated financial statements included elsewhere in this prospectus), which occurred in August 2016.

You should read this table together with “Prospectus summary—Summary consolidated financial data,” “Selected consolidated financial data,” “Management’s discussion and analysis of financial condition and results of operations,” “Underwriting” and our audited consolidated financial statements and unaudited condensed consolidated financial statements and the related notes included elsewhere in this prospectus. The following table reflects a 2.76:1 forward stock split of our common stock to be effected prior to the effectiveness of the registration statement of which this prospectus forms a part.

      Successor  
     As of June 30, 2016  
(dollars in thousands, except share and per share amounts)    Actual     Pro Forma    

Pro Forma As

Adjusted

 

Balance sheet data:

      

Cash and cash equivalents

   $ 3,763      $ 3,763      $ 22,053   
  

 

 

   

 

 

   

 

 

 

Capital lease obligations (1)

     2,938      $ 2,938      $ 2,938   

Bank debt, including current portion:

      

Senior Secured Credit Facility (2)

     163,430        163,430        163,430   

Second Lien Term Loan

     40,000        40,000          

Less: debt issuance costs

     (2,711     (2,711     (2,143
  

 

 

   

 

 

   

 

 

 

Total bank debt (3)

     200,719        200,719        161,287   
  

 

 

   

 

 

   

 

 

 

Total debt, net of issuance costs

     203,657        203,657        164,225   
  

 

 

   

 

 

   

 

 

 

Convertible preferred stock, par value of $ 0.01 per share; 200,000 shares authorized, 37,271,375 shares issued and outstanding, actual; no shares authorized, issued and outstanding, pro forma and pro forma as adjusted

     262,385                 

Stockholders’ equity (deficit)

      

Preferred stock, par value of $ 0.01 per share; no shares authorized, issued and outstanding, actual; 30,000,000 shares authorized, no shares issued and outstanding, pro forma and pro forma as adjusted

                     

Common stock, par value of $ 0.01 per share; 13,800,000 shares authorized; 3,108,458 shares issued and outstanding, actual; 250,000,000 shares authorized, 40,379,833 shares issued and outstanding, pro forma; 250,000,000 shares authorized, 44,379,833 shares issued and outstanding, pro forma as adjusted

     8        381        421   

Additional paid-in capital

     1,040        263,052        319,642   

Employee loan receivable

     (6,390     (6,390       

Accumulated deficit

     (193,443     (193,443     (197,226
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity (deficit)

     (198,785     63,600        122,837   
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ 267,257      $ 267,257      $ 287,062   

 

  

 

 

   

 

 

   

 

 

 
(1)   In connection with the transition of a warehouse and distribution center from New Jersey to California, we entered into certain capital leases during the six months ended June 30, 2016. The capital leases are primarily related to equipment and fixtures required to prepare the new facility for use.

 

(2)     As of June 30, 2016, the Senior Secured Credit Facility consisted of a $ 169.0 million term loan and a $ 25.0 million revolving line of credit. As of June 30, 2016, there were borrowings of $ 2.0 million and an undrawn letter of credit of $ 0.2 million outstanding under the revolving line of credit.

 

(3)     Total bank debt is presented net of debt issuance costs which have been recorded as a reduction to the gross carrying amount on the consolidated balance sheets.

 

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Dilution

If you invest in our common stock in this offering, your interest will be immediately diluted to the extent of the difference between the initial public offering price per share of our common stock in this offering and the net tangible book value per share of our common stock after this offering. As of June 30, 2016, we had a historical net tangible book deficit of $ 473 million, or $ 152.23 per share of common stock. Our net tangible book deficit represents total tangible assets less total liabilities and convertible preferred stock, all divided by the number of shares of common stock outstanding on June 30, 2016. Our pro forma net tangible book deficit as of June 30, 2016, before giving effect to this offering, was $ 211 million, or $ 5.22 per share of our common stock. Pro forma net tangible book value, before the issuance and sale of shares in this offering, gives effect to:

 

  the conversion of all outstanding shares of our convertible preferred stock into an aggregate of 37,271,375 shares of common stock immediately prior to the consummation of this offering;

 

  a 2.76:1 forward stock split of our common stock to be effected prior to the effectiveness of the registration statement of which this prospectus forms a part; and

 

  the filing and effectiveness of our amended and restated certificate of incorporation, which will occur immediately prior to the consummation of this offering.

After giving effect to the sale of shares of common stock by us in this offering at an assumed initial public offering price of $ 15.00 per share (the midpoint of the range set forth on the cover of this prospectus) and after deducting the estimated underwriting discounts and commissions and estimated offering expenses, our pro forma as adjusted net tangible book deficit as of June 30, 2016 would have been approximately $ 159.5 million, or $ 3.59 per share. This represents an immediate increase in pro forma as adjusted net tangible book value of $ 1.63 per share to existing stockholders and an immediate dilution of $ 18.59 per share to new investors. The following table illustrates this per share dilution:

 

Assumed initial public offering price per share

   $ 15.00   

Historical net tangible book deficit per share as of June 30, 2016

     152.23   

Pro forma decrease in net tangible book deficit per share

     147.01   

Pro forma net tangible book deficit per share as of June 30, 2016

     5.22   

Decrease in pro forma net tangible book deficit per share attributable to new investors

     1.63   

Pro forma as adjusted net tangible book value per share after this offering

     3.59   
  

 

 

 

Dilution per share to new investors participating in this offering

     18.59   

 

 

A $ 1.00 increase (decrease) in the assumed initial public offering price of $ 15.00 per share (the midpoint of the range set forth on the cover of this prospectus) would increase (decrease) our pro forma as adjusted net tangible book value as of June 30, 2016 after this offering by approximately $ 3.5 million, or approximately $ 0.08 per share, and would decrease (increase) dilution to investors in this offering by approximately $ 0.08 per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. An increase (decrease) of 1,000,000 in the number of shares we are offering would increase (decrease) our pro forma as adjusted net tangible book value as of June 30, 2016 after this offering by approximately $ 13.5 million, or approximately $ 0.38 per share, and would decrease (increase) dilution to investors in this offering by approximately $ 0.38 per share, assuming the assumed initial public offering price per share remains the same, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. The pro forma as adjusted information is illustrative only, and we will adjust this information based on the actual initial public offering price and other terms of this offering determined at pricing.

If the underwriters fully exercise their option to purchase additional shares, pro forma as adjusted net tangible book deficit after this offering would decrease to approximately $ 0.47 per share, and there would be an immediate dilution of approximately $ 18.12 per share to new investors.

To the extent that outstanding options with an exercise price per share that is less than the pro forma as adjusted net tangible book value per share, before giving effect to the issuance and sale of shares in this offering, are exercised, new investors will experience further dilution. In addition, we may choose to raise additional capital due to market conditions or

 

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strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to our stockholders.

The following table shows, as of June 30, 2016, on a pro forma as adjusted basis, after giving effect to the pro forma adjustments described above, the number of shares of common stock purchased from us, the total consideration paid to us and the average price paid per share by existing stockholders and by new investors purchasing common stock in this offering at an assumed initial public offering price of $ 15.00 per share (the midpoint of the range set forth on the cover of this prospectus), before deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us (in thousands, except share and per share amounts and percentages):

 

      Shares purchased      Total consideration      Average
price per

share
 
      Number      Percent      Amount      Percent     

Existing stockholders

     40,379,833         91%       $ 146,284         71%       $ 3.62   

Investors participating in this offering

     4,000,000         9%       $ 60,000         29%       $ 15.00   
  

 

 

    

Total

     44,379,833         100%       $ 206,284         100%       $ 4.65   

 

 

The number of shares of common stock to be outstanding after this offering is based on the number of shares outstanding as of June 30, 2016 and excludes the following:

 

  4,796,225 shares of common stock issuable upon exercise of stock options outstanding as of June 30, 2016 under our 2014 Equity Plan, at a weighted average exercise price of $ 2.01 per share (as adjusted for the special dividend declared on June 7, 2016 as described under “Dividend policy”);

 

  1,583,466 shares of common stock reserved as of June 30, 2016 for future issuance under our 2014 Equity Plan;

 

  5,430,690 shares of common stock reserved for issuance pursuant to future awards under the 2016 Plan, from which we will grant 596,217 restricted stock units in the aggregate and options to purchase an aggregate of 1,250,517 shares of our common stock with an exercise price per share equal to the initial public offering price to certain officers, employees and directors upon the pricing of this offering, as well as any automatic increases in the number of shares of our common stock reserved for future issuance under this plan, which will become effective immediately prior to the effectiveness of the registration statement of which this prospectus forms a part;

 

  905,115 shares of common stock reserved for issuance pursuant to future awards under the ESPP, as well as any automatic increases in the number of shares of our common stock reserved for future issuance under this plan, which will become effective immediately prior to the effectiveness of the registration statement of which this prospectus forms a part; and

 

  220,800 shares of common stock reserved for issuance pursuant to the settlement of phantom shares issued pursuant to the Phantom Plan in shares of our common stock.

Sales by the selling stockholders in this offering will cause the number of shares held by existing stockholders to be reduced to 36,046,500 shares or 81% of the total number of shares of our common stock outstanding after this offering. If the underwriters’ overallotment option is exercised in full, the number of shares held by the existing stockholders after this offering would be reduced to 78% of the total number of shares of our common stock outstanding after this offering, and the number of shares held by new investors would increase to 9,583,333 or 22% of the total number of shares of our common stock outstanding after this offering.

 

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Unaudited pro forma condensed financial information

The unaudited pro forma condensed financial information presented below has been derived from e.l.f. Beauty, Inc.’s historical consolidated financial statements appearing elsewhere in this prospectus, and gives effect to the following transactions (collectively the “Transactions”):

 

  incurrence of an incremental $ 64.0 million in borrowings to fund, in part, a $ 72.0 million dividend to shareholders (the “Dividend recapitalization”);

 

  the conversion of all of our outstanding shares of convertible preferred stock into an aggregate of 37,271,375 shares of common stock immediately prior to the consummation of this offering, the acceleration of vesting on certain time-based vesting options that will become exercisable immediately prior to this offering and the acceleration of certain performance-based awards, for which the performance condition will have been met upon consummation of this offering, and may become exercisable shortly after completion of this offering, assuming achievement of a minimum rate of return (the “IPO-related transactions”); and

 

  the issuance of 2,957,680 shares of common stock in this offering and the application of $ 40.4 million of the net proceeds from the sale of such shares (assuming the midpoint of the price range set forth on the cover page of this prospectus) to repay existing indebtedness under the Second Lien Term Loan, including a pre-payment penalty of 1%, less underwriting discounts and commissions, as described in “Use of proceeds” (the “IPO transactions”).

The unaudited pro forma condensed balance sheet gives effect to the Transactions as if they occurred on June 30, 2016. The unaudited pro forma condensed statements of operations for the year ended December 31, 2015 and the six months ended June 30, 2016, gives effect to the Transactions as if they occurred on January 1, 2015.

The historical financial statements have been adjusted in the unaudited pro forma condensed financial information to give effect to pro forma events that are (i) directly attributable to the Transactions; (ii) factually supportable; and (iii) with respect to the unaudited pro forma condensed statements of operations, expected to have a continuing impact on the combined results.

The unaudited pro forma condensed financial information is provided for illustrative purposes only and does not purport to represent what the actual consolidated results of operations or the consolidated financial position of e.l.f. Beauty, Inc. would have been had the Transactions occurred on the dates assumed, nor is it necessarily indicative of future consolidated results of operations or consolidated financial position. The unaudited pro forma condensed financial information should be read in conjunction with the consolidated financial statements of e.l.f. Beauty, Inc. included elsewhere in this prospectus.

 

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e.l.f. Beauty, Inc. and subsidiaries

Unaudited pro forma condensed balance sheet

As of June 30, 2016

(in thousands)

 

     Historical (1)                                    Pro forma  
     June 30,
2016
    Dividend
recapitalization(2)
    IPO-related
transactions(3)
         IPO
transactions(4)
         June 30,
2016
 

Assets

             

Current assets:

             

Cash

  $ 3,763      $      $        $        $ 3,763   

Accounts receivable, net

    21,611                                 21,611   

Inventory

    32,371                                 32,371   

Prepaid expenses and other current assets

    10,574                                 10,574   
 

 

 

 

Total current assets

    68,319                                 68,319   

Property and equipment, net

    14,281                                 14,281   

Intangible assets, net

    117,144                                 117,144   

Goodwill

    157,264                                 157,264   

Deferred tax assets

    262                                 262   

Other assets

    1,719                                 1,719   
 

 

 

 

Total assets

  $ 358,989      $      $        $        $ 358,989   
 

 

 

 

Liabilities, convertible preferred stock and stockholders’ equity (deficit)

             

Current liabilities:

             

Current portion of long-term debt and capital lease obligations

  $ 6,583      $      $        $        $ 6,583   

Accounts payable

    21,470                                 21,470   

Accrued expense and other current liabilities

    15,079                                 15,079   

Foreign currency forward contracts

    5,417                                 5,417   
 

 

 

 

Total current liabilities

    48,549                                 48,549   

Long-term debt and capital lease obligations

    197,074                        (39,432   4a     157,642   

Deferred tax liabilities

    40,215               (1,515   3b              38,700   

Other long-term liabilities

    9,551                                 9,551   
 

 

 

 

Total liabilities

    295,389          (1,515       (39,432       254,442   

Convertible preferred stock

    262,385               (262,385   3a                
                  

Stockholders’ equity (deficit):

                  

Common stock

    8               373      3a     30      4c     411   

Additional paid-in capital

    1,040               266,342      3a, 3b     40,370      4c     307,752   

Employee loan receivable

    (6,390                              (6,390

Accumulated deficit

    (193,443            (2,815   3b     (968   4b     (197,226
 

 

 

 

Total stockholders’ equity (deficit)

    (198,785            263,900          39,432          104,547   
 

 

 

 

Total liabilities and shareholders’ equity (deficit)

  $ 358,989      $               $        $ 358,989   

 

 

See accompanying notes to the unaudited pro forma condensed financial information.

 

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e.l.f. Beauty, Inc. and subsidiaries

Unaudited pro forma condensed statement of operations

For the six months ended June 30, 2016

(in thousands, except share and per share data)

 

     Historical(1)                                        Pro forma  
     Six months ended
June 30, 2016
    Dividend
recapitalization(2)
           IPO-related
transactions(3)
    IPO
transactions(4)
           Six months ended
June 30, 2016
 

Net sales

  $ 96,820                $ 96,820   

Cost of sales

    42,383                  42,383   
 

 

 

 

Gross profit

    54,437                  54,437   

Selling, general and administrative expenses

    47,804                  47,804   
 

 

 

 

Operating income

    6,633                  6,633   

Other income (expense), net

    1,964                  1,964   

Interest expense

    (6,396     (2,000     2a          2,310        4d        (6,086
 

 

 

 

Income (loss) before provision for income taxes

    2,201        (2,000         2,310          2,511   

(Provision) benefit for income taxes

    (1,112     700        2c          (809     4e        (1,221
 

 

 

 

Net income (loss)

  $ 1,089      $ (1,300       $ 1,501        $ 1,290   
 

 

 

 

Net income (loss) per share—basic(5)

  $ (200.43             $ 0.03   

Net income (loss) per share—diluted(5)

  $ (200.43             $ 0.02   

Weighted average number of shares outstanding—basic(5)

    651,268                  41,922,643   

Weighted average number of shares outstanding—diluted(5)

    651,268                  44,614,061   

 

 

See accompanying notes to the unaudited pro forma condensed financial information.

 

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e.l.f. Beauty, Inc. and subsidiaries

Unaudited pro forma condensed statement of operations

For the year ended December 31, 2015

(in thousands, except share and per share data)

 

     Historical(1)                                               Pro forma  
     Year ended
December 31,
2015
    Dividend
recapitalization(2)
           IPO-related
transactions(3)
           IPO
transactions(4)
           Year ended
December 31,
2015
 

Net sales

  $ 191,413                  $ 191,413   

Cost of sales

    91,084                    91,084   
 

 

 

 

Gross profit

    100,329                    100,329   

Selling, general and administrative expenses

    74,758                    74,758   
 

 

 

 

Operating income

    25,571                    25,571   

Other income (expense), net

    (4,172                 (4,172

Interest expense

    (12,721     (4,644     2b            4,620        4d        (12,745
 

 

 

 

Income (loss) before provision for income taxes

    8,678        (4,644           4,620          8,654   

(Provision) benefit for income taxes

    (4,321     1,625        2c            (1,617     4e        (4,313
 

 

 

 

Net income (loss)

  $ 4,357      $ (3,019         $ 3,003        $ 4,341   
 

 

 

 

Net income (loss) per share—basic(5)

  $ (1,559.80               $ 0.11   

Net income (loss) per share—diluted(5)

  $ (1,559.80               $ 0.10   

Weighted average number of shares outstanding—
basic(5)

    30,523                    41,301,898   

Weighted average number of shares outstanding—diluted(5)

    30,523                    42,972,032   

 

 

 

 

See accompanying notes to the unaudited pro forma condensed financial information.

 

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Notes to the unaudited pro forma condensed financial information

1. Basis of presentation

The unaudited pro forma condensed financial information was prepared in accordance with U.S. GAAP and pursuant to U.S. Securities and Exchange Commission Regulation S-X Article 11, and presents the pro forma financial position and results of operations of the Transactions based upon historical information after giving effect to adjustments described in these Notes to the Unaudited Pro Forma Condensed Financial Information. An unaudited pro forma condensed balance sheet as of June 30, 2016 is presented as if the Transactions had occurred on June 30, 2016. The unaudited pro forma condensed statements of operations for the year ended December 31, 2015 and for the six months ended June 30, 2016 are presented as if the Transactions had occurred on January 1, 2015.

2. Dividend recapitalization

Unaudited pro forma condensed balance sheet

The dividend recapitalization has already been reflected in our historical consolidated balance sheet as of June 30, 2016. Therefore, this transaction does not require further adjustment within the June 30, 2016 unaudited pro forma condensed balance sheet presented herein.

Unaudited pro forma condensed statement of operations

 

a.   This adjustment reflects the impact of the incremental borrowings on interest expense for the six months ended June 30, 2016, as computed below:

 

Pro forma interest expense components:

        

Aggregate $ 206 million debt interest expense(1)

   $ 7,461   

Amortization of debt issuance costs associated with aggregate term loan

     839   

Adminstrative and other costs

     96   
  

 

 

 

Total pro forma interest expense

     8,396   

Less: actual interest expense for the period

     6,396   
  

 

 

 

Net pro forma adjustment to interest expense

   $ 2,000   

 

 

 

  (1)   Does not reflect the impact of scheduled amortization payments. A 1/8% change in the interest rate would change our interest expense for the six month period by $ 0.1 million.

 

b.   This adjustment reflects the impact of the incremental borrowings on interest expense for the year ended December 31, 2015, as computed below:

 

   

Pro forma interest expense components:

  

Aggregate $ 212 million debt interest expense(1)

   $ 15,535   

Amortization of debt issuance costs associated with aggregate debt

     1,714   

Adminstrative and other costs

     116   
  

 

 

 

Total pro forma interest expense

     17,365   

Less: actual interest expense for the period

     12,721   
  

 

 

 

Net pro forma adjustment to interest expense

   $ 4,644   

 

 

 

  (1)   Does not reflect the impact of scheduled amortization payments. A 1/8% change in the interest rate would change our annual interest expense by $ 0.3 million.

 

c.   To record the tax effects associated with the pro forma adjustments by applying a 35% federal statutory rate.

 

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3. IPO-related transactions

Unaudited pro forma condensed balance sheet

 

a.   To record the conversion of all of our outstanding shares of convertible preferred stock into an aggregate of 37,271,375 shares of common stock immediately prior to the consummation of this offering.

 

b.   To record the unrecognized compensation cost related to certain time-based vesting awards for which vesting will be accelerated immediately prior to the consummation of this offering and certain performance-based awards, for which satisfaction of the performance condition will have been met upon consummation of this offering. The acceleration of vesting will result in a $ 4.3 million increase to APIC, a $ 1.5 million decrease to deferred tax liabilities and the recognition of a $ 2.8 million charge in accumulated deficit.

Unaudited pro forma condensed statements of operations

The unaudited pro forma condensed statements of operations for the year ended December 31, 2015 and the six months ended June 30, 2016, have not been adjusted to reflect the incremental stock-based compensation expense of $ 3.4 million and $ 2.9 million, respectively, related to the acceleration of vesting on certain time-based vesting awards and the acceleration of vesting of certain performance-based awards, as these amounts are expected to have a one-time impact on the pro forma net income (loss) in the twelve months following the Transactions.

4. IPO transactions

Unaudited pro forma condensed balance sheet

The unaudited pro forma condensed balance sheet reflects the IPO transactions, specifically the pro forma effects of the issuance of 2,957,680 shares of common stock and the application of $ 40.4 million of the net proceeds from the sale of such shares to repay existing indebtedness under the Second Lien Term Loan, including a pre-payment penalty of 1%, less underwriting discounts and commissions, as described in “Use of proceeds” as if these events had occurred on June 30, 2016, as follows:

 

a.   To record the repayment of $ 40.0 million of outstanding debt with proceeds from this offering less unamortized debt issuance costs of $ 0.6 million.

 

b.   To record the  $ 0.4 million pre-payment penalty of 1% on the $ 40.0 million of the Second Lien Term Loan and the write-off of $ 0.6 million in unamortized debt issuance costs upon repayment of the Second Lien Term Loan.

 

c.   To record the issuance of shares of common stock to repay $ 40.4 million of outstanding debt, including the related pre-payment penalty of 1%, less associated underwriting discounts and commissions.

Unaudited pro forma condensed statements of operations

 

d.   To record the $ 4.6 million and $ 2.3 million decrease to interest expense for the year ended December 31, 2015 and the six months ended June 30, 2016, respectively, related to the application of $ 40.4 million of the net proceeds from the offering to repay outstanding debt, including the related pre-payment penalty of 1%.

 

e.   To record the tax effects associated with the pro forma adjustments by applying a 35% federal statutory rate.

 

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5. Pro forma basic and diluted net income per share:

Pro forma basic and diluted net income per share reflects (i) the application of the proceeds from the sale of 4,000,000 shares from the proposed initial public offering (assuming the mid-point of the initial public offering price range) that are necessary to cover a portion of the $ 72.0 million dividend paid to stockholders on June 7, 2016, which was in excess of the Company’s historical earnings and (ii) the effect of the conversion of the outstanding convertible preferred stock into common stock at the applicable conversion prices immediately prior to, and conditioned upon, the closing of the Company’s initial public offering.

Pro forma basic and diluted net income per share is computed as follows (in thousands except share and per share data):

 

      Year ended
December 31, 2015
     Six months ended
June 30, 2016
 

Numerator:

     

Pro forma net income

   $ 4,341       $ 1,291   

Adjustment to interest on debt

   $ 16       $ (202
  

 

 

 

Net income attributable to common stockholders-basic and diluted

     4,357         1,089   

Denominator:

     

Basic:

     

Weighted-average number of shares outstanding - Basic

     30,523         651,268   

Add: Assumed conversion of convertible preferred stock

     37,271,375         37,271,375   

Add: Common shares offered hereby to fund the dividend in excess of earnings

     4,000,000         4,000,000   
  

 

 

 

Pro forma weighted average number of shares outstanding - Basic

     41,301,898         41,922,643   
  

 

 

 

Diluted:

     

Pro forma weighted average number of shares outstanding - Basic

     41,301,898         41,922,643   

Add: Weighted average effect of dilutive securities:

     

Service-based stock options

     1,670,134         2,691,417   
  

 

 

 

Pro forma weighted average number of shares outstanding - Diluted

     42,972,032         44,614,061   
  

 

 

 

Pro forma net income per share:

     

Basic

     0.11         0.03   

Diluted

     0.10         0.02   

 

 

Notes:

Assumes the conversion of preferred stock occurred as of the beginning of the period.

 

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Selected consolidated financial data

The following table presents our selected consolidated financial data for the periods and as of the dates indicated. The periods prior to and including January 31, 2014 include all of the accounts of e.l.f. Cosmetics, Inc. (formerly known as J.A. Cosmetics US, Inc.) and its subsidiaries and are referred to in the following table as “Predecessor,” and all periods after January 31, 2014 include all of the accounts of e.l.f. Beauty, Inc. and its subsidiaries and are referred to in the following table as “Successor.” The selected consolidated financial data as of December 31, 2014 and 2015, and for the period from January 1, 2014 through January 31, 2014, the period from February 1, 2014 through December 31, 2014 and the year ended December 31, 2015, has been derived from the audited consolidated financial statements included elsewhere in this prospectus. The selected consolidated financial data as of June 30, 2016, and for the six months ended June 30, 2015 and 2016, has been derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. Our unaudited condensed consolidated financial statements were prepared on a basis consistent with our audited consolidated financial statements and include, in management’s opinion, all normal recurring adjustments necessary for fair presentation of the financial information set forth in those statements. The selected consolidated financial data for the years ended December 31, 2012 and 2013 have been derived from the Predecessor’s audited consolidated financial statements which are not included in this prospectus and is presented in order to provide a reconciliation from net income to Adjusted EBITDA for these periods.

You should read the following financial information together with the information under “Capitalization” and “Management’s discussion and analysis of financial condition and results of operations” and our consolidated financial statements and the related notes included elsewhere in this prospectus.

 

     Predecessor            Successor     Unaudited
pro forma
combined(1)
    Successor  
(dollars in thousands, except
share and per share amounts)
  Period from
January 1,
2014
through
January 31,
2014
           Period from
February 1,
2014
through
December 31,
2014
    Year ended
December 31,
2014
    Year ended
December 31,
2015
    Six
months
ended
June 30,
2015
    Six
months
ended
June 30,
2016
 
 

Statement of operations data:

               

Net sales

  $ 9,810          $ 135,134      $ 144,944      $ 191,413      $ 75,194      $ 96,820   

Gross profit

    4,772            61,450        67,496        100,329        39,298        54,437   

Operating income

    1,727            5,347        16,119        25,571        8,130        6,633   

Other income (expense), net

    36            (6,633     (6,597     (4,172     3,254        1,964   

Interest expense

    (128         (11,545     (12,546     (12,721     (6,281     (6,396

Income (loss) before provision for income taxes

    1,635            (12,831     (3,024     8,678        5,103        2,201   

(Provision) benefit for income taxes

    (542         3,545        143        (4,321     (2,425     (1,112

Net income (loss)

  $ 1,093          $ (9,286   $ (2,881   $ 4,357      $ 2,678      $ 1,089   

Net income (loss) per share—basic

  $ 1,093          $ (709   $ (512   $ (1,560   $ (116   $ (200

Net income (loss) per share—diluted

  $ 1,088          $ (709   $ (512   $ (1,560   $ (116   $ (200

Weighted average number of shares outstanding—basic

    1,000            27,593        27,593        30,523        27,593        651,268   

Weighted average number of shares outstanding—diluted

    1,005            27,593        27,593        30,523        27,593        651,268   
 

Other data:

               

EBITDA(2)

    1,804            6,658        18,190        31,688        15,980        14,827   

Adjusted EBITDA(2)

    2,087            26,013        28,100        46,178        16,300        19,964   

Adjusted EBITDA margin

    21.3%            19.2%        19.4%        24.1%        21.7%        20.6%   

Depreciation and amortization

    41            7,944        8,668        10,289        4,595        6,230   

Capital expenditures

    19            1,597        1,616        10,242        3,649        2,910   

 

 

 

(1)  

For the purpose of performing a comparison to the Successor’s year ended December 31, 2015, we have prepared Unaudited Pro Forma Combined Supplemental Financial Information for the year ended December 31, 2014, which gives effect to the acquisition of 100% of the outstanding shares of capital stock of the Predecessor by the Successor, as if it had occurred on January 1, 2014. The Unaudited Pro Forma Combined 2014 Period is being discussed herein for informational purposes only and does not reflect any operating efficiencies or potential cost savings that may result from the consolidation of operations. See “Management’s discussion and analysis of financial conditions and results of

 

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operations—Recent transactions and basis of presentation” for a description of the adjustments made in preparing the Unaudited Pro Forma Combined 2014 Period.

 

(2)   EBITDA represents net income (loss) plus interest expense, provision (benefit) for income taxes and depreciation and amortization. Adjusted EBITDA represents EBITDA further adjusted to exclude the impact of other items that management does not believe are reflective of the Company’s ongoing operations (comprising transaction-related expenses incurred in connection with the acquisition of the Predecessor, the restructuring of our operations, including warehouse transition and reorganization of our operations in China, and the preparation for our initial public offering), stock-based compensation expense, management fees paid to our Sponsor, costs associated with e.l.f. stores incurred prior to the store opening (including legal-related costs, rent and occupancy expenses, marketing and other store operating supply expenses), costs associated with securing additional distribution space (including slotting expense, freight and certain costs related to installation of fixtures), costs related to the evaluation of an acquisition in 2014, certain non-cash losses and write-offs, and gains and losses on our foreign currency contracts as reflected in the reconciliation below.

We present EBITDA and Adjusted EBITDA because our management uses these as supplemental measures in assessing our operating performance, and we believe they are helpful to investors, securities analysts and other interested parties in evaluating the performance of companies in our industry. We also believe EBITDA and Adjusted EBITDA are useful to management and investors, securities analysts and other interested parties as measures of our comparative operating performance from period to period. EBITDA and Adjusted EBITDA are not measurements of financial performance under GAAP. They should not be considered as alternatives to cash flow from operating activities, as measures of liquidity, or as alternatives to net income as a measure of our operating performance or any other measures of performance derived in accordance with GAAP. In addition, EBITDA and Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. EBITDA and Adjusted EBITDA have limitations as analytical tools, and you should not consider such measures either in isolation or as substitutes for analyzing our results as reported under GAAP. Our definitions and calculations of EBITDA and Adjusted EBITDA are not necessarily comparable to other similarly titled measures used by other companies due to different methods of calculation.

The following table provides a reconciliation of EBITDA and Adjusted EBITDA to net income (loss):

 

     Predecessor            Successor     Unaudited
pro forma
combined
    Successor  
(dollars in thousands)   Year ended
December 31,
2012
    Year ended
December 31,
2013
    Period from
January 1,
2014
through
January 31,
2014
           Period from
February 1,
2014
through
December 31,
2014
    Year ended
December 31,
2014
    Year ended
December 31,
2015
    Six
months
ended
June 30,
2015
    Six
months
ended
June 30,
2016
 

Net income (loss)

  $ 9,897      $ 16,555      $ 1,093          $ (9,286   $ (2,881   $ 4,357      $ 2,678      $ 1,089   

Interest expense

    610        1,637        128            11,545        12,546        12,721        6,281        6,396   

Provision (benefit) for income taxes

    6,275        9,211        542            (3,545     (143     4,321        2,425        1,112   

Depreciation and amortization

    395        538        41            7,944        8,668        10,289        4,595        6,230   
 

 

 

       

 

 

 

EBITDA

  $ 17,177      $ 27,941      $ 1,804          $ 6,658      $ 18,190      $ 31,688      $ 15,980      $ 14,827   

Transaction-related expenses(a)

           194        63            9,759        94        705        579          

Cost related to “restructuring” of operations(b)

                             370        370        1,595        420        3,844   

Initial public offering preparation costs

                                           1,144        318        395   

Stock-based compensation

           26                   287        287        503        197        1,155   

Management fee(c)

    233        250                   775        775        854        350        475   

Pre-opening costs(d)

           118        15            180        195        64        59        229   

Customer expansion
costs(e)

                                           1,191        879        350   

Other miscellaneous
items(f)

                             1,104        1,104        530                 

Unrealized losses (gains) on foreign currency contracts(g)

                  205            6,880        7,085        7,904        (2,482     (1,311
 

 

 

       

 

 

 

Adjusted EBITDA

  $ 17,410      $ 28,529      $ 2,087          $ 26,013      $ 28,100      $ 46,178      $ 16,300      $ 19,964   
                                                                         

 

  (a)   Represents transaction-related expenses related to the acquisition of the Predecessor.

 

  (b)   Represents costs associated with the restructuring of our operations, including warehouse transition and reorganization of our operations in China.

 

  (c)   Represents management fees paid to our Sponsor.

 

  (d)   Represents costs associated with e.l.f. stores incurred prior to the store opening, including legal-related costs, rent and occupancy expenses, marketing and other store operating supply expenses.

 

  (e)   Represents costs associated with securing additional distribution space, including slotting expense, freight and certain costs related to installation of fixtures.

 

  (f)   Represents costs related to evaluation of an acquisition in 2014 as well as other non-cash losses and write-offs.

 

  (g)   Represents non-cash (gains) / losses on our foreign currency contracts.

 

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      Successor  
     As of December 31,     As of June 30,  
(dollars in thousands)    2014     2015     2016  

Balance sheet data:

      

Cash and cash equivalents

   $ 4,668      $ 14,004      $ 3,763   

Net working capital(3)

     23,218        10,860        16,007   

Property and equipment, net

     2,125        9,854        14,281   

Total assets

     354,178        361,072        358,989   

Total bank debt, including current maturities(4)

     148,424        144,919        203,657   

Total liabilities

     222,656        224,175        295,389   

Convertible preferred stock

     145,328        197,295        262,385   

Total stockholders’ deficit

     (13,806     (60,398     (198,785

 

 

 

(3)   Net working capital is defined as current assets, excluding cash and cash equivalents, minus current liabilities.

 

(4)   Total bank debt, including current maturities is net of $ 4.3 million, $ 3.2 million and $ 2.7 million of debt issuance costs as of December 31, 2014, December 31, 2015 and June 30, 2016, respectively.

 

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Management’s discussion and analysis of financial condition and results of operations

You should read the following discussion and analysis of our financial condition and results of operations together with “Selected consolidated financial data” and our consolidated financial statements and related notes included elsewhere in this prospectus. This discussion and analysis and other parts of this prospectus contain forward-looking statements that reflect our current plans, expectations, estimates and beliefs that involve risks, uncertainties and assumptions, such as statements regarding our plans, objectives, expectations, intentions and projections. Our actual results and the timing of selected events may differ materially from those discussed in these forward-looking statements. You should carefully read the “Risk factors” section of this prospectus to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements. Please also see the sections entitled “Special note regarding forward-looking statements” and “Industry and market data.”

Overview

We are one of the fastest growing, most innovative cosmetics companies in the United States. Driven by our mission to make luxurious beauty accessible for all women to play beautifully, we have challenged the traditional belief that quality cosmetics are only available at high prices in select channels. e.l.f. offers high-quality, prestige-inspired beauty products for eyes, lips and face at extraordinary value, with the majority of our items retailing for $ 6 or less. Our price points encourage trial and experimentation, while our commitment to quality and a differentiated consumer engagement model engender loyalty among a passionate and vocal group of consumers. We have built an authentic brand and a company with strong growth, margins and cash flow from operations.

We believe our success is rooted in our innovation process and ability to build direct consumer relationships. Born as an e-commerce company over a decade ago, we have created a modern consumer engagement and responsive innovation model that keeps our products on-trend and our consumers engaged as brand ambassadors. Our consumers provide us with real-time feedback through reviews and social media, which enables us to refine and augment our product portfolio in response to their needs. We leverage our fast-cycle product development and asset-light supply chain to launch high-quality products in as few as 20 weeks from concept, and 27 weeks on average. Our products are first launched on elfcosmetics.com, and distribution is generally only broadened to our retail customers after we receive strong consumer validation online. We believe this has led to our consistently strong productivity at retail.

We sell our products in national and international retailers (with international primarily serviced by distributors) and direct-to-consumer channels, which include e-commerce and e.l.f. stores. We currently sell our products in approximately 19,000 retail stores in the United States across mass, drug store, food and specialty retail channels. Our largest customers, Walmart, Target and CVS, accounted for 28%, 23% and 10%, respectively, of our net sales in 2015. National and international retailers comprised 87% of our total net sales in 2015. The remaining 13% came from our direct-to-consumer channels, the substantial majority of which was comprised of e-commerce, with the balance from e.l.f. stores. We believe the combination of our affordable price points and on-trend, innovative product assortment encourages trial, offers a strong value proposition and appeals to a broad base of consumers. By combining our strong relationships with leading retailers with integrated consumer engagement across our e.l.f. stores, e-commerce and social media, we are a true multi-channel brand.

The primary market for our products is the United States, which accounted for 93% of our net sales in 2015 and 94% of our net sales for the six months ended June 30, 2016. The remaining 7% and 6% were attributable to international markets. e.l.f. products are sold in a number of international markets, including Australia, Canada and France.

Components of our results of operations and trends affecting our business

Net sales

We develop, market and sell cosmetic products under the e.l.f. brand through national retailers, e-commerce and our e.l.f. stores. Our net sales are derived from sales of cosmetic products, net of provisions for sales discounts and allowances, product returns, markdowns and price adjustments.

Our growth in net sales is driven by a number of trends, including the broader economic environment, levels of consumer spending, and increasing awareness of and demand for our products. Within our existing national retailers, we are able to drive growth by growing space allocation and increasing sales per linear foot, supported by our continued innovation, including our ability to introduce new first-to-mass products in our existing categories and new products in adjacent

 

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categories such as skin care. While we have distribution with a number of key retail accounts, we expect to continue to grow through increased penetration into additional stores within existing accounts as well as the addition of new retail customers and retail stores.

These factors have fueled our growth at a faster rate than the overall cosmetics industry. However, our results of operations and business face challenges and uncertainties, including our ability to introduce new products that will appeal to a broad consumer base, our ability to service demand, the ability of our major retail customers to keep products in stock, our ability to continue to grow our customer base and competitive threats from other cosmetics companies.

Gross profit

Gross profit is our net sales less cost of sales. Cost of sales reflects the aggregate costs to procure our products, including the amounts invoiced by our third-party contractors for finished goods as well as costs related to transportation to our distribution center, customs and duties. Cost of sales also includes the effect of changes in the balance of reserves for excess and obsolete inventory and the write-off of inventory not previously reserved. Gross margin measures our gross profit as a percentage of net sales.

We have an extensive network of third-party manufacturers in China where we purchase finished goods. Over the past two years, we have worked to evolve our supply chain to increase capacity and technical capabilities while maintaining or reducing overall costs as a percentage of sales.

Over the past year, we have improved our gross margin largely through changes in pricing, our product mix, purchasing efficiencies and cost reductions in our supply chain, and expect to continue leveraging our innovation and sourcing capabilities to drive increased margin in future periods.

Selling, general and administrative

Our selling, general and administrative (“SG&A”) expenses primarily consist of personnel-related expenses, including salaries, bonuses, fringe benefits and stock-based compensation. Prior to our initial public offering, our stock-based compensation is highly impacted by the changes in the estimated value of our common stock. See “Critical accounting policies and estimates—Stock-based compensation” for more detail regarding stock-based compensation. Other significant SG&A expenses include warehousing, freight, advertising, professional fees for accounting, auditing, consulting and legal services, travel and overhead expenses, depreciation and amortization of intangible assets.

SG&A expenses have increased over the past year, primarily driven by investments in headcount and investment in our corporate infrastructure to support our continued scale and growth, partially offset by leveraging the balance of our general overhead expenses at a slower pace than net sales.

In the near term, we expect SG&A expense to increase as we invest to support our growth initiatives, including investments in the e.l.f. brand and infrastructure as well as the expansion of our e.l.f. store and international footprints. After the consummation of this offering, there will also be an increase in our SG&A expenses as a result of the additional reporting and compliance costs associated with being a public company. Over time, we expect our SG&A expenses to grow at a slower rate than our net sales growth as we leverage our past investments.

Interest expense

Interest expense primarily consists of cash interest and fees on our outstanding indebtedness. See “Financial condition, liquidity and capital resources” and ‘‘Description of indebtedness.’’

Other income

Our purchases are largely in Chinese renminbi (“RMB”), and, as such, we are exposed to periodic fluctuations in that currency. While we do not have an active hedging program, we have a number of legacy exchange rate forward contracts that are in the process of runoff. We do not follow hedge accounting, and therefore the periodic impact of these legacy hedging activities is calculated on a mark-to-market basis. Other income is primarily driven by fluctuations in the exchange rate in the RMB to the U.S. dollar.

 

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Provision for income taxes

The provision for income taxes represents federal, foreign, state and local income taxes. The effective rate differs from statutory rates due to the effect of state and local income taxes, tax rates in foreign jurisdictions and certain nondeductible expenses. Our effective tax rate will change from quarter to quarter based on recurring and nonrecurring factors including, but not limited to, the geographical mix of earnings, enacted tax legislation, state and local income taxes, tax audit settlements and the interaction of various tax strategies.

Net income (loss)

Our net income for future periods will be affected by the various factors described above.

Recent transactions and basis of presentation

On January 31, 2014, e.l.f. Beauty, Inc. (the “Successor”) acquired 100% of the outstanding shares of capital stock of e.l.f. Cosmetics, Inc. (the “Predecessor” and the “Acquisition”). Accordingly, the accompanying consolidated financial statements presented elsewhere in this prospectus as of and for the years ended December 31, 2014 and 2015 reflect periods both prior and subsequent to the Acquisition. The consolidated financial statements for December 31, 2014 and December 31, 2015 are presented separately for the Predecessor period from January 1, 2014 through January 31, 2014 (the “Predecessor 2014 Period”), the Successor period from February 1, 2014 through December 31, 2014 (the “Successor 2014 Period”) and the year ended December 31, 2015 (the “Successor 2015 Period”), with the periods prior to the Acquisition being labeled as Predecessor and the periods subsequent to the Acquisition labeled as Successor. The financial position and results of the Successor reflect the application of purchase accounting in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805, Business Combinations (“ASC 805”) .

For the purpose of performing a comparison to the Successor 2015 Period, we have prepared Unaudited Pro Forma Combined Supplemental Financial Information for the year ended December 31, 2014, which gives effect to the Acquisition as if it had occurred on January 1, 2014 (the “Unaudited Pro Forma Combined 2014 Period”). The Unaudited Pro Forma Combined 2014 Period discussed herein has been prepared in accordance with Article 11 of Regulation S-X, does not purport to represent what our actual consolidated results of operations would have been had the Acquisition actually occurred on January 1, 2014, nor is it necessarily indicative of future consolidated results of operations. The Unaudited Pro Forma Combined 2014 Period is being discussed herein for informational purposes only and does not reflect any operating efficiencies or potential cost savings that may result from the consolidation of operations.

 

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In preparing the Unaudited Pro Forma Combined 2014 Period, we combined the Predecessor 2014 Period and Successor 2014 Period and adjusted the historical results within these periods to give effect to pro forma events that are (i) directly attributable to the Acquisition; (ii) factually supportable; and (iii) expected to have a continuing impact on the combined financial results. The pro forma adjustments made to give effect to the Acquisition, as if it had occurred on January 1, 2014, are summarized in the table below:

 

     Predecessor                   Successor            Unaudited
pro forma
combined
 
(dollars in thousands)   Period from
January 1, 2014
through
January 31, 2014
                  Period from
February 1, 2014
through
December 31, 2014
    Pro forma
adjustments
    Year ended
December 31, 2014
 
 

Statement of operations data:

             

Net sales

  $ 9,810            $ 135,134      $      $ 144,944   

Cost of sales

    5,038              73,684        (1,274 )(a)      77,448   
 

 

 

         

 

 

 

Gross profit

    4,772              61,450        1,274        67,496   

Selling, general and administrative expenses

    3,045              56,103        (7,771 )(b)(d)      51,377   
 

 

 

         

 

 

 

Operating income

    1,727              5,347        9,045        16,119   

Other income (expense), net

    36              (6,633            (6,597

Interest expense

    (128           (11,545     (873 )(c)      (12,546
 

 

 

         

 

 

 

Loss before provision for income taxes

    1,635              (12,831     8,172        (3,024

(Provision) benefit for income taxes

    (542           3,545        (2,860 )(e)      143   
 

 

 

         

 

 

 

Net income (loss)

  $ 1,093            $ (9,286   $ 5,312      $ (2,881

 

 

 

(a)   Represents the exclusion of $ 1.3 million in non-recurring charges recorded in cost of sales from the fair value step-up on inventory related to the Acquisition.

 

(b)   Represents $ 0.7 million in incremental amortization expense within SG&A related to intangible assets recorded at the time of the Acquisition.

 

(c)   Represents $ 0.9 million in incremental net interest expense related to new financing facilities.

 

(d)   Represents the exclusion of non-recurring items that were directly related to the Acquisition and did not have a continuing impact on the combined pro forma results, including $ 5.4 million in compensation expense recorded within SG&A associated with a change in control payment to a former employee and $ 3.1 million in transaction costs recorded within SG&A, including professional fees.

 

(e)   Represents $ 2.9 million in incremental tax expense based on statutory rates and associated with the pro forma adjustments.

As the Predecessor and Successor have the same accounting policies, no conforming accounting policy adjustments were necessary. Nor were any reclassifications necessary to conform the Predecessor’s historical financial statements presentation to that of the Successor.

Seasonality

Our results of operations are subject to seasonal fluctuations, with net sales in the third and fourth fiscal quarters typically being higher than in the first and second fiscal quarters. The higher net sales in our third and fourth fiscal quarters are largely attributable to the increased levels of purchasing by retailers for the holiday season, and adverse events that occur during the third or fourth quarter could have a disproportionate effect on our results of operations for the entire fiscal year. As a result of higher sales during the third and fourth quarters, our working capital needs are greater during the second and third quarters of the fiscal year. Fluctuations throughout the year are also driven by the timing of product restocking or rearrangement by our major customers as well as our expansion into new customers. Because a limited number of our retail customers account for a large percentage of our net sales, a change in the order pattern of one or more of our large retail customers could cause a significant fluctuation of our quarterly results or reduce our liquidity.

 

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Results of operations

The following table sets forth our consolidated statements of operations data in dollars and as a percentage of net sales for the periods presented:

 

     Predecessor            Successor     Unaudited
pro forma
combined
    Successor  
(dollars in thousands, except percentages)   Period from
January 1,
2014 through
January 31,
2014
           Period from
February 1,
2014 through
December 31,
2014
    Year ended
December 31,
2014
    Year ended
December 31,
2015
    Six
months
ended
June 30,
2015
    Six
months
ended
June 30,
2016
 
 

Statement of operations data:

               

Net sales

  $ 9,810          $ 135,134      $ 144,944      $ 191,413      $ 75,194      $ 96,820   

Cost of sales

    5,038            73,684        77,448        91,084        35,896        42,383   
 

 

 

       

 

 

 

Gross profit

    4,772            61,450        67,496        100,329        39,298        54,437   

Selling, general and administrative expenses

    3,045            56,103        51,377        74,758        31,168        47,804   
 

 

 

       

 

 

 

Operating income

    1,727            5,347        16,119        25,571        8,130        6,633   

Other income (expense), net

    36            (6,633     (6,597     (4,172     3,254        1,964   

Interest expense

    (128         (11,545     (12,546     (12,721     (6,281     (6,396
 

 

 

       

 

 

 

Income (loss) before provision for income taxes

    1,635            (12,831     (3,024     8,678        5,103        2,201   

(Provision) benefit for income taxes

    (542         3,545        143        (4,321     (2,425     (1,112
 

 

 

       

 

 

 

Net income (loss)

  $ 1,093          $ (9,286   $ (2,881   $ 4,357      $ 2,678      $ 1,089   

 

 
                                           
     Predecessor            Successor     Unaudited
pro forma
combined
    Successor  
     Period from
January 1,
2014 through
January 31,
2014
           Period from
February 1,
2014 through
December 31,
2014
    Year ended
December 31,
2014
    Year ended
December 31,
2015
    Six
months
ended
June 30,
2015
    Six
months
ended
June 30,
2016
 
 
               

% of net sales

               

Net sales

    100%            100%        100%        100%        100%        100%   

Cost of sales

    51%            55%        53%        48%        48%        44%   
 

 

 

       

 

 

 

Gross profit

    49%            45%        47%        52%        52%        56%   

Selling, general and administrative expenses

    31%            42%        35%        39%        41%        49%   
 

 

 

       

 

 

 

Operating income

    18%            4%        11%        13%        11%        7%   

Other income (expense), net

    0%            (5%     (5%     (2%     4%        2%   

Interest expense

    (1%         (9%     (9%     (7%     (8%     (7%
 

 

 

       

 

 

 

Income (loss) before provision for income taxes

    17%            (9%     (2%     5%        7%        2%   

Provision for income taxes

    (6%         3%        0%        (2%     (3%     (1%
 

 

 

       

 

 

 

Net income (loss)

    11%            (7%     (2%     2%        4%        1%   
                                                         

Comparison of six months ended June 30, 2016 to six months ended June 30, 2015

Net sales

Net sales increased $ 21.6 million, or 29%, to $ 96.8 million for the six months ended June 30, 2016, from $ 75.2 million for the six months ended June 30, 2015. The increase was primarily driven by growth in existing national retailers due to expanding space allocation and improved productivity as well as the full-year impact of the establishment of new retailer relationships during 2015.

Gross profit

Gross profit increased $ 15.1 million, or 39%, to $ 54.4 million for the six months ended June 30, 2016, compared to $ 39.3 million for the six months ended June 30, 2015. Increased volume accounted for $ 11.3 million of the increase in gross profit,

 

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with the remaining $ 3.8 million primarily attributable to favorable sales mix changes and cost improvements. Gross margin improved from 52% for the six months ended June 30, 2015 to 56% for the six months ended June 30, 2016, primarily as a result of favorable sales mix changes and cost improvements.

Selling, general and administrative expenses

SG&A expenses were $ 47.8 million for the six months ended June 30, 2016, up $ 16.6 million, or 53%, from $ 31.2 million for the six months ended June 30, 2015. SG&A expenses as a percentage of net sales increased to 49% in the six months ended June 30, 2016 from 41% in the six months ended June 30, 2015. The increase was primarily a result of higher warehouse and distribution costs related to the relocation of our distribution center from New Jersey to California, additional investments in sales and marketing to support growth, higher information technology costs to support infrastructure improvements and increased costs related to preparation for our initial public offering, such as professional fees and additions to headcount.

Other income (expense), net

Other income decreased $ 1.3 million from $ 3.3 million for the six months ended June 30, 2015 to $ 2.0 million for the six months ended June 30, 2016. Favorable exchange rate changes resulted in positive mark-to-market adjustments on our foreign currency forward contracts in each period. The decrease in other income is primarily attributable to the reduction in the notional value of our outstanding forward contracts during the six months ended June 30, 2016 as compared to the six months ended June 30, 2015.

Interest expense

Interest expense increased $ 0.1 million, or 2%, to $ 6.4 million for the six months ended June 30, 2016, compared to $ 6.3 million for the six months ended June 30, 2015. This increase was due to incremental borrowings under our Term Loan Facility related to the June 2016 Dividend recapitalization, partially offset by lower borrowings under our Revolving Credit Facility.

Net income (loss)

As a result of the factors above, net income decreased $ 1.6 million to $ 1.1 million for the six months ended June 30, 2016, compared to $ 2.7 million for the six months ended June 30, 2015.

Comparison of the Successor 2015 Period to the Successor 2014 Period, the Predecessor 2014 Period and the Unaudited Pro Forma Combined Period for the year ended December 31, 2014

The results of operations discussion herein focuses on the comparison of the Successor 2015 Period to the Successor 2014 Period, the Predecessor 2014 Period and the Unaudited Pro Forma Combined 2014 Period.

We believe that a discussion of results of operations for the Predecessor 2014 Period and the Successor 2014 Period on a standalone basis is not meaningful as the Acquisition was accounted for as a business combination in accordance with ASC 805, and the resulting new basis of accounting is reflected in the Company’s consolidated financial statements for all periods beginning on or after January 31, 2014, and therefore, the two periods are not comparable. Except for the specific pro forma adjustments made to arrive at the Unaudited Pro Forma Combined 2014 Period, the underlying drivers for the change in 2015 as compared to 2014, both actual 2014 results and the Unaudited Pro Forma Combined 2014 Period results, are the same. We believe that the comparison of the Successor 2015 Period to the Unaudited Pro Forma Combined 2014 Period provides for a more meaningful discussion of the 2015 and 2014 results of operations for potential investors and users of the financial statements.

Net sales

Net sales were $ 191.4 million for the Successor 2015 Period, as compared to $ 135.1 million for the Successor 2014 Period and $ 9.8 million for the Predecessor 2014 Period. This represents a 32% increase as compared to the Unaudited Pro Forma Combined 2014 Period. This increase was fairly evenly attributable to expanding space allocation within our existing national retailers and the establishment of additional distribution space through new retailer relationships.

 

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Gross profit

As compared to the Unaudited Pro Forma Combined 2014 Period, gross profit increased $ 32.8 million, or 49%, to $ 100.3 million for the Successor 2015 Period. Increased volume accounted for $ 21.6 million of the increase in gross profit, with the remaining $ 11.2 million primarily attributable to favorable sales mix changes. Gross margin improved from 47% for the Unaudited Pro Forma Combined 2014 Period to 52% for the Successor 2015 Period, primarily as a result of favorable sales mix changes in sales to national retailers.

Selling, general and administrative expenses

SG&A expenses were $ 74.8 million for the Successor 2015 Period, compared to $ 56.1 million for the Successor 2014 Period and $ 3.0 million for the Predecessor 2014 Period. SG&A expenses increased $ 23.4 million, or 46%, as compared to the Unaudited Pro Forma Combined 2014 Period. As a percentage of net sales, SG&A expenses increased from 35% in the Unaudited Pro Forma Combined 2014 Period to 39% in 2015. The increase was primarily driven by additions to our headcount and bonus incentives, increased warehouse and distribution costs to support revenue growth and incremental marketing and e-commerce costs primarily related to expenditures to support incremental traffic to our e-commerce site.

Other income (expense), net

Other income (expense) was $ (4.2 million) for the Successor 2015 Period, compared to $ (6.6 million) for the Successor 2014 Period and $ 36,000 for the Predecessor 2014 Period. The decrease in expense was primarily due to a $ 2.8 million reduction in unrealized losses on forward currency contracts and a $ 3.3 million decrease in transaction losses on foreign currency denominated payables, offset by a $ 3.7 million increase in realized losses related to settlement of forward currency contracts. These fluctuations are the result of the volatility in the currency exchange market for the RMB as the U.S. dollar strengthened versus the RMB in the respective periods, particularly in the third and fourth quarters of 2015.

Interest expense

Interest expense was $ 12.7 million for the Successor 2015 Period, as compared to $ 11.5 million for the Successor 2014 Period and $ 0.1 million for the Predecessor 2014 Period. This increase was due to the new credit facilities entered into as of January 31, 2014 as well as additional borrowings under our Revolving Credit Facility during the Successor 2015 Period as compared to the Successor 2014 Period.

 

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Unaudited quarterly statement of operations data

The following table sets forth certain unaudited quarterly statement of operations data for each quarter from April 1, 2014 through June 30, 2016. The unaudited quarterly statement of operations data includes all adjustments (consisting of normal recurring adjustments) that, in the opinion of management, are necessary for a fair presentation of the information presented. This information should be read in conjunction with the consolidated financial statements and related notes thereto included elsewhere in this prospectus. Operating results for interim periods are not necessarily indicative of the results that may be expected for a full fiscal year. Our results of operations are subject to seasonal fluctuations. For additional information regarding the impact of seasonality, see “—Seasonality.”

 

     Successor  
(dollars in thousands)  

Q2

2014

   

Q3

2014

   

Q4

2014

   

Q1

2015

   

Q2

2015

   

Q3

2015

   

Q4

2015

   

Q1

2016

   

Q2

2016

 

Net sales

  $ 28,006      $ 33,027      $ 54,210      $ 38,941      $ 36,253      $ 50,783      $ 65,436      $ 52,673      $ 44,147   

Gross profit

    12,890        15,146        24,437        20,190        19,108        26,002        35,029        29,300        25,137   

Operating income (loss)

    (2,600     1,403        8,450        6,007        2,123        6,504        10,937        6,191        442   

Net income (loss)

    (5,264     (1,431     3,048        1,315        1,363        (748     2,427        3,804        (2,715

Adjusted EBITDA

  $ 3,757      $ 5,312      $ 13,099      $ 10,151      $ 6,149      $ 12,308      $ 17,570      $ 11,567      $ 8,397   

 

 
                                                       
     Successor  
(dollars in thousands)  

Q2

2014

   

Q3

2014

   

Q4

2014

   

Q1

2015

   

Q2

2015

   

Q3

2015

   

Q4

2015

   

Q1

2016

   

Q2

2016

 

Net income (loss)

  $ (5,264   $ (1,431   $ 3,048      $ 1,315      $ 1,363      $ (748   $ 2,427      $ 3,804      $ (2,715

Interest expense

    3,069        3,117        3,312        3,149        3,132        3,194        3,246        3,061        3,335   

Provision (benefit) for income taxes

    (2,104     (452     1,144        1,154        1,272        (114     2,009        2,916        (1,804

Depreciation and amortization

    2,207        2,152        2,214        2,268        2,327        2,796        2,898        2,980        3,250   
 

 

 

 

EBITDA

  $ (2,092   $ 3,386      $ 9,718      $ 7,886      $ 8,094      $ 5,128      $ 10,580      $ 12,761      $ 2,066   

Transaction-related expenses(a)

    2,363        1,595        1,535        507        72        126                        

Cost related to “restructuring” of operations(b)

                  370        227        193        1,168        7        1,182        2,662   

Initial public offering preparation costs

                         87        231        316        510        179        216   

Stock-based compensation

    65        92        104        95        102        158        148        187        968   

Management fee(c)

    252        157        266        251        99        312        192        225        250   

Pre-opening costs(d)

    32        29        88        20        39        5               62        167   

Customer expansion costs(e)

                                879        (124     436        350          

Other miscellaneous items(f)

    1,032        72                             122        408                 

Unrealized losses on foreign currency contracts(g)

    2,105        (19     1,018        1,078        (3,560     5,097        5,289        (3,379     2,068   
 

 

 

 

Adjusted EBITDA

  $ 3,757      $ 5,312      $ 13,099      $ 10,151      $ 6,149      $ 12,308      $ 17,570      $ 11,567      $ 8,397   

 

 

 

(a)   Represents transaction-related expenses related to the acquisition of the Predecessor.

 

(b)   Represents costs associated with the restructuring of the Company’s operations, including warehouse transition and reorganization of our operations in China.

 

(c)   Represents management fees paid to our Sponsor.

 

(d)   Represents costs associated with e.l.f. stores incurred prior to the store opening, including legal-related costs, rent and occupancy expenses, marketing and other store operating supply expenses.

 

(e)   Represents costs associated with securing additional distribution space, including slotting expense, freight and certain costs related to installation of fixtures.

 

(f)   Represents costs related to evaluation of an acquisition in 2014 as well as other non-cash losses and write-offs.

 

(g)   Represents non-cash (gains) / losses on our foreign currency contracts.

 

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Financial condition, liquidity and capital resources

Overview

As of June 30, 2016, we held $ 3.8 million of cash and cash equivalents. In addition, as of June 30, 2016, we had borrowing capacity of $ 22.8 million under our Revolving Credit Facility.

Our primary cash needs are for capital expenditures and working capital. Capital expenditures typically vary depending on strategic initiatives selected for the fiscal year, including investments in infrastructure, expansion into new national retailer doors and expansion of our e.l.f. store base. We expect to fund ongoing capital expenditures from cash generated from operations and, if necessary, draws on our Revolving Credit Facility.

Our primary working capital requirements are for product and product-related costs, the payment of payroll, rent, distribution costs and advertising and marketing. Fluctuations in working capital are primarily driven by the timing of when a retailer rearranges or restocks its products, expansion of space within our existing retailer base, expansion into new retail stores and the general seasonality of our business. As of June 30, 2016, we had working capital, excluding cash, of $ 16.0 million, compared to $ 10.9 million as of December 31, 2015. Working capital, excluding cash and debt, was $ 22.6 million and $ 21.2 million as of June 30, 2016 and December 31, 2015, respectively.

We believe that our operating cash flow and cash on hand will be adequate to meet our operating, investing and financing needs for the next 12 months. If necessary, we may borrow funds under our Revolving Credit Facility to finance our liquidity requirements, subject to customary borrowing conditions. To the extent additional funds are necessary to meet our long-term liquidity needs as we continue to execute our business strategy, we anticipate that they will be obtained through the incurrence of additional indebtedness, additional equity financings or a combination of these potential sources of funds; however, such financing may not be available on favorable terms, or at all. Our ability to meet our operating, investing and financing needs depends to a significant extent on our future financial performance, which will be subject in part to general economic, competitive, financial, regulatory and other factors that are beyond our control, including those described elsewhere in this prospectus under the heading “Risk Factors.” In addition to these general economic and industry factors, the principal factors in determining whether our cash flows will be sufficient to meet our liquidity requirements will be our ability to provide innovative products to our customers and consumers and manage production and our supply chain.

Cash flows

 

     Predecessor                   Successor  
     Period from
January 1, 2014
through
January 31, 2014
                  Period from
February 1, 2014
through
December 31, 2014
   

Year ended
December 31,

2015

   

Six months

ended
June 30,
2015

   

Six months

ended
June 30,
2016

 
 

Net cash provided by (used in):

               

Operating activities

  $ 908            $ (8,415   $ 24,519      $ 5,831      $ 7,858   

Investing activities

    (19           (239,488     (10,242     (3,749     (2,826

Financing activities

                 252,571        (4,941     (4,263     (15,274
 

 

 

         

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash:

  $ 889            $ 4,668      $ 9,336      $ (2,181   $ (10,242

 

 

Cash flows for the six months ended June 30, 2016 compared to the six months ended June 30, 2015

Cash provided by (used in) operating activities

For the six months ended June 30, 2016, net cash provided by operating activities was $ 7.9 million. This included net income, before deducting depreciation, amortization and other non-cash items, of $ 2.1 million as well as favorable reductions in net working capital of $ 5.8 million during this period. The favorable reductions in net working capital were largely driven by continued focus on working capital optimization and primarily attributable to a $ 7.9 million increase in accounts payable and accrued expenses.

For the six months ended June 30, 2015, net cash provided by operating activities was $ 5.8 million. This included net income, before deducting depreciation, amortization and other non-cash items, of $ 3.6 million as well as favorable

 

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reductions in working capital of $ 2.2 million during this period. The favorable reductions in working capital were primarily driven by a reduction in accounts receivable of $ 9.6 million, an increase in accounts payable and accrued expenses of $ 6.3 million and were partially offset by a $ 12.3 million increase in inventory and a $ 1.3 million increase in prepaid expenses and other current assets.

Cash provided by (used in) investing activities

For the six months ended June 30, 2016, net cash used in investing activities was $ 2.9 million, compared to $ 3.7 million for the six months ended June 30, 2015. The decrease was driven primarily by lower purchases of property and equipment related to store fixtures to support expanded shelf space at national retailers, offset in part by the build-out of new e.l.f. stores scheduled to open during the second half of 2016.

Cash provided by (used in) financing activities

For the six months ended June 30, 2016, net cash used in financing activities was $ 15.2 million, driven primarily by a $ 68.0 million dividend paid to stockholders, $ 7.0 million of net debt repayments related to our Senior Secured Credit Facility (as defined below) and the payment of $ 3.1 million of deferred offering costs, partially offset by $ 62.3 million in net proceeds from the issuance of additional debt under the Term Loan Facility described below.

For the six months ended June 30, 2015, net cash used in financing activities was $ 4.3 million, consisting of net repayments of debt related to our Senior Secured Credit Facility.

Cash flows for the Successor 2015 Period compared to the Successor 2014 Period and the Predecessor 2014 Period

Cash provided by (used in) operating activities

For the Successor 2015 Period, net cash provided by operating activities was $ 24.5 million. Net income before deducting depreciation, amortization and other non-cash items generated cash of $ 18.1 million and further benefitted from favorable reductions in net working capital of $ 6.4 million during this period. The favorable reductions in net working capital were largely driven from an increased focus on working capital optimization and were primarily attributable to a decrease of $ 4.4 million in accounts receivable, a $ 0.9 million increase in prepaid expenses and a $ 4.3 million increase in accounts payable and accrued expenses and other liabilities being only partially offset by a $ 2.1 million increase in inventories and a $ 1.1 million decrease in due to related parties during the period.

For the Successor 2014 Period, net cash used in operating activities was $ 8.4 million. Net income before deducting depreciation, amortization and other non-cash items generated cash of $ 7.4 million. This was offset by a net increase in working capital of $ 15.8 million. The most significant drivers of the net increase in working capital were a $ 11.0 million increase in accounts receivable, a $ 4.8 million increase in inventory and a $ 2.1 million increase in prepaid expenses and other assets. These increases were primarily due to net sales and inventory builds to support ongoing operational demands as the business scaled during this period. The significant drivers of the net increase in working capital were partially offset by a $ 2.1 million aggregate increase in accounts payable, accrued expenses and other liabilities during the period.

For the Predecessor 2014 Period, net cash provided by operating activities was $ 0.9 million. Net income before deducting depreciation, amortization and other non-cash items generated cash of $ 3.1 million. This was partially offset by a net increase in working capital of $ 2.2 million. The most significant drivers of the net increase in working capital were a $ 5.5 million decrease in accounts receivable being offset by a $ 1.5 million increase in inventory, a $ 0.2 million increase in prepaid expenses and other assets and a $ 6.0 million decrease in accounts payable and accrued expenses during the period.

Cash provided by (used in) investing activities

For the Successor 2015 Period, net cash used in investing activities was $ 10.2 million, consisting primarily of purchases of property and equipment to support the continued scaling of our business infrastructure during this period.

For the Successor 2014 Period, net cash used in investing activities was $ 239.5 million, consisting of $ 237.9 million used for our Acquisition of the Predecessor and $ 1.6 million used for purchases of property and equipment during this period.

 

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Cash provided by (used in) financing activities

For the Successor 2015 Period, net cash used in financing activities was $ 4.9 million, consisting primarily of debt repayments related to our Senior Secured Credit Facility (as defined below).

For the Successor 2014 Period, net cash provided by financing activities was $ 252.6 million, consisting of $ 149.4 million in net proceeds, after issuance costs, from borrowings on our Senior Secured Credit Facility, $ 105.1 million in proceeds from the issuance of our common and preferred stock and a $ 2.0 million repayment on our long-term debt. The proceeds from the Senior Secured Credit Facility and the issuance of the common and preferred stock were utilized to finance the Acquisition of the Predecessor during this period.

Description of indebtedness

Senior Secured Credit Facility

In conjunction with our acquisition of the Predecessor on January 31, 2014, and as amended in conjunction with the one-time extraordinary cash dividend declared on June 7, 2016 as described under “Dividend policy,” we entered into a five-year, senior secured credit agreement (as amended, the “Senior Secured Credit Facility”) with a syndicate consisting of several large financial institutions. The Senior Secured Credit Facility originally consisted of a $ 20 million revolving line of credit (the “Revolving Credit Facility”) and a $ 105 million term loan facility (the “Term Loan Facility”). On June 7, 2016, we entered into an amendment to our Senior Secured Credit Facility, pursuant to which we incurred an additional $ 64 million of indebtedness under the Term Loan Facility and increased the size of our Revolving Credit Facility to $ 25 million.

All amounts under the Revolving Credit Facility are available for draw until the maturity date on January 31, 2019. The Revolving Credit Facility is collateralized by substantially all of our assets and has a commitment fee of 0.5% of unused balance, payable quarterly in arrears. The Revolving Credit Facility also provides for sub-facilities in the form of a $ 5 million letter of credit and a $ 2 million swing line loan; however, the aggregate amounts under the Revolving Credit Facility cannot exceed $ 25 million.

The Term Loan Facility will mature on January 31, 2019 and is also collateralized by substantially all of our assets. The Term Loan Facility will be repaid in quarterly installments equal to (i)  $ 656,250 plus (ii) starting with fiscal quarter ending September 30, 2016, $ 400,000, with the remaining outstanding balance of the Term Loan Facility due upon the maturity date. The Term Loan Facility can be prepaid at any time without penalty and is subject to mandatory prepayments upon (i) the receipt of excess cash flow; (ii) asset dispositions that, individually, result in net proceeds in excess of $ 1 million, or, in aggregate, in excess of $ 2 million during a year; or (iii) the issuance of additional debt. The Term Loan Facility requires an annual administrative fee of $ 50,000.

Both the Revolving Credit Facility and the Term Loan Facility carry interest, at our option, at (i) a rate per annum equal to the greater of an adjusted London Interbank Offered Rate (“LIBOR”) (subject to a minimum floor of 1.25%) plus an applicable margin or (ii) a floating base rate plus an applicable margin. The interest rate on both the Revolving Credit Facility and the Term Loan Facility was 6.25% per annum as of December 31, 2015 and June 30, 2016.

The Senior Secured Credit Facility contains a number of covenants that, among other things, restrict our ability to (subject to certain exceptions) pay dividends and distributions or repurchase our capital stock, incur additional indebtedness or issue preferred stock, create liens on assets, engage in mergers or consolidations and sell or otherwise dispose of assets. The Senior Secured Credit Facility also includes maintenance covenants that require us to comply with certain consolidated total net leverage ratios and consolidated interest coverage ratios. As of December 31, 2015 and June 30, 2016, we were in compliance with all financial covenants. For more information related to the covenants in the Senior Secured Credit Facility, see the section entitled “Description of certain indebtedness—Senior Secured Credit Facility.”

Second Lien Credit Facility

In conjunction with our entry into the Senior Secured Credit Facility, and as amended in conjunction with the special dividend declared on June 7, 2016 as described under “Dividend policy,” we entered into a second lien credit agreement (as amended, the “Second Lien Credit Facility”) which provided a $ 40 million second lien term loan (the “Second Lien Term Loan”). The Second Lien Term Loan does not require any principal payments until maturity on July 31, 2019. The Second Lien Term Loan requires prepayment penalties if prepaid prior to the maturity date, other than in conjunction with a change in control, in the amount of 4% of amounts prepaid in year one, 2% in year two and 1% in year three; and requires

 

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prepayment penalties of 1% if prepaid on or prior to end of year three in conjunction with a change in control. The Second Lien Term Loan carries interest equal to Adjusted LIBOR plus 10% per annum, with an adjusted LIBOR equal to the higher of (i) the London interbank offered rate for U.S. dollars adjusted for customary Eurodollar reserve requirements, if any, and (ii) 1%. As of December 31, 2015 and June 30, 2016, the Second Lien Term Loan carried interest at a rate per annum of 11%.

The Second Lien Credit Facility contains substantially similar covenants as the Senior Secured Credit Facility, including maintenance covenants requiring compliance with certain consolidated total net leverage ratios and consolidated interest coverage ratios. As of December 31, 2015 and June 30, 2016, we were in compliance with all financial covenants. For more information related to the covenants in the Second Lien Credit Facility, see the section entitled “Description of certain indebtedness—Second Lien Credit Facility.”

Contractual obligations and commitments

The following table summarizes our contractual obligations as of December 31, 2015:

 

      Payments due by period  
      Total      Less than
one year
     1-3 Years      3-5 Years      More than
5 years
 

Bank debt(1)

   $ 148,106       $ 10,325       $ 5,250       $ 132,531       $   

Interest on bank debt(2)

     34,903         10,791         21,023         3,089           

Operating lease obligations

     14,886         2,564         5,605         4,682         2,035   
  

 

 

 

Total contractual obligations(3)

   $ 197,895       $ 23,680       $ 31,878       $ 140,302       $ 2,035   

 

 

 

(1)   Long-term debt payments include scheduled principal payments only.

 

(2)   Assumes an annual interest rate of 6.25% and 11% on the senior secured credit facility and second lien term loan, respectively, over the terms of the loans.

 

(3)   We have excluded our liability for uncertain tax positions from the table above because we are unable to make a reasonably reliable estimate of the timing of payments.

Off-balance sheet arrangements

As of June 30, 2016, our off-balance sheet arrangements consisted of operating leases for e.l.f. stores and office and warehouse space. See Note 7 to our unaudited condensed consolidated financial statements included elsewhere in this prospectus for more information regarding these operating leases.

Critical accounting policies and estimates

Our consolidated financial statements included elsewhere in this prospectus have been prepared in accordance with GAAP. The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies are more fully described in the notes to our consolidated financial statements included elsewhere in this prospectus, we believe that the following accounting policies and estimates are critical to our business operations and understanding of our financial results.

Revenue recognition

We recognize revenues when persuasive evidence of an arrangement exists, the product has been shipped, when title passes, when all risks and rewards of ownership have transferred, the sales price is fixed or determinable, and collectability is reasonably assured. Delivery is considered to have occurred at the time the title and risk of loss passes to the customer.

In the normal course of business, we offer various incentives to customers. We maintain a provision for sales discounts, markdowns, shortages and price adjustments, which are reflected as reductions to our net sales. The provision for these reductions is established based on our best estimate at the time of sale. We regularly review and revise, when deemed necessary, our estimates of sales incentives and other required reserves based primarily upon the historical rate of realization. These revenue reductions are reflected on the consolidated balance sheet as a sales allowance against accounts receivable.

 

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Business combinations

We allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The valuation methodologies used are based on the nature of the asset or liability.

For purposes of our acquisition of the Predecessor, the fair value of the trade name is estimated using the relief from royalty method, an income approach to valuation, which includes projecting net sales and other estimates. Customer relationships are valued based on an estimate of future revenues and costs related to the respective contracts over the remaining expected lives. Favorable leases are recorded based on differences between contractual rents under the respective lease agreements and prevailing market rents at the lease acquisition date.

Determining an acquired intangible asset’s useful life requires management judgment and is based on an evaluation of a number of factors, including the expected use of the asset, consumer awareness, trade name history and future expansion expectations, as well as any contractual provisions that could limit or extend an asset’s useful life. We estimate the useful lives of the intangible assets based on the expected period over which we anticipate generating economic benefit from the asset. We consider the trade name that we acquired to have an indefinite useful life, based upon its history of strong revenue and cash flow performance, and the intent and our ability to support the trade name with marketplace spending for the foreseeable future.

Impairment of long-lived assets, including goodwill and intangible assets

We assess potential impairments to our long-lived assets, which include property and equipment and amortizable intangible assets, whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of an asset is measured by a comparison of the carrying amount of an asset group to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of the asset group exceeds its estimated undiscounted future cash flows, an impairment charge is recognized as the amount by which the carrying amount of the asset exceeds the fair value of the asset. There were no impairment charges recorded on long-lived assets during the Predecessor 2014 Period, the Successor 2014 Period or the Successor 2015 Period.

Goodwill and indefinite-lived intangibles have been assigned to our reporting units for purposes of impairment testing. Historically we had a single reporting unit for the purpose of performing our goodwill impairment test. During the third quarter of 2015, we made structural and reporting changes to our internal organization. This reorganization aligned the internal management and functional support around our primary sales channels, which report into the chief operating decision maker. These changes resulted in the identification of three reporting units that met the definition in ASC 350, Intangibles—Goodwill and Other , of components of the Company’s one operating segment: (i) retail customers; (ii) e.l.f. stores; and (iii) e-commerce. In accordance with ASC 350 , on October 1, 2015, we reallocated the goodwill to the three reporting units using a relative fair value approach. As a result of the internal reorganization, we performed a quantitative goodwill impairment test immediately before and a quantitative goodwill impairment test immediately after this change in reporting units and noted no indication of impairment.

The goodwill impairment test consists of a comparison of each reporting unit’s fair value to its carrying value. The fair value of a reporting unit is an estimate of the amount for which the unit as a whole could be sold in a current transaction between willing parties. If the carrying value of a reporting unit exceeds its fair value, goodwill is written down to its implied fair value. Fair value of a reporting unit is estimated based on a combination of comparative market multiples and discounted cash flow valuation approaches. We are also permitted to make a qualitative assessment of whether it is more likely than not that the fair value of a reporting unit is less than its carrying value prior to applying the quantitative assessment. If based on our qualitative assessment it is more likely than not that the carrying value of the reporting unit is less than its fair value, then a quantitative assessment may be required.

We evaluate our indefinite-lived intangible asset to determine whether current events and circumstances continue to support an indefinite useful life. In addition, our indefinite-lived intangible asset is tested for impairment annually. The indefinite-lived intangible asset impairment test consists of a comparison of the fair value of each asset with its carrying value, with any excess of carrying value over fair value being recognized as an impairment loss. We are also permitted to make a qualitative assessment of whether it is more likely than not an indefinite-lived intangible asset’s fair value is less than its carrying value prior to applying the quantitative assessment. If based on our qualitative assessment it is more likely than not that the carrying value of the asset is less than its fair value, then a quantitative assessment may be required.

 

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We have selected October 1 as the date on which to perform our annual impairment tests for goodwill. We also test for impairment whenever events or circumstances indicate that the fair value of such indefinite-lived intangible asset has been impaired. No impairment of goodwill or our indefinite-lived intangible asset was recorded during the Predecessor 2014 Period, the Successor 2014 Period or the Successor 2015 Period.

Stock-based compensation

Stock-based compensation cost is measured at grant date, based on the fair value of the award, and is recognized on a straight-line method over the requisite service period for awards expected to vest. We estimate 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. We estimate the fair value of employee stock-based payment awards subject to both a market condition and the occurrence of a performance condition on the date of grant using a Monte Carlo simulation model that assumes the performance criteria will be met and the target payout levels will be achieved. We will continue to use the Black-Scholes and Monte Carlo models for option pricing following the consummation of this offering.

Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. We recognize compensation expense for awards expected to vest with only a service condition on a straight-line basis over the requisite service period, which is generally the award’s vesting period. Vesting of these awards is accelerated for certain employees in the event of a change in control or an initial public offering. 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.

The expected stock price volatility for the common stock was estimated by taking the average historic price volatility for industry peers based on daily price observations over a period equivalent to the expected term of the stock option grants. Industry peers consist of several public companies in our industry which are of similar size, complexity and stage of development. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury implied yield at the date of grant. The weighted-average expected term is determined with reference to historical exercise and post-vesting cancellation experience and the vesting period and contractual term of the awards. The forfeitures rate is estimated based on historical experience and expected future activity.

The fair value of shares of common stock underlying the stock options has historically been the determined by our board of directors, with input from management. Because there has been no public market for our common stock, the board of directors determined the fair value of common stock at the time of grant by considering a number of objective and subjective factors including independent third-party valuations of our common stock, operating and financial performance, the lack of liquidity of our capital stock and general and industry specific economic outlook, among other factors. Following the consummation of this offering, the fair value of our common stock will be the closing price of our common stock as reported on the date of grant.

We have no current plans to pay a regular dividend.

JOBS Act

We qualify as an emerging growth company pursuant to the provisions of the JOBS Act. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. We currently intend to opt out of the extended transition period with respect to new or revised accounting standards and, as a result, we will comply with any such new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies.

Quantitative and qualitative disclosure about market risk

We are exposed to certain market risks arising from transactions in the normal course of our business. Such risk is principally associated with interest rates and foreign exchange.

 

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Interest rate risk

We are exposed to changes in interest rates because the indebtedness incurred under our Senior Secured Credit Facility and Second Lien Credit Facility are variable rate debt. Interest rate changes generally do not affect the market value of our Senior Secured Credit Facility or our Second Lien Credit Facility; however, they do affect the amount of our interest payments and, therefore, our future earnings and cash flows. As of December 31, 2015, we had variable rate debt of $ 148.1 million under our Senior Secured Credit Facility and Second Lien Credit Facility. An interest rate increase of 1% would have increased our interest expense for the year ended December 31, 2015 by $ 1.4 million.

Foreign exchange risk

We are exposed to foreign exchange risk as we have contracts with suppliers in China for future purchases of inventories denominated in RMB. While we do not have an active hedging program, we have a number of legacy exchange rate forward contracts that are in the process of runoff. We neither use these foreign currency forward contracts for trading purposes nor do we follow hedge accounting, and therefore the periodic impact of these legacy hedging activities is calculated on a mark-to-market basis. Accordingly, the foreign currency forward contracts are carried at their fair value either as an asset or liability on the consolidated balance sheet with changes in fair value being recorded in other income (expense), net in our consolidated statements of operations.

Information regarding the Company’s foreign currency forward contracts, all of which mature in 2016, is as follows (in thousands):

 

Forward contracts (“FC”)   

Avg. contractual rate

$ /FC

     Original U.S. dollar
notional amount
    

Asset/(Liab.) fair value

December 31, 2015

 

Buy Chinese Renminbi / Sell USD

     6.2152       $ 148,978       $ (10,702

 

 

Controls and procedures

Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP. We are currently in the process of reviewing, documenting and testing our internal control over financial reporting.

We have not performed an evaluation of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, nor have we engaged an independent registered public accounting firm to perform an audit of our internal control over financial reporting as of any balance sheet date or for any period reported in our consolidated financial statements. Our management is not presently required to perform an annual assessment of the effectiveness of our internal control over financial reporting. This requirement will first apply to our Annual Report on Form 10-K for the year ending December 31, 2017. For as long as we are an emerging growth company, our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting. When we lose our status as an “emerging growth company” and reach an accelerated filer threshold, our independent registered public accounting firm will be required to attest to the effectiveness of our internal control over financial reporting.

In connection with the preparation of our financial statements for the year ended December 31, 2014, we, in conjunction with our independent registered public accounting firm, identified a material weakness in the design and operating effectiveness of our internal control over financial reporting. The material weakness was primarily comprised of deficiencies related to a lack of technical accounting skills and a lack of adequate review processes and controls within our accounting and finance organization. This material weakness was remediated in 2015. For additional information on this material weakness and the steps we took to remediate it, see “Risk factors—Risks related to our business—We have previously identified a material weakness in our internal control over financial reporting, and if we are unable to maintain effective internal controls, we may not be able to produce timely and accurate financial statements, and we or our independent registered public accounting firm may conclude that our internal control over financial reporting is not effective, which could adversely impact our investors’ confidence and our stock price.”

 

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Business

 

LOGO

e.l.f.: Changing the face of beauty

We are one of the fastest growing, most innovative cosmetics companies in the United States. Driven by our mission to make luxurious beauty accessible for all women to play beautifully , we have challenged the traditional belief that quality cosmetics are only available at high prices in select channels. e.l.f. offers high-quality, prestige-inspired beauty products for eyes, lips and face at extraordinary value, with the majority of our items retailing $ 6 or less. Our price points encourage trial and experimentation, while our commitment to quality and a differentiated consumer engagement model engender loyalty among a passionate and vocal group of consumers. We have built an authentic brand and a company with strong growth, margins and cash flow from operations.

We believe our success is rooted in our innovation process and ability to build direct consumer relationships. Born as an e-commerce company over a decade ago, we have created a modern consumer engagement and responsive innovation model that keeps our products on-trend and our consumers engaged as brand ambassadors. Our consumers provide us with real-time feedback through reviews and social media, which enables us to refine and augment our product portfolio in response to their needs. We leverage our fast-cycle product development and asset-light supply chain to launch high-quality products in as few as 20 weeks from concept, and 27 weeks on average. Our products are first launched on elfcosmetics.com, and distribution is generally only broadened to our retail customers after we receive strong consumer validation online. We believe this has led to our consistently strong productivity. We are one of the fastest growing cosmetics brands at Target, Walmart and CVS.

Our brand appeals to some of the most sought after consumers in the category. We believe the combination of our affordable price points and on-trend, innovative product assortment encourages trial, offers a strong value proposition and appeals to a broad base of consumers. Relative to the overall cosmetics category, our brand over-indexes with Millennials, multi-cultural consumers and some of the heaviest users in the category. This attractive and loyal consumer base supports high sales per linear foot and higher category sales for our retail customers. By combining our strong relationships with leading retailers with integrated consumer engagement across our e.l.f. stores, e-commerce and social media, we are a true multi-channel brand.

 

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Our net sales growth in the United States over the last three years was 20 times that of the mass cosmetics category on average. Our net sales still only represented 2.3% of the $ 8 billion U.S. mass cosmetics category in 2015. Our net sales grew from $ 144.9 million in the Unaudited Pro Forma Combined 2014 Period to $ 191.4 million in the year ended December 31, 2015, and, over the same period, our Adjusted EBITDA grew from $ 28.1 million to $ 46.2 million, representing an increase of 32% and 64%, respectively. Over the same period, net income grew from an unaudited pro forma combined net loss of $ 2.9 million to a net profit of $ 4.4 million. In 2015, our Adjusted EBITDA margin was 24% and our net income margin was 2%. 2

 

LOGO

Our history

We were founded in 2004 by father-son entrepreneurs Alan and Joey Shamah. Having spent over 30 collective years in the apparel business, they noted the changes being driven by the advent of “fast-fashion” players. They believed that a similar opportunity existed in cosmetics, where the traditional beauty model of high prices, long product cycles and traditional advertising was out of touch with changing consumer behavior. Utilizing sourcing relationships in China, they rapidly created prestige-inspired products at an affordable price. Bypassing traditional channels, they connected directly with consumers and launched elfcosmetics.com, where the first products sold for $ 1 each.

From those early days onward, we sought to delight our consumers with luxurious beauty at an extraordinary value. Our affordable, on-trend offering coupled with our direct approach resonated with young, diverse makeup enthusiasts, who became loyal e.l.f. consumers and helped build the brand through digital engagement and strong word of mouth. We spent the first few years nurturing this small and loyal consumer base. We grew virally and by 2006 found ourselves with a few hundred thousand orders and a vibrant community that valued our quality, affordable prices and honest approach.

Consumers told us what they did and did not like, as well as what other products they wanted to see from the brand. And we listened. We established deep, genuine connections with our consumers as they informed, inspired and motivated us. We broadened our assortment and expanded our price range up to $ 6 while staying true to our promise to provide extraordinary value relative to comparable prestige products. e.l.f. brought a degree of sophistication that was not present at these price points, and the industry took note—we won our first Allure Best of Beauty award in 2008 for our Shimmering Facial Whip, building credibility behind our promise of affordable, luxurious beauty.

In 2008, Target, a key beauty destination for many consumers, decided to test e.l.f. in its stores. Once at Target, we brought incremental sales to Target’s cosmetic category and the highest sales per linear foot across the entire cosmetics department. We believe the Target guest appreciated not having to choose between quality and affordable prices, and the e.l.f. cosmetics brand has exhibited strong sales growth in this account ever since. Over the next several years, we nurtured our vibrant community and expanded our distribution to other leading retailers such as Walmart. We gained chain-wide distribution in Target stores in 2013 and in that same year, we opened our first e.l.f. store to add another dimension to the brand experience and further bring our accessible beauty vision to life.

In January 2014, TPG Growth, a leading global private equity firm, acquired a controlling interest in e.l.f. to further scale and transform the company. Concurrent with the acquisition, Tarang Amin was appointed as CEO. The objective was to grow the business by enhancing the management team, building the e.l.f. brand, driving industry-leading innovation, expanding distribution and improving operational efficiency.

 

 

2     Adjusted EBITDA and Adjusted EBITDA margin are not measurements of financial performance under GAAP. See “Summary consolidated financial data” for a discussion of Adjusted EBITDA, Adjusted EBITDA margin and their respective limitations and reconciliations to GAAP measures.

 

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Over the past two years, we have made significant investments in our business by adding top talent and building our functional capabilities. We have developed strong consumer relationships and a new brand strategy behind play beautifully; accelerated our first-to-mass innovation capability, including our first category adjacency in skin care; expanded our distribution to approximately 19,000 retail stores, including Walmart, CVS and Old Navy; and significantly strengthened our operations, including transforming our China team and supplier base to deliver even higher quality. Our efforts have made e.l.f. one of the fastest-growing cosmetics companies in the United States. Women’s Wear Daily, a leading beauty industry publication, awarded e.l.f. Mass Brand of the Year in 2014 in recognition of our strong growth and impact on the overall cosmetics industry.

We are proud of the progress we have made to date and believe that we are in the early stages of brand development with significant room to grow. Many of the traditional brands in cosmetics have been in business 50 to 100 years. We are still building our brand and customer base and will continue to seek to shift industry paradigms. We aim to make the world a place where women can play beautifully every day.

Our mission

 

LOGO

Every word of this mission is meaningful to us. We believe that women should not have to choose between quality and price, so we take great pride in making prestige-inspired cosmetics accessible to all women. We understand our consumers and their desire to do more than look good. We share in their joy of makeup and strive to deliver them the beauty experience they desire. Our mission to play beautifully fosters a deep, authentic connection with our consumer.

Play beautifully is more than a trademarked slogan. It is an invitation to celebrate our consumer’s love of makeup, passion to explore new products and techniques, and desire to look and feel beautiful every day. From natural to classic to bold, e.l.f. gives our consumers endless possibilities so that they can have fun creating the looks they want.

 

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The cosmetics industry is large and attractive

We believe that the cosmetics category is highly attractive given its scale, growth dynamics and consumer demand trends. The U.S. and global cosmetics markets generated $ 14 billion and $ 57 billion, respectively, of retail sales in 2015. The cosmetics category primarily consists of face makeup, eye makeup, lip products, nail products and cosmetics sets/kits and excludes beauty tools and accessories such as brushes and applicators.

 

  Face makeup .      Face makeup products include BB/CC creams, blush, bronzer and highlighter, foundation, concealer and powder. Estimated U.S. retail sales of face makeup were $ 5 billion in 2015.

 

  Eye makeup .     Eye makeup products include eyeliner/pencil, eye shadow and mascara. Estimated U.S. retail sales of eye makeup were $ 4 billion in 2015.

 

  Lip products .     Lip products include lip gloss, lip liner/pencil and lipstick. Estimated U.S. retail sales of lip products were $ 3 billion in 2015.

 

  Nail products .     Nail products include nail polish, nail treatments/strengthener and nail polish remover. Estimated U.S. retail sales of nail products were $ 1 billion in 2015.

 

  Cosmetics sets/kits .     Cosmetics sets/kits include multiple cosmetics items of the same brand line packaged together in a set and priced at an advantageous price compared to purchasing the items separately. Estimated U.S. retail sales of cosmetics sets/kits were $ 1 billion in 2015.

The following chart illustrates cosmetics sales in the United States by product type in 2015:

U.S. Cosmetics Retail Sales by Product 2015

 

LOGO

Source: Euromonitor International Limited

The cosmetics category has experienced strong growth both in the United States and globally. In the United States, retail sales increased from $ 11 billion in 2010 to $ 14 billion in 2015, representing a CAGR of 5%, with each product category driving growth. Globally, retail sales increased from $ 43 billion in 2010 to $ 57 billion in 2015, representing a CAGR of 5%. Drivers of growth include innovation and new product launches, which span from new formulations that enhance performance, feel and fragrance, to new colors, delivery forms and packaging.

Cosmetics appeal broadly to women of all ages and ethnic groups, with penetration reaching 82% of U.S. women in 2014. Given the importance of cosmetics in a woman’s daily regimen and the availability of products across price points, the category has demonstrated resiliency through economic cycles. For example, during the most recent recessionary period of 2008 to 2009, the cosmetics category remained stable while broader gross domestic product declined 3%. We expect cosmetics to continue to be among the fastest growing and most consistent consumer categories.

 

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Channels

Cosmetics are broadly sold through food, drug, and mass channels, which accounted for 46% of U.S. cosmetics retail sales in 2015. Cosmetics are also distributed through department stores, direct and specialty channels accounting for 27%, 20% and 7% of retail sales, respectively, in 2015. The following chart illustrates cosmetics retail sales in the United States by channel in 2015:

U.S. Cosmetics Retail Sales by Channel 2015

 

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Source: Euromonitor International Limited data, Company channel definitions

FDM stores are typically considered to be the mass channel and include a diverse set of retailers, including grocery retailers such as Kroger, drug retailers such as CVS and mass merchandisers such as Target and Walmart. This channel is a key beauty destination for many consumers that seek affordable cosmetics and find that the large store footprints and multi-category offerings provide added convenience. From 2010 to 2015, cosmetics retail sales in FDM stores grew at a 4% CAGR.

Department stores typically utilize an assisted sales model for selling prestige cosmetics: products are stored in locked cabinets and consumers must ask a store associate to hand them products they would like to purchase. In this channel, store associates are able to provide beauty advice, product recommendations and facilitate product trial. From 2010 to 2015, cosmetics retail sales in department stores grew at a 7% CAGR.

The specialty channel includes multi-brand beauty retailers such as Sephora and Ulta. The cosmetics specialty channel also includes mono-brand beauty retailers such as e.l.f., Benefit Cosmetics and MAC Cosmetics. While beauty specialty retailers utilize an open sell model in which consumers are able to directly select product from shelves, stores are also staffed by sales associates who are able to provide advice, recommendations and promote product trial. In addition, many also offer salon services such as brow bars and spa services such as facials. Some specialty retailers in apparel and other segments, such as Old Navy, also offer cosmetics. From 2010 to 2015, cosmetics retail sales in specialty channels grew at a 3% CAGR.

The direct channel includes e-commerce, home shopping and direct selling. e-commerce sales accounted for 10% of the U.S. cosmetics market in 2015. From 2010 to 2015, while retail sales in the direct channel grew at a 6% CAGR, e-commerce sales grew at a 15% CAGR, three times the rate of the broader cosmetics category. We believe that beauty bloggers, social media and other online content enable consumers to be educated about cosmetics online and that growth rates in this channel will continue to outpace the broader category.

e.l.f. participates in the FDM, specialty and direct channels and has a strong track record of delivering above category average growth.

 

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Market segments

In the United States, the cosmetics category traditionally has been separated into two discrete segments—prestige and mass—which generally represent higher and lower price points and are associated with certain channels. The following chart illustrates cosmetics sales in the United States by market segment in 2015:

U.S. Cosmetics Retail Sales by Segment 2015

 

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Source: Euromonitor International Limited

Prestige products, which accounted for 42% of U.S. cosmetics retail sales in 2015, are characterized by higher price points and are typically sold in department stores and in high-end specialty stores such as Sephora. They have historically been at the forefront of quality and innovation in the category but remain too expensive for many consumers in the United States, where the average disposable personal income is less than $ 15,000. From 2010 to 2015, retail sales in the prestige segment grew at a 9% CAGR.

Mass products, which generated 58% of 2015 U.S. cosmetics retail sales, are more affordable than their prestige counterparts but generally have not delivered the same level of quality or innovation. They are more broadly available than prestige products given their presence in FDM and direct channels. From 2010 to 2015, retail sales in the mass segment grew at a 3% CAGR.

We believe that a paradigm shift has occurred in cosmetics: today’s cosmetics consumer is increasingly connected and informed, and purchasing decisions are often influenced by friends, beauty bloggers, social media and other online content. These sources provide consumers easy access to a breadth and depth of information formerly only available from beauty experts in assisted sales environments. The growth of specialty retailers like Ulta that carry both mass and prestige products has blurred the lines between segments and influenced consumers’ perceptions of each. As a result, consumers have shown a propensity to seek the most innovative products across prestige and mass to maximize their experience and budget.

Competitive landscape

The cosmetics industry is relatively concentrated. In 2015, over 60% of cosmetics retail sales in the United States were generated by brands owned by L’Oreal S.A., The Estee Lauder Companies Inc., The Procter & Gamble Company, Revlon Inc. and Shiseido Company, Limited. These large multinational companies own many brands across mass and prestige cosmetics. Of the nearly 30 cosmetics brands with retail sales exceeding $ 100 million in the United States in 2015, e.l.f. is one of only four that are independent. In addition to the traditional brands against which we compete, small independent companies continue to enter the market with new brands and customized product offerings. At less than 1% of total cosmetics retail sales, there is low private-label penetration in this highly branded category.

Among other areas, we believe that we compete against other cosmetics brands on price, quality of products and packaging, perceived value, innovation, in-store presence and visibility, and e-commerce and mobile commerce initiatives. e.l.f.’s share of the U.S. mass cosmetics market was 2.3% in 2015, ranking us as the eighth largest mass cosmetics brand in the United States excluding brands primarily focused on nails.

 

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In 2015, e.l.f.’s retail sales grew at 43%, which is almost five times faster than the next fastest top-10 mass cosmetics brand based on size, excluding brands primarily focused on nails, as illustrated by the chart below:

2015 Sales Growth for Top 10 U.S. Mass Cosmetics Brands Based on Size (1)

 

 

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Source: e.l.f. retail sales growth rate per Nielsen and e.l.f. internal data; other brands retail sales growth rates per Euromonitor

 

(1)   Excludes Sally Hansen, which is primarily a nail brand.

Our strategic differentiation: how e.l.f. helps women to play beautifully

We are driven by what today’s cosmetics consumer wants—an assortment of high-quality, prestige-inspired cosmetics at extraordinary value. We do not define ourselves as strictly mass or prestige, or limit our product availability to select channels. Through our modern consumer engagement and responsive innovation model, we interact with our consumers instead of broadcasting at them. This allows us to stay in tune with their needs and build trust and loyalty. Our business model has multiple areas of competitive advantage:

 

 

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Authentic brand that attracts some of the best consumers in the category

e.l.f. was founded to fill the gap between high-priced prestige beauty products and less innovative mass products. For over a decade, we have prioritized getting to know our consumers, and they in turn have provided us with valuable feedback, enabling us to address this gap and build e.l.f. into an authentic and trusted brand. By providing a comprehensive experience—from integrated engagement online, through social media and in our stores to our differentiated product offerings—we have drawn a strong following among the most sought after and heaviest users of cosmetic products.

One of our greatest strengths is the consumer that we attract. We appeal to a broad base of beauty consumers from experts to novices who enjoy experimenting with makeup. Many traditional brands have rapidly aging user bases. In contrast, we have strong appeal with Millennials and Hispanics, two of the fastest growing demographic groups in the United States.

 

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Cosmetics Industry Consumers* – Age and Ethnicity

 

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Source: Calimesa Consulting Partners, LLC; MetrixLab

 

Source: Third-party study commissioned by our Sponsor

* Includes mass and prestige cosmetics                        

 

Consumer-centric and efficient marketing model

We believe that modern cosmetics consumers are fundamentally different than generations of women before them and are not as engaged by the broad-scale marketing and advertising tactics used by many traditional beauty companies. In 2014, over $ 2 billion was spent on U.S. beauty advertising according to Nielsen, including many print media and TV campaigns highlighting celebrities and supermodels as brand advocates. In contrast, e.l.f. has deployed a low-cost, consumer-centric marketing model. Total expenses for advertising and promotions in 2015 were $ 3.9 million, less than 3% of our net sales. This compares to an average of over 20% of net sales for the top five global cosmetics companies from both the mass and prestige segments by net sales in their last fiscal year according to their public filings with the SEC or equivalent international regulatory agency.

Our consumers have been our best advocates, growing the e.l.f. brand virally through strong word of mouth. Many are very active in social media, write reviews of our products online and generate content on YouTube and other social media outlets. We have the #1 mass cosmetics brand e-commerce site with over 25 million visitors a year and possess a social media following on Instagram, Facebook and YouTube that rivals the larger cosmetic brands. elfcosmetics.com reflects our passionate consumer base with over 100,000 ratings. Over the past two years, we have received 18 times more reviews than the industry average. Consumers also love our high-quality, innovative products, with 66% of 2015 reviews being 5 stars, the highest rating. Our digital content—including images, text, and video—inspires our fans with looks and products they love and avoids common industry messaging that beauty is about perfection. We feature e.l.f. consumers as our stars, and reinforce our promise to make luxurious beauty accessible.

High-quality cosmetics at an extraordinary value enabled by flexible, asset-light operations

e.l.f. consumers recognize our ability to provide a broad assortment of high-quality products at an extraordinary value. The majority of our items retail for $ 6 or less, providing a low-risk way for consumers to try new products. Examples of our high-quality and extraordinary value innovations include e.l.f. Mineral Infused Face Primer at $ 6 versus a prestige primer at $ 36, e.l.f. Baked Eyeshadow Trio at $ 4 versus a competitive baked eyeshadow trio at $ 28 and e.l.f. Lip Exfoliator at $ 3 versus a similar type of lip treatment at $ 24. From formulation to package design, our products deliver quality and innovation at a fraction of prestige prices, facilitating frequent consumer purchasing and experimentation without the guilt of overspending.

Our low price points are supported by our ability to source low cost, high-quality cosmetics quickly. As of August 2016, we had 48 e.l.f. professionals involved in sourcing, quality and innovation. We have longtime relationships with strategic vendors that pair a strong quality orientation with the ability to execute rapidly. Our supply chain is built for growth with asset-light operations, ample capacity and low capital requirements. This capability and commitment to an agile supply chain allows us to introduce a stream of on-trend innovation.

All e.l.f. products are hypoallergenic and non-comedogenic. We do not test on animals or endorse such practices, nor do we use ingredients that are tested on animals. We have been designated as being a “cruelty-free” company by People for the Ethical Treatment of Animals.

 

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Our portfolio spans the eyes, lips, face, kits, tools and skin care categories. Our largest product categories, face makeup and eye makeup, accounted for 38% and 33%, respectively, of our sales of cosmetics in 2015, which excludes tools and skin care. In comparison, face makeup and eye makeup accounted for 36% and 29%, respectively, of the U.S. cosmetics category retail sales in 2015.

 

 

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Eye makeup .     Eye makeup accounted for 33% of our sales in 2015, excluding tools and skin care. Eye makeup is a segment where our consumers truly have an opportunity to play and experiment. Our breadth of accessible, high-quality eye makeup includes eyeshadow, eyeliner, mascara and eyelashes, and eyebrow grooming products. We offer everything from the basics to must-have items for capturing the season’s latest looks. Our top-rated eye cosmetic products include our best-selling Mad for Matte Eyeshadow Palette with 10 matte shades that consumers can use to customize a multitude of looks, our e.l.f. Eyebrow Kit and e.l.f. Intense Ink Eyeliner. We currently offer eye makeup products with retail prices from $ 1 to $ 10.

 

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Lip makeup .     Lip makeup accounted for 14% of our sales in 2015, excluding tools and skin care. We offer a wide assortment of color and non-color lip products that delight our consumers. Our lip colors are made with nourishing ingredients in a range of finishes and forms, including lipsticks, glosses and liners. Our Matte Lip Color and Moisturizing Lipsticks offer deep, pigmented color for $ 3 and are consistent top sellers. We also offer lip care products like our e.l.f. Lip Exfoliator that gently exfoliates lips prior to makeup application. Overall, our lip products have retail prices from $ 1 to $ 10.

 

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Face makeup .     Face makeup accounted for 38% of our sales in 2015, excluding tools and skin care. Our consumers use a variety of products to achieve their desired look. Their multi-step regimen often involves products from a base primer layer to finishing and highlighting powders. Our high-quality face makeup line includes a breadth of complexion essentials our consumers can use to prime their skin, conceal imperfections and smooth, sculpt, highlight and define a look. We currently offer foundation, primer, blush, powder, concealer, bronzer, tinted moisturizer, shimmer, bronzers and luminizers that retail from $ 1 to $ 8. Consumer favorites include the top-rated e.l.f. Blush Palette and e.l.f. Mineral Infused Face Primer .

 

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Kits .     Kits accounted for 15% of our sales in 2015, excluding tools and skin care. In addition to purchasing our products individually, our consumers may opt to try our sets, kits and palettes, which encourage them to try a complete look and provide greater variety at exceptional value. We also provide special kits during the holiday season that enable consumers to gift their favorite e.l.f. products. These kits also give national retailers an opportunity to prominently display e.l.f.

 

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Beauty tools .     We sell a broad range of prestige-inspired makeup brushes, tools and accessories that enable our consumers to perfect the technique and look they desire. Within tools, many of our brushes are top sellers, including our e.l.f. 11 Piece Brush Collection for $ 30 and our e.l.f. Kabuki Face Brush for $ 6. Our tools are highly complementary to our eye, lip and face makeup and round out what our consumers need to play beautifully. We currently offer beauty tools, including brush sets, with retail prices ranging from $ 1 to $ 35.

 

 

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Skin care .     In late 2015, we launched our skin care line. Inspired by global and prestige trends, e.l.f. skin care provides the consumer with a luxurious beauty experience – high-quality formulas with prestige-like componentry and packaging, all at an extraordinary value. Our skin care assortment offers a regimen of hydration-focused products and includes moisturizers, cleansers, eye and night creams, masks, an exfoliating scrub and a serum. Leveraging our historical success with tools, we also offer skin care-specific brushes. Within the first year of our skin care launch, the e.l.f. Daily Hydration Moisturizer received an Allure Best of Beauty award. Our skin care products have a retail price range between $ 4 and $ 12.

 

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Fast-cycle innovation and validation model

We believe innovation is key to our success and that we are a leader in the industry in speed and new product introductions. We have built an innovation capability that can progress a new e.l.f. beauty product from concept to online launch in as few as 20 weeks from concept, and 27 weeks on average. In 2015, this capability allowed us to introduce over 50 new items across eyes, lips, face, tools, kits and skin care, and 40% of our retail sales came from products launched in the last three years based on data from Nielsen.

We leverage multiple sources of inspiration to develop our new product ideas, including global trend assessments, supplier and industry research, strategic customer input and consumer feedback and insights. Our innovation strategy is underpinned by three key pillars to delight consumers:

 

  First-to-mass.     “First-to-mass” products are inspired by trends in prestige beauty that we bring to the mass market. As consumers are increasingly savvy and knowledgeable about trends in the prestige market, they look for how they can achieve on-trend looks, but at an accessible price. In the past eight years, we have introduced over 50 new items. Examples include the e.l.f. Mineral Infused Face Primer at $ 6 versus a prestige primer at $ 36, e.l.f. Baked Eyeshadow Trio at $ 4 versus a competitive baked eyeshadow trio at $ 28, the e.l.f. Contouring Brush at $ 6 versus a similar type of brush at $ 35 and the e.l.f. Lip Exfoliator at $ 3 versus a similar type of lip treatment at $ 24.

 

  Core expansion.     Core expansion items are those trend-inspired products across eyes, lips, face and tools that augment our assortment and deliver extraordinary value across price points. We consistently evaluate our core eyes, lips, face and tools offerings and develop new items based on category trends, consumer feedback and other market intelligence. We had over 50 new launches in 2015, including Intense Ink Eyeliner at $ 3, Instant Lift Brow Pencil at $ 2, Gotta Glow Lip Tint at $ 6 and Matte Magic Mist & Set Spray at $ 4.

 

  Adjacencies.     We believe that we can reapply our model to launch products into adjacent categories. We recently entered the skin care category with a high-quality skin care product assortment priced at just $ 4 to $ 12. Inspired by global and prestige trends, e.l.f. skin care provides the consumer with a luxurious beauty experience – high-quality formulas with prestige-like componentry and packaging, all at an extraordinary value.

When we launch a new e.l.f. beauty product online, we leverage our unique community of digitally engaged consumers. With 25 million visits per year and over 100,000 online reviews, elfcosmetics.com is a vehicle for refining products and determining best sellers. We are able to analyze sales results, reviews and feedback through social media to provide a quick indication of a product’s performance. We use this valuable data to introduce validated, best-selling products to retail, which drives leading performance relative to others in the category. Not only does this fast, high-output, testing methodology result in leading performance in retail, it also contributes to building our consumer relationships. Our consumers are part of the process, and know that their feedback is valuable and impacts the brand. We believe our active dialogue with our consumers provides us with a highly differentiated perspective on innovation and informs the launch, validation and refinement of our products.

 

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Unlike many cosmetics companies that launch products in concert with the timing of when retailers rearrange or restock products, we leverage our multi-channel model to launch products throughout the year and test them online and in e.l.f. stores. Distribution is generally only broadened to our retail customers after we receive strong consumer validation in those channels, leading to strong productivity and year-over-year comparable store sales growth. This focus on best sellers allows us to present retail customers with a broad portfolio of highly productive products with focused color assortments, which contrasts starkly with most cosmetics companies’ broad color assortments spread over fewer items.

 

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True multi-channel brand blurs the lines between mass and prestige

We are a true multi-channel brand with strength across e-commerce, national retailers and our e.l.f. stores. Our ability to engage our consumers across multiple touch points differentiates e.l.f. from traditional mass brands, which typically focus on one channel. We also leverage insights gained from each channel to drive performance across the business.

e-commerce .      We have the #1 mass cosmetics brand e-commerce site with over 25 million visitors per year and 4.5 million cumulative transactions representing over 50 million units. elfcosmetics.com also has the highest revenue, traffic, time spent on-site and units per transaction of any mass cosmetics brand website. Our e-commerce business serves as a strong source of sales and an important component of our engagement and innovation model. We have nurtured a loyal, highly active online community for over a decade. Our foundation as an e-commerce company and our digital engagement model drive high conversion on elfcosmetics.com, where we sell our full product offering of over 900 SKUs. Offering a dynamic platform for consumers to play beautifully , elfcosmetics.com reflects our passionate consumer base with its more than 100,000 ratings. Over the past two years, we have received 18 times more reviews than the industry average.

National retailers .     We currently sell our products in approximately 19,000 retail stores in the United States in the mass, drug store, food, and specialty retail channels. We are one of the fastest growing cosmetics brands at Target, Walmart and CVS. e.l.f. offers retailers a compelling retailer value proposition driven by four key factors:

 

  Highly sought after consumers.     One of our greatest strengths is the consumer that we attract. We appeal to a broad base of beauty consumers—from experts to novices who enjoy experimenting with makeup—and have drawn a strong following among the most sought after and heaviest users of cosmetic products. Many traditional brands have rapidly aging user bases. In contrast, we have strong appeal with Millennials and Hispanics, two of the fastest growing demographic groups in the United States.

 

  Innovation.     The key drivers of growth in the cosmetics industry are innovation and new product launches, and we have a track record of bringing prestige-inspired innovation quickly to the mass channel. We have built an innovation capability that can progress a new e.l.f. beauty product from concept to online launch in as few as 20 weeks and 27 weeks on average. Our new on-trend products attract consumers to our retail customers’ stores and drive increased sales from consumers wanting to experience these trending products.

 

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  Highly incremental sales.     Most new brands entering a category capture the majority of their sales from existing brands instead of adding new sales to the category. By contrast, e.l.f. has proven its ability to deliver incremental category sales across a range of retail formats. A recent controlled store test at a national retailer highlighted that over 50% of e.l.f.’s sales were incremental to the key product categories upon introduction of e.l.f. products at the retailer, as opposed to diverting sales from another brand on the shelf.

% of e.l.f. Sales Incremental to Select Cosmetics Product Categories

 

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Source: e.l.f. point of sale data from a national retailer s internal data

 

  High productivity.     From a productivity standpoint, we stand out in comparison to other brands in the category on both a dollar sales and unit sales basis. The chart below illustrates our productivity at one of our largest retail customers.

Brand Productivity Per Linear Foot Per Week at a National Retailer

 

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Source: U.S. cosmetics retail sales per Nielsen XAOC including C-Stores database for a national retailer for the 52 weeks ended February 19, 2016 and linear feet per Retail Merchandising Services, Inc. data

Our top 10 retail customers represented 72% of our net sales in 2015. Our largest retail customers, Target and Walmart, accounted for 28% and 23%, respectively, of our net sales in 2015.

Target is our longest-standing national retail customer and a key beauty destination for many consumers. At Target, we achieved double digit growth in retail sales from 2014 to 2015. e.l.f. is Target’s most productive cosmetics brand measured in sales per linear foot, and we have had full chain distribution in the United States since 2013. We have been steadily growing shelf space at Target and believe there is a significant opportunity for more space given the productivity of our larger sets and a strong innovation pipeline.

At Walmart, the world’s largest retailer, we have significantly outpaced cosmetics category growth and continue to earn additional space. Cosmetics is an important category for Walmart, with sales of over $ 2 billion in the United States in 2014. Similar to our experience at Target, we have been able to grow Walmart’s cosmetics category through incremental consumer purchases and strong productivity. As of August 2016, e.l.f. products were sold in approximately 85% of Walmart’s U.S. stores. Given our strong productivity, we believe we have the opportunity to expand distribution to more stores as well as gain additional shelf space.

In the drug channel, CVS, the largest drug store chain in the United States, undertook a national roll-out of e.l.f. in 2015 based on strong test results. We are still in the early stages of both CVS and broader drug channel expansion.

 

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In the specialty channel, we have full chain distribution at Old Navy, and the brand continues to earn incremental space as a result of strong productivity.

e.l.f. store s .     We were the first mass cosmetics brand with our own stores, a format historically limited to prestige brands. We believe our stores serve as one of our most effective and efficient vehicles for marketing and consumer engagement. e.l.f. stores showcase a broad assortment of e.l.f. products, create an environment dedicated to play beautifully , and allow us to test and validate new products. As of August 2016, we had nine e.l.f. stores in the New York metro area located in high-traffic malls and urban areas.

International .     e.l.f. products are sold in a number of international markets. Similar to how we started in the United States, we believe we can introduce e.l.f. via an e-commerce platform to test new markets and expand our distribution based on the market-specific learnings we gather online. This approach, coupled with our rapid, low-cost innovation, provides flexibility and a strong foundation for growth in new and established markets abroad. We are focused on growing sales in three priority international markets: Canada, the United Kingdom and Mexico. We have also identified other attractive markets where we believe the e.l.f. brand can succeed, including Australia, Chile, France and Vietnam, among others. International sales accounted for 7% of net sales in 2015.

High-performance team and culture

Our CEO Tarang Amin joined us in January 2014, and under his leadership we have assembled a world-class management team that possesses an excellent track record of results and has successfully worked together for many years. During the team’s prior tenure at Schiff Nutrition (NYSE: SHF), the company grew in enterprise value from $ 190 million to $ 1.5 billion in less than two years and was acquired by Reckitt Benckiser (London Stock Exchange: RB). With strong backgrounds from The Clorox Company, The Procter & Gamble Company, L’Oreal S.A., Mary Kay Inc., TPG and other leading companies, our team has demonstrated skills in building brands, leading innovation, expanding distribution, making acquisitions and driving world-class operations. We operate with a high-performance team culture. We communicate with great candor and transparency in the spirit of helping the team succeed, make quick decisions and drive executional excellence. The combination of a talented team, strong culture and values and disciplined execution forms the foundation of our success.

Our values guide our behavior and set the tone for our high-performance team culture:

 

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The e.l.f. growth strategy

We believe e.l.f. is one of the most disruptive brands in the cosmetics industry. We are in the early stages of development, with significant room to grow by converting more consumers to the brand, making e.l.f. products more widely available and offering more innovative products to our consumers. We expect the United States to be the largest source of our growth over the next few years and also see an opportunity to expand in select international markets. We also believe we have an opportunity to improve our margins through greater operating leverage and efficiency.

We have made substantial investments over the last two years and believe we are well positioned for continued growth driven by four strategies:

 

  Build a great brand

Draw new consumers to the brand .     We have a loyal consumer following, as illustrated by our repeat purchase rates which are among the highest in the industry: 58% of our consumers purchase one or more additional products within 12 months of initial purchase. We believe we can significantly grow this following of passionate consumers from current levels. Increasing brand awareness is a major growth driver for our company, as it has historically led to strong trial and high repeat purchase rates. e.l.f. is still unknown to many women, with only 6% unaided and 58% aided awareness as of August 2015. In contrast, many traditional brands have unaided awareness close to 40% and aided awareness close to 100%. We plan to continue to drive awareness and draw consumers to the brand.

Encourage current consumers to use more e.l.f. products.     Our consumers’ loyalty to the e.l.f. brand drives growth through increased usage of our products across categories and advocacy of our brand to other potential consumers. Many of our consumers regularly visit elfcosmetics.com, where in 2015 they bought over nine units per transaction on average. We have designed our product assortment to encourage cross-category purchases across eyes, lips, face, tools and skin care. We find that consumers often enter the brand through one of our lower priced items and then purchase other e.l.f. products across categories once they understand our extraordinary value proposition. Our consumers also seek out our innovation, buying new products both online and in stores. We believe that through sustained innovation and efficient marketing, we will increase the number of e.l.f. items our consumers purchase.

 

  Lead innovation

Use innovation to drive sales and margin.     We have a track record of bringing prestige-inspired innovation quickly to the mass channel. We expect to continue to leverage our rapid innovation and flexible supply chain to introduce new products across the eyes, lips, face and tools categories. We believe our innovation has also led consumers to purchase products at higher price points while still delivering an extraordinary value. Many consumers who first tried a $ 1 item have now migrated to $ 3 to $ 8 items, which often have higher margins than our less expensive products.

Expand into skin care and relevant adjacencies.     We have successfully brought a prestige-like approach to mass cosmetics at extraordinary value. We believe there are opportunities to use this same approach in other beauty categories, leveraging our brand equity and relationship with e.l.f. enthusiasts to extend our brand into adjacent segments. One such category is skin care, which generated $ 16 billion in retail sales in the United States and $ 110 billion globally in 2015. We recently introduced a high-quality skin care line retailing for just $ 4 to $ 12 per product, a fraction of the price of prestige brands. We plan to capitalize on our innovation expertise to develop new products in other adjacent categories.

 

  Expand brand penetration

Grow space allocation with our existing national retailers.     We have significant potential upside in deepening distribution with our existing retailers by continuing to leverage our productivity, innovation and growth to win more shelf space. Even at our largest customers, e.l.f. is currently in less than 6% of the space allocated to cosmetics despite having among the highest productivity in the category. While certain legacy cosmetics brands have an average of 15 to 18 feet of inline space in major retailers, e.l.f.’s average is only five feet. We believe that our strong performance will enable our shelf presence in our current retailers to become larger over time.

Increase number of new customers.     We are one of the fastest growing cosmetics brands at Target, Walmart and CVS, and our growth rates and productivity are among the highest in the industry. We have major distribution whitespace, as we are currently in only approximately 19,000 national retail stores in the United States and believe there are thousands of additional stores available to us.

 

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Grow our direct-to-consumer business.     We plan to grow elfcosmetics.com by driving traffic and conversion. In addition, our e.l.f. stores have been highly productive and profitable. As of August 2016, we operated nine stores in the New York metro area and we plan to selectively open more e.l.f. stores nationally in high-traffic areas.

Expand internationally.     We operate in a number of countries outside the United States, which accounted for 7% of our net sales in 2015. Given the portability of the e.l.f. brand, we believe that we have a significant opportunity in international markets over the long term.

 

  Drive world-class operations

Leverage high-performance team culture and execution capability.     We have made significant investments in our business over the past two years by hiring top talent and building functional capabilities. Our management team comes from leading consumer packaged goods companies and has experience implementing growth strategies and driving operational improvements. We believe what differentiates us from many traditional cosmetics companies is our ability to make fast decisions and execute with excellence. We believe we have a major speed-to-market advantage over many other companies and are highly responsive to retail customer and consumer needs. We will continue to leverage our executional excellence as we seek to become the preferred partner of our key customers.

Drive operating margins and efficiencies.     We have built a low-cost, quality-oriented supply chain with ample capacity to support future growth. We intend to grow our margins by pursuing additional cost savings opportunities and enhancing our product mix through innovation. We also expect to benefit from operating leverage as we scale the business.

Operations

We have developed a scalable, asset-light supply chain centered on speed to market and high-quality at low costs. Our China-based sourcing, quality and innovation teams work with their U.S.-based counterparts to deliver ongoing product quality, innovation and cost savings.

Manufacturing process

Our manufacturing process centers on close collaboration with a network of third-party manufacturers in China. What differentiates us is our ability to drive speed, quality and efficient production. We leverage high annual unit volumes with our suppliers to have them quickly produce small quantities of a new product so that we can launch online in as few as 20 weeks and 27 weeks on average. These early sales provide us with validation data to determine which products to introduce at our national retail customers. Based on what we decide to scale up, we can provide higher, more reliable, longer-term volumes to our manufacturers. We find this process more efficient than making assumptions about what products will sell and being burdened with high levels of working capital.

Over the past two years, we have transformed our China team and supply network to drive even higher quality, while keeping our flexible and low cost structure. We have ample manufacturing capacity as well as back-up capability in the event that one or more suppliers cannot meet our needs. Our broad supply base gives us the ability to fulfill our product requirements and remain cost competitive.

Innovation

Leading innovation is one of our core strategies and is supported by strong research and development capabilities. We have built a team of both internal and external personnel that focuses on a broad range of innovation capabilities including product development, materials science, quality assurance and packaging. Our team delivers dozens of new products every year as well as improvements to our core line.

Our innovation approach is consumer driven. Our product development team works closely with marketing to identify consumer needs, trends and market opportunities. We use these insights to quickly develop and screen prototypes. We utilize elfcosmetics.com to validate our innovation through sales data and direct consumer feedback. This leads to a nimble process that delivers rapid output.

We are passionate about delivering high-quality products. Our in-house quality control, quality assurance and regulatory staff define product specifications and formulas. We partner with a network of third-party manufacturers for production. Product quality and performance is achieved by applying industry standard processes for ingredient integrity and manufacturing compliance. We supplement these processes with both internal and external stability and microbiological testing to monitor compliance with industry and country-specific regulations and standards.

 

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Ingredients and packaging

We work closely with our suppliers on new product innovation and quality. Our innovation team creates our formulas and our suppliers produce to our specifications. With no single product contributing more than 2% of net sales in 2015, and with over 200 materials used in our formulas, we are not overly dependent on any single formula raw material. These raw materials are broadly available and have regular quality testing for ingredient integrity.

e.l.f. team members create our component and secondary packaging specifications and source their production. We have multiple component and packaging suppliers in place with ample back-up capacity. Our co-packers purchase from our packaging suppliers at our pre-negotiated specifications and rates. This allows us to efficiently manage our packaging quality, capacity and cost.

Quality control

We have a comprehensive quality assurance program that gives us visibility into the quality of our products during the sourcing and production cycle. Our innovation team approves product samples and is on-site for initial production runs. Our China-based quality team provides oversight through on-site inspections and audits of our third-party manufacturers as well as component and packaging suppliers. We conduct comprehensive audits at least annually of all our suppliers and have an on-site weekly presence at our primary suppliers, where we inspect and monitor finished and semi-finished product, raw materials, batch records and testing records. We also validate our manufacturers’ finished product testing results with third-party laboratory testing. In the spirit of continual improvement, we have frequent dialogue with our suppliers on quality assurance enhancements.

Warehousing, distribution and logistics

In early 2016, we opened a new distribution center in Ontario, California, to replace our previous distribution center in New Jersey. This facility supports multi-channel shipping, with the ability to pick and ship directly to e-commerce consumers, e.l.f. stores, national retail customers and international customers. We have also invested capital in scanning and conveying technology. Our facility is operated by a leading third-party logistics provider.

Seasonality

Our results of operations are subject to seasonal fluctuations, with net sales in the third and fourth fiscal quarters typically being higher than in the first and second fiscal quarters. The higher net sales in our third and fourth fiscal quarters are largely attributable to the increased levels of purchasing by retailers for the holiday season, and adverse events that occur during the third or fourth quarter could have a disproportionate effect on our results of operations for the entire fiscal year. As a result of higher sales during the third and fourth quarters, our working capital needs are greater during the second and third quarters of the fiscal year. Fluctuations throughout the year are also driven by the timing of product restocking or rearrangement by our major customers as well as our expansion into new customers. Because a limited number of our retail customers account for a large percentage of our net sales, a change in the order pattern of one or more of our large retail customers could cause a significant fluctuation of our quarterly results or reduce our liquidity.

Management information systems

We use our information systems to manage our national retailers, e.l.f. stores, e-commerce and corporate operations. These management information systems provide business process support and intelligence across our multi-channel operations.

In 2015, we embarked on a comprehensive strategy to replace our legacy information system infrastructure. Our new systems employ a comprehensive enterprise resource planning (“ERP”) platform provided and supported by a leading global software partner. This system covers order entry, customer service, accounts payable, accounts receivable, purchasing, asset management and manufacturing.

Our order management process is automated via electronic data interchange with the vast majority of our retail customers feeding orders directly to our ERP platform. From time to time, we enhance and complement the system with additional software. We are currently integrating into a warehouse management system managed by our third-party logistics provider, which will allow us to improve real-time tracking and management of inventory. We are also implementing computerized point-of-sale systems in our e.l.f. stores to enable real-time reporting and analytics.

 

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In connection with our overall strategy and improvement of these processes, we hired a Vice President of Information Technology in 2016 who oversees our systems infrastructure upgrade. We expect these systems to be fully functional by the third quarter of 2016 and have a broader strategic roadmap to continue building our information technology capabilities.

Trademarks and other intellectual property

We believe that our intellectual property has substantial value and has contributed significantly to the success of our business. Our primary trademarks include “e.l.f.,” “eyes lips face” and “play beautifully,” all of which are registered with the U.S. Patent and Trademark Office for our goods and services of primary interest. These trademarks are also registered or have a registration pending in Australia, Brazil, Canada, China, the European Union, India, Mexico, Russia and approximately 20 other countries or registries. We also have numerous other trademark registrations and pending applications for product names and tag lines. Our trademarks are valuable assets that reinforce the distinctiveness of our brand and our consumers’ favorable perception of our products. The current registrations of these trademarks in the United States and foreign countries are effective for consecutive terms of 10 to 15 years and due for periodic renewals, presently scheduled between 2016 and 2028, provided that we comply with all applicable renewal requirements including, where necessary, the continued use of trademarks in connection with the listed goods. In addition to trademark protection, we own numerous URL designations, including elfcosmetics.com. We also rely on and use reasonable business activities to protect unpatented proprietary expertise and product formulations, continuing innovation and other know-how to develop and maintain our competitive position.

Employees

As of December 31, 2015, we had approximately 159 full-time employees and an additional 72 part-time employees. As of December 31, 2015, we had 104 and 55 full-time employees in the United States and China, respectively. Approximately 93% of our part-time employees worked in our e.l.f. stores. None of our employees are currently covered by a collective bargaining agreement, and we have experienced no work stoppages. We consider our relationship with our employees to be good.

Government regulation

We and our products are subject to regulation by the FDA, the CPSC and the FTC as well as various other federal, state, local and foreign regulatory authorities. These laws and regulations principally relate to the ingredients, proper labeling, advertising, packaging, marketing, manufacture, safety, shipment and disposal of our products.

Under the FDCA cosmetics are defined as articles or components of articles that are applied to the human body and intended to cleanse, beautify or alter its appearance, with the exception of soap. The labeling of cosmetic products is also subject to the requirements of the FDCA, the Fair Packaging and Labeling Act, the Poison Prevention Packaging Act and other FDA regulations. Cosmetics are not subject to pre-market approval by the FDA, however certain ingredients, such as color additives, must be pre-authorized. If safety of the products or ingredients has not been adequately substantiated, a specific warning label is required. Other warnings may also be mandated pursuant to FDA regulations. The FDA monitors compliance of cosmetic products through market surveillance and inspection of cosmetic manufacturers and distributors to ensure that the products neither contain false nor misleading labeling and that they are not manufactured under unsanitary conditions. Inspections also may arise from consumer or competitor complaints filed with the FDA. In the event the FDA identifies false or misleading labeling or unsanitary conditions or otherwise a failure to comply with FDA requirements, we may be required by a regulatory authority or we may independently decide to conduct a recall or market withdrawal of our product or to make changes to our manufacturing processes or product formulations or labels which could result in an insufficient amount of our products in the market and harm our reputation.

The FDA evaluates the “intended use” of a product to determine whether it is a drug, cosmetic product, or both. If a product is intended for use in the diagnosis, cure, mitigation, treatment or prevention of a disease condition or to affect the structure or function of the human body, the FDA will regulate the product as a drug. Drug products will then be subject to applicable requirements under the FDCA. The FDA may also consider labeling claims in determining the intended use of a product. If the FDA considers label claims for our cosmetic products to be claims affecting the structure or function of the human body, or intended for a disease condition, those products may be regulated as “new” drugs. If such products were regulated as “new” drugs by the FDA, it would be necessary to obtain pre-market approval, which includes, among other things, conducting clinical trials to demonstrate safety and efficacy of our products in order to continue marketing those

 

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products. However, we may not have sufficient resources to conduct any required clinical studies and because clinical trial outcomes are uncertain we may not be able to demonstrate sufficient efficacy or safety data to resume future marketing of those products.

Our current products that are intended to treat acne and used as sunscreen are considered OTC drug products by the FDA. Our OTC products are subject to regulation through the FDA’s “monograph” system which specifies, among other things, permitted active drug ingredients and their concentrations. The FDA’s monograph system also provides the permissible product claims and certain product labeling requirements, based on the intended use of the product. Our OTC drug products must be manufactured consistent with the FDA’s current GMP requirements, and the failure to maintain compliance with these requirements could require us to conduct recalls, market withdrawals, or make changes to our manufacturing practices. Any of these actions could result in harm to our reputation or affect our ability to provide sufficient product to the market.

The FDA may change the regulations as to any product category, requiring a change in labeling, product formulation or analytical testing. However, we may not have sufficient resources to conduct any required analytical testing, reformulate the product or make required label changes, possibly resulting in an inability to continue or resume marketing these products. Any inquiries or investigations from the FDA, FTC or other foreign regulatory authorities into the regulatory status of our cosmetic products and any subsequent interruption in the marketing and sale of those products could severely damage our brand and company reputation in the marketplace.

We are subject to regulation by the CPSC under the Consumer Product Safety Act, as amended by the Consumer Product Safety Improvement Act of 2008. These statutes and the related regulations ban from the market consumer products that fail to comply with applicable product safety laws, regulations, and standards. The CPSC has the authority to require the recall, repair, replacement or refund of any such banned products or products that otherwise create a substantial risk of injury and may seek penalties for regulatory noncompliance under certain circumstances. CPSC regulations also require manufacturers of consumer products to report to the CPSC certain types of information regarding products that fail to comply with applicable regulations. Certain state laws also address the safety of consumer products, and mandate reporting requirements, and noncompliance may result in penalties or other regulatory action.

The FTC, FDA and other government authorities also regulate advertising and product claims regarding the safety, performance and benefits of our products. These regulatory authorities typically require a safety assessment of the product and reasonable basis to support any marketing claims. What constitutes a reasonable basis for substantiation can vary widely from market to market, and there is no assurance that our efforts to support our claims will be considered sufficient. The most significant area of risk for such activities relates to improper or unsubstantiated claims about the use and safety of our products. If we cannot adequately support safety or substantiate our product claims, or if our promotional materials make claims that exceed the scope of allowed claims for the classification of the specific product, the FDA, FTC or other regulatory authority could take enforcement action or impose penalties, such as monetary consumer redress, requiring us to revise our marketing materials, amend our claims or stop selling certain products, all of which could harm our business, financial condition and results of operations.

We are also subject to a number of U.S. federal and state and foreign laws and regulations that affect companies conducting business on the Internet, including consumer protection regulations that regulate retailers and govern the promotion and sale of merchandise. Many of these laws and regulations are still evolving and being tested in courts, and could be interpreted in ways that could harm our business. These may involve user privacy, data protection, content, intellectual property, distribution, electronic contracts and other communications, competition, protection of minors, consumer protection, telecommunications, product liability, taxation, economic or other trade prohibitions or sanctions and online payment services. In particular, we are subject to federal, state and foreign laws regarding privacy and protection of people’s data. Foreign data protection, privacy and other laws and regulations can be more restrictive than those in the United States. U.S. federal and state and foreign laws and regulations are constantly evolving and can be subject to significant change. In addition, the application, interpretation and enforcement of these laws and regulations are often uncertain, and may be interpreted and applied inconsistently from country to country and inconsistently with our current policies and practices. There are also a number of legislative proposals pending before the U.S. Congress, various state legislative bodies and foreign governments concerning privacy and data protection which could affect us. For example, the European Commission recently published the final draft of new data protection regulations that include operational requirements for companies that receive personal data which are different than those previously in place in the European Union, and also include significant penalties for non-compliance.

 

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Environmental, health and safety

We are subject to numerous foreign, federal, provincial, state, municipal and local environmental, health and safety laws and regulations relating to, among other matters, safe working conditions, product stewardship and environmental protection, including those relating to emissions to the air, discharges to land and surface waters, generation, handling, storage, transportation, treatment and disposal of hazardous substances and waste materials, and the registration and evaluation of chemicals. We maintain policies and procedures to monitor and control environmental, health and safety risks, and to monitor compliance with applicable environmental, health and safety requirements. Compliance with such laws and regulations pertaining to the discharge of materials into the environment, or otherwise relating to the protection of the environment, has not had a material effect upon our capital expenditures, earnings or competitive position. However, environmental laws and regulations have tended to become increasingly stringent and, to the extent regulatory changes occur in the future, they could result in, among other things, increased costs to our company. For example, certain states such as California and the U.S. Congress have proposed legislation relating to chemical disclosure and other requirements related to the content of our products.

Description of property

Our principal executive office is located in Oakland, California. We also have one distribution center located in Ontario, California as well as offices in New York and Shanghai, China. In addition, we operated nine e.l.f. stores in the New York metro area as of August 2016. All of our properties are leased. The leases expire at various times through 2026, subject to renewal options. We consider our properties to be generally in good condition and believe that our existing facilities are adequate to support our existing operations.

Legal proceedings

We are from time to time subject to, and are presently involved in, litigation and other proceedings. We believe that there are no pending lawsuits or claims that, individually or in the aggregate, may have a material adverse effect on our business, financial condition or results of operations.

 

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Management

Executive officers and directors

Below is a list of our executive officers and directors and their respective ages and a brief account of the business experience of each of them as of September 1, 2016.

 

Name    Age      Position

Executive Officers

     
Tarang P. Amin      51       Chairman, Chief Executive Officer and Director
John P. Bailey      36       President and Chief Financial Officer
Richard F. Baruch, Jr.      48       Senior Vice President and Chief Commercial Officer
Erin C. Daley      45       Senior Vice President and Chief Marketing Officer
Jonathan T. Fieldman      46       Senior Vice President, Operations
Scott K. Milsten     
47
  
   Senior Vice President, General Counsel, Corporate Secretary & Chief People Officer
Non-Employee Directors      
Lauren Cooks Levitan      50       Director
William E. McGlashan, Jr.      52       Director
Kirk L. Perry      49       Director
Joseph A. Shamah      35       Director
Sabrina L. Simmons      53       Director
Maureen C. Watson      48       Director
Richard G. Wolford      71       Director

 

Executive officers and employee directors

Tarang P. Amin.      Mr. Amin has served as our Chief Executive Officer and Director since January 2014, and has served as our Chairman since August 2015. Mr. Amin has more than 25 years of consumer products experience, as well as a demonstrated record of driving profitable growth at the companies he leads. Previously, he served as President, Chief Executive Officer and Director of Schiff Nutrition, a manufacturer of nutritional supplements, from March 2011 to January 2013. Under his leadership, Schiff, with leading brands Airborne, MegaRed, Digestive Advantage and Move Free, grew enterprise value from $ 190 million to $ 1.5 billion. Prior to that, Mr. Amin worked for The Clorox Company, a multinational manufacturer and marketer of consumer products, from December 2002 to March 2011. He served as Vice President, General Manager of The Clorox Company’s $ 1.7 billion Litter, Food and Charcoal Strategic Business Units, taking Kingsford, Hidden Valley and Fresh Step to new records. He also served in senior management roles that helped to double the sales of the global Clorox franchise to $ 1.5 billion. Prior to Clorox, Mr. Amin held management positions at Procter & Gamble, a multinational consumer goods company, where he helped grow Pantene’s sales from $ 50 million to $ 2 billion, as well as helped increase sales of Bounty by $ 300 million. Mr. Amin earned his B.A. in international policy and M.B.A. from Duke University. We believe Mr. Amin’s executive leadership skills and considerable experience in consumer products provide him with the qualifications and skills to serve as a member of our board of directors.

John P. Bailey.      Mr. Bailey has served as our President and Chief Financial Officer since August 2015. Previously, from July 2010 to August 2015, Mr. Bailey served as Partner with TPG, a global investment firm, where he was responsible for leading the consumer sector for TPG Growth, LLC, the middle market and growth equity platform of TPG and an affiliate of the Company. While at TPG, Mr. Bailey served as a member of the board of directors of the Company, as well as a number of portfolio companies including Angie’s Artisan Treats, Beautycounter, Fender and Ride and provided significant contributions to the board of directors of Schiff Nutrition. Prior to joining TPG, Mr. Bailey was with Greenwich, Connecticut-based North Castle Partners, a consumer private equity firm focused in the healthy, active and sustainable living sectors, focusing on consumer and retail investments in the personal care, food and beverage, fitness and recreation, vitamin minerals, and supplements and OTC health sectors. During that time, Mr. Bailey served on the boards of directors of Cascade Sports, Octane Fitness and Red Door Spas, and worked closely with a number of other portfolio companies. Prior to North Castle,

 

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Mr. Bailey was in the investment banking division of Credit Suisse First Boston. Mr. Bailey earned his B.B.A. at the University of Michigan Business School.

Richard F. Baruch Jr.     Mr. Baruch has served as our Senior Vice President and Chief Commercial Officer since February 2014. Mr. Baruch most recently served as Senior Vice President and Chief Commercial Officer at Schiff Nutrition from July 2012 to January 2013. From December 2010 to June 2012, he was Vice President, Category Advisory Services at Coca-Cola Refreshments, a division of The Coca-Cola Company, a leading global beverage company, where he led an initiative to build a new organization and bring a new set of capabilities to Coca-Cola’s North American business. From January 2009 to December 2012, Mr. Baruch was President and Chief Operating Officer of Cotn’Wash, Inc., a laundry products company. Prior to that, Mr. Baruch spent 14 years at The Clorox Company in a number of leadership roles, with the most recent as Vice President and General Manager of the Home Care business. He began his career at Procter & Gamble in various sales management roles. Mr. Baruch holds a B.A. in English from the University of Pennsylvania.

Erin C. Daley.      Ms. Daley has served as our Senior Vice President and Chief Marketing Officer since February 2014. Prior to that, Ms. Daley served as Vice President of Marketing and New Products at Schiff Nutrition from September 2011 to January 2013, having led initiatives resulting in more than 35% of company revenue being generated from new items and having established a future product pipeline valued in excess of $ 100 million. From February 2013 to January 2014, Ms. Daley served as a consultant for Reckitt Benckiser, a multinational producer of health, hygiene and home products, in support of the Schiff business integration, as well as for several health and wellness consumer start-ups. Previously, Ms. Daley worked for Pacific Gas & Electric Company, where she served as Director of Solutions Marketing from January 2010 to September 2011, and Director, Corporate Branding from December 2008 to December 2010. From July 2004 to November 2007, she served as a Brand Manager at Procter & Gamble where she launched Crest Whitestrips and developed Charmin Ultra Strong. She began her career in Washington, D.C. as a legislative affairs and communications representative. Ms. Daley holds a B.A. in Economics from the University of Michigan and an M.B.A. from Cornell University.

Jonathan T. Fieldman .    Mr. Fieldman has served as our Senior Vice President, Operations since July 2016. Prior to that, Mr. Fieldman served as Senior Vice President, Operations at Angie’s Boom Chicka Pop, a snack food company, from January 2015 to July 2016. From January 2014 to January 2015, Mr. Fieldman served as Chief Supply Officer for Shaklee Corporation, a natural nutrition company. Previously, Mr. Fieldman worked for Schiff Nutrition, where he served as Senior Vice President, Operations from May 2011 to February 2013. Prior to Schiff Nutrition, Mr. Fieldman spent 12 years at The Clorox Company in various supply chain roles, including Planning Director, Sourcing Director and Plant Manager, with the most recent as Vice President, Specialty Supply Chain. Prior to that, Mr. Fieldman worked for General Mills, Inc., a multinational manufacturer and marketer of branded consumer foods, for eight years in a variety of manufacturing roles. Mr. Fieldman holds a B.S. in Industrial Engineering and Engineering Management from Stanford University.

Scott K. Milsten.      Mr. Milsten has served as our Senior Vice President, General Counsel and Corporate Secretary since January 2014 and, in addition, as our Chief People Officer since August 2016. Previously, Mr. Milsten served as Senior Vice President, General Counsel and Corporate Secretary at Schiff Nutrition from July 2011 to January 2013. Prior to that, Mr. Milsten was Senior Vice President, General Counsel and Corporate Secretary of Celera Corporation, a healthcare diagnostics company, from August 2009 until Celera’s sale to Quest Diagnostics Incorporated in June 2011. He also served as Vice President, General Counsel and Corporate Secretary of Celera from November 2008 to August 2009. Prior to Celera, Mr. Milsten was Deputy General Counsel for Gen-Probe Incorporated, a molecular diagnostic products and services company. Prior to joining Gen-Probe, he practiced corporate law with the law firm of Latham & Watkins LLP. Mr. Milsten holds a J.D. from the University of Pennsylvania Law School and a B.A. in English from Duke University.

Non-employee directors

Lauren C ooks Levitan.     Ms. Levitan has served as a member of our board of directors since June 2016. Ms. Levitan currently serves as Chief Financial Officer of Fanatics, Inc., a retailer of licensed sports apparel and merchandise, a position she has held since June 2015. Previously, from January 2009 to May 2015, Ms. Levitan was Co-Founder and Managing Partner at Moxie Capital LLC, a private equity firm, where she provided capital investment and advisory services to branded, consumer-facing businesses that operated in wholesale, retail, e-commerce and direct sales. Prior to that, she served as Managing Director and Senior Research Analyst at Cowen & Company, an investment bank, and as Managing Director at Robertson Stephens, an investment bank, and worked in various capacities in the retail industry at Crate & Barrel and the Gymboree Corporation and in equity capital markets and investment banking at Goldman Sachs. She received her B.A. in Political Science from Duke University and received her M.B.A. from Stanford University Graduate School of Business. We believe Ms. Levitan’s operational, financial and strategic experience across a variety of retail businesses provide her with the qualifications and skills to serve as a member of our board of directors.

 

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William E. McGlashan, Jr.     Mr. McGlashan has served as a member of our board of directors since August 2015 and has been designated to serve as a member of our board by our Sponsor. Mr. McGlashan is the Managing Partner of TPG Growth and a member of the TPG Executive Committee. Mr. McGlashan currently serves on the boards of directors of several private companies. Mr. McGlashan served as a director of SuccessFactors, Inc. from 2005 to 2012, where he served on the audit committee, nominating and governance committee and mergers & acquisition committee from 2007 to 2012. Mr. McGlashan also served as a director of Schiff Nutrition from 2010 to 2012, where he served on the compensation committee from 2010 to 2012. From December 2001 to March 2004, Mr. McGlashan served as Chairman of the board of directors and Chief Executive Officer of Critical Path, Inc., a digital communications software company. Mr. McGlashan holds a B.A. in History from Yale University and an M.B.A. from Stanford University Graduate School of Business. We believe Mr. McGlashan’s significant corporate governance experience and operational expertise provide him with the qualifications and skills to serve as a member of our board of directors.

Kirk L. Perry.     Mr. Perry has served as a member of our board of directors since September 2016. Mr. Perry currently serves as President, Brand Solutions at Google Inc., a technology company, a position he has held since December 2013, and is responsible for driving Google’s revenue with the world’s largest advertisers and advertising agencies. Prior to this role, Mr. Perry was President, Global Family Care at Procter & Gamble from May 2011 to December 2013. He held numerous positions of increasing responsibility with Procter & Gamble beginning in 1990 in marketing and general management roles, including General Manager Northeast Asia Baby & Family Care from 2001 to 2003 (Mr. Perry was based in Korea and Japan from 1997 to 2003), Vice President North America Baby Care from 2003 to 2008 and Vice President, North America Marketing and U.S. Operations from 2008 to 2011. Mr. Perry served as a member of the board of the Hillerich & Bradsby Co. (Louisville Slugger), a sporting goods manufacturer, from September 2013 to August 2016. Other volunteer board affiliations have included the Ronald McDonald House, The CityLink Foundation, The United Way Campaign Cabinet, The March of Dimes National and Regional boards, the University of Cincinnati Foundation and the University of Cincinnati Bicentennial Commission. Mr. Perry graduated with a B.B.A. in Marketing and Finance from the University of Cincinnati. We believe Mr. Perry’s extensive operational experience in marketing, operations, general management, consumer products, technology and digital media provide him with the qualifications and skills to serve as a member of our board of directors.

Joseph A. Shamah.     Mr. Shamah has served as a member of our board of directors since January 2014 and has been designated to serve as a member of our board by J.A. Cosmetics Corp. Mr. Shamah founded the Company in 2004 with his father, Alan Shamah. Mr. Shamah served as Chief Executive Officer of the Company until the TPG acquisition in January 2014, at which time he continued to serve as an officer and member of our executive team until December 2015. He graduated from New York University’s Stern School of Business and serves as a president of the board of trustees of the Barkai Yeshiva School in Brooklyn, New York. We believe Mr. Shamah’s institutional knowledge and experience with the Company provide him with the qualifications and skills to serve as a member of our board of directors.

Sabrina L. Simmons.     Ms. Simmons has served as a member of our board of directors since March 2016. Ms. Simmons currently serves as Executive Vice President and Chief Financial Officer of The Gap, Inc., a clothing company, a position she has held since January 2008. Previously, Ms. Simmons also served in the following positions at Gap: Executive Vice President, Corporate Finance from September 2007 to January 2008, Senior Vice President, Corporate Finance and Treasurer from March 2003 to September 2007, and Vice President and Treasurer from September 2001 to March 2003. Prior to that, Ms. Simmons served as Chief Financial Officer and an executive member of the board of directors of Sygen International PLC, a British genetics company. Prior to that, Ms. Simmons was Assistant Treasurer at Levi Strauss & Co., a clothing company. Ms. Simmons currently serves as a member of the board of directors of Williams-Sonoma, Inc., a consumer retail company, where she is a member of the audit and finance committee. Ms. Simmons currently also serves on the Haas School of Business Advisory Board and is a member of the Gap Foundation Board of Trustees. Ms. Simmons received her B.S. in Business from the University of California, Berkeley and received her M.B.A. from the Anderson School at the University of California, Los Angeles. Ms. Simmons is a certified public accountant (inactive status). We believe Ms. Simmons’ significant financial and accounting experience provide her with the qualifications and skills to serve as a member of our board of directors.

Maureen C. Watson.     Ms. Watson has served as a member of our board of directors since August 2015 and has been designated to serve as a member of our board by our Sponsor. Ms. Watson currently serves as Chief Product Officer of Madison Reed, Inc., a hair care company, a position she has held since August 2015. Previously, she served at Sephora USA, Inc., a cosmetics company, as Senior Vice President, Merchandising from March 2013 to March 2015. Prior to that, she served as Senior Vice President, Global Sales and Merchandising of Lucky Brand Jeans (Lucky Brand, Inc.), a clothing company, from September 2010 to September 2011. Prior to that, Ms. Watson served in various leadership roles at The Gap, Inc. Ms. Watson earned a B.A. in Political Science and French from Middlebury College. We believe Ms. Watson’s extensive

 

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consumer products and cosmetics experience provide her with the qualifications and skills to serve as a member of our board of directors.

Richard G. Wolford.     Mr. Wolford has served as a member of our board of directors since September 2014 and has been designated to serve as a member of our board by our Sponsor. Mr. Wolford served as interim President and Chief Executive Officer of Diamond Foods, Inc., an American packaged food company, from February 2012 until May 2012. Mr. Wolford served as Chief Executive Officer and a director of Del Monte Foods Company, a North American food production and distribution company, from April 1997 until March 2011. He was elected President of Del Monte in February 1998 and Chairman of the board of directors in May 2000. From 1988 to 1996, Mr. Wolford was Chief Executive Officer of HK Acquisition Corp., where he developed food industry investments with venture capital investors. From 1967 to 1987, he held a variety of positions at Dole Foods, an agricultural multinational corporation, including President of Dole Packaged Foods from 1982 to 1987. Mr. Wolford was a member of the board of directors of Diamond Foods, Inc. from April 2011 until May 2012. Mr. Wolford served on the board of directors of Schiff Nutrition from September 2011 to January 2013. Mr. Wolford served as a member of the board of directors of Pulte Homes, Inc., a homebuilding company, from May 2008 to August 2009. In addition, Mr. Wolford served as Chairman of the board of directors of the Grocery Manufacturers Association (“GMA”), from January 2010 to March 2011, resigning upon the sale of Del Monte. As Chairman of GMA, Mr. Wolford also served on the board of directors of Consumer Goods Forum, a global association of consumer packaged goods companies, retailers and manufacturers. Prior to that, Mr. Wolford served as Vice Chairman of GMA from January 2008 to January 2010, and chaired GMA’s Industry Affairs Council from June 2005 to January 2010. In 2011, Mr. Wolford was the recipient of the GMA Hall of Achievement award honoring extraordinary leadership and commitment to the consumer packaged goods industry. Mr. Wolford holds a B.A. in Economics from Harvard University. We believe Mr. Wolford’s extensive public company management, reporting, finance and corporate governance experience, as well as deep knowledge of the consumer products industry, provide him with the qualifications and skills to serve as a member of our board of directors.

Composition of the board of directors

Director independence

Our board of directors currently consists of eight members. Our board of directors has determined that each of Mses. Levitan, Simmons and Watson and Messrs. McGlashan, Perry and Wolford qualify as independent directors in accordance with the New York Stock Exchange (“NYSE”) listing requirements. Mr. Amin is not considered independent because he is an employee of the Company, and Mr. Shamah is not considered independent because he was an employee of the Company until December 2015. NYSE’s independent director definition includes a series of objective tests, including that the director is not, and has not been within the last three years, one of our employees and that neither the director nor any of his or her family members has engaged in various types of business dealings with us. In addition, as required by NYSE rules, our board of directors has made an affirmative determination as to each independent director that he or she has no material relationship with the Company (either directly or as a partner, stockholder or officer of an organization that has a relationship with us). In making these determinations, our board of directors considered ownership of our stock and reviewed and discussed information provided by the directors and us with regard to each director’s business and personal activities and relationships as they may relate to us and our management. There are no family relationships among any of our directors or executive officers.

Classified board of directors

In accordance with our amended and restated certificate of incorporation to be in effect immediately prior to the consummation of this offering, our board of directors will be divided into three classes with staggered, three-year terms. At each annual meeting of stockholders, the successors to directors whose terms then expire will be elected to serve from the time of election and qualification until the third annual meeting following election. Effective upon the consummation of this offering, we expect that our directors will be divided among the three classes as follows:

 

  the Class I directors will be Mr. Perry and Mses. Simmons and Watson, and their terms will expire at the annual meeting of stockholders to be held in 2017;

 

  the Class II directors will be Messrs. Shamah and Wolford, and their terms will expire at the annual meeting of stockholders to be held in 2018; and

 

  the Class III directors will be Messrs. Amin and McGlashan and Ms. Levitan, and their terms will expire at the annual meeting of stockholders to be held in 2019.

 

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Our amended and restated certificate of incorporation will provide that the authorized number of directors may be changed only by resolution of the board of directors. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the directors. The division of our board of directors into three classes with staggered three-year terms may delay or prevent a change of our management or a change in control of our company.

For so long as our Sponsor has the right to designate at least one director for nomination under the Amended Stockholders Agreement, the number of directors serving on our board of directors will not exceed nine; provided, that the number of directors may be increased if necessary to satisfy the requirements of applicable laws and stock exchange regulations.

Board composition arrangements

Following this offering, the composition of our board of directors will be governed by the Amended Stockholders Agreement and the related provisions of our amended and restated certificate of incorporation. Pursuant to the terms of the Amended Stockholders Agreement, our Sponsor will have the right to designate up to three members of our board of directors so long as it holds at least 30% of our outstanding common stock, two members of our board of directors so long as it holds less than 30% but greater than or equal to 20% of our outstanding common stock, and one member of our board of directors so long as it holds less than 20% but greater than or equal to 5% of our outstanding common stock. Also under our Amended Stockholders Agreement, J.A. Cosmetics Corp. will have the right to designate one member of our board of directors so long as it holds at least 10% of our outstanding common stock. In addition, subject to applicable laws and stock exchange regulations, our Sponsor will have the right to have a representative appointed to serve on each committee of our board of directors other than the audit committee for so long as our Sponsor has the right to designate at least one director for election to our board. Messrs. McGlashan and Wolford and Ms. Watson were designated to serve on our board of directors by our Sponsor, and Mr. Shamah was designated to serve on our board of directors by J.A. Cosmetics Corp. To the extent not inconsistent with Section 141(k) of the DGCL and our amended and restated certificate of incorporation, any director who is nominated by our Sponsor or J.A. Cosmetics Corp. may only be removed by our Sponsor or J.A. Cosmetics Corp., respectively, and if our Sponsor or J.A. Cosmetics Corp. provides notice of its desire to remove one of its nominated directors, our board of directors and the other parties to the Amended Stockholders Agreement shall take all reasonable action necessary to effect such removal.

Board leadership structure and the board’s role in risk oversight

Committees of the board of directors

The standing committees of our board of directors will consist of an audit committee, a compensation committee and a nominating and corporate governance committee. Our board of directors may also establish from time to time any other committees that it deems necessary or desirable. Under our Amended Stockholders Agreement, subject to applicable laws and stock exchange regulations, our Sponsor will have the right to have a representative appointed to serve on each committee of our board of directors other than the audit committee for so long as our Sponsor has the right to designate at least one director for election to our board.

Our chief executive officer and other executive officers will regularly report to the non-employee directors and the audit, compensation and nominating and corporate governance committees to ensure effective and efficient oversight of our activities and to assist in proper risk management and the ongoing evaluation of management controls.

Audit committee

Upon the consummation of this offering, the audit committee will consist of Mr. Wolford, who will serve as the Chair, and Mses. Levitan and Simmons. Each of the members of our audit committee qualifies as an independent director under NYSE corporate governance standards and the independence requirements of Rule 10A-3 of the Exchange Act. Our board of directors has determined that Ms. Simmons qualifies as an “audit committee financial expert” as such term is defined in Item 407(d)(5) of Regulation S-K.

The purpose of the audit committee is to assist the board of directors in its oversight of: (i) the integrity of our financial statements; (ii) our compliance with legal and regulatory requirements; (iii) the independent auditor’s qualifications and independence; (iv) the performance of our independent auditor; and (v) the design and implementation of our internal audit function, and the performance of the internal audit function after it has been established.

 

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Our board of directors has adopted a written charter for the audit committee, which will be effective upon the consummation of this offering and available on our website.

Compensation committee

Upon the consummation of this offering, the compensation committee will consist of Mr. McGlashan, who will serve as the Chair, and Mr. Wolford. Each of the members of our compensation committee is an independent director under the applicable rules and regulations of the NYSE relating to compensation committee independence.

The purpose of the compensation committee is to assist our board of directors in discharging its responsibilities relating to (i) setting our compensation program and compensation of our executive officers, directors and key personnel, (ii) monitoring our incentive-compensation and equity-based compensation plans, (iii) succession planning for our executive officers, directors and key personnel and (iv) preparing the compensation committee report required to be included in our proxy statement under the rules and regulations of the SEC.

Our board of directors has adopted a written charter for the compensation committee, which will be effective upon the consummation of this offering and available on our website.

Nominating and corporate governance committee

Upon the consummation of this offering, the nominating and corporate governance committee will consist of Ms. Watson, who will serve as the Chair, and Ms. Levitan. Each of the members of our nominating and corporate governance committee is an independent director under the applicable rules and regulations of the NYSE relating to nominating and corporate governance committee independence.

The nominating and corporate governance committee is responsible for making recommendations to our board of directors regarding candidates for directorships and the size and composition of our board of directors. In addition, the nominating and corporate governance committee is responsible for overseeing our corporate governance policies and reporting and making recommendations to our board of directors concerning governance matters.

Our board of directors has adopted a written charter for the nominating and corporate governance committee, which will be effective upon the consummation of this offering and available on our website.

Compensation committee interlocks and insider participation

None of the members of our compensation committee has at any time been one of our executive officers or employees. None of our executive officers currently serves, or has served during the last completed fiscal year, on the compensation committee or board of directors of any other entity that has one or more executive officers serving as a member of our board of directors or compensation committee.

Board diversity

Our nominating and corporate governance committee will be responsible for reviewing with the board of directors, on an annual basis, the appropriate characteristics, skills and experience required for the board of directors as a whole and its individual members. In evaluating the suitability of individual candidates (both new candidates and current members), the nominating and corporate governance committee, in recommending candidates for election, and the board of directors, in approving (and, in the case of vacancies, appointing) such candidates, may take into account many factors, including but not limited to the following:

 

  personal and professional integrity;

 

  ethics and values;

 

  experience in corporate management, such as serving as an officer or former officer of a publicly held company;

 

  experience in the industries in which we compete;

 

  experience as a board member or executive officer of another publicly held company;

 

  diversity of expertise and experience in substantive matters pertaining to our business relative to other board members;

 

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  conflicts of interest; and

 

  practical and mature business judgment.

Our board of directors evaluates each individual in the context of the board of directors as a whole, with the objective of assembling a group that can best maximize the success of our business and represent stockholder interests through the exercise of sound judgment using its diversity of experience in these various areas.

Code of ethics and business conduct

We have adopted a Code of Ethics and Business Conduct that applies to all of our directors, officers and employees, including our principal executive officer and principal financial and accounting officer. Our Code of Ethics and Business Conduct will be available on our website upon the completion of this offering. Our Code of Ethics and Business Conduct is a “code of ethics,” as defined in Item 406(b) of Regulation S-K. We will make any legally required disclosures regarding amendments to, or waivers of, provisions of our code of ethics on our website.

 

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Executive compensation

Overview

This compensation discussion provides an overview of our executive compensation program and compensation for our named executive officers (“NEOs”) for the 2015 fiscal year. Our NEOs for the 2015 fiscal year were (i) Mr. Tarang P. Amin, our Chief Executive Officer, (ii) Mr. John P. Bailey, our President and Chief Financial Officer, (iii) Mr. Scott K. Milsten, our Senior Vice President, General Counsel, Corporate Secretary & Chief People Officer, and (iv) Mr. Jay P. Brandimarte, our former Senior Vice President and Chief Financial Officer. All equity-based awards reported and described in this “Executive Compensation” section have been adjusted to reflect the 2.76:1 forward stock split.

Summary compensation table

The following table sets forth information regarding compensation awarded to, earned by or paid to our NEOs during the year ended December 31, 2015.

 

Name and principal position    Year     Salary
( $ )
    

Option

awards
( $ )(5)

   

Non-equity
incentive plan
compensation

( $ )(7)

   

All other
compensation

( $ )

   

Total

( $ )

 

Tarang P. Amin(1)

     2015        475,000                950,000        32,065 (8)      1,457,065   

Chief Executive Officer, Chairman

             

John P. Bailey(2)

     2015        163,462         490,269        637,500               1,291,231   

President, Chief Financial Officer

             

Scott K. Milsten

     2015        325,000         0        260,000               585,000   

Senior Vice President, General Counsel, Corporate Secretary & Chief People Officer(3)

             

Jay P. Brandimarte(4)

     2015        207,465         31,528 (6)      73,333        343,287 (9)      655,613   

Former Senior Vice President, Chief Financial Officer

             

 

 

 

(1)   Mr. Amin was appointed as Chairman of our board of directors effective as of August 2015.

 

(2)   Mr. Bailey commenced employment and was appointed as President and Chief Financial Officer, effective as of August 2015. His base salary is $ 425,000.

 

(3)   Mr. Milsten was appointed as our Chief People Officer in August 2016.

 

(4)   Mr. Brandimarte served as our Senior Vice President, Chief Financial Officer from September 2014 to August 2015, when his employment with us terminated.

 

(5)   Amounts reported in the “Option Awards” column represent the grant date fair values of stock options granted under the 2014 Equity Plan, calculated in accordance with FASB Topic 718, disregarding the effects of estimated forfeitures. For a discussion of the assumptions used to calculate the value of our stock options, see note 12 to our audited financial statements included elsewhere in this prospectus. During fiscal year 2015, (i) Mr. Bailey was granted an option to purchase 1,332,151 shares of our common stock, of which 617,872 shares are subject to time-based vesting and the remainder are subject to performance-based vesting and (ii) Mr. Milsten was granted an option to purchase 209,942 shares of our common stock, with all such shares subject to performance-based vesting. The grant date fair value with respect to the performance-based portion of such awards is calculated based on the probable outcome of the applicable performance conditions as more fully described under the heading “2014 Equity Plan” below, which was assessed as zero. The aggregate maximum fair value of the performance-based portion of such stock options assuming the highest level of achievement of the performance conditions with respect to Mr. Bailey’s stock option is $ 709,497 and with respect to Mr. Milsten’s stock option is $ 38,071.

 

(6)   In connection with his execution of a separation agreement and general release of claims, an option held by Mr. Brandimarte that was subject to time-based vesting became immediately vested in respect of 43,056 shares of our common stock as of his separation date. The amount in this column includes the incremental fair value of Mr. Brandimarte’s option award after giving effect to the modification. For a more detailed description of Mr. Brandimarte’s terms of separation, please see the heading entitled “Separation agreement” below.

 

(7)   Represents the actual bonus earned for fiscal year 2015 and paid in February 2016. For Mr. Brandimarte, the amount reflects his pro-rated annual bonus for fiscal year 2015 based on actual performance, as reduced by $ 100,000, in exchange for an extension of the exercisability of his vested option to purchase 43,056 shares of our common stock. Mr. Brandimarte exercised this option on August 18, 2016.

 

(8)   This amount reflects reimbursement to Mr. Amin paid in 2015 for expenses incurred by him in an amount of $ 19,860 and $ 12,205, for fiscal years 2014 and 2015, respectively, relating to financial planning and tax preparation assistance per the terms of his employment agreement.

 

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(9)   In addition to the option acceleration noted above, pursuant to his separation agreement, Mr. Brandimarte became entitled to severance payments as follows: (i) continued payment of his base salary for 12 months following his date of separation ( $ 325,000); and (ii) continued payments for healthcare coverage under COBRA for Mr. Brandimarte and his covered dependents for up to 18 months following his date of separation (resulting in an actual aggregate payment of $ 18,287).

Employment agreements

We and our operating subsidiary, e.l.f. Cosmetics, Inc., have entered into employment agreements with each of our current NEOs. These agreements set forth the terms and conditions of employment of each NEO, including base salary, initial stock option grants and standard employee benefit plan participation. Our board of directors or the compensation committee reviews each NEO’s compensation from time to time to ensure that it adequately reflects the NEO’s qualifications, experience, role and responsibilities.

Initial term

Each employment agreement provides that the respective NEO will continue to serve in his stated capacity until the fifth anniversary of his date of hire (the “Initial Term”). The Initial Term will be automatically extended for successive one-year periods (the “Extension Period”), unless either we or the NEO provide written notice of intent to terminate at least 60 days prior to the end of the Initial Term or any Extension Period.

Severance

Each NEO’s employment agreement provides that if his employment is terminated by us for reasons other than death, disability or “cause,” or at the election of the NEO “for good reason,” prior to the end of the Initial Term, then he will be entitled to receive severance payments of (i) an amount equal to his base salary, payable monthly for a period of 12 months following the date of termination (except that Mr. Amin will be entitled to two times his base salary); (ii) continued COBRA coverage for such NEO and his eligible dependents for a period of up to 18 months; (iii) the amount of any unpaid annual bonus earned for a previously completed fiscal year (the “Accrued Bonus”); (iv) a pro-rated bonus based on actual performance for the fiscal year in which termination occurs, provided that the NEO has been employed with us for at least six months of such fiscal year; and (v) any accrued but unpaid base salary and vacation time, such employee benefits, if any, to which the NEO or his dependents may be entitled under our employee benefit plans or programs, and reimbursement for reasonable business expenses, each as would have been payable through the date of termination (the “Accrued Obligations”). All such payments (other than the Accrued Bonus and the Accrued Obligations) are contingent upon each NEO’s compliance with certain non-compete, confidentiality and other provisions as set forth in his respective employment agreement, and the execution of a general release of claims against the Company.

Pursuant to each employment agreement, “cause” is defined as the NEO’s (i) material nonperformance of his obligations to the Company, subject to certain notice and opportunity to cure provisions; (ii) commission of an act of fraud, embezzlement, misappropriation, willful misconduct against or breach of his fiduciary duty to the Company; (iii) material breach of certain non-compete, non-solicitation, confidentiality and other restrictive covenants; (iv) conviction, plea of no contest or nolo contendre , deferred adjudication or unadjudicated probation for any felony or any crime involving moral turpitude; (v) failure to carry out, or comply with, in any material respect, any lawful directive of the board of directors, subject to certain notice and opportunity to cure provisions; or (vi) unlawful use or possession of illegal drugs.

Pursuant to each employment agreement “good reason” is defined as (i) a material default in the performance of the Company’s obligations under the applicable employment agreement; (ii) a significant diminution of the NEO’s duties, responsibilities or authority, or a material diminution of his base compensation, unless such diminution is mutually agreed between the NEO and the Company; or (iii) the Company’s relocation of the NEO’s principal office without his consent to a location in excess of 50 miles from San Francisco, California, in each case subject to certain notice and opportunity to cure provisions.

Separation agreement

Mr. Brandimarte terminated his service as our Senior Vice President, Chief Financial Officer effective August 21, 2015. In connection with his termination, we entered into a separation agreement and general release of claims with Mr. Brandimarte whereby Mr. Brandimarte became entitled to severance payments as follows: (i) continued payment of his base salary for 12 months following his date of separation; (ii) continued payments for healthcare coverage under COBRA for Mr. Brandimarte and his covered dependents for up to 18 months following his date of separation; (iii) the Accrued Bonus; (iv) a pro-rated annual bonus for fiscal year 2015 based on actual performance, as measured following the end of such

 

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period and subject to such reduction as noted below; and (v) the Accrued Obligations. In addition, 43,056 shares underlying Mr. Brandimarte’s outstanding option became immediately vested as of his separation date. Pursuant to the terms of his separation agreement, we reduced the amount of Mr. Brandimarte’s pro-rata bonus as described above by $ 100,000 and extended the exercisability of his vested option. Mr. Brandimarte exercised this option on August 18, 2016.

Base salaries

We provide a base salary to our NEOs and other employees to compensate them for services rendered during the year. Base salaries are intended to provide a level of compensation sufficient to attract and retain an effective management team when considered in combination with the other components of our executive compensation program. The relative levels of base salary for our NEOs are designed to reflect each such NEO’s scope of responsibility and accountability to us. Please see the “Salary” column in the summary compensation table for the base salary of each NEO in 2015.

Bonuses

Pursuant to their respective employment agreements, Messrs. Amin and Bailey were entitled to an annual cash bonus targeted at 100% and 75% of their respective base salaries, and Messrs. Milsten and Brandimarte were entitled to an annual cash bonus targeted at 40% of their respective base salaries, in each case subject to the attainment of certain financial goals as determined by the board of directors. For fiscal year 2015, our board of directors established an Adjusted EBITDA goal for the annual cash bonus program and provided for bonuses to be payable at 80% to 200% of each NEO’s annual cash bonus target for performance based on predetermined Adjusted EBITDA levels of achievement. No bonus would be payable if performance was less than 94% of the Adjusted EBITDA goal, and the bonus amount was capped at 200% of each NEO’s annual cash bonus target.

In early 2016, our board of directors determined that, based on our Adjusted EBITDA performance for 2015, each NEO was entitled to receive 200% of his annual cash bonus target. Mr. Brandimarte’s bonus for 2015 was pro-rated based on his partial year of service and reduced by $ 100,000 in exchange for the extension of the exercisability of his vested option to purchase 43,056 shares of our common stock. Mr. Brandimarte exercised this option on August 18, 2016. The actual annual cash bonuses paid to each NEO with respect to 2015 are set forth above in the summary compensation table in the column entitled “Non-Equity Incentive Plan Compensation.”

Equity compensation

Stock options awarded to our senior executives have typically been subject to both (i) time-based and (ii) performance-based vesting. The time-based portion of such options will become vested and exercisable immediately prior to this offering, subject to each executive’s continued employment by us through such date. The performance-based portion of such options will vest if our equityholders, including our Sponsor, who are party to the Stockholders Agreement (as defined in “Certain relationships and related party transactions—Stockholders Agreement”) and their permitted transferees, receive cash distributions in respect of their investment in us, including proceeds received in connection with this offering, that exceed certain investment return multiples.

Generally, in the event of a senior executive’s termination by reason of death or disability, by the Company without “cause” or by the executive for “good reason” (as such terms are defined in his or her employment agreement), (i) the time-based portion of any option which would have vested within 12 months (or 24 months if such termination occurs without cause or for good reason within 12 months of the executive’s date of hire or the grant date of the option as set forth in the applicable award agreement) following the termination will become immediately vested and exercisable and (ii) the executive will vest in the performance-based portion of such option in the event the performance goal is achieved within six months following the date of termination.

Upon the pricing of this offering, Messrs. Amin, Bailey and Milsten will be granted an option under the 2016 Plan to purchase 428,037, 194,563 and 97,281 shares of our common stock, respectively, and an award of 146,561, 66,618 and 33,310 restricted stock units, respectively. Each option will have an exercise price per share equal to the initial public offering price and will vest in four substantially equal installments on each anniversary of the pricing of this offering, subject to continued service through the applicable vesting date. Each award of restricted stock units will vest in four substantially equal installments on each anniversary of the pricing of the offering, subject to continued service through the applicable vesting date.

 

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For more information related to our equity compensation incentives, see the section entitled “Equity compensation plans and stock purchase plans” below.

Other elements of compensation

Retirement plans

We also maintain a 401(k) retirement savings plan through e.l.f. Cosmetics, Inc. for the benefit of our employees, including our NEOs, who satisfy certain eligibility requirements. Under the 401(k) plan, eligible employees may elect to defer a portion of their compensation, within the limits prescribed by the Internal Revenue Code of 1986, as amended (the “Code”), on a pre-tax or after-tax (Roth) basis through contributions to the 401(k) plan. We also generally make matching contributions based on the percentage of each employee’s elective deferrals, subject to a pre-determined maximum. We believe that providing a vehicle for tax-deferred retirement savings through our 401(k) plan adds to the overall desirability of our executive compensation package and further incentivizes our employees in accordance with our compensation policies. We did not make any matching contributions to any of our NEOs during the year ended December 31, 2015.

Employee benefits and perquisites

All of our full-time employees, including our NEOs, are eligible to participate in our health and welfare plans, including medical, dental and vision benefits, medical flexible spending accounts, short-term and long-term disability insurance and life insurance.

In addition, pursuant to his employment agreement, we offer Mr. Amin reimbursement of up to $ 20,000 per year for expenses incurred by him in connection with financial planning and tax preparation assistance. Please see the summary compensation table for information relating to amounts reimbursed to Mr. Amin during 2015. Except as noted above with respect to Mr. Amin, we do not provide our NEOs with perquisites or other personal benefits other than those which apply uniformly to all of our employees.

Outstanding equity awards at 2015 fiscal year-end

The following table sets forth information regarding outstanding option awards held by our NEOs as of December 31, 2015. All awards reflected were granted under the 2014 Equity Plan.

 

              Option awards(1)  
Name    Grant date      Number of
securities
underlying
unexercised
options (#)
exercisable
     Number of
securities
underlying
unexercised
options (#)
unexercisable
     Equity
incentive
plan
awards:
number of
securities
underlying
unexercised
unearned
options (#)
     Option
exercise
price ( $ )(2)
     Option
expiration
date
 

Tarang P. Amin

     1/31/2014         245,088         980,363         2,359,705       $ 1.84         1/31/2024   

John P. Bailey

     8/12/2015                 617,872         714,279       $ 1.84         8/12/2025   

Scott K. Milsten

     1/31/2014         43,056         172,224         156,078       $ 1.84         1/31/2024   
     8/12/2015                         209,942       $ 1.84         8/12/2025   

Jay Brandimarte

     9/4/2014         43,056                       $ 1.84         8/21/2016 (3) 

 

 

 

(1)   Subject to each executive’s continued employment, (i) the time-based portion of each such option granted pursuant to the 2014 Equity Plan will become fully vested and exercisable immediately prior to the consummation of this offering; and (ii) the performance-based portion of such options will become vested and exercisable if our equityholders who are party to the Stockholders Agreement, and their permitted transferees, receive cash distributions in respect of their investment in us, including proceeds received in connection with this offering, that exceed certain investment return multiples.

 

(2)   Although occurring after the end of the most recent fiscal year, option exercise prices have been adjusted to reflect the reduction approved by the Compensation Committee of our board of directors in connection with the special dividend declared on June 7, 2016 as described under “Dividend policy.” In connection with the payment of the special dividend, the exercise price of each outstanding option as of June 7, 2016 was reduced by $ 1.79, the amount of the per share dividend. The exercise price of any options exercised prior to June 7, 2016 were not adjusted by our board of directors as a result of the special dividend.

 

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(3)   Pursuant to his separation agreement as described above, the option held by Mr. Brandimarte became vested and exercisable in respect of 43,056 shares of our common stock as of his separation date. Mr. Brandimarte exercised his option on August 18, 2016.

Equity compensation plans and stock purchase plans

The following description of each of our equity compensation plans is qualified by reference to the full text of those plans, which will be filed as exhibits to the registration statement of which this prospectus forms a part. Our equity compensation plans are designed to continue to give the Company flexibility to grant a wide variety of equity awards to reflect what the compensation committee believes at the time of such award will best motivate and reward our employees, directors, consultants and other service providers.

2014 Equity Incentive Plan

We currently maintain the 2014 Equity Plan. The purposes of the 2014 Equity Plan are to enhance the profitability and value of the Company by offering incentives to attract, retain and reward our employees, non-employee directors and consultants and to align the interests between such individuals and our stockholders. The material terms of the 2014 Equity Plan are summarized below:

Share reserve .      Subject to adjustment as described below, the 2014 Equity Plan has an aggregate of 9,460,556 shares of our common stock reserved for issuance under the plan. As of December 31, 2015, awards with respect to 8,846,381 shares of our common stock were outstanding and 607,276 shares of our common stock remained available for issuance under the 2014 Equity Plan. The following share counting provisions are in effect for the share reserve under the 2014 Equity Plan:

 

  to the extent that an award terminates, expires, is forfeited or canceled for any reason without having been exercised in full or is settled in cash, any shares subject to the award at such time will be available for future grants under the 2014 Equity Plan;

 

  to the extent that shares subject to an award are withheld or reacquired by the Company to satisfy the exercise price or tax withholding obligations under the 2014 Equity Plan, such shares will be available for future grants under the 2014 Equity Plan; and

 

  to the extent any stock appreciation right is granted in tandem with an option, such grant will only apply once against the maximum number of shares which may be granted under the 2014 Equity Plan.

Administration .      Our board of directors or an authorized committee thereof administers the 2014 Equity Plan. Subject to the terms and conditions of the 2014 Equity Plan, the administrator has the authority to, among other things, select the persons to whom awards are to be made, to determine the kinds of awards granted, the number of shares to be subject to awards and the terms and conditions of awards, and to adopt, amend or rescind rules relating to administration of the 2014 Equity Plan.

Eligibility .      Awards under the 2014 Equity Plan may be granted to our officers, employees or consultants or the officers, employees or consultants of certain of our subsidiaries. Such awards may also be granted to our non-employee directors. However, only employees of our Company or certain of our subsidiaries may be granted incentive stock options (“ISOs”).

Awards .     The 2014 Equity Plan provides that the administrator may grant or issue stock options, stock appreciation rights, restricted stock awards, other stock- or cash-based awards or any combination thereof. Each award will be set forth in a separate award agreement with the participant and will indicate the type of award and applicable terms and conditions.

 

  Nonstatutory stock options (“NSOs”) provide for the right to purchase shares of our common stock at a specified price which may not be less than the fair market value of a share of our common stock on the date of grant, and usually become exercisable (at the discretion of the administrator) in one or more installments after the grant date, subject to the participant’s continued employment or service with us. NSOs may be granted for any term specified by the administrator that does not exceed 10 years as measured from the date of grant. The administrator may permit a participant to exercise all or any part of his or her stock option prior to vesting, provided that the portion of unvested shares subject thereto will be subject to the same terms and conditions as restricted stock granted under the 2014 Equity Plan and may also be subject to a right of repurchase in favor of the Company in addition to any other restrictions as the administrator may deem appropriate.

 

 

ISOs provide for the right to purchase shares of our common stock and are designed in a manner intended to comply with the provisions of Section 422 of the Code. Among other restrictions, ISOs must have an exercise price of not less than the

 

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fair market value of a share of our common stock on the date of grant, may only be granted to employees and must not be exercisable after a period of 10 years measured from the date of grant. In the case of an ISO granted to an individual who owns (or is deemed to own) at least 10% of the total combined voting power of all classes of our capital stock, the 2014 Equity Plan provides that the exercise price must be at least 110% of the fair market value of a share of common stock on the date of grant and the ISO may not be exercisable after a period of five years as measured from the date of grant.

 

  Stock appreciation rights represent the right to receive payment (in cash and/or in common stock in the discretion of the administrator) of an amount equal to the excess of the fair market value of a share of our common stock on the date of exercise over the fair market value of our common stock on the date of grant. Stock appreciation rights may be granted separately or in conjunction with stock options. They generally vest and are exercisable at such time and on such terms and conditions as determined by the administrator at the time of grant, and may have a term not exceeding 10 years as measured from the date of grant. However, stock appreciation rights granted in conjunction with stock options generally may be exercisable on the same terms and conditions and for the same period as the related stock option. In addition, the administrator may also grant stock appreciation rights referred to as “limited stock appreciation rights,” which are exercisable only upon the occurrence of a sale of the Company, or such other event as the administrator may determine at the time of grant or thereafter.

 

  Restricted stock represents the grant of shares of our common stock at a price, if any, determined by the administrator, subject to certain restrictions. Restricted stock typically will be forfeited by the holder or may be repurchased by us at the original purchase price if the conditions or restrictions on vesting, which may include the attainment of specified performance goals, are not met. In general, restricted stock may not be sold or otherwise transferred or hypothecated until certain restrictions are removed or expire. To the extent determined by the administrator, holders of restricted stock, unlike recipients of options, may have voting rights and the right to receive dividends, if any, prior to the time when the restrictions lapse. The administrator, however, may determine that payment of dividends, if any, be deferred until the restrictions are removed or expire.

 

  Other stock-based awards may be in the form of shares of common stock, stock equivalents, restricted stock units or such other awards as the administrator may determine that are payable in, valued in whole or in part by reference to, or otherwise based on shares of our common stock. Other stock-based awards may be subject to such vesting conditions, including the achievement of performance criteria, as the administrator may determine or may be awarded without any restrictions. To the extent applicable, the administrator may determine the exercise price, if any, of other stock-based awards and whether to provide for the payment (or deferral) of any dividends subject to shares underlying such awards.

 

  Other cash-based awards may also be granted to eligible individuals in such amounts, on such terms and conditions and for such consideration, including no consideration, as the administrator may determine. Cash-based awards may be granted subject to the satisfaction of vesting conditions, which may be accelerated by the administrator in its sole discretion at any time, or may be awarded purely as a bonus and not subject to any restrictions or conditions.

Sale or reorganization .      In the event of a sale or reorganization of the Company the administrator may, in its sole discretion, (i) provide for the accelerated vesting of, or lapse of restrictions applicable to, outstanding awards at any time; (ii) provide for the continuation, assumption or substitution of outstanding awards, whether vested or unvested; (iii) terminate outstanding and unexercised stock-based awards pursuant to applicable award agreements; or (iv) provide for the purchase of outstanding awards by us or any of our subsidiaries in an amount of cash equal to the excess of the fair market value of shares of common stock covered by such awards over the aggregate exercise price or purchase price (if any) required to be paid under such awards for the acquisition of the underlying common stock. In addition, the administrator will appropriately adjust the aggregate number or kind of securities that may be issued under the 2014 Equity Plan, the number and kind of securities or other property which may be issued pursuant to awards under the 2014 Equity Plan or the purchase price thereof in order to prevent dilution or enlargement of rights granted to, or available for participants, under the 2014 Equity Plan.

Under the 2014 Equity Plan, a “sale of the Company” is generally defined as a bona fide sale of (i) the majority of the Company’s outstanding shares or (ii) all or substantially all of the Company’s assets, determined on a consolidated basis, in either case to any person (other than an affiliate of the Company). A “reorganization” is generally defined as any merger, consolidation, statutory exchange, spin-off, reorganization, sale or transfer of all or substantially all of the Company’s assets or business, or other corporate transaction or event in which the Company’s outstanding shares of common stock are converted or exchanged, either immediately or upon liquidation of the Company, into the right to receive securities or the property of the Company or other entity.

 

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Adjustments of awards.     In the event of any stock split, including a reverse stock split, or similar transaction, the administrator will adjust the respective exercise price and number of shares covered by outstanding awards to prevent dilution or enlargement of the rights granted to, or available for, participants under the 2014 Equity Plan. Further, in the event of any other change in the capital structure of the Company, including by reason of any extraordinary stock or cash dividend, any conversion, adjustment or issuance of any class of securities convertible or exercisable into any class of equity securities of the Company, then the administrator may adjust the 2014 Equity Plan and any award granted thereunder in order to prevent dilution or enlargement of the rights grant to, or available for participants.

Amendment and termination .      Our board of directors may amend, modify, suspend or terminate the 2014 Equity Plan at any time. However, except in connection with certain changes in the Company’s capital structure or to comply with applicable law, stockholder approval will be required for an amendment that (i) increases the maximum number of shares which may be issued under the 2014 Equity Plan or (ii) requires stockholder approval in order for the 2014 Equity Plan to continue to comply with certain provisions of Section 422 of the Code, related to ISOs. The administrator (to the extent such power has been delegated by our board of directors) may amend the terms of any award. However, generally no amendment may impair the rights of a holder of an outstanding award without the holder’s consent.

Immediately prior to the completion of this offering and in connection with the effectiveness of our 2016 Plan, the 2014 Equity Plan will terminate and no further awards will be granted thereunder. However, any awards under the 2014 Equity Plan that are outstanding as of the effective date of the 2016 Plan will continue to be subject to the terms and conditions of the 2014 Equity Plan.

2014 Phantom Equity Plan

We also currently maintain the Phantom Plan to further incentivize our current and prospective employees, non-employee directors and consultants. We have only granted phantom shares to our employees in leadership positions who reside outside of the United States. Each phantom share entitles the holder to receive (i) a one-time award of shares of our common stock or (ii) a one-time cash payment in an amount equal to the fair market value of the amounts distributable to a holder of our common stock in connection with a sale of the Company, less the grant date fair value, as determined in the Company’s sole discretion. “Sale of the Company” is generally defined in the same manner as under the 2014 Equity Plan. Holders of phantom shares are not entitled to any dividend or distribution rights, voting rights, liquidation rights, preemptive or other rights generally available to stockholders of the Company.

The total number of phantom shares available for issuance under the Phantom Plan is 220,800. If any phantom shares are forfeited or cancelled for any reason, then they will again be available for issuance under the Phantom Plan. If at any time a holder of phantom shares ceases providing services to the Company for any reason prior to vesting, then all phantom shares held by such individual will be immediately forfeited and deemed canceled without any consideration.

In the event of a stock split, declaration of a stock dividend or similar distribution, recapitalization, spin-off or other similar occurrence, the board of directors or compensation committee, as administrator of the Phantom Plan, may equitably adjust the number of phantom shares available for future awards and the number of phantom shares then outstanding under the Phantom Plan in such manner as it deems appropriate.

Our board of directors may further amend or terminate the Phantom Plan and any outstanding award agreement pursuant to which phantom shares were issued at any time and for any reason, provided that no such amendment of the Phantom Plan or applicable award agreements that would adversely affect the holders of outstanding phantom shares may be made without prior written consent of the holders of a majority of the affected shares.

2016 Equity Incentive Award Plan

In connection with this offering, we intend to adopt the 2016 Plan, which will become effective immediately prior to the effectiveness of the registration statement of which this prospectus forms a part. The principal purpose of the 2016 Plan is to attract, retain and motivate selected employees, consultants and directors through the granting of stock-based compensation awards and cash-based performance bonus awards. The material terms of the 2016 Plan, as it is currently contemplated, are summarized below.

Upon the pricing of this offering, we will grant 596,217 restricted stock units in the aggregate and options to purchase an aggregate of 1,250,517 shares of our common stock to certain officers, employees and directors under the 2016 Plan. Each option will have an exercise price per share equal to the initial public offering price.

 

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Share reserve .    Under the 2016 Plan, an aggregate of 5,430,690 shares of our common stock will be initially reserved for issuance pursuant to a variety of stock-based compensation awards, including stock options, stock appreciation rights (“SARs”), restricted stock awards, restricted stock unit awards, deferred stock awards, dividend equivalent awards, stock payment awards and performance awards. The number of shares initially reserved for issuance or transfer pursuant to awards under the 2016 Plan will be increased by (i) the number of shares represented by awards outstanding under our 2014 Equity Plan that are forfeited or lapse unexercised following the effective date up to a maximum of 4,341,200 shares and (ii) an annual increase on the first day of each calendar year beginning in 2017 and ending in 2026, equal to the lesser of (A) 4% of the shares of common stock outstanding (on an as converted basis) on the last day of the immediately preceding calendar year and (B) such smaller number of shares of stock as determined by our board of directors; provided, however, that no more than 22,627,878 shares of stock may be issued upon the exercise of ISOs.

The following counting provisions will be in effect for the share reserve under the 2016 Plan:

 

  to the extent that an award terminates, expires or lapses for any reason or an award is settled in cash without the delivery of shares, any shares subject to the award at such time will be available for future grants under the 2016 Plan;

 

  to the extent shares are tendered or withheld to satisfy the grant or exercise price of a stock option, or the tax withholding obligation with respect to any award under the 2016 Plan, or shares subject to SARs that are not issued in connection with the stock settlement of the SAR, such tendered or withheld shares will be available for future grants under the 2016 Plan;

 

  to the extent that shares of our common stock underlying unvested awards are repurchased by us, such shares will be available for future grants under the 2016 Plan;

 

  the payment of dividend equivalents in cash in conjunction with any outstanding awards will not be counted against the shares available for issuance under the 2016 Plan;

 

  to the extent permitted by applicable law or any exchange rule, shares issued in assumption of, or in substitution for, any outstanding awards of any entity acquired by us or any of our subsidiaries will not be counted against the shares available for issuance under the 2016 Plan; and

 

  to the extent that an entity acquired by us or any of our subsidiaries has shares available for grant under pre-existing plan, the shares available for grant pursuant to the terms of such pre-existing plan (as may be appropriately adjusted) may be used for awards under the 2016 Plan, subject to certain limitations, and will not be counted against the shares available for issuance under the 2016 Plan.

Administration .    The compensation committee of our board of directors is expected to administer the 2016 Plan. Our board of directors or the compensation committee thereof may delegate their duties and responsibilities to committees of directors and/or officers, subject to certain limitations that may be imposed under Section 162(m) of the Code, Section 16 of the Exchange Act and/or stock exchange rules. The administrator must consist of at least two members of our board of directors, each of whom is intended to qualify as an “outside director,” within the meaning of Section 162(m) of the Code, a “non-employee director” for purposes of Rule 16b-3 under the Exchange Act and an “independent director” within the meaning of the rules of the applicable stock exchange, or other principal securities market on which shares of our common stock are traded. The 2016 Plan provides that our board of directors or the compensation committee thereof may delegate, consistent with applicable law, its authority to grant awards to employees other than executive officers and certain senior executives of the Company to a committee consisting of one or more members of our board of directors or one or more of our officers. Awards made to our non-employee directors must be approved by our full board of directors. Our board of directors may at any time remove the compensation committee as the administrator and revest in itself the authority to administer the 2016 Plan.

Subject to the terms and conditions of the 2016 Plan, the administrator has the authority to select the persons to whom awards are to be made, to determine the number of shares to be subject to awards, to prescribe the terms and conditions of awards and to make all other determinations and to take all other actions necessary or advisable for the administration of the 2016 Plan. The administrator is also authorized to adopt, amend or rescind rules relating to administration of the 2016 Plan.

Eligibility .    Options, SARs, restricted stock and all other stock-based and cash-based awards under the 2016 Plan may be granted to individuals who are then our officers, employees or consultants or are the officers, employees or consultants of certain of our subsidiaries. Such awards also may be granted to our non-employee directors. Only employees of our

 

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Company or certain of our subsidiaries may be granted ISOs. The aggregate value of awards (determined on the grant date under applicable accounting standards) that may be granted to any non-employee director in the calendar year in which his or her service first commences may not exceed $ 1,000,000 and in any calendar year may not exceed $ 500,000.

Awards .    The 2016 Plan provides that the administrator may grant or issue stock options, SARs, restricted stock, restricted stock units, deferred stock, dividend equivalents, performance awards, stock payments and other stock-based and cash-based awards, or any combination thereof. Each award will be set forth in a separate agreement with the person receiving the award and will indicate the type of award, and the terms and conditions thereof.

 

  NSOs will provide for the right to purchase shares of our common stock at a specified price which may not be less than fair market value on the date of grant, and usually will become exercisable (at the discretion of the administrator) in one or more installments after the grant date, subject to the participant’s continued employment or service with us and/or subject to the satisfaction of corporate performance targets and individual performance targets established by the administrator. NSOs may be granted for any term specified by the administrator that does not exceed 10 years.

 

  ISOs will be designed in a manner intended to comply with the provisions of Section 422 of the Code and will be subject to specified restrictions contained in the Code. Among such restrictions, ISOs must have an exercise price of not less than the fair market value of a share of common stock on the date of grant, may only be granted to employees and must not be exercisable after a period of 10 years measured from the date of grant. In the case of an ISO granted to an individual who owns (or is deemed to own) at least 10% of the total combined voting power of all classes of our capital stock, the 2016 Plan provides that the exercise price must be at least 110% of the fair market value of a share of common stock on the date of grant and the ISO must not be exercisable after a period of five years measured from the date of grant.

 

  Restricted stock may be granted to any eligible individual and made subject to such restrictions as may be determined by the administrator. Restricted stock typically will be forfeited by the holder or may be repurchased by us at the original purchase price if the conditions or restrictions on vesting are not met. In general, restricted stock may not be sold or otherwise transferred or hypothecated until certain restrictions are removed or expire. Holders of restricted stock will have voting rights and will have the right to receive dividends, if any, prior to the time when the restrictions lapse; however, extraordinary dividends will generally be placed in escrow and will not be released until the restrictions are removed or expire.

 

  Restricted stock units may be awarded to any eligible individual, typically without payment of consideration, but subject to vesting conditions based on continued employment or service or on performance criteria established by the administrator. Like restricted stock, restricted stock units may not be sold, or otherwise transferred or hypothecated, until vesting conditions are removed or expire. Unlike restricted stock, stock underlying restricted stock units will not be issued until the restricted stock units have vested, and recipients of restricted stock units generally will have no voting or dividend rights prior to the time when vesting conditions are satisfied.

 

  Deferred stock awards represent the right to receive shares of our common stock on a future date. Deferred stock may not be sold or otherwise transferred or hypothecated until issued. Deferred stock will not be issued until the deferred stock award has vested, and recipients of deferred stock generally will have no voting or dividend rights prior to the time when the vesting conditions are satisfied and the shares are issued. Deferred stock awards generally will be forfeited, and the underlying shares of deferred stock will not be issued, if the applicable vesting conditions and other restrictions are not met.

 

  Deferred stock units may be awarded to any eligible individual and may be subject to vesting conditions based on continued employment or service or on performance criteria established by the administrator. Like deferred stock, deferred stock units may not be sold, or otherwise transferred or hypothecated, until vesting conditions are removed or expire. Stock underlying deferred stock units will not be issued until the deferred stock units have vested or upon a specified settlement date thereafter. Recipients of deferred stock units generally will have no voting or dividend rights prior to the time when the vesting conditions are satisfied and the shares are issued.

 

  SARs may be granted in connection with stock options or other awards, or separately. SARs granted in connection with stock options or other awards typically will provide for payments to the holder based upon increases in the price of our common stock over a set exercise price. The exercise price of any SAR granted under the 2016 Plan must be at least 100% of the fair market value of a share of our common stock on the date of grant. There are no restrictions specified in the 2016 Plan on the exercise of SARs or the amount of gain realizable therefrom, although restrictions may be imposed by the administrator in the SAR agreements, including vesting based on continued service or the satisfaction of performance criteria. SARs under the 2016 Plan will be settled in cash or shares of our common stock, or in a combination of both, at the election of the administrator.

 

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  Dividend equivalents represent the value of the dividends per share, if any, paid by us, calculated with reference to the number of shares covered by the award. Dividend equivalents may be settled in cash or shares and at such times as determined by the administrator.

 

  Performance awards may be granted by the administrator on an individual or group basis. Generally, these awards will be based upon specific performance targets and may be paid in cash or in common stock or in a combination of both. Performance awards may include “phantom” stock awards that provide for payments based upon the value of our common stock. Performance awards may also include bonuses that may be granted by the administrator on an individual or group basis and which may be payable in cash or in common stock or in a combination of both.

 

  Stock payments may be authorized by the administrator in the form of common stock or an option or other right to purchase common stock as part of a deferred compensation or other arrangement in lieu of all or any part of compensation, including bonuses, that would otherwise be payable in cash to the employee, consultant or non-employee director.

Adjustments of awards .    In the event of any stock dividend, stock split, combination or exchange of shares, merger, consolidation, spin-off, recapitalization, distribution of our assets to stockholders (other than normal cash dividends) or any other corporate event affecting the number of outstanding shares of our common stock or the share price of our common stock other than an equity restructuring (as defined below), the administrator may make appropriate, proportionate adjustments to:

 

  the aggregate number and kind of shares subject to the 2016 Plan;

 

  the number and kind of shares subject to outstanding awards;

 

  the terms and conditions of outstanding awards (including, without limitation, any applicable performance targets or criteria with respect to such awards); and

 

  the grant or exercise price per share of any outstanding awards under the 2016 Plan.

In the event of any transaction or event described above, or any unusual or nonrecurring transaction or events, and in order to prevent dilution or enlargement of the potential benefits intended to be made available under the 2016 Plan, the administrator in its sole discretion may:

 

  provide for the termination or replacement of an award in exchange for cash or other property;

 

  provide that any outstanding award cannot vest, be exercised or become payable after such event; and/or

 

  provide that awards may be exercisable, payable or fully vested as to shares of common stock covered thereby.

In the event of an equity restructuring, the administrator will make appropriate, proportionate adjustments to the number and type of securities subject to each outstanding award and the exercise price or grant price thereof, if applicable. In addition, the administrator will make equitable adjustments, as the administrator in its discretion may deem appropriate to reflect such equity restructuring, with respect to the aggregate number and type of shares subject to the 2016 Plan. The adjustments upon an equity restructuring are nondiscretionary and will be final and binding on the affected holders and the Company.

For purposes of the 2016 Plan, “equity restructuring” means a nonreciprocal transaction between us and our stockholders, such as a stock dividend, stock split, spin-off, rights offering or recapitalization through a large, nonrecurring cash dividend, that affects the number or kind of shares (or other securities) or the share price of our common stock (or other securities) and causes a change in the per share value of the common stock underlying outstanding stock-based awards granted under the 2016 Plan.

In the event of a change in control where the successor corporation does not assume or substitute awards granted prior to the consummation of such transaction, awards issued under the 2016 Plan will become fully vested and, as applicable, exercisable and will be deemed exercised immediately prior to the consummation of such transaction, other than performance awards, which will vest pursuant to the terms of the applicable award agreements. The administrator may also include any further provisions and limitations in any award agreement that are not inconsistent with the terms of the 2016 Plan. Under the 2016 Plan, a “change in control” is generally defined as the occurrence, in a single transaction or in a series of related transactions, any one or more of the following events:

 

  the transfer or exchange by our stockholders of more than 50% of our voting stock to any person or related group of persons;

 

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  a change in the composition of our board of directors over a consecutive two-year period such that 50% or more of the members of the board of directors were elected through one or more contested elections;

 

  a merger, consolidation, reorganization or business combination in which we are involved, directly or indirectly, or a sale of all or substantially all our assets, other than a transaction which results in our outstanding voting securities immediately before the transaction continuing to represent a majority of the voting power of the acquiring company’s outstanding voting securities and after which no person or group beneficially owns 50% or more of the outstanding voting securities of the surviving entity immediately after the transaction; or

 

  stockholder approval of our liquidation or dissolution.

Foreign participants, claw-back provisions and transferability .     The administrator may modify award terms, establish subplans and/or adjust other terms and conditions of awards, subject to the share limits described above, in order to facilitate grants of awards subject to the laws and/or stock exchange rules of countries outside of the United States. All awards will be subject to the provisions of any claw-back policy implemented by the Company to the extent set forth in such claw-back policy and/or in the applicable award agreement. With limited exceptions for estate planning, domestic relations orders, certain beneficiary designations and the laws of descent and distribution, awards under the 2016 Plan are generally non-transferable prior to vesting unless otherwise determined by the administrator, and are exercisable only by the participant during his or her lifetime.

Amendment and termination .    Our board of directors or the compensation committee thereof (with board approval) may terminate, amend or modify the 2016 Plan at any time and from time to time. However, we must generally obtain stockholder approval:

 

  to increase the number of shares available under the 2016 Plan (other than in connection with the automatic annual increases and certain corporate events, in each case, as described above);

 

  to cancel any outstanding option or SAR in exchange for cash or another award when the exercise or base price of the option or SAR, respectively, exceeds the fair market value of the underlying shares; or

 

  to the extent required by applicable law, rule or regulation (including any applicable stock exchange rule).

Termination.     Our board of directors may terminate the 2016 Plan at any time. No ISOs may be granted pursuant to the 2016 Plan after the tenth anniversary of the effective date of the 2016 Plan, and no additional automatic annual share increases to the 2016 Plan’s aggregate share limit will occur from and after such anniversary. Any award that is outstanding on the termination date of the 2016 Plan will remain in force according to the terms of the 2016 Plan and the applicable award agreement.

2016 Employee Stock Purchase Plan

In connection with this offering, we will also adopt the ESPP, which will become effective immediately prior to the effectiveness of the registration statement of which this prospectus forms a part. The ESPP is designed to allow our eligible employees to purchase shares of our common stock with accumulated payroll deductions. The ESPP is intended to qualify under Section 423 of the Code. The material terms of the ESPP, as it is currently contemplated, are summarized below.

Plan administration.     Our compensation committee is expected to administer the ESPP, subject to the terms and conditions of the ESPP. Our board of directors or the compensation committee may delegate administrative tasks under the ESPP to the services of an agent and/or employees. The administrator will have the discretionary authority to administer and interpret the ESPP. Interpretations and constructions of the administrator of any provision of the ESPP or of any rights thereunder will be conclusive and binding on all persons. We will bear all expenses and liabilities incurred by the ESPP administrator.

Shares available under ESPP .     The maximum number of shares of our common stock which will be authorized for sale under the ESPP is equal to the sum of (a) 905,115 shares of common stock and (b) an annual increase on the first day of each calendar year beginning in 2017 and ending in 2026, equal to the lesser of (i) 1% of the shares of our common stock outstanding (on an as converted basis) on the last day of the immediately preceding calendar year and (ii) such number of shares of common stock as determined by our board of directors; provided, however, that no more than 6,788,363 shares of our common stock may be issued under the ESPP, subject to certain adjustments. The shares made available for sale under the ESPP may be authorized but unissued shares, treasury stock or common stock purchased on the open market.

 

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Eligible employees.     Employees eligible to participate in the ESPP for a given offering period generally include employees who are employed by us or one of our designated subsidiaries on the first day of the offering period, or the enrollment date. Any employee who owns (or is deemed to own through attribution) 5% or more of the combined voting power or value of all our classes of stock, or the stock of one of our subsidiaries, will not be allowed to participate in the ESPP. Further, the administrator may exclude any of our employees and any employees of our subsidiaries who customarily work less than five months in a calendar year, are customarily scheduled to work less than 20 hours per week, fail to meet other service requirements designated by the administrator or qualify as “highly compensated employees” within the meaning of Section 423 of the Code.

Participation.     Employees will enroll under the ESPP by completing a payroll deduction form permitting the deduction from their compensation of at least 1% of their compensation but not more than a maximum percentage of their compensation per offering period as specified by the administrator. A participant may not purchase more than 50,000 shares in each offering period. The administrator has the authority to change these limitations for any subsequent offering period.

Offering.     Under the ESPP, participants are offered the option to purchase shares of our common stock at a discount during a series of successive offering periods. The offering periods will commence and end on dates as determined by the ESPP administrator. However, in no event may an offering period be longer than 27 months in length.

The option purchase price will generally be designated by the administrator and may not be less than the lower of 85% of the closing trading price per share of our common stock on the first trading date of an offering period in which a participant is enrolled or 85% of the closing trading price per share on the designated purchase date within each offering period.

Unless a participant cancels his or her participation in the ESPP before the purchase date, the participant will be deemed to have exercised his or her option in full as of each purchase date. Upon exercise, the participant will purchase the number of whole shares that his or her accumulated payroll deductions will buy at the option purchase price, subject to the participation limitations listed above.

A participant may increase, decrease or suspend his or her payroll deduction authorization at any time prior to the end of the offering period, provided that the administrator may limit the number of changes a participant may make to his or her payroll deduction elections during each offering period. In the event a participant suspends his or her payroll deductions, such participant’s cumulative payroll deductions prior to the suspension will remain in his or her account and will be applied to the purchase of shares on the next occurring purchase date. A participant may also withdraw all, but not less than all, of the payroll deductions credited to his or her account and not yet used to exercise his or her rights no later than one week prior to the end of an offering period. In the event of withdrawal, all of the participant’s payroll deductions credited to his or her account will be refunded as soon as reasonably practicable following his or her notice of withdrawal.

Rights granted under the ESPP are generally non-transferrable (other than by will or the applicable laws of descent and distribution) and are exercisable only by the participant during his or her lifetime. Any unauthorized attempt at assignment, transfer, pledge or other disposition will not be given effect.

Adjustments upon change in control and other changes in capitalization .     In the event the administrator determines that any dividend or other distribution, change in control, reorganization, liquidation, dissolution or sale or transfer of all or substantially all of the assets of the Company, or sale or exchange of our common stock or other securities or other similar corporate transaction or event affects our common stock such that an adjustment is determined by the administrator to be appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended by the Company to be made available under the plan, the administrator will make equitable adjustments to reflect such changes with respect to:

 

  the aggregate number and type of shares available under the ESPP (including adjustments to the maximum number of shares that may be purchased);

 

  the class, number of shares and price per share subject to outstanding rights under the ESPP; and

 

  the purchase price with respect to any outstanding rights under the ESPP.

A change in control is defined in a manner substantially similar to the definition of a change in control under the 2016 Plan. In the event of any transaction or similar occurrence described above, or any unusual or nonrecurring transactions or events affecting the Company, any affiliate of the Company or their respective financial statements, or changes in applicable law or accounting principles, the administrator is also authorized to terminate any outstanding rights without being exercised or in exchange for cash, replace outstanding rights with other rights or property, provide that outstanding rights be assumed by a successor or survivor corporation (or parent or subsidiary thereof), make adjustments to the number and type of shares

 

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subject to outstanding rights or of rights that may be granted in the future, or provide for a participant’s accumulated payroll deductions to be used for purchases of common stock prior to the next occurring purchase date as the administrator may determine in its sole discretion as appropriate in order to prevent the dilution or enlargement of the benefits or potential benefits intended to be made available under the ESPP.

Amendment and termination.     The administrator may amend, suspend or terminate the ESPP at any time. However, approval of the Company’s stockholders will be required to amend the ESPP to (i) increase the aggregate number, or change the type of shares that may be sold pursuant the rights granted; (ii) change the corporations or classes of corporations or classes of corporations whose employees may be granted rights under the ESPP; or (iii) change the ESPP in any manner that would cause the ESPP to no longer be an “employee stock purchase plan” within the meaning of Section 423(b) of the Code.

We intend to file with the SEC a registration statement on Form S-8 covering the shares issuable under the 2014 Equity Plan, the 2016 Plan and the ESPP.

Director compensation

We have provided each of our non-employee directors, with the exception of Mr. McGlashan, the option to either receive an annual cash payment of $ 25,000 or a one-time option to purchase 34,500 shares of our common stock in lieu of such payments. Pursuant to the Stockholders Agreement, Mr. McGlashan serves on our board of directors as a representative of the Sponsor and receives no compensation for his service on the board of directors. In addition, Mr. Shamah served as an officer of the Company until December 2015. As a result, Mr. Shamah received no compensation in respect of his service as a member of our board of directors during 2015.

During the year ended December 31, 2015, we did not pay cash compensation to any of our non-employee directors. We also did not grant any stock options or other equity awards, except with respect to Ms. Watson, who, on August 12, 2015, was granted an option to purchase 34,500 shares of our common stock in connection with her appointment to our board of directors. The option vests and becomes exercisable with respect to the underlying shares in substantially equal installments on each of the first five anniversaries of the date of grant, subject to Ms. Watson’s continued service to the Company through the applicable vesting date. In addition, we reimburse our directors for travel and other reasonable business expenses incurred in the performance of their services for us.

Director compensation table

The table set forth below describes all fees paid in 2015 to our directors who are not named executive officers.

 

Name   

Fees earned or
paid in cash

( $ )

     Option
awards
( $ )(1)
     All other
compensation
    

Total

( $ )

 

William E. McGlashan, Jr.(2)

                               

Maureen C. Watson

             27,375                 27,375   

Richard G. Wolford

                               

Joseph A. Shamah(3)

                     313,750         313,750   

Amy Shenkan(4)

                               

 

 

 

(1)   Amounts reported in the “Option Awards” column represent the grant date fair values of stock options granted under the 2014 Equity Plan, calculated in accordance with FASB Topic 718, disregarding the effects of estimated forfeitures. For a discussion of the assumptions used to calculate the value of our stock options, see note 12 to our audited financial statements included elsewhere in this prospectus. As of December 31, 2015, (i) Mr. Wolford and Mses. Watson and Shenkan each held an option to purchase 34,500 shares of our common stock and (ii) Mr. Shamah held options to purchase an aggregate of 242,190 shares of our common stock.

 

(2)   Mr. McGlashan was appointed to our board effective August 11, 2015.

 

(3)   Amounts reported included in the column entitled “All Other Compensation” reflect base salary of $ 313,750 paid to Mr. Shamah in his capacity as an officer of the Company.

 

(4)   Ms. Shenkan ceased service on our board of directors effective April 20, 2016.

 

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Director compensation program

In September 2016, our board of directors approved a compensation policy for our non-employee directors to be effective in connection with the pricing of this offering (the “Post-IPO Director Compensation Program”). Pursuant to the Post-IPO Director Compensation Program, our non-employee directors will receive cash compensation, paid quarterly in arrears, as set forth below; provided, however, that each non-employee director may elect to receive his or her annual compensation in the form of restricted stock units that vest in full on the earlier of the first anniversary of the date of grant, or immediately prior to the next annual meeting of our stockholders occurring after such award is granted, subject to certain limitations.

Currently, all of our directors other than Messrs. McGlashan and Shamah are entitled to participate in the Post-IPO Director Compensation Program. Under the Post-IPO Director Compensation Program:

 

  Each non-employee director will receive an annual cash retainer in the amount of $ 45,000;

 

  The chairperson of the audit committee will receive additional annual compensation in the amount of $ 15,000 for such chairperson’s service on the audit committee, and each non-chairperson member of the audit committee will receive additional annual cash compensation in the amount of $ 7,500 for such member’s service on the audit committee;

 

  The chairperson of the compensation committee will receive additional annual compensation in the amount of $ 10,000 for such chairperson’s service on the compensation committee, and each non-chairperson member of the compensation committee will receive additional annual cash compensation in the amount of $ 5,000 for such member’s service on the compensation committee; and

 

  The chairperson of the nominating and corporate governance committee will receive additional annual compensation in the amount of $ 6,000 for such chairperson’s service on the nominating and corporate governance committee, and each non-chairperson member of the nominating and corporate governance committee will receive additional annual cash compensation in the amount of $ 3,000 for such member’s service on the nominating and corporate governance committee.

In addition, under the Post-IPO Director Compensation Program, each non-employee director who is elected or appointed to serve on our board of directors after the completion of this offering will be granted restricted stock units in an amount equal to (i)  $ 140,000 divided by (ii) the fair market value of a share of our common stock as of the date of the appointment or election, pro-rated for such director’s service until the next annual meeting of our stockholders (the “Initial Award”). In addition, each non-employee director who continues to serve on our board of directors immediately following any annual meeting of our stockholders will be granted, on the date of the annual meeting, that number of restricted stock units calculated by dividing (i)  $ 140,000 by (ii) the fair market value of a share of our common stock as of such date (the “Subsequent Award”). In each case, the fair market value will be determined pursuant to the terms of the 2016 Plan, or any other applicable equity incentive plan that we maintain at such time.

Each Initial Award will vest in full upon the earlier of the date of the first annual meeting of our stockholders occurring after the Initial Award is granted, or the first anniversary of the annual meeting of our stockholders immediately preceding the date on which the Initial Award is granted. Each Subsequent Award will vest in full on the earlier of the first anniversary of the date of grant, or immediately prior to the next annual meeting of our stockholders occurring after the Subsequent Award is granted. In each case, vesting will be subject to the non-employee director continuing to provide services to us through the applicable vesting date.

Pursuant to the terms of the Post-IPO Director Compensation Program, all of a non-employee director’s Initial Awards and Subsequent Awards, and any other stock options or other equity-based awards then held by him or her, will vest and, if applicable, become exercisable in full immediately prior to the occurrence of a change in control (as defined in the 2016 Plan). These awards will otherwise be subject to the terms of the 2016 Plan and the Company’s applicable award agreements.

Upon the pricing of this offering, Mr. Perry will be granted an option to purchase 34,500 shares of our common stock under the 2016 Plan. The option award will vest in five substantially equal installments on each anniversary of his appointment to our board of directors, subject to continued service through the applicable vesting date, and will vest and become exercisable in full immediately prior to the occurrence of a change in control (as defined in the 2016 Plan).

 

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Certain relationships and related party transactions

The following is a description of transactions since January 1, 2013 in which the amount involved exceeds $ 120,000, and in which any of our directors, executive officers or holders of more than 5% of our capital stock, or an affiliate or immediate family member thereof, had or will have a direct or indirect material interest.

Registration rights

We entered into a registration rights agreement (the “Registration Rights Agreement”) on January 31, 2014 with our Sponsor and certain stockholders. The Registration Rights Agreement provides that all stockholders party to the agreement are entitled to participate in certain offerings of the Company’s securities registered under the Securities Act, subject to certain exceptions, and provides for “demand” and “piggyback” registration rights. The Registration Rights Agreement also provides that we will pay certain expenses of these stockholders relating to such registrations and indemnify them against certain liabilities that may arise under the Securities Act.

The Registration Rights Agreement has been filed as an exhibit to the registration statement of which this prospectus forms a part.

Stockholders Agreement

We entered into a stockholders agreement (the “Stockholders Agreement”) on January 31, 2014 with our Sponsor, J.A. Cosmetics Corp. and certain other stockholders. In connection with this offering, we will enter into an amended and restated stockholders agreement with our Sponsor, J.A. Cosmetics Corp., Joseph Shamah, our executive officers and certain other equity holders (the “Amended Stockholders Agreement”), which will contain provisions related to the composition of our board of directors, the committees of our board of directors and our corporate governance. Our board of directors will initially be comprised of eight directors, (i) three of whom will be designated by our Sponsor, (ii) one of whom will be designated by J.A. Cosmetics Corp., (iii) one of whom will be the Chief Executive Officer and (iv) three of whom will meet the independence criteria set forth in Rule 10A-3 under the Exchange Act. Pursuant to the terms of the Amended Stockholders Agreement, our Sponsor will have the right to designate up to three members of our board of directors so long as it holds at least 30% of our outstanding common stock, two members of our board of directors so long as it holds less than 30% but greater than or equal to 20% of our outstanding common stock, and one member of our board of directors so long as it holds less than 20% but greater than or equal to 5% of our outstanding common stock. Also under our Amended Stockholders Agreement, J.A. Cosmetics Corp. will have the right to designate one member of our board of directors so long as it holds at least 10% of our outstanding common stock. In addition, subject to applicable laws and stock exchange regulations, our Sponsor will have the right to have a representative appointed to serve on each committee of our board of directors other than the audit committee for so long as our Sponsor has the right to designate at least one director for election to our board. Pursuant to the Amended Stockholders Agreement, the holders of approximately 75% of our outstanding common stock will agree to vote their shares in favor of individuals designated to serve on our board of directors by our Sponsor and J.A. Cosmetics Corp. and grant an irrevocable proxy to our Sponsor that gives it sole voting power with respect to matters relating to the composition of our board of directors and the rights of our Sponsor and J.A. Cosmetics Corp. to appoint members of our board of directors, for so long as our Sponsor has the right to designate at least one member of our board of directors. To the extent not inconsistent with Section 141(k) of the DGCL and our amended and restated certificate of incorporation, any director who is nominated by our Sponsor or J.A. Cosmetics Corp. may only be removed by our Sponsor or J.A. Cosmetics Corp., respectively, and if our Sponsor or J.A. Cosmetics Corp. provides notice of its desire to remove one of its nominated directors, our board of directors and the other parties to the Amended Stockholders Agreement shall take all reasonable action necessary to effect such removal.

In addition, the Amended Stockholders Agreement will provide that for as long as our Sponsor owns or holds, directly or indirectly, at least 30% of the shares of our outstanding common stock, we must obtain the consent of our Sponsor before we or our subsidiaries are permitted to take any of the following actions:

 

  authorize, issue or enter into any agreement providing for the issuance (contingent or otherwise) of (x) any notes or debt securities with options, warrants or other rights to acquire equity securities or otherwise containing profit participation features or (y) any equity securities other than equity securities issued to employees, directors, consultants or advisors pursuant to a plan, agreement or arrangement approved by our board of directors;

 

  liquidate, dissolve or effect a recapitalization or reorganization in any form of transaction or series of transactions;

 

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  incur any indebtedness in an aggregate amount in excess of $ 50.0 million (other than indebtedness under the terms and provisions of the Senior Secured Credit Facility); and

 

  increase or decrease the size of our board of directors.

The Amended Stockholders Agreement will provide our Sponsor with certain information rights to receive our quarterly and annual financial statements so long as it has the right to designate at least one member of our board of directors. In addition, for so long as our Sponsor holds at least 5% of our outstanding common stock, our Sponsor will be permitted to review our books and records and to discuss our affairs, finances and condition with our officers.

The Amended Stockholders Agreement will further provide that it shall not preclude or in any way restrict our Sponsor or any of its affiliates from investing or participating in any particular enterprise, or trading in the securities thereof, whether or not such enterprise has products or services that compete with our products and services. The Company and the equity holders party to the Amended Stockholders Agreement will waive, in perpetuity, any and all claims in connection with the doctrine of corporate opportunity (or any similar doctrine).

Management Services Agreement

We entered into a management services agreement (the “Management Services Agreement”) with our Sponsor on January 31, 2014 whereby our Sponsor agreed to provide certain financial and strategic advisory services and consulting services. Under the Management Services Agreement, we incurred management and consulting fees of $ 0.8 million, $ 0.9 million and $ 0.5 million in the Successor 2014 Period, Successor 2015 Period and six months ended June 30, 2016, respectively. We have agreed to indemnify the Sponsor and, among others, its employees, stockholders and affiliates, against all actions, suits, claims, liabilities, losses, damages, costs and out-of-pocket expenses incurred as a result the Management Services Agreement or the acquisition of the Predecessor.

Upon the consummation of this offering, the Management Services Agreement will terminate. On termination, and in accordance with the terms of the agreement, we will pay the Sponsor the net present value of the remaining portion of any management and consulting fees owed through December 31, 2016 as well as certain other expenses of the Sponsor. We expect the amount payable on the termination of the Management Services Agreement will be approximately $ 0.2 million.

Director and executive officer compensation

Please see “Executive compensation” for information regarding compensation of directors and executive officers.

Employment agreements

We have entered into employment agreements with our executive officers. For more information regarding these agreements, see “Executive compensation—Summary compensation table.”

The employment agreements have been filed as exhibits to the registration statement of which this prospectus forms a part.

Indemnification agreements and directors’ and officers’ liability insurance

We have entered into indemnification agreements with each of our directors and executive officers. These agreements will require us to, among other things, indemnify each director and executive officer to the fullest extent permitted by Delaware law, including indemnification of expenses such as attorneys’ fees incurred by the director or executive officer in any action or proceeding, including any action or proceeding by or in right of us, arising out of the person’s services as a director or executive officer. We have obtained an insurance policy that insures our directors and officers against certain liabilities, including liabilities arising under applicable securities laws.

Other transactions

On January 25, 2016 and July 22, 2016, we loaned Tarang P. Amin, our Chief Executive Officer, Director and Chairman, $ 6.6 million at an interest rate of 0.75% and $ 1.5 million at an interest rate of 0.71%, respectively. The proceeds of the loans were used to finance the exercise price of Mr. Amin’s options to purchase common stock. As collateral for the loans, an aggregate of 2,640,637 shares of common stock beneficially owned by Mr. Amin were pledged to the Company pursuant to

 

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pledge and security agreements dated January 25, 2016 and July 22, 2016. In connection with the special dividend declared on June 7, 2016 (as described under “Dividend policy”), the outstanding amount of the loan provided on January 25, 2016 was reduced to $ 4.2 million. The loans were repaid in full on August 24, 2016.

On January 25, 2016, we loaned Scott K. Milsten, our Senior Vice President, General Counsel and Corporate Secretary, $ 1.0 million at an interest rate of 0.75%. The proceeds of the loan were used to finance the exercise price of Mr. Milsten’s options to purchase common stock. As collateral for the loan, 267,720 shares of common stock beneficially owned by Mr. Milsten were pledged to the Company pursuant to a pledge and security agreement dated January 25, 2016. In connection with the special dividend declared on June 7, 2016 (as described under “Dividend policy”), the outstanding amount of the loan was reduced to $ 0.6 million. The loan was repaid in full on August 22, 2016.

On February 9, 2016, we loaned John P. Bailey, our President and Chief Financial Officer, $ 2.2 million at an interest rate of 0.81%. The proceeds of the loan were used to finance the exercise price of Mr. Bailey’s options to purchase common stock. As collateral for the loan, 617,872 shares of common stock beneficially owned by Mr. Bailey were pledged to the Company pursuant to a pledge and security agreement dated February 9, 2016. In connection with the special dividend declared on June 7, 2016 (as described under “Dividend policy”), the outstanding amount of the loan was reduced to $ 1.1 million. The loan was repaid in full on August 22, 2016.

The brother-in-law of John P. Bailey, our President and Chief Financial Officer, is as an employee of the Company. The approximate dollar value of the employee’s total compensation, including equity awards, for 2016 is expected to be $ 0.3 million.

Alan Shamah, our former president, is the father of Joseph A. Shamah, a member of our board of directors. The approximate dollar value of Alan Shamah’s total compensation, including equity awards, for the combined Predecessor 2014 and Successor 2014 periods and the year ended December 31, 2015 was $ 0.6 million and $ 0.4 million, respectively.

Cosmopack LLC and Promotions Plus, each a related party entity owned by a relative of Frank Pisani, a former executive officer, manage our distribution and fulfillment operations at our New Jersey warehouse. In December 2014, Mr. Pisani concluded his employment with the Company. We incurred $ 4.1 million and $ 6.1 million for these services during the combined Predecessor 2014 and Successor 2014 periods and the year ended December 31, 2015, respectively.

Policies and procedures for related party transactions

Our board of directors has adopted a written related person transaction policy to set forth the policies and procedures for the review and approval or ratification of related person transactions. This policy will cover, with certain exceptions set forth in Item 404 of Regulation S-K, any transaction, arrangement or relationship, or any series of similar transactions, arrangements or relationships in which we were or are to be a participant, where the amount involved exceeds $ 120,000 and a related person had, has or will have a direct or indirect material interest, including, without limitation, purchases of goods or services by or from the related person or entities in which the related person has a material interest, indebtedness, guarantees of indebtedness and employment by us of a related person.

Our audit committee will be responsible for reviewing and approving in advance the related party transactions covered by our related transaction policies and procedures.

 

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Principal and selling stockholders

The following table contains information about the beneficial ownership of our common stock as of September 1, 2016, (i) immediately prior to the consummation of this offering and (ii) as adjusted to reflect the sale of shares of our common stock offered by this prospectus by:

 

  each person, or group of persons, known to us who beneficially owns more than 5% of our capital stock;
  each named executive officer;
  each of our directors;
  all directors and executive officers as a group; and
  each selling stockholder.

Our calculation of the percentage of beneficial ownership prior to and after the offering is based on 41,255,757 shares of common stock outstanding on September 1, 2016, which reflects the assumed conversion of all of our outstanding shares of preferred stock into an aggregate of 37,271,375 shares of common stock.

Beneficial ownership and percentage ownership are determined in accordance with the rules and regulations of the SEC and include voting or investment power with respect to shares of stock. This information does not necessarily indicate beneficial ownership for any other purpose. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to restrictions, options or warrants held by that person that are currently exercisable or exercisable within 60 days of September 1, 2016 are deemed outstanding. Such shares are not deemed outstanding for the purposes of computing the percentage ownership of any other person. Except as indicated in the footnotes to the following table or pursuant to applicable community property laws, we believe, based on information furnished to us, that each stockholder named in the table has sole voting and investment power with respect to the shares set forth opposite such stockholder’s name.

Pursuant to the Amended Stockholders Agreement, the holders of approximately 75% of our outstanding common stock will agree to vote their shares in favor of individuals designated to serve on our board of directors by our Sponsor and J.A. Cosmetics Corp. and grant an irrevocable proxy to our Sponsor that gives it sole voting power with respect to matters relating to the composition of our board of directors and the rights of our Sponsor and J.A. Cosmetics Corp. to appoint members of our board of directors, for so long as our Sponsor has the right to designate at least one member of our board of directors. For further information regarding the Amended Stockholders Agreement and other material transactions between us and certain of our stockholders, see “Certain relationships and related party transactions.”

 

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Unless otherwise indicated in the footnotes, the address of each of the individuals named below is: c/o e.l.f. Beauty, Inc., 570 10 th Street, Oakland, California 94607.

 

     Shares beneficially owned
prior to the offering
    Shares beneficially owned after the offering  
                Excluding exercise of the
underwriters’
over-allotment option to
purchase additional shares
    Including exercise of the
underwriters’
over-allotment option to
purchase additional shares
 
Name of beneficial owner   Number     Percent     Number     Percent     Number     Percent  

Greater than 5% Stockholders:

           

Parties to the Amended Stockholders Agreement (1)

    40,760,478        93.3%        36,427,145        76.4%        35,177,145        73.8%   

TPG elf Holdings, L.P. (2)(3)

    23,429,980        56.8%        20,228,152        44.7%        19,304,548        42.7%   

J.A. Cosmetics Corp. (3)(4)

    8,279,999        20.1%        7,148,494        15.8%        6,822,098        15.1%   

Named Executive Officers and Directors:

           

Tarang P. Amin (5)

    5,877,523        14.1%        5,877,523        12.9%        5,877,523        12.9%   

John P. Bailey (6)

    1,332,151        3.2%        1,332,151        2.9%        1,332,151        2.9%   

Scott K. Milsten (7)

    712,261        1.7%        712,261        1.6%        712,261        1.6%   

Jay Brandimarte

    43,056        *        43,056        *        43,056        *   

William E. McGlashan (8)

           *               *               *   

Joseph A. Shamah (9)

    8,366,111        20.3%        7,234,606        16.0%        6,908,210        15.3%   

Sabrina Simmons (10)

    34,500        *        34,500        *        34,500        *   

Maureen Watson (11)

    34,500        *        34,500        *        34,500        *   

Richard G. Wolford (12)

    34,500        *        34,500        *        34,500        *   

Lauren Cooks Levitan (13)

    34,500        *        34,500        *        34,500        *   

Kirk L. Perry (14)

           *               *               *   

All executive officers and directors as a group (12 persons) (15)

    17,382,386        39.7%        16,250,881        34.0%        15,924,485        33.3%   

 

 

 

*   Less than 1%

 

(1)   Each of the parties to the Amended Stockholders Agreement, which includes TPG elf Holdings, L.P., J.A. Cosmetics Corp., Messrs. Amin, Bailey, Baruch, Fieldman, Milsten and Shamah and Ms. Daley, among other parties, will (a) agree to vote its shares in favor of individuals designated to serve on our board of directors by TPG elf Holdings, L.P. and J.A. Cosmetics Corp. and (b) grant an irrevocable proxy in respect of all of its shares of our common stock to TPG elf Holdings, L.P. (or its permitted transferees), for so long as TPG elf Holdings, L.P. has the right to designate at least one member of our board of directors, to vote all of the shares of the common stock held by such entity or individual in connection with matters relating to the composition of our board of directors and the rights of TPG elf Holdings, L.P. and J.A. Cosmetics Corp. to appoint members of our board of directors; provided that such proxy will terminate with respect to Messrs. Amin, Bailey, Baruch, Fieldman, Milsten and Shamah and Ms. Daley and their affiliated holders if and when they are no longer executive officers, directors or holders of more than 10% of any class of our equity securities, as the case may be.

 

(2)   Consists of (a) 23,412,643 shares of common stock issuable upon conversion of preferred stock held by TPG elf Holdings, L.P. and (b) 17,337 shares of common stock held by TPG elf Holdings, L.P. As a result of the voting obligations and irrevocable proxy set forth in the Amended Stockholders Agreement, TPG elf Holdings, L.P. may be deemed to be the beneficial owner of an additional 17,330,498 shares held by the other parties to the agreement, including 956,340 shares of common stock underlying options exercisable within 60 days of September 1, 2016 held by certain executive officers of the Company who will be parties to the Amended Stockholders Agreement. The general partner of TPG elf Holdings, L.P. is TPG Growth II Advisors, Inc., a Delaware corporation. David Bonderman and James G. Coulter are the sole stockholders of TPG Growth II Advisors, Inc. and may therefore be deemed to beneficially own the securities held by TPG elf Holdings, L.P. Messrs. Bonderman and Coulter disclaim beneficial ownership of the securities held by TPG elf Holdings, L.P. except to the extent of their pecuniary interest. The address of each of TPG Growth II Advisors, Inc. and Messrs. Bonderman and Coulter is c/o TPG Global, LLC, 301 Commerce Street, Suite 3300, Fort Worth, Texas 76102.

 

(3)   Selling stockholder in the offering.

 

(4)  

Consists of (a) 8,273,873 shares of common stock issuable upon conversion of preferred stock held by J.A. Cosmetics Corp. and (b) 6,126 shares of common stock held by J.A. Cosmetics Corp. As a result of the voting obligations set forth in the Amended Stockholders Agreement, J.A. Cosmetics Corp. may be deemed to be the beneficial owner of an additional 32,480,479 shares held by the other parties to the agreement, including 956,340 shares of common stock underlying options exercisable within 60 days of September 1, 2016 held by certain executive

 

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officers of the Company who will be parties to the Amended Stockholders Agreement. Joseph A. Shamah, Alan Shamah and Frank Pisani have shared voting, investment and dispositive power over the shares held by J.A. Cosmetics Corp. The address of J.A. Cosmetics Corp. is 1393 East 7 th  Street, Brooklyn, New York 11230.

 

(5)   Consists of (a) an aggregate of 2,757,956 shares of common stock issuable upon conversion of preferred stock and an aggregate of 2,041 shares of common stock held by family trusts over which Tarang P. Amin and his spouse each have sole investment and voting power, (b) 2,640,637 shares of common stock held by Mr. Amin and (c) 476,889 shares of common stock underlying stock options exercisable within 60 days of September 1, 2016 held by Mr. Amin. The information excludes 146,561 restricted stock units and 428,037 shares underlying an option award to be granted to Mr. Amin upon the pricing of this offering. The restricted stock units and the option award will each vest in four substantially equal installments on each anniversary of the pricing of the offering, subject to continued service through the applicable vesting date and accelerated vesting upon a change in control.

 

(6)   Consists of (a) 617,872 shares of common stock held by John P. Bailey and (b) 714,279 shares of common stock underlying stock options exercisable within 60 days of September 1, 2016 held by Mr. Bailey. The information excludes 66,618 restricted stock units and 194,563 shares underlying an option award to be granted to Mr. Bailey upon the pricing of this offering. The restricted stock units and the option award will each vest in four substantially equal installments on each anniversary of the pricing of the offering, subject to continued service through the applicable vesting date and accelerated vesting upon certain termination events in connection with a change in control.

 

(7)   Consists of (a) 179,267 shares of common stock issuable upon conversion of preferred stock and 132 shares of common stock held by Milsten/Conner Trust dated October 17, 2008, (b) 267,720 shares of common stock held by Scott K. Milsten and (c) 265,142 shares of common stock underlying stock options exercisable within 60 days of September 1, 2016 held by Mr. Milsten. The information excludes 33,310 restricted stock units and 97,281 shares underlying an option award to be granted to Mr. Milsten upon the pricing of this offering. The restricted stock units and the option award will each vest in four substantially equal installments on each anniversary of the pricing of the offering, subject to continued service through the applicable vesting date and accelerated vesting upon certain termination events in connection with a change in control.

 

(8)   William E. McGlashan, Jr. is a TPG Partner. Mr. McGlashan has no voting or investment power over and disclaims beneficial ownership of the shares held by TPG elf Holdings, L.P. The address of Mr. McGlashan is c/o TPG Global, LLC, 301 Commerce Street, Suite 3300, Fort Worth, Texas 76102.

 

(9)   Includes (a) 86,112 shares of common stock held by Joseph A. Shamah and (b) 8,273,873 shares of common stock issuable upon conversion of preferred stock and 6,126 shares of common stock held by J.A. Cosmetics Corp. Joseph A. Shamah, Alan Shamah and Frank Pisani have shared voting, investment and dispositive power over the shares held by J.A. Cosmetics Corp. Joseph A. Shamah disclaims beneficial ownership of the shares held by J.A. Cosmetics Corp. except to the extent of his pecuniary interest therein.

 

(10)   Includes 34,500 shares of common stock underlying stock options exercisable within 60 days of September 1, 2016 held by Sabrina L. Simmons.

 

(11)   Includes 34,500 shares of common stock underlying stock options exercisable within 60 days of September 1, 2016 held by Maureen C. Watson.

 

(12)   Includes 34,500 shares of common stock underlying stock options exercisable within 60 days of September 1, 2016 held by Richard G. Wolford.

 

(13)   Includes 34,500 shares of common stock underlying stock options exercisable within 60 days of September 1, 2016 held by Lauren Cooks Levitan.

 

(14)   In September 2016, Kirk L. Perry was appointed to our board of directors and, upon the pricing of this offering, will be granted an option to purchase 34,500 shares of our common stock.

 

(15)   The information in this table excludes an aggregate of 326,430 restricted stock units and an aggregate of 987,859 shares underlying option awards to be granted to certain of our executive officers and directors upon the pricing of this offering.

 

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Description of capital stock

The following description summarizes the terms of our capital stock, our amended and restated certificate of incorporation and our amended and restated bylaws. Because it is only a summary, it does not contain all the information that may be important to you. For a complete description, you should refer to our amended and restated certificate of incorporation and amended and restated bylaws, each of which will be in effect upon the consummation of this offering, the forms of which are filed as exhibits to the registration statement of which this prospectus is a part.

Our purpose is to engage in any lawful act or activity for which corporations may now or hereafter be organized under the DGCL. Upon the consummation of this offering, our authorized capital stock will consist of 250,000,000 shares of common stock, par value $ 0.01 per share, and 30,000,000 shares of preferred stock, par value $ 0.01 per share. As of June 30, 2016, there were outstanding 40,379,833 shares of common stock, on an as-converted basis, held of record by 22 stockholders. In addition, 4,796,225 shares of our common stock were issuable upon exercise of outstanding options granted under the 2014 Equity Plan. No shares of preferred stock will be issued or outstanding immediately after the offering contemplated by this prospectus. Unless our board of directors determines otherwise, we will issue all shares of our capital stock in uncertificated form.

We, our executive officers, directors and holders of substantially all of our outstanding securities, including the selling stockholders, will sign lock-up agreements with the underwriters that will, subject to certain customary exceptions, restrict the sale of the shares of our common stock and certain other securities held by them for 180 days following the date of this prospectus. J.P. Morgan Securities LLC and Morgan Stanley & Co. LLC may, in their sole discretion and at any time without notice, release all or any portion of the shares or securities subject to any such lock-up agreements. See “Underwriting” for a description of these lock-up agreements.

Common stock

Holders of our common stock are entitled to one vote for each share held of record on all matters on which stockholders are entitled to vote generally, including the election or removal of directors. The holders of our common stock do not have cumulative voting rights in the election of directors. Upon our liquidation, dissolution or winding up and after payment in full of all amounts required to be paid to creditors and to the holders of preferred stock having liquidation preferences, if any, the holders of our common stock will be entitled to receive pro rata our remaining assets available for distribution. Holders of our common stock do not have preemptive, subscription, redemption or conversion rights. The common stock will not be subject to further calls or assessment by us. There will be no redemption or sinking fund provisions applicable to the common stock. All shares of our common stock that will be outstanding at the time of the completion of the offering will be fully paid and non-assessable. The rights, powers, preferences and privileges of holders of our common stock will be subject to those of the holders of any shares of our preferred stock we may authorize and issue in the future.

Preferred stock

Our amended and restated certificate of incorporation will authorize our board of directors to establish one or more series of preferred stock, including convertible preferred stock. Unless required by law, the authorized shares of preferred stock will be available for issuance without further action by stockholders. Our board of directors will be able to determine, with respect to any series of preferred stock, the powers including preferences and relative participations, optional or other special rights, and the qualifications, limitations or restrictions thereof, of that series, including, without limitation:

 

  the designation of the series;

 

  the number of shares of the series, which our board of directors may, except where otherwise provided in the preferred stock designation, increase (but not above the total number of authorized shares of the class) or decrease (but not below the number of shares then outstanding);

 

  whether dividends, if any, will be cumulative or non-cumulative and the dividend rate of the series;

 

  the dates at which dividends, if any, will be payable;

 

  the redemption rights and price or prices, if any, for shares of the series;

 

  the terms and amounts of any sinking fund provided for the purchase or redemption of shares of the series;

 

  the amounts payable on shares of the series in the event of any voluntary or involuntary liquidation, dissolution or winding-up of the affairs of the Company;

 

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  whether the shares of the series will be convertible into shares of any other class or series, or any other security, of the Company or any other corporation and, if so, the specification of the other class or series or other security, the conversion price or prices or rate or rates, any rate adjustments, the date or dates as of which the shares will be convertible and all other terms and conditions upon which the conversion may be made;

 

  restrictions on the issuance of shares of the same series or of any other class or series; and

 

  the voting rights, if any, of the holders of the series.

We will be able to issue a series of preferred stock that could, depending on the terms of the series, impede or discourage an acquisition attempt or other transaction that some, or a majority, of the holders of our common stock might believe to be in their best interests or in which the holders of our common stock might receive a premium for their common stock over the market price of the common stock. In addition, the issuance of preferred stock may adversely affect the rights of holders of our common stock by restricting dividends on the common stock, diluting the voting power of the common stock or subordinating the liquidation rights of the common stock. As a result of these or other factors, the issuance of preferred stock may have an adverse impact on the market price of our common stock.

Dividends

The DGCL permits a corporation to declare and pay dividends out of “surplus” or, if there is no “surplus,” out of its net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. “Surplus” is defined as the excess of the net assets of the corporation over the amount determined to be the capital of the corporation by the board of directors. The capital of the corporation is typically calculated to be (and cannot be less than) the aggregate par value of all issued shares of capital stock. Net assets equal the fair value of the total assets minus total liabilities. The DGCL also provides that dividends may not be paid out of net profits if, after the payment of the dividend, remaining capital would be less than the capital represented by the outstanding stock of all classes having a preference upon the distribution of assets.

The declaration, amount and payment of any future dividends will be at the sole discretion of our board of directors. Our board of directors may take into account general and economic conditions, our financial condition and results of operations, our available cash and current and anticipated cash needs, capital requirements, contractual, legal, tax and regulatory restrictions and implications on the payment of dividends by us to our stockholders or by our subsidiaries to us, including restrictions under our existing credit facilities and other indebtedness we may incur, and such other factors as our board of directors may deem relevant. See “Description of certain indebtedness.” In addition, because we are a holding company and have no direct operations, we will only be able to pay dividends from funds we receive from our subsidiaries.

We currently expect to retain all future earnings for use in the operation and expansion of our business and have no current plans to pay dividends.

Annual stockholder meetings

Our amended and restated bylaws will provide that annual stockholder meetings will be held at a date, time and place, if any, as exclusively selected by our board of directors. To the extent permitted under applicable law, we may conduct meetings by remote communications, including by webcast.

Anti-takeover effects of certain provisions of our amended and restated certificate of incorporation, amended and restated bylaws and Delaware law

Certain provisions of Delaware law and our amended and restated certificate of incorporation and our amended and restated bylaws that will become effective immediately prior to the consummation of this offering contain provisions that could make the following transactions more difficult: acquisition of us by means of a tender offer; acquisition of us by means of a proxy contest or otherwise; or removal of our incumbent officers and directors. It is possible that these provisions could make it more difficult to accomplish or could deter transactions that stockholders may otherwise consider to be in their best interest or in our best interests, including transactions that might result in a premium over the market price for our shares.

These provisions, summarized below, are expected to discourage coercive takeover practices and inadequate takeover bids. These provisions are also designed to encourage persons seeking to acquire control of us to first negotiate with our board of directors. We believe that the benefits of increased protection of our potential ability to negotiate with the proponent of an

 

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unfriendly or unsolicited proposal to acquire or restructure us outweigh the disadvantages of discouraging these proposals because negotiation of these proposals could result in an improvement of their terms.

Delaware anti-takeover statute

After such time as the Trigger Event occurs, we will be subject to Section 203 of the DGCL, which prohibits persons deemed to be interested stockholders from engaging in a business combination with a publicly-held Delaware corporation for three years following the date these persons become interested stockholders unless the business combination is, or the transaction in which the person became an interested stockholder was, approved in a prescribed manner or another prescribed exception applies. Generally, an interested stockholder is a person who, together with affiliates and associates, owns, or within three years prior to the determination of interested stockholder status did own, 15% or more of a corporation’s voting stock. Generally, a business combination includes a merger, asset or stock sale or other transaction resulting in a financial benefit to the interested stockholder. The existence of this provision after the Trigger Event may have an anti-takeover effect with respect to transactions not approved in advance by the board of directors, such as discouraging takeover attempts that might result in a premium over the market price of our common stock.

Undesignated preferred stock

The ability to authorize undesignated preferred stock pursuant to our amended and restated certificate of incorporation will make it possible for our board of directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to change control of us. These and other provisions may have the effect of deterring hostile takeovers or delaying changes in control or management of our Company.

Special stockholder meetings

Our amended and restated certificate of incorporation will provide that a special meeting of stockholders may be called at any time by the board of directors or, until the occurrence of the Trigger Event, our Sponsor, but such special meetings may not be called by the stockholders or any other person or persons.

Requirements for advance notification of stockholder nominations and proposals

Our amended and restated bylaws will establish advance notice procedures with respect to stockholder proposals and the nomination of candidates for election as directors, subject to the Amended Stockholders Agreement, other than nominations made by or at the direction of the board of directors or a committee of the board of directors.

Elimination of stockholder action by written consent

Our amended and restated certificate of incorporation will eliminate the right of stockholders to act by written consent without a meeting after the Trigger Event.

Classified board; election and removal of directors; filling vacancies

Effective upon consummation of this offering, our board of directors will be divided into three classes. The directors in each class will serve for a three-year term, one class being elected each year by our stockholders, with staggered three-year terms. Only one class of directors will be elected at each annual meeting of our stockholders, with the other classes continuing for the remainder of their respective three-year terms. Because our stockholders do not have cumulative voting rights, our stockholders holding a majority of the shares of common stock outstanding will be able to elect all of our directors. After the completion of this offering, our Sponsor and J.A. Cosmetics Corp. will hold approximately 62% of our common stock and may be deemed to beneficially own approximately 78% of our common stock after the completion of this offering and therefore will have the ability to control the composition of our board of directors, among other matters requiring stockholder approval. See “Certain relationships and related party transactions—Stockholders Agreement.” After the Trigger Event, our amended and restated certificate of incorporation will provide for the removal of any of our directors only for cause and require a stockholder vote by the holders of at least a 75% of the voting power of the then-outstanding voting stock. For more information on the classified board, see “Management—Composition of the board of directors.” Furthermore, subject to the Amended Stockholders Agreement, any vacancy on our board of directors, however occurring, including a vacancy resulting from an increase in the size of the board, may only be filled by a resolution of the board of directors unless the board of directors determines that such vacancies shall be filled by the stockholders. This system of electing and removing directors and filling vacancies may tend to discourage a third-party from making a tender offer or otherwise attempting to obtain control of us, because it generally makes it more difficult for stockholders to replace a majority of the directors.

 

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Choice of forum

Our amended and restated certificate of incorporation and our amended and restated bylaws will provide that the Court of Chancery of the State of Delaware will be the exclusive forum for any derivative action or proceeding brought on our behalf; any action asserting a breach of fiduciary duty; any action asserting a claim against us arising pursuant to the DGCL, our amended and restated certificate of incorporation or our amended and restated bylaws; or any action asserting a claim against us that is governed by the internal affairs doctrine. Although our amended and restated certificate of incorporation and amended and restated bylaws contain the choice of forum provision described above, it is possible that a court could find that such a provision is inapplicable for a particular claim or action or that such provision is unenforceable.

Corporate opportunities

Our amended and restated certificate of incorporation will provide that our Sponsor and its affiliates will not have any duty to refrain from (i) engaging, directly or indirectly, in the same or similar business activities or lines of business as us, including those business activities or lines of business deemed to be competing with us, or (ii) doing business with any of our clients, customers or vendors. In the event that our Sponsor or any of its affiliates acquire knowledge of a potential business opportunity which may be a corporate opportunity for us, they will have no duty to communicate or offer such corporate opportunity to us. Our amended and restated certificate of incorporation will also provide that, to the fullest extent permitted by law, neither our Sponsor nor any of its affiliates will be liable to us, for breach of any fiduciary duty or otherwise, by reason of the fact that our Sponsor or any of its affiliates directs such corporate opportunity to another person, or otherwise does not communicate information regarding such corporate opportunity to us, and we will waive and renounce any claim that such business opportunity constituted a corporate opportunity that should have been presented to us. In addition, any member of our board of directors designated by our Sponsor pursuant to the Amended Stockholders Agreement may consider both the interests of our Sponsor and our Sponsor’s obligations under the Amended Stockholders Agreement in exercising such board member’s powers, rights and duties as a director of our company.

Amendment of charter provisions

Before the Trigger Event, the amendment of any of the above provisions in our amended and restated certificate of incorporation will require the affirmative vote of holders of a majority of the voting power of the then-outstanding shares of voting stock. From and after the Trigger Event, the affirmative vote of holders of at least 75% of the voting power of the then-outstanding shares of voting stock will be required to amend certain provisions of our amended and restated certificate of incorporation.

The provisions of the DGCL, our amended and restated certificate of incorporation and our amended and restated bylaws could have the effect of discouraging others from attempting hostile takeovers, provided that we will not be subject to Section 203 of the DGCL until after such time as the Trigger Event occurs (see “Description of capital stock—Delaware anti-takeover statute”). As a consequence, they may also inhibit temporary fluctuations in the market price of our common stock that often result from actual or rumored hostile takeover attempts. These provisions may also have the effect of preventing changes in our management. It is possible that these provisions could make it more difficult to accomplish transactions that stockholders may otherwise deem to be in their best interests.

Limitations on liability and indemnification of officers and directors

The DGCL authorizes corporations to limit or eliminate the personal liability of directors to corporations and their stockholders for monetary damages for breaches of directors’ fiduciary duties, subject to certain exceptions. Our amended and restated certificate of incorporation will include a provision that, to the fullest extent permitted by the DGCL, eliminates the personal liability of directors to us or our stockholders for monetary damages for any breach of fiduciary duty as a director. The effect of these provisions will be to eliminate the rights of us and our stockholders, through stockholders’ derivative suits on our behalf, to recover monetary damages from a director for breach of fiduciary duty as a director, including breaches resulting from grossly negligent behavior. However, exculpation will not apply to any director if the director has acted in bad faith, knowingly or intentionally violated the law, authorized illegal dividends or redemptions or derived an improper benefit from his or her actions as a director.

Further, our amended and restated certificate of incorporation and our amended and restated bylaws will provide that we must indemnify and advance expenses to our directors and officers to the fullest extent authorized by the DGCL. We also will be expressly authorized to carry directors’ and officers’ liability insurance providing indemnification for our directors, officers and certain employees for some liabilities. We believe that these indemnification and advancement provisions and insurance will be useful to attract and retain qualified directors and officers.

 

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The limitation of liability, indemnification and advancement provisions in our amended and restated certificate of incorporation and amended and restated bylaws may discourage stockholders from bringing a lawsuit against directors for breach of their fiduciary duty. These provisions also may have the effect of reducing the likelihood of derivative litigation against directors and officers, even though such an action, if successful, might otherwise benefit us and our stockholders. In addition, your investment may be adversely affected to the extent we pay the costs of settlement and damage awards against directors and officers pursuant to these indemnification provisions.

There is currently no pending material litigation or proceeding involving any of our directors, officers or employees for which indemnification is sought.

Listing

Our common stock has been approved for listing on NYSE under the symbol “ELF.”

Transfer agent and registrar

The transfer agent and registrar for our common stock is Computershare Inc.

 

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Description of certain indebtedness

Senior Secured Credit Facility

Overview

On January 31, 2014, e.l.f. Beauty, Inc. (formerly known as J.A. Cosmetics Holdings, Inc.), as initial borrower, entered into a senior secured credit agreement (as amended by the first amendment to credit agreement entered into as of June 7, 2016 and together with related loan and security documents, the “Senior Secured Credit Facility”) with Bank of Montreal, as the administrative agent, swingline lender and l/c issuer and the lenders from time to time party thereto, which (as amended) provided a $ 169 million term loan facility (the “Term Loan Facility”) and a $ 25 million revolving credit facility (the “Revolving Credit Facility”). The proceeds from the Term Loan Facility were used in connection our acquisition of a controlling interest in e.l.f. Cosmetics, Inc. (formerly known as J.A. Cosmetics US, Inc.) to partially pay the acquisition purchase price; refinance the debt of e.l.f. Cosmetics, Inc.; pay related fees, costs and expenses; fund working capital; and for general corporate purposes and, in conjunction with the first amendment, pay the special dividend declared on June 7, 2016, as described under “Dividend policy” and amendment fees. e.l.f. Beauty, Inc., as the initial borrower, e.l.f. Cosmetics, Inc. and certain of our U.S. subsidiaries, each as new borrowers and obligors, and Bank of Montreal, as the administrative agent, entered into a joinder agreement to the Senior Credit Facility on January 31, 2014 whereby e.l.f. Cosmetics, Inc. and our U.S. subsidiaries party thereto joined the Senior Credit Facility as borrowers and guarantors and e.l.f. Beauty, Inc. was released from its obligations as a borrower (but not its obligations as a guarantor or grantor of security interests) under the Senior Credit Facility. Bank of Montreal, as the administrative agent, entered into a joinder agreement to the senior credit facility on July 31, 2014 whereby our subsidiaries J.A. RF, LLC and J.A. Cherry Hill, LLC joined the senior credit facility as borrowers and guarantors. The borrowers, together with e.l.f. Beauty, Inc. and the subsidiary guarantors parties thereto, are loan parties under the Senior Credit Facility.

As of June 30, 2016, there were borrowings of $ 2.0 million and an undrawn $ 0.2 million letter of credit outstanding under the Revolving Credit Facility and $ 161.4 million of borrowings outstanding under the Term Loan Facility.

Interest rate and fees

Borrowings under both the Term Loan Facility and the Revolving Credit Facility bear interest, at the borrowers’ option, at either (i) a rate per annum equal to an adjusted LIBOR rate determined by reference to the cost of funds for U.S. dollar deposits for the applicable interest period (subject to a minimum floor of 1.25%) plus an applicable margin of 5% or (ii) a floating base rate plus an applicable margin of 4%. The interest rate on both the Revolving Credit Facility and the Term Loan Facility was 6.25% as of June 30, 2016.

Interest on borrowings under the Senior Secured Credit Facility is payable (i) on the last day of any interest period with respect to LIBOR borrowing with an applicable interest period of three months or less, (ii) every three months with respect to LIBOR borrowings with an interest period of greater than three months or (iii) on the last business day of each March, June, September and December with respect to base rate borrowings. In addition, the Senior Secured Credit Facility requires payment of an unused fee equal to 0.50% times the average daily amount by which the unutilized commitments under the Revolving Credit Facility exceed the amount outstanding under the Revolving Credit Facility. The unused fee is payable on the last day of each quarter. The borrowers are also required to pay customary letter of credit fees and annual agency fees as well as an annual administrative fee of $ 50,000 for the Term Loan Facility.

Prepayments

The Senior Secured Credit Facility requires prepayment of outstanding loans, subject to certain exceptions, with:

 

  50% (which percentage will be reduced to 25% if our consolidated total net leverage ratio is less than 4.00:1.00 but greater than or equal to 3.50:1.00 and 0% if our consolidated total net leverage ratio is less than 3.50:1.00, in each case as determined as of the last day of the applicable fiscal year and subject to certain reductions) of our annual excess cash flow (defined as EBITDA less certain customary deductions including, without limitation, unfinanced capital expenditures, fees and expenses under loan documents, insurance proceeds and others);

 

  100% of the net cash proceeds of all non-ordinary course asset sales or other dispositions of property by the loan parties and their respective subsidiaries (including insurance and condemnation proceeds, subject to de minimis thresholds), (i) if we do not reinvest those net cash proceeds in assets to be used in our business within 365 days of the receipt of such net cash proceeds or (ii) if we do not commit to reinvest such net cash proceeds within 365 days of the receipt thereof and do not actually reinvest such net cash proceeds within 545 days of the receipt thereof; and

 

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  100% of the net proceeds of any issuance or incurrence of debt by the loan parties or any of their respective subsidiaries, other than debt permitted under the Senior Secured Credit Facility.

The foregoing mandatory prepayments are used to first reduce the principal installments of the Term Loan Facility (prepaying the then-next four principal installments in direct order of maturity, then pro rata to the remaining principal installments) and, second, to the Revolving Credit Facility (without a corresponding reduction in the revolving credit commitment). For the year ended December 31, 2015 and the six months ended June 30, 2016, we were not required to make any mandatory prepayments. As of June 30, 2016, our consolidated total net leverage ratio was 4.00:1.00 and our consolidated interest coverage ratio was 4.24:1.00.

We may voluntarily repay outstanding loans under the Senior Secured Credit Facility at any time without premium or penalty.

Amortization

Amortization installment payments on the Term Loan Facility are required to be made in quarterly installments of (i)  $ 656,250 plus (ii) starting with fiscal quarter ending September 30, 2016, $ 400,000, with the remaining outstanding amount to be payable on January 31, 2019, the maturity date for the Term Loan Facility. Principal amounts outstanding under the Revolving Credit Facility will be due and payable in full on January 31, 2019, the maturity date for the Revolving Credit Facility.

Guarantee and security

All obligations under the Senior Secured Credit Facility are unconditionally guaranteed by e.l.f. Beauty, Inc. and, subject to certain exceptions, each of our current and future domestic subsidiaries. All obligations under our Senior Secured Credit Facility, and the guarantees of those obligations, are secured by substantially all of the following assets of the each borrower and guarantor, subject to certain exceptions, including:

 

  a pledge of 100% of the capital stock of each of the borrowers and 100% of the equity interests directly held by each borrower and guarantor in any subsidiary of the borrower or guarantor (which pledge, in the case of any (i) non-U.S. subsidiary of a U.S. subsidiary or (ii) certain excluded U.S. subsidiaries, will not include more than 65% of the voting stock of such subsidiary), subject to certain exceptions; and

 

  a security interest in substantially all tangible and intangible assets (including intellectual property) of each borrower and guarantor, subject to certain exceptions.

Certain covenants and events of default

The Senior Secured Credit Facility contains a number of covenants that, among other things, restrict the ability of the loan parties and their respective subsidiaries to (subject to certain exceptions):

 

  incur additional indebtedness or issue preferred stock;
  create liens on assets;
  enter into sale and leaseback transactions;
  engage in mergers or consolidations;
  sell or otherwise dispose of assets;
  pay dividends and distributions or repurchase our capital stock;
  make investments, loans or advances;
  repay certain subordinated indebtedness;
  make certain acquisitions;
  engage in certain transactions with affiliates;
  amend material agreements governing subordinated indebtedness; and
  change the line of business.

The Senior Secured Credit Facility also contains customary representations and warranties, affirmative covenants, notice provisions and events of default, including a change of control. The change of control provision is triggered (a) upon or after the consummation of a qualified IPO, if any person or group other than our Sponsor and its controlled investment affiliates becomes the beneficial owner, directly or indirectly, of voting equity interests representing more than 35% of the voting equity interests of e.l.f. Beauty, Inc. and a greater percentage of voting equity interests of e.l.f. Beauty, Inc. than is then beneficially owned, directly or indirectly, in the aggregate by our Sponsor and its controlled investment affiliates, unless our Sponsor and its controlled investment affiliates has, at such time, the right or the ability by percentage of voting equity

 

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interest of e.l.f. Beauty, Inc. owned, contract or otherwise to elect or designate for election at least a majority of the board of directors of e.l.f. Beauty, Inc., (b) e.l.f. Beauty, Inc. fails to own 100% of the outstanding equity interests of e.l.f. Cosmetics, Inc. (or such entity’s permitted successor), 100% of any other issued and outstanding equity interests pledged by e.l.f. Beauty, Inc. to the administrative agent, and, directly or indirectly, 100% of the issued and outstanding equity interests of the other borrowers (except as otherwise permitted in the loan documents) and (c) the occurrence of any “change of control” or similar event under the Second Lien Term Loan or other material indebtedness.

The Senior Secured Credit Facility includes quarterly maintenance covenants that require maintenance of (a) a certain consolidated total net leverage ratio of not more than 6.50 to 1.00 for the 12-month period ended June 30, 2016, with gradual step-downs to 4.75 to 1.00 for the 12-month period ending December 31, 2018 and (b) a certain consolidated interest coverage ratio of not less than 1.80 to 1.00 for the 12-month period ended June 30, 2016, with gradual increases to 2.40 to 1.00 for the 12-month period ending December 31, 2018. The availability of certain baskets and the ability to enter into certain transactions (including the ability of e.l.f. Beauty, Inc. to pay dividends to its stockholders) may also be subject to compliance with such leverage ratios. We were in compliance with the financial covenants in the Senior Secured Credit Facility as of June 30, 2016.

This description of the Senior Secured Credit Facility does not purport to be complete and is qualified in its entirety by reference to the full text of the senior credit documents, which are filed as exhibits to the registration statement of which this prospectus forms a part.

Second Lien Credit Facility

Overview

On January 31, 2014, e.l.f. Beauty, Inc., as initial borrower, entered into a second lien credit agreement (as amended by the first amendment to second lien credit agreement entered into as of August 14, 2014, and by the second amendment to second lien credit agreement entered into as of June 7, 2016, together with related loan and security documents, the “Second Lien Credit Facility”) with U.S. Bank National Association, as collateral agent, and the lenders from time to time party thereto, which provided a $ 40 million second lien term loan (the “Second Lien Term Loan”). The proceeds from the Second Lien Term Loan were used in connection with the acquisition to partially pay the acquisition purchase price, to refinance the debt of e.l.f. Cosmetics, Inc. and to pay related fees, costs and expenses (including amendment fees). e.l.f. Beauty, Inc., as the initial borrower, e.l.f. Cosmetics, Inc. and certain of our U.S. subsidiaries, each as new borrowers and obligors, U.S. Bank National Association, as collateral agent, and certain lenders under the Second Lien Credit Facility, entered into a joinder agreement to the second lien credit agreement on January 31, 2014 whereby e.l.f. Cosmetics, Inc. and our U.S. subsidiaries party thereto joined the Second Lien Credit Facility as borrowers and guarantors and e.l.f. Beauty, Inc. was released from its obligations as a borrower (but not its obligations as a guarantor or grantor of security interests) under the Second Lien Credit Facility and related security agreements. U.S. Bank National Association, as collateral agent, entered into a joinder agreement to the second lien credit agreement on July 31, 2014 whereby J.A. RF, LLC and J.A. Cherry Hill, LLC joined the second lien credit agreement as borrowers and guarantors. The borrowers, together with e.l.f. Beauty, Inc. and the subsidiary guarantors parties thereto, are loan parties under the Second Lien Credit Facility.

As of June 30, 2016, a total of $ 40.0 million was outstanding under the Second Lien Term Loan.

Interest rate and fees

Borrowings under the Second Lien Term Loan bear interest, at a rate per annum equal to an adjusted LIBOR rate determined by reference to the cost of funds for U.S. dollar deposits for the applicable interest period (subject to a minimum floor of 1.00%) plus an applicable margin of 10%, or, if making loans at such interest rates are illegal or unable to be determined, a floating base rate plus an applicable margin of 9%. The interest rate on the Second Lien Term Loan was 11% as of June 30, 2016. Interest is payable every three months, with respect to LIBOR borrowings, or on the last business day of each March, June, September and December, with respect to base rate borrowings. The borrowers are also required to pay annual agency fees.

Prepayments

Subject to the terms of the intercreditor agreement (which, subject to certain exceptions, requires prepayments to be made first to the senior lenders under the Senior Credit Facility until repayment in full of the obligations under the Senior Credit Facility), the Second Lien Credit Facility requires prepayment of outstanding amounts under the Second Lien Term Loan, subject to certain exceptions, with:

 

 

50% (which percentage will be reduced to 25% if our consolidated total net leverage ratio is less than 4.60:1.00 but greater than or equal to 4.03:1.00 and 0% if our consolidated total net leverage ratio is less than 3.50:1.00, in each case

 

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as determined as of the last day of the applicable fiscal year and subject to certain reductions) of our annual excess cash flow (defined as EBITDA less certain customary deductions including, without limitation, unfinanced capital expenditures, fees and expenses under loan documents, insurance proceeds and others);

 

  100% of the net cash proceeds of all non-ordinary course asset sales or other dispositions of property by the loan parties and their respective subsidiaries (including insurance and condemnation proceeds, subject to de minimis thresholds), (i) if we do not reinvest those net cash proceeds in assets to be used in our business within 365 days of the receipt of such net cash proceeds or (ii) if we do not commit to reinvest such net cash proceeds within 365 days of the receipt thereof and do not actually reinvest such net cash proceeds within 545 days of the receipt thereof; and

 

  100% of the net proceeds of any issuance or incurrence of debt by the loan parties or any of their respective subsidiaries, other than debt permitted under the Second Lien Credit Facility.

The foregoing mandatory prepayments are used to reduce the outstanding amount of the Second Lien Term Loan. For the year ended December 31, 2015 and the six months ended June 30, 2016, we were not required to make any mandatory prepayments.

Subject to the terms of the intercreditor agreement, we may voluntarily repay outstanding loans under the Second Lien Term Loan at any time.

In the event that all or any portion of the Second Lien Term Loan is voluntarily prepaid for any reason other than in connection with a change of control or mandatorily prepaid due to debt incurrence (other than in connection with a change of control), such prepayment will be made at: (i) 104% of the principal amount of the loans prepaid if prepayment is made on or prior to the first anniversary of the closing date, (ii) 102% of the principal amount of the loans prepaid if prepayment is made after the first anniversary of the closing date and on or prior to the second anniversary of the closing date, (iii) 101% of the principal amount of the loans prepaid if prepayment is made after the second anniversary of the closing date and on or prior to the third anniversary of the closing date and (iv) par if prepayment is made after the third anniversary of the closing date. In the event that all or any portion of the Second Lien Term Loan is voluntarily prepaid in connection with a change of control or mandatorily prepaid due to debt incurrence in connection with a change of control, such prepayment will be made will be made at: (a) 101% of the principal amount of the loans prepaid if prepayment is made on or prior to the third anniversary of the closing date and (b) par if prepayment is made after the third anniversary of the closing date.

Maturity date

We are required to pay the outstanding aggregate principal amount of the Second Lien Term Loan, together with all accrued and unpaid interest, on July 31, 2019.

Guarantee and security

All obligations under the Second Lien Credit Facility are unconditionally guaranteed by e.l.f. Beauty, Inc. and, subject to certain exceptions, each of our current and future domestic subsidiaries. All of the obligations under our Second Lien Credit Facility, and the guarantees of those obligations, are secured by a second priority security interest in substantially all of the same collateral securing the Senior Secured Credit Facility.

Certain covenants and events of default

The Second Lien Credit Facility contains substantially similar covenants and events of defaults as the Senior Secured Credit Facility. The Second Lien Credit Facility’s quarterly maintenance covenants require maintenance of (i) a certain consolidated total net leverage ratio of not more than 8.05 to 1.00 for the 12-month period ending June 30, 2014, with gradual step-downs to 5.45 to 1.00 for the 12-month period ending December 31, 2018 and (ii) a certain consolidated interest coverage ratio of not less than 1.55 to 1.00 for the 12-month period ending June 30, 2014, with gradual increases to 2.05 to 1.00 for the 12-month period ending December 31, 2018. The availability of certain baskets and ability to enter into certain transactions (including the ability of e.l.f. Beauty, Inc. to pay dividends to our stockholders) may also be subject to compliance with such ratios. We were in compliance with the financial covenants in the Second Lien Credit Facility as of June 30, 2016.

This description of the Second Lien Credit Facility does not purport to be complete and is qualified, in its entirety, by reference to the full text of the second lien credit documents, which are filed as exhibits to the registration statement of which this prospectus forms a part.

 

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Shares eligible for future sale

Prior to this offering, there has been no public market for shares of our common stock. We cannot predict the effect, if any, future sales of shares of common stock, or the availability for future sale of shares of common stock, will have on the market price of shares of our common stock prevailing from time to time. Future sales of substantial amounts of our common stock in the public market or the perception that such sales might occur may adversely affect market prices prevailing from time to time. Furthermore, there may be sales of substantial amounts of our common stock in the public market after the existing legal and contractual restrictions lapse. This may adversely affect the prevailing market price and our ability to raise equity capital in the future. See “Risk factors—Risks related to this offering and ownership of our common stock—Future sales, or the perception of future sales, by us or our existing stockholders in the public market following this offering could cause the market price of our common stock to decline.”

Upon completion of this offering, we will have a total of 44,379,833 shares of our common stock outstanding. Of the 44,379,833 outstanding shares, the shares sold or issued in this offering will be freely tradable without restriction or further registration under the Securities Act, except that any shares held by our affiliates, as that term is defined under Rule 144 of the Securities Act, may be sold only in compliance with the limitations described below. The remaining outstanding 36,046,500 shares of common stock held by existing our stockholders, including our Sponsor and certain of our directors and officers, after this offering will be deemed restricted securities under the meaning of Rule 144 and may be sold in the public market only if registered or if they qualify for an exemption from registration, including the exemptions pursuant to Rule 144 under the Securities Act, which we summarize below.

Lock-up agreements

There are approximately 45,002,177 shares of common stock (including options) held by executive officers, directors and our existing stockholders, who are subject to lock-up agreements for a period of 180 days after the date of this prospectus, under which they have agreed not to sell or otherwise dispose of their shares of common stock, subject to certain exceptions. J.P. Morgan Securities LLC and Morgan Stanley & Co. LLC may, in their sole discretion and at any time without notice, release all or any portion of the shares subject to any such lock-up agreements. See “Underwriting.”

Rule 144

In general, under Rule 144, as currently in effect, an affiliate who beneficially owns shares that were purchased from us, or any affiliate, at least six months previously, is entitled to sell, upon the expiration of the lock-up agreement described in “Underwriting,” within any three-month period beginning 180 days after the date of this prospectus, a number of shares that does not exceed the greater of 1% of our then-outstanding shares of common stock, which equals approximately 443,799 shares immediately after this offering, or the average reported weekly trading volume of our common stock on NYSE during the four calendar weeks preceding the filing of a notice of the sale on Form 144.

Sales under Rule 144 by our affiliates or persons selling shares on behalf of our affiliates are also subject to certain manner of sale provisions, notice requirements and the availability of current public information about us. The sale of these shares, or the perception that sales will be made, may adversely affect the price of our common stock after this offering because a large number of shares would be, or would be perceived to be, available for sale in the public market.

Following this offering, a person who is not deemed to be or have been an affiliate of ours at the time of, or at any time during the three months preceding, a sale and who has beneficially owned restricted securities within the meaning of Rule 144 for at least six months, may sell such shares subject only to the availability of current public information about us, and any such person who has beneficially owned restricted shares of our common stock for at least one year may sell such shares without restriction.

We are unable to estimate the number of shares that will be sold under Rule 144 since this will depend on the market price for our common stock, the personal circumstances of the stockholder and other factors.

Rule 701

In general, under Rule 701, as currently in effect, any of our employees, directors, officers, consultants or advisors who purchase shares from us in connection with a compensatory stock or option plan or other written agreement before the effective date of this offering is entitled to resell such shares 90 days after the effective date of this offering in reliance on Rule 144.

 

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Securities issued in reliance on Rule 701 are restricted securities and, subject to the contractual restrictions described above, beginning 90 days after the date of this prospectus, may be sold by persons other than “affiliates,” as defined in Rule 144, subject only to the manner of sale provisions of Rule 144 and by “affiliates” under Rule 144 without compliance with its one-year minimum holding period requirement.

Registration statements on Form S-8

We intend to file one or more registration statements on Form S-8 under the Securities Act to register all shares of our common stock subject to outstanding stock options and the shares of stock subject to issuance under the 2016 Plan and the ESPP. Any such Form S-8 registration statement will automatically become effective upon filing. Accordingly, shares registered under such registration statements will be available for sale in the open market. We expect that the initial registration statement on Form S-8 will cover 11,839,600 shares.

Registration rights agreement

For a description of rights some holders of common stock have to require us to register the shares of common stock they own, see “Certain relationships and related party transactions—Registration rights.” Registration of these shares under the Securities Act would result in these shares becoming freely tradable without restriction under the Securities Act immediately upon effectiveness of the applicable registration statement.

 

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Material U.S. federal income tax consequences to non-U.S. holders

The following discussion is a summary of the material U.S. federal income tax consequences to Non-U.S. Holders (as defined below) of the purchase, ownership and disposition of our common stock issued pursuant to this offering, but does not purport to be a complete analysis of all potential tax effects. The effects of other U.S. federal tax laws, such as estate and gift tax laws and any applicable state, local or non-U.S. tax laws are not discussed. This discussion is based on the Code, Treasury Regulations promulgated thereunder, judicial decisions, and published rulings and administrative pronouncements of the U.S. Internal Revenue Service (the “IRS”), in each case in effect as of the date hereof. These authorities may change or be subject to differing interpretations. Any such change or differing interpretation may be applied retroactively in a manner that could adversely affect a Non-U.S. Holder. We have not sought and will not seek any rulings from the IRS regarding the matters discussed below. There can be no assurance the IRS or a court will not take a contrary position to that discussed below regarding the tax consequences of the purchase, ownership and disposition of our common stock.

This discussion is limited to Non-U.S. Holders that hold our common stock as a “capital asset” within the meaning of Section 1221 of the Code (generally, property held for investment). This discussion does not address all U.S. federal income tax consequences relevant to a Non-U.S. Holder’s particular circumstances, including the impact of the Medicare contribution tax on net investment income. In addition, it does not address consequences relevant to Non-U.S. Holders subject to special rules, including, without limitation:

 

  U.S. expatriates and former citizens or long-term residents of the United States;

 

  persons subject to the alternative minimum tax;

 

  persons holding our common stock as part of a hedge, straddle or other risk reduction strategy or as part of a conversion transaction or other integrated investment;

 

  banks, insurance companies and other financial institutions;

 

  brokers, dealers or traders in securities;

 

  “controlled foreign corporations,” “passive foreign investment companies” and corporations that accumulate earnings to avoid U.S. federal income tax;

 

  partnerships or other entities or arrangements treated as partnerships for U.S. federal income tax purposes (and investors therein);

 

  tax-exempt organizations or governmental organizations;

 

  persons deemed to sell our common stock under the constructive sale provisions of the Code;

 

  persons who hold or receive our common stock pursuant to the exercise of any employee stock option or otherwise as compensation; and

 

  tax-qualified retirement plans.

If an entity treated as a partnership for U.S. federal income tax purposes holds our common stock, the tax treatment of a partner in the partnership will depend on the status of the partner, the activities of the partnership and certain determinations made at the partner level. Accordingly, partnerships holding our common stock and the partners in such partnerships should consult their tax advisors regarding the U.S. federal income tax consequences to them.

THIS DISCUSSION IS NOT TAX ADVICE. INVESTORS SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE APPLICATION OF THE U.S. FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR SITUATIONS AS WELL AS ANY TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF OUR COMMON STOCK ARISING UNDER THE U.S. FEDERAL ESTATE OR GIFT TAX LAWS OR UNDER THE LAWS OF ANY STATE, LOCAL OR NON-U.S. TAXING JURISDICTION OR UNDER ANY APPLICABLE INCOME TAX TREATY.

Definition of a Non-U.S. Holder

For purposes of this discussion, a “Non-U.S. Holder” is any beneficial owner of our common stock that is neither a “U.S. person” nor an entity treated as a partnership for U.S. federal income tax purposes. A U.S. person is any person that, for U.S. federal income tax purposes, is or is treated as any of the following:

 

  an individual who is a citizen or resident of the United States;

 

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  a corporation created or organized under the laws of the United States, any state thereof or the District of Columbia;

 

  an estate, the income of which is subject to U.S. federal income tax regardless of its source; or

 

  a trust that (i) is subject to the primary supervision of a U.S. court and all substantial decisions of which are subject to the control of one or more “United States persons” (within the meaning of Section 7701(a)(30) of the Code) or (ii) has a valid election in effect to be treated as a United States person for U.S. federal income tax purposes.

Distributions

As described in the section entitled “Dividend policy,” we do not anticipate paying any additional cash dividends in the foreseeable future. However, if we do make distributions of cash or property on our common stock, such distributions will constitute dividends for U.S. federal income tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Amounts not treated as dividends for U.S. federal income tax purposes will constitute a return of capital and first be applied against and reduce a Non-U.S. Holder’s adjusted tax basis in its common stock, but not below zero. Any excess will be treated as capital gain and will be treated as described below under “—Sale or other taxable disposition.”

Subject to the discussion below of effectively connected income, dividends paid to a Non-U.S. Holder will be subject to U.S. federal withholding tax at a rate of 30% of the gross amount of the dividends (or such lower rate specified by an applicable income tax treaty, provided the Non-U.S. Holder furnishes a valid IRS Form W-8BEN or W-8BEN-E (or other applicable documentation) certifying qualification for the lower treaty rate). A Non-U.S. Holder that does not timely furnish the required documentation, but that qualifies for a reduced treaty rate, may obtain a refund of any excess amounts withheld by timely filing an appropriate claim for refund with the IRS. Non-U.S. Holders should consult their tax advisors regarding their entitlement to benefits under any applicable tax treaties.

If dividends paid to a Non-U.S. Holder are effectively connected with the Non-U.S. Holder’s conduct of a trade or business within the United States (and, if required by an applicable income tax treaty, the Non-U.S. Holder maintains a permanent establishment in the United States to which such dividends are attributable), the Non-U.S. Holder will be exempt from the U.S. federal withholding tax described above. To claim the exemption, the Non-U.S. Holder must furnish to the applicable withholding agent a valid IRS Form W-8ECI, certifying that the dividends are effectively connected with the Non-U.S. Holder’s conduct of a trade or business within the United States.

Any such effectively connected dividends will be subject to U.S. federal income tax on a net income basis at the regular graduated rates. A Non-U.S. Holder that is a corporation also may be subject to a branch profits tax at a rate of 30% (or such lower rate specified by an applicable income tax treaty) on such effectively connected dividends, as adjusted for certain items. Non-U.S. Holders should consult their tax advisors regarding any applicable tax treaties that may provide for different rules.

Sale or other taxable disposition

A Non-U.S. Holder will not be subject to U.S. federal income tax on any gain realized upon the sale or other taxable disposition of our common stock unless:

 

  the gain is effectively connected with the Non-U.S. Holder’s conduct of a trade or business within the United States (and, if required by an applicable income tax treaty, the Non-U.S. Holder maintains a permanent establishment in the United States to which such gain is attributable);

 

  the Non-U.S. Holder is a nonresident alien individual present in the United States for 183 days or more during the taxable year of the disposition and certain other requirements are met; or

 

  our common stock constitutes a U.S. real property interest (“USRPI”) by reason of our status as a U.S. real property holding corporation (“USRPHC”) for U.S. federal income tax purposes.

Gain described in the first bullet point above generally will be subject to U.S. federal income tax on a net income basis at the regular graduated rates. A Non-U.S. Holder that is a corporation also may be subject to a branch profits tax at a rate of 30% (or such lower rate specified by an applicable income tax treaty) on such effectively connected gain, as adjusted for certain items.

 

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Gain described in the second bullet point above will be subject to U.S. federal income tax at a rate of 30% (or such lower rate specified by an applicable income tax treaty), which may be offset by certain U.S. source capital losses of the Non-U.S. Holder (even though the individual is not considered a resident of the United States), provided the Non-U.S. Holder has timely filed U.S. federal income tax returns with respect to such losses.

With respect to the third bullet point above, we believe we currently are not, and do not anticipate becoming, a USRPHC. Because the determination of whether we are a USRPHC depends, however, on the fair market value of our USRPIs relative to the fair market value of our non-U.S. real property interests and our other business assets, there can be no assurance we currently are not a USRPHC or will not become one in the future. Even if we are or were to become a USRPHC, gain arising from the sale or other taxable disposition by a Non-U.S. Holder of our common stock will not be subject to U.S. federal income tax if our common stock is “regularly traded,” as defined by applicable Treasury Regulations, on an established securities market, and such Non-U.S. Holder owned, actually and constructively, 5% or less of our common stock throughout the shorter of the five-year period ending on the date of the sale or other taxable disposition or the Non-U.S. Holder’s holding period.

Non-U.S. Holders should consult their tax advisors regarding any applicable tax treaties that may provide for different rules.

Information reporting and backup withholding

Payments of dividends on our common stock will not be subject to backup withholding, provided the Non-U.S. Holder certifies its non-U.S. status, such as by furnishing a valid IRS Form W-8BEN, W-8BEN-E or W-8ECI, or otherwise establishes an exemption. However, information returns are required to be filed with the IRS in connection with any dividends on our common stock paid to the Non-U.S. Holder, regardless of whether any tax was actually withheld. In addition, proceeds of the sale or other taxable disposition of our common stock within the United States or conducted through certain U.S.-related brokers generally will not be subject to backup withholding or information reporting if the applicable withholding agent receives the certification described above or the Non-U.S. Holder otherwise establishes an exemption. Proceeds of a disposition of our common stock conducted through a non-U.S. office of a non-U.S. broker that does not have certain enumerated relationships with the United States generally will not be subject to backup withholding or information reporting.

Copies of information returns that are filed with the IRS may also be made available under the provisions of an applicable treaty or agreement to the tax authorities of the country in which the Non-U.S. Holder resides or is established.

Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules may be allowed as a refund or a credit against a Non-U.S. Holder’s U.S. federal income tax liability, provided the required information is timely furnished to the IRS.

Additional withholding tax on payments made to foreign accounts

Withholding taxes may be imposed under Sections 1471 to 1474 of the Code (such Sections commonly referred to as the Foreign Account Tax Compliance Act, or “FATCA”) on certain types of payments made to non-U.S. financial institutions and certain other non-U.S. entities. Specifically, a 30% withholding tax may be imposed on dividends on, or gross proceeds from the sale or other disposition of, our common stock paid to a “foreign financial institution” or a “non-financial foreign entity” (each as defined in the Code), unless (i) the foreign financial institution undertakes certain diligence and reporting obligations, (ii) the non-financial foreign entity either certifies it does not have any “substantial United States owners” (as defined in the Code) or furnishes identifying information regarding each substantial United States owner, or (iii) the foreign financial institution or non-financial foreign entity otherwise qualifies for an exemption from these rules. If the payee is a foreign financial institution and is subject to the diligence and reporting requirements in (i) above, it must enter into an agreement with the U.S. Department of the Treasury requiring, among other things, that it undertake to identify accounts held by certain “specified United States persons” or “United States-owned foreign entities” (each as defined in the Code), annually report certain information about such accounts, and withhold 30% on certain payments to non-compliant foreign financial institutions and certain other account holders. Foreign financial institutions located in jurisdictions that have an intergovernmental agreement with the United States governing FATCA may be subject to different rules.

Under the applicable Treasury Regulations and administrative guidance, withholding under FATCA generally applies to payments of dividends on our common stock, and will apply to payments of gross proceeds from the sale or other disposition of such stock on or after January 1, 2019.

Prospective investors should consult their tax advisors regarding the potential application of withholding under FATCA to their investment in our common stock.

 

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Underwriting

We and the selling stockholders are offering the shares of common stock described in this prospectus through a number of underwriters. J.P. Morgan Securities LLC and Morgan Stanley & Co. LLC are acting as joint book-running managers of the offering and as representatives of the underwriters. We and the selling stockholders have entered into an underwriting agreement with the underwriters. Subject to the terms and conditions of the underwriting agreement, we and the selling stockholders have agreed to sell to the underwriters, and each underwriter has severally agreed to purchase, at the public offering price less the underwriting discounts and commissions set forth on the cover page of this prospectus, the number of shares of common stock listed next to its name in the following table:

 

Name   

Number of

shares

 

J.P. Morgan Securities LLC

  

Morgan Stanley & Co. LLC

  

Piper Jaffray & Co.

  

Wells Fargo Securities, LLC

  

William Blair & Company, L.L.C.

  

Cowen and Company, LLC

  

BMO Capital Markets Corp.

  

Stifel, Nicolaus & Company, Incorporated

  

SunTrust Robinson Humphrey, Inc.

  
  

 

 

 

Total

     8,333,333   

 

 

The underwriters are committed to purchase all the common shares offered by us and the selling stockholders if they purchase any shares. The underwriting agreement also provides that if an underwriter defaults, the purchase commitments of non-defaulting underwriters may also be increased or the offering may be terminated.

The underwriters propose to offer the common shares directly to the public at the initial public offering price set forth on the cover page of this prospectus and to certain dealers at that price less a concession not in excess of $          per share. Any such dealers may resell shares to certain other brokers or dealers at a discount of up to $          per share from the initial public offering price. After the initial public offering of the shares, the offering price and other selling terms may be changed by the underwriters. Sales of shares made outside of the United States may be made by affiliates of the underwriters.

The underwriters have an option to buy up to 1,250,000 additional shares of common stock from the selling stockholders to cover sales of shares by the underwriters which exceed the number of shares specified in the table above. The underwriters have 30 days from the date of this prospectus to exercise this option. If any shares are purchased with this option, the underwriters will purchase shares in approximately the same proportion as shown in the table above. If any additional shares of common stock are purchased, the underwriters will offer the additional shares on the same terms as those on which the shares are being offered.

At our request, the underwriters have reserved up to 5% of the shares of common stock offered by this prospectus for sale, at the initial public offering price, to our directors, officers and other individuals associated with them, and our employees, to the extent permitted by local securities laws and regulations. The sales will be made at our direction by Morgan Stanley & Co. LLC, an underwriter of this offering, and its affiliates through a directed share program. We do not know if these persons will choose to purchase all or any portion of these reserved shares, but any purchases they do make will reduce the number of shares available to the general public. Any reserved shares not so purchased will be offered by the underwriters to the general public on the same terms as the other shares of common stock offered by this prospectus. Any shares sold in the directed share program to our directors, executive officers or stockholders who have entered into lock-up agreements described in this section shall be subject to the provisions of such lock-up agreements. Other participants in the directed share program shall be subject to substantially similar lock-up provisions with respect to any shares sold to them pursuant to the directed share program.

The underwriting fee is equal to the public offering price per share of common stock less the amount paid by the underwriters to us and the selling stockholders per share of common stock. The underwriting fee is $          per share. The following table shows the per share and total underwriting discounts and commissions to be paid to the underwriters assuming both no exercise and full exercise of the underwriters’ option to purchase additional shares.

 

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      Without
over-allotment
exercise
     With full
over-allotment
exercise
 

Per Share

   $                $            

Total

   $                $            

 

 

We estimate that the total expenses of this offering, including registration, filing and listing fees, printing fees and legal and accounting expenses, but excluding the underwriting discounts and commissions, will be approximately $ 3.5 million. We have agreed to reimburse the underwriters for certain FINRA-related and other expenses incurred by them in connection with this offering in an amount up to $ 30,000.

A prospectus in electronic format may be made available on the web sites maintained by one or more underwriters, or selling group members, if any, participating in the offering. The underwriters may agree to allocate a number of shares to underwriters and selling group members for sale to their online brokerage account holders. Internet distributions will be allocated by the representatives to underwriters and selling group members that may make Internet distributions on the same basis as other allocations.

We have agreed not to (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of, directly or indirectly, or file with the SEC a registration statement under the Securities Act relating to, any shares of our common stock or securities convertible into or exchangeable or exercisable for any shares of our common stock, or publicly disclose the intention to make any offer, sale, pledge, disposition or filing, or (ii) enter into any swap or other arrangement that transfers all or a portion of the economic consequences associated with the ownership of any shares of common stock or any such other securities (regardless of whether any of these transactions are to be settled by the delivery of shares of common stock or such other securities, in cash or otherwise), in each case without the prior written consent of J.P. Morgan Securities LLC and Morgan Stanley & Co. LLC for a period of 180 days after the date of this prospectus, other than the shares of our common stock to be sold hereunder, any shares of our common stock awarded, issued upon the exercise of options or purchase rights, issued upon vesting of equity awards and/or settlement of other awards granted under our existing stock incentive plans, the filing of registration statements on Form S-8 with respect to benefit plans and the issuance of common stock and securities convertible or exercisable or exchangeable for common stock, in an aggregate amount not to exceed 10% of our outstanding securities as of the date of closing of this offering, in connection with one more acquisitions of a company or a business, securities, property or assets of another person or entity, joint ventures, commercial relationships or strategic alliances.

Our directors and executive officers and holders of substantially all of our outstanding securities, including the selling stockholders, have entered into lock-up agreements with the underwriters prior to the commencement of this offering pursuant to which each of these persons or entities, with limited exceptions, for a period of 180 days after the date of this prospectus, may not, without the prior written consent of J.P. Morgan Securities LLC and Morgan Stanley & Co. LLC on behalf of the Underwriters, (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of our common stock or any securities convertible into or exercisable or exchangeable for our common stock (including, without limitation, common stock or such other securities which may be deemed to be beneficially owned by such directors, executive officers, managers and members in accordance with the rules and regulations of the SEC and securities which may be issued upon exercise of a stock option or warrant) or (ii) enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of the common stock or such other securities, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of common stock or such other securities, in cash or otherwise, or (iii) make any demand for or exercise any right with respect to the registration of any shares of our common stock or any security convertible into or exercisable or exchangeable for our common stock. The restrictions described in the immediately preceding paragraph do not apply to certain exceptions described therein.

We and the selling stockholders have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act.

We intend to apply to have our common stock approved for listing on NYSE under the symbol “ELF.”

In connection with this offering, the underwriters may engage in stabilizing transactions, which involves making bids for, purchasing and selling shares of common stock in the open market for the purpose of preventing or retarding a decline in the market price of the common stock while this offering is in progress. These stabilizing transactions may include making

 

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short sales of the common stock, which involves the sale by the underwriters of a greater number of shares of common stock than they are required to purchase in this offering, and purchasing shares of common stock on the open market to cover positions created by short sales. Short sales may be “covered” shorts, which are short positions in an amount not greater than the underwriters’ option referred to above, or may be “naked” shorts, which are short positions in excess of that amount. The underwriters may close out any covered short position either by exercising their option, in whole or in part, or by purchasing shares in the open market. In making this determination, the underwriters will consider, among other things, the price of shares available for purchase in the open market compared to the price at which the underwriters may purchase shares through the option to purchase additional shares. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the common stock in the open market that could adversely affect investors who purchase in this offering. To the extent that the underwriters create a naked short position, they will purchase shares in the open market to cover the position.

The underwriters have advised us and the selling stockholders that, pursuant to Regulation M of the Securities Act, they may also engage in other activities that stabilize, maintain or otherwise affect the price of the common stock, including the imposition of penalty bids. This means that if the representatives of the underwriters purchase common stock in the open market in stabilizing transactions or to cover short sales, the representatives can require the underwriters that sold those shares as part of this offering to repay the underwriting discount received by them.

These activities may have the effect of raising or maintaining the market price of the common stock or preventing or retarding a decline in the market price of the common stock, and, as a result, the price of the common stock may be higher than the price that otherwise might exist in the open market. If the underwriters commence these activities, they may discontinue them at any time. The underwriters may carry out these transactions on NYSE, in the OTC market or otherwise.

Prior to this offering, there has been no public market for our common stock. The initial public offering price will be determined by negotiations among us, the selling stockholders and the representatives of the underwriters. In determining the initial public offering price, we, the selling stockholders and the representatives of the underwriters expect to consider a number of factors including:

 

  the information set forth in this prospectus and otherwise available to the representatives;

 

  our prospects and the history and prospects for the industry in which we compete;

 

  an assessment of our management;

 

  our prospects for future earnings;

 

  the general condition of the securities markets at the time of this offering;

 

  the recent market prices of, and demand for, publicly traded common stock of generally comparable companies; and

 

  other factors deemed relevant by the underwriters and us.

Neither we, the selling stockholders nor the underwriters can assure investors that an active trading market will develop for our common shares, or that the shares will trade in the public market at or above the initial public offering price.

Certain of the underwriters and their affiliates may provide to us and our affiliates from time to time in the future certain commercial banking, financial advisory, investment banking and other services for us and such affiliates in the ordinary course of their business, for which they may receive customary fees and commissions. In addition, from time to time, certain of the underwriters and their affiliates may effect transactions for their own account or the account of customers, and hold on behalf of themselves or their customers, long or short positions in our debt or equity securities or loans, and may do so in the future.

Selling restrictions

General

Other than in the United States, no action has been taken by us or the underwriters that would permit a public offering of the securities offered by this prospectus in any jurisdiction where action for that purpose is required. The securities offered by this prospectus may not be offered or sold, directly or indirectly, nor may this prospectus or any other offering material or advertisements in connection with the offer and sale of any such securities be distributed or published in any jurisdiction,

 

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except under circumstances that will result in compliance with the applicable rules and regulations of that jurisdiction. Outside of the United States, persons into whose possession this prospectus comes are advised to inform themselves about and to observe any restrictions imposed by any applicable laws and regulations outside of the United States relating to the offering and the distribution of this prospectus.

This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities offered by this prospectus in any jurisdiction in which such an offer or a solicitation is unlawful.

United Kingdom

This document is only being distributed to and is only directed at (i) persons who are outside the United Kingdom or (ii) to investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the “Order”) or (iii) high net worth entities, and other persons to whom it may lawfully be communicated, falling with Article 49(2)(a) to (d) of the Order (all such persons together being referred to as “relevant persons”). The securities are only available to, and any invitation, offer or agreement to subscribe, purchase or otherwise acquire such securities will be engaged in only with, relevant persons. Any person who is not a relevant person should not act or rely on this document or any of its contents.

European Economic Area

In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a “Relevant Member State”), from and including the date on which the European Union Prospectus Directive (the “EU Prospectus Directive”) was implemented in that Relevant Member State (the “Relevant Implementation Date”) an offer of securities described in this prospectus may not be made to the public in that Relevant Member State prior to the publication of a prospectus in relation to the shares which has been approved by the competent authority in that Relevant Member State or, where appropriate, approved in another Relevant Member State and notified to the competent authority in that Relevant Member State, all in accordance with the EU Prospectus Directive, except that, with effect from and including the Relevant Implementation Date, an offer of securities described in this prospectus may be made to the public in that Relevant Member State at any time:

 

  to any legal entity which is a qualified investor as defined under the EU Prospectus Directive;

 

  to fewer than 100 or, if the Relevant Member State has implemented the relevant provision of the 2010 PD Amending Directive, 150 natural or legal persons (other than qualified investors as defined in the EU Prospectus Directive); or

 

  in any other circumstances falling within Article 3(2) of the EU Prospectus Directive, provided that no such offer of securities described in this prospectus shall result in a requirement for the publication by us of a prospectus pursuant to Article 3 of the EU Prospectus Directive.

For the purposes of this provision, the expression an “offer of securities to the public” in relation to any securities in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the securities to be offered so as to enable an investor to decide to purchase or subscribe for the securities, as the same may be varied in that Member State by any measure implementing the EU Prospectus Directive in that Member State. The expression “EU Prospectus Directive” means Directive 2003/71/EC (and any amendments thereto, including the 2010 PD Amending Directive, to the extent implemented in the Relevant Member State) and includes any relevant implementing measure in each Relevant Member State, and the expression “2010 PD Amending Directive” means Directive 2010/73/EU.

Canada

The common stock may be sold only to purchasers purchasing, or deemed to be purchasing, as principal that are accredited investors, as defined in National Instrument 45-106 Prospectus Exemptions or subsection 73.3(1) of the Securities Act (Ontario), and are permitted clients, as defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations. Any resale of shares of the common stock must be made in accordance with an exemption from, or in a transaction not subject to, the prospectus requirements of applicable securities laws.

Securities legislation in certain provinces or territories of Canada may provide a purchaser with remedies for rescission or damages if this prospectus (including any amendment thereto) contains a misrepresentation, provided that the remedies for rescission or damages are exercised by the purchaser within the time limit prescribed by the securities legislation of the purchaser’s province or territory. The purchaser should refer to any applicable provisions of the securities legislation of the purchaser’s province or territory for particulars of these rights or consult with a legal advisor.

 

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Pursuant to section 3A.3 of National Instrument 33-105 Underwriting Conflicts (NI 33-105), the underwriters are not required to comply with the disclosure requirements of NI 33-105 regarding underwriter conflicts of interest in connection with this offering.

Legal matters

The validity of the issuance of the shares of common stock offered by the Company will be passed upon for e.l.f. Beauty, Inc. by Latham & Watkins LLP, Menlo Park, California. Certain legal matters relating to this offering will be passed upon for the underwriters by Ropes & Gray LLP, San Francisco, California.

Experts

The consolidated financial statements as of December 31, 2015 (Successor) and 2014 (Successor), and for the period from January 1, 2014 through January 31, 2014 (Predecessor), the period from February 1, 2014 through December 31, 2014 (Successor) and the year ended December 31, 2015 (Successor), included in this registration statement have been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report appearing herein. Such consolidated financial statements have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.

Where you can find additional information

We have filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to the shares of common stock offered by this prospectus. This prospectus does not contain all of the information set forth in the registration statement and its exhibits, certain portions of which are omitted as permitted by the rules and regulations of the SEC. For further information pertaining to us and our common stock, we refer you to the registration statement, including its exhibits and the financial statements, notes and schedules filed as a part of that registration statement. Statements contained in this prospectus regarding the contents of any contract or other document referred to in those documents are not necessarily complete, and in each instance we refer you to the copy of the contract or other document filed as an exhibit to the registration statement or other document. Each of these statements is qualified in all respects by this reference.

You may read and copy the registration statement and its exhibits and schedules at the SEC’s public reference room at 100 F Street, N.E., Washington, D.C. 20549. You also may obtain information on the operation of the public reference room by calling the commission at 1-800-SEC-0330. The SEC maintains a website at www.sec.gov that contains reports, proxy and information statements and other information regarding registrants, such as e.l.f. Beauty, Inc., that file electronically with the SEC.

As a result of this offering, we will become subject to the information and reporting requirements of the Exchange Act and, in accordance with this law, will file periodic reports, proxy statements and other information with the SEC. These periodic reports, proxy statements and other information will be available for inspection and copying at the SEC’s public reference facilities and the website of the SEC referred to above. We also maintain a website at www.elfcosmetics.com. Upon completion of this offering, you may access these materials free of charge as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC. Information contained on our website is not a part of this prospectus and the inclusion of our website address in this prospectus is an inactive textual reference only.

 

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Index to consolidated financial statements

 

Audited financial statements

  

Report of Independent Registered Public Accounting Firm

     F-2   

Consolidated Balance Sheets as of December  31, 2014 (Successor) and 2015 (Successor)

     F-3   

Consolidated Statements of Operations and Comprehensive Income (Loss) for the period from January 1, 2014 through January 31, 2014 (Predecessor), the period from February 1, 2014 through December 31, 2014 (Successor) and the year ended December 31, 2015 (Successor)

     F-4   

Consolidated Statements of Preferred Stock and Stockholders’ Equity (Deficit) for the period from January 1, 2014 through January 31, 2014 (Predecessor), the period from February 1, 2014 through December 31, 2014 (Successor) and the year ended December 31, 2015 (Successor)

     F-5   

Consolidated Statements of Cash Flows for the period from January  1, 2014 through January 31, 2014 (Predecessor), the period from February 1, 2014 through December 31, 2014 (Successor) and the year ended December 31, 2015 (Successor)

     F-6   

Notes to Consolidated Financial Statements

     F-7   

Unaudited financial statements

  

Condensed Consolidated Balance Sheets as of December 31, 2015 and June 30, 2016

     F-34   

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the six months ended June 30, 2015 and 2016

     F-35   

Condensed Consolidated Statements of Preferred Stock and Stockholders’ Equity (Deficit) as of December 31, 2015 and June 30, 2016

     F-36   

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2015 and 2016

     F-37   

Notes to Condensed Consolidated Financial Statements

     F-38   

 

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Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

J.A. Cosmetics Holdings, Inc.

Oakland, California

We have audited the accompanying consolidated balance sheets of J.A. Cosmetics Holdings, Inc. and subsidiaries (the “Company”) as of December 31, 2015 and 2014 (Successor), and the related consolidated statements of operations and comprehensive income (loss), preferred stock and stockholders’ equity (deficit), and cash flows for the period from January 1, 2014 through January 31, 2014 (Predecessor), the period from February 1, 2014 through December 31, 2014 (Successor) and the year ended December 31, 2015. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of J.A. Cosmetics Holdings, Inc. and subsidiaries as of December 31, 2015 and 2014 (Successor), and the results of their operations and their cash flows for the period from January 1, 2014 through January 31, 2014 (Predecessor), the period from February 1, 2014 through December 31, 2014 (Successor) and the year ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America.

San Francisco, California

April 28, 2016 (September     , 2016 as to effects of the stock split discussed in the last paragraph of Note 1)

The accompanying consolidated financial statements have been adjusted to give effect to the 2.76:1 stock split of the Company’s outstanding common stock which is to be effected prior to the Company’s proposed initial public offering. The above opinion is in the form which will be signed by Deloitte & Touche LLP upon consummation of such stock split, which is described in Note 1 to the consolidated financial statements and assuming that, from September 8, 2016 to the date such stock split occurs, no other events shall have occurred that would affect the accompanying consolidated financial statements or notes thereto.

/s/ Deloitte & Touche LLP

San Francisco, California

September 8, 2016

 

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J.A. Cosmetics Holdings, Inc. and subsidiaries

Consolidated balance sheets

(in thousands, except share and per share data)

 

      Successor  
     As of December 31,  
      2014     2015  

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 4,668      $ 14,004   

Accounts receivable, net

     26,946        22,475   

Inventory

     29,114        31,261   

Prepaid expenses and other current assets

     2,711        2,978   
  

 

 

 

Total current assets

     63,439        70,718   

Property and equipment, net

     2,125        9,854   

Intangible assets, net

     129,428        121,282   

Goodwill

     157,264        157,264   

Deferred tax assets

     240        262   

Other assets

     1,682        1,692   
  

 

 

 

Total assets

   $ 354,178      $ 361,072   
  

 

 

 

Liabilities, convertible preferred stock and stockholders’ deficit

    

Current liabilities:

    

Accounts payable and accrued expenses

   $ 20,266      $ 24,827   

Due to related parties

     1,154          

Bank debt, current portion

     12,275        10,325   

Foreign currency forward contracts, current portion

     1,858        10,702   
  

 

 

 

Total current liabilities

     35,553        45,854   

Bank debt, net of current portion

     136,149        134,594   

Foreign currency forward contracts, net of current portion

     4,103          

Deferred tax liabilities

     46,037        42,126   

Other long-term liabilities

     814        1,601   
  

 

 

 

Total liabilities

     222,656        224,175   

Commitments and contingencies (Note 9)

    

Convertible preferred stock, par value of $ 0.01 per share; 200,000 shares authorized, and 135,041 shares issued and outstanding as of December 31, 2014 and 2015; liquidation preference of $ 145,328 and $ 197,295 as of December 31, 2014 and 2015, respectively

     145,328        197,295   

Stockholders’ deficit:

    

Common stock, par value of $ 0.01 per share; 13,800,000 shares authorized as of December 31, 2014 and 2015; 27,593 shares issued and outstanding as of December 31, 2014 and 34,493 shares issued and outstanding as of December 31, 2015

              

Additional paid-in capital

     5,767        6,785   

Accumulated deficit

     (19,573     (67,183
  

 

 

   

 

 

 

Total stockholders’ deficit

     (13,806     (60,398
  

 

 

   

 

 

 

Total liabilities, convertible preferred stock and stockholders’ deficit

   $ 354,178      $ 361,072   

 

 

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

 

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J.A. Cosmetics Holdings, Inc. and subsidiaries

Consolidated statements of operations and comprehensive income (loss)

(in thousands, except share and per share data)

 

      Predecessor                   Successor  
     

Period from

January 1, 2014
through
January 31, 2014

                 

Period from

February 1, 2014
through
December 31, 2014

    Year ended
December 31, 2015
 

Net sales

   $ 9,810            $ 135,134      $ 191,413   

Cost of sales

     5,038              73,684        91,084   
  

 

 

         

 

 

 

Gross profit

     4,772              61,450        100,329   

Selling, general and administrative expenses

     3,045              56,103        74,758   
  

 

 

         

 

 

 

Operating income

     1,727              5,347        25,571   

Other income (expense), net

     36              (6,633     (4,172

Interest expense

     (128           (11,545     (12,721
  

 

 

         

 

 

 

Income (loss) before provision for income taxes

     1,635              (12,831     8,678   

(Provision) benefit for income taxes

     (542           3,545        (4,321
  

 

 

         

 

 

 

Net income (loss)

   $ 1,093            $ (9,286   $ 4,357   
  

 

 

         

 

 

 

Comprehensive income (loss)

   $ 1,093            $ (9,286   $ 4,357   
  

 

 

         

 

 

 

Net income (loss) per share—basic

   $ 1,093            $ (709   $ (1,560

Net income (loss) per share—diluted

   $ 1,088            $ (709   $ (1,560

Weighted average number of shares outstanding—basic

     1,000              27,593        30,523   

Weighted average number of shares outstanding—diluted

     1,005              27,593        30,523   

Unaudited pro forma net loss per share—basic (Note 15)

             $ 0.11   

Unaudited pro forma net loss per shares—diluted (Note 15)

             $ 0.10   

Unaudited pro forma weighted average number of shares outstanding—basic (Note 15)

               41,301,898   

Unaudited pro forma weighted average number of shares outstanding—diluted (Note 15)

               42,972,032   

 

 

 

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

 

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J.A. Cosmetics Holdings, Inc. and subsidiaries

Consolidated statements of preferred stock and stockholders’ equity (deficit)

(in thousands, except share data)

 

     Preferred stock                   Common stock     Additional
paid-in
   

Retained

earnings
(accumulated

    Total
stockholders’
 
     Shares     Amount                   Shares     Amount     capital     deficit)     equity  
 

Predecessor:

                   
 

Balance as of January 1, 2014

    1,000      $              1,000      $      $ (3,928   $ 15,509      $ 11,581   

Net income

                                             1,093        1,093   
 

 

 

         

 

 

 
 

Balance as of January 31, 2014

    1,000      $              1,000      $      $ (3,928   $ 16,602      $ 12,674   

 

 

 

     Preferred stock                   Common stock    

Additional

paid-in

   

Retained

earnings

(accumulated

   

Total

stockholders’

 
     Shares     Amount                   Shares     Amount     capital     deficit)     deficit  
 

Successor:

                   

Balance as of February 1, 2014

         $                   $      $      $      $   

Net loss

                                             (9,286     (9,286

Issuance of common stock for JACUS acquisition

                        27,593               100               100   

Issuance of preferred stock

    135,041        135,041                                       

Convertible preferred stock accretion

           10,287                                   (10,287     (10,287

Compensation expense paid to seller

                                      5,380               5,380   

Stock-based compensation

                                      287               287   
 

 

 

         

 

 

 

Balance as of December 31, 2014

    135,041        145,328              27,593               5,767        (19,573     (13,806

Net income

                                             4,357        4,357   

Convertible preferred stock accretion

           51,967                                   (51,967     (51,967

Compensation expense paid to seller

                                      489               489   

Stock-based compensation

                                      503               503   

Exercise of stock options

                        6,900               25               25   
 

 

 

         

 

 

 

Balance as of December 31, 2015

    135,041      $ 197,295              34,493      $      $ 6,785      $ (67,183   $ (60,398

 

 

 

 

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

 

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J.A. Cosmetics Holdings, Inc. and subsidiaries

Consolidated statements of cash flows

(in thousands)

 

      Predecessor                   Successor  
     

Period from

January 1, 2014
through
January 31, 2014

                  Period from
February 1, 2014
through
December 31, 2014
    Year ended
December 31, 2015
 
 

Cash flows from operating activities:

            

Net income (loss)

   $ 1,093            $ (9,286   $ 4,357   
 

Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:

            

Depreciation of property and equipment

     30              392        2,043   

Amortization of intangible assets

     11              7,552        8,246   

Allowance for doubtful accounts

                  91        23   

Inventory reserve

                  250          

Amortization of debt issuance costs

     15              994        1,070   

Loss on disposal of property and equipment

                  71        571   

Stock-based compensation expense

                  287        503   

Compensation expense paid to seller

                  5,380        489   

Loss on foreign currency forward contracts

                  5,961        4,741   

Deferred income taxes

     1,967              (4,276     (3,933

Changes in operating assets and liabilities:

            

Accounts receivable

     5,492              (10,980     4,448   

Inventory

     (1,455           (4,752     (2,147

Prepaid expenses and other current assets

     (5           (464     953   

Other assets

     (232           (1,682     (10

Accounts payable and accrued expenses

     (6,032           1,904        3,532   

Other liabilities

     2              232        787   

Due to related parties

     22              (89     (1,154
  

 

 

         

 

 

 

Net cash provided by (used in) operating activities

     908              (8,415     24,519   
  

 

 

         

 

 

 
 

Cash flows from investing activities:

            

Acquisition, net of cash acquired

                  (237,891       

Purchase of property and equipment

     (19           (1,597     (10,142

Acquisition of intangible assets

                         (100
  

 

 

         

 

 

 

Net cash used in investing activities

     (19           (239,488     (10,242
  

 

 

         

 

 

 
 

Cash flows from financing activities:

            

Proceeds from revolving line of credit

                  15,250        27,150   

Repayment of revolving line of credit

                  (5,600     (29,100

Debt issuance costs

                  (5,251       

Deferred offering costs paid

                         (391

Proceeds from long term debt

                  145,000          

Repayment of long term debt

                  (1,969     (2,625

Cash received from issuance of preferred stock

                  105,041          

Cash received from issuance of common stock

                  100        25   
  

 

 

         

 

 

 

Net cash provided by (used in) financing activities

                  252,571        (4,941
  

 

 

         

 

 

 

Net increase in cash and cash equivalents

     889              4,668        9,336   

Cash and cash equivalents—beginning of period

     6,934                     4,668   
  

 

 

         

 

 

 

Cash and cash equivalents—end of period

   $ 7,823            $ 4,668      $ 14,004   
  

 

 

         

 

 

 
 

Supplemental disclosure of cash flow information:

            

Cash paid for interest

   $            $ 10,544      $ 11,617   

Cash paid for income taxes

   $            $ 3,948      $ 7,790   
 

Noncash investing and financing activities:

            

Property & equipment purchase not paid in cash

   $            $      $ 200   

Deferred offering costs not paid in cash

   $            $      $ 829   

 

 

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

 

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J.A. Cosmetics Holdings, Inc. and subsidiaries

Notes to consolidated financial statements

Note 1—Nature of operations

J.A. Cosmetics Holdings, Inc. and subsidiaries (the “Company,” “Successor,” “we,” “us” or “its”) was formed as a Delaware corporation on December 20, 2013. The Company is majority owned by TPG Growth II, Ltd. (“TPG”), a private equity fund. The Company and its subsidiaries conduct business under the name e.l.f. Cosmetics, and offer high-quality, prestige-inspired products for eyes, lips and face to consumers through its retail customers, e.l.f. stores and e-commerce channels.

On September 5, 2016, the Board of Directors of the Company approved a 2.76:1 forward stock split of the Company’s common stock which will be effective immediately prior to the effectiveness of the registration statement of which this prospectus is a part. All common shares, stock options, and per share information presented in the financial statements have been adjusted to reflect the stock split on a retroactive basis for all periods presented. There will be no change in the par value of the Company’s common stock. The ratio by which shares of preferred stock are convertible into shares of common stock will be adjusted to reflect the effects of the stock split.

Note 2—Summary of significant accounting policies

Basis of presentation

On January 31, 2014, the Company acquired 100% of the outstanding shares of capital stock of J.A. Cosmetics US, Inc. (“JACUS” or the “Predecessor”) and its subsidiaries, a developer and marketer of branded value-priced cosmetics, from J.A. Cosmetics Corporation, TSG5 L.P., a private equity fund, and its co-investors (together, the “Sellers”). The acquisition was accounted for as a business combination in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805, Business Combinations (“ASC 805”), and the resulting new basis of accounting is reflected in the Company’s consolidated financial statements for all periods beginning on or after January 31, 2014. As a result, financial information of the Predecessor and Successor periods have been prepared under two different bases of accounting and therefore are not comparable.

The accompanying consolidated financial statements of the Company include all the accounts of J.A. Cosmetics Holdings, Inc. and its subsidiaries for periods designated as “Successor” and relate to periods after the acquisition. The Company had no operations from December 20, 2013 to the date of acquisition of the Predecessor. The period from January 1, 2014 through January 31, 2014 relates to the period prior to the acquisition, includes all the accounts of JACUS and its subsidiaries, and is referred to herein as the “Predecessor 2014 Period.” The period from February 1, 2014 through December 31, 2014 and the year ended December 31, 2015 are herein referred to as the “Successor 2014 Period” and the “Successor 2015 Period,” respectively.

The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“US GAAP”) and all intercompany balances and transactions have been eliminated in consolidation.

Use of estimates

The preparation of the accompanying financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. 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 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. As of December 31, 2014 and 2015, the Company recorded an allowance for doubtful accounts of $ 0.1 million and $ 40,000, respectively. The Company recorded a sales allowance of $ 2.0 million and $ 3.9 million as of December 31, 2014 and 2015, respectively, which is also

 

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J.A. Cosmetics Holdings, Inc. and subsidiaries

Notes to consolidated financial statements

 

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, foreign currency forward contracts and trade receivables. 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. Foreign currency forward contracts are transacted with creditworthy financial institutions, and no collateral is required. 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 Predecessor 2014 Period and the Successor 2014 Period, two customers individually accounted for greater than 10% of the Company’s revenue. During the Successor 2015 Period, three customers individually accounted for greater than 10% of the Company’s revenue as disclosed below:

 

      Predecessor                   Successor  
      Period from
January 1, 2014
through
January 31, 2014
                  Period from
February 1, 2014
through
December 31, 2014
     Year ended
December 31, 2015
 

Customer A

     30%              30%         28%   

Customer B

     17%              19%         23%   

Customer C

                          10%   

 

 

Two customers individually accounted for greater than 10% of the Company’s accounts receivable at the end of the periods presented:

 

      Successor  
     As of December 31,  
      2014      2015  

Customer A

     52%         35%   

Customer B

     16%         21%   

 

 

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. A provision is recorded to adjust inventory to its estimated realizable value when inventory is determined to be in excess of anticipated demand. In the Predecessor 2014 Period, the Successor 2014 Period and the Successor 2015 Period, the Company incurred insignificant inventory write-downs.

Property and equipment

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

useful lives

 

Machinery, equipment and software

     3-5 years   

Leasehold improvements

     5 years   

Furniture and fixtures

     2-5 years   

Store fixtures

     2-3 years   

 

 

 

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Table of Contents

J.A. Cosmetics Holdings, Inc. and subsidiaries

Notes to consolidated financial statements

 

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. 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 was no impairment charge recorded in the Predecessor 2014 Period, the Successor 2014 Period or the Successor 2015 Period.

Goodwill and intangible assets

Goodwill represents the excess purchase price for the acquisition of JACUS over the fair value of the net assets acquired. As part of the acquisition, the Company also acquired finite-lived intangible assets (customer relationships and favorable leases) and an indefinite-lived intangible asset (trademark).

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.

Historically the Company had a single reporting unit for the purpose of performing its goodwill impairment test. During the third quarter of 2015, the Company made structural and reporting changes to its internal organization. This reorganization aligned the internal management and functional support around the Company’s primary sales channels which report into the chief operating decision maker. These changes resulted in the identification of three reporting units that met the definition in ASC 350, Intangibles—Goodwill and Other , of components of the Company’s one operating segment: (i) retail customers; (ii) e.l.f. stores; and (iii) e-commerce. In accordance with ASC 350, on October 1, 2015, the Company reallocated the goodwill to the three reporting units using a relative fair value approach. As a result of the internal reorganization, the Company also performed a goodwill impairment test both immediately before and after this change in reporting units and concluded that no impairment existed.

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 remaining useful life of the indefinite-lived intangible asset is evaluated each reporting period, and when the useful life is no longer considered to be indefinite, the intangible asset is amortized over its remaining useful life on a straight-line basis. Amortization of intangible assets with finite useful lives is computed on a straight-line basis over periods of three 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.

Deferred initial public offering costs

Deferred offering costs, which consist of direct incremental legal and accounting fees relating to the initial public offering (“IPO”), are capitalized. The deferred offering costs will be offset against IPO proceeds upon the consummation of the offering. In the event the offering is terminated, deferred offering costs will be expensed. As of December 31, 2015, $ 1.2 million of offering costs were deferred in other assets on the consolidated balance sheets. No deferred offering costs were capitalized as of December 31, 2014.

Debt issuance costs

Debt issuance costs were incurred for arranging the credit facilities from various financial institutions. These costs are presented within the related bank debt liability on the consolidated balance sheet and accreted over the term of the related debt using the effective interest rate method.

 

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Table of Contents

J.A. Cosmetics Holdings, Inc. and subsidiaries

Notes to consolidated financial statements

 

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 reported for bank debt approximate their fair values as the stated interest rates approximate market rates currently available to the Company for loans with similar terms. The foreign currency forward contracts are carried at fair value. See Note 6—Fair value of financial instruments.

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 Predecessor 2014 Period, the Successor 2014 Period and the Successor 2015 Period, net sales in the United States and outside of the United States were as follows (in thousands):

 

      Predecessor                   Successor  
      Period from
January 1, 2014
through
January 31, 2014
                  Period from
February 1, 2014
through
December 31, 2014
     Year ended
December 31, 2015
 

U.S.

   $ 9,334            $ 122,317       $ 178,817   

International

     476              12,817         12,596   
  

 

 

         

 

 

 

Total net sales

   $ 9,810            $ 135,134       $ 191,413   

 

 

As of December 31, 2014 and December 31, 2015, the Company had long-lived assets in the United States and outside of the United States as follows (in thousands):

 

      Successor  
     December 31,  
      2014      2015  

U.S.

   $ 1,813       $ 9,230   

International

     312         624   
  

 

 

 

Total long-lived assets

   $ 2,125       $ 9,854   

 

 

Revenue recognition

Revenue consists of sales of cosmetics through retail customers, e.l.f. stores and e-commerce channels. Sales are recognized when persuasive evidence of an arrangement exists, the product has shipped, title has passed, all risks and rewards of ownership have transferred, the sales price is fixed or determinable and collectability is reasonably assured. Delivery is considered to have occurred at the time the title and risk of loss passes to the customer.

For sales to retail customers, delivery is considered to have occurred at the time of shipment or the time of delivery depending upon the specific terms of the customer arrangement. For sales to e-commerce consumers, delivery is considered to have occurred at the time of delivery of merchandise to the customer.

Revenue from sales to consumers through e.l.f. stores is recognized at the time of purchase. Revenue recognized through e.l.f. store and e-commerce sales channels is recognized net of any taxes that are collected from consumers and subsequently remitted to governmental authorities, such as sales, use and value added taxes.

Provision for sales discounts, product returns, markdowns, shortages and price adjustments are recorded as revenue reductions. These revenue reductions are established by the Company based upon management’s best estimates at the time of sale. The Company regularly reviews and revises, when deemed necessary, its estimates of sales returns and other

 

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Table of Contents

J.A. Cosmetics Holdings, Inc. and subsidiaries

Notes to consolidated financial statements

 

required reserves based primarily upon the historical rate of actual product returns and the duration of time between the original sale and return. These revenue reductions are reflected on the consolidated balance sheet as a sales allowance against accounts receivable.

A reconciliation of the beginning and ending amounts of sales allowances for the Predecessor 2014 Period, the Successor 2014 Period and the Successor 2015 Period is as follows (in thousands):

 

      Sales allowances  

Balance as of January 1, 2014 (Predecessor)

   $ 2,411   

Charges

     306   

Deductions

     (1,092
  

 

 

 

Balance as of January 31, 2014 (Predecessor)

     1,625   

Charges

     6,408   

Deductions

     (6,068
  

 

 

 

Balance as of December 31, 2014 (Successor)

     1,965   

Charges

     13,903   

Deductions

     (12,002
  

 

 

 

Balance as of December 31, 2015 (Successor)

   $ 3,866   

 

 

In the Predecessor 2014 Period, the Successor 2014 Period and the Successor 2015 period, the Company recorded $ 0.5 million, $ 4.0 million and $ 3.6 million, respectively, of reimbursed shipping expenses from customers within revenues. The shipping and handling costs associated with product distribution were $ 0.9 million, $ 8.3 million and $ 12.6 million in the Predecessor 2014 Period, the Successor 2014 Period and the Successor 2015 Period, 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.

Deferred rent

Certain leases provide for rent abatements or scheduled increases in base rent. Rent expense is recognized on a straight-line basis over the lease term, which results in deferred rent payable being recognized on the consolidated balance sheet.

As part of its lease agreements, the Company may receive construction allowances from landlords for tenant improvements. These leasehold improvements made by the Company are capitalized and amortized over the shorter of the lease term or five years. The construction allowances are recorded as deferred rent and amortized on a straight-line basis over the lease term as a reduction of rent expense.

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

 

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Table of Contents

J.A. Cosmetics Holdings, Inc. and subsidiaries

Notes to consolidated financial statements

 

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 statements of operations.

Derivative instruments

The Company is exposed to foreign exchange risk as it has contracts with suppliers in China for future purchases of inventories denominated in the Chinese renminbi (RMB). The Company uses derivative instruments, specifically forward contracts, to mitigate the impact of foreign currency fluctuations on a portion of its forecasted foreign currency exposures. These contracts are carried at their fair value either as an asset or liability on the consolidated balance sheet. The Company’s derivative contracts are not designated as hedge instruments, and changes in fair value of derivatives are recorded in other income (expense), net in the consolidated statements of operations. The Company does not enter into derivative contracts for speculative or trading purposes.

Stock-based compensation

Share-based compensation cost is measured at grant date, based on the fair value of the award, and is recognized on a straight-line method over the requisite service period for awards expected to vest. 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 both a market condition and the occurrence of a performance condition on the date of grant using a Monte Carlo simulation model that assumes the performance criteria will be met and the target payout levels will be achieved. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

The Company recognizes compensation expense for awards expected to vest with only a service condition on a straight-line basis over the requisite service period, which is generally the award’s vesting period. Vesting of these awards is accelerated for certain employees in the event of a change-in-control or an IPO. 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.

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 financial statements of operations and amounted to approximately $ 0.2 million, $ 2.5 million and $ 3.9 million in the Predecessor 2014 Period, the Successor 2014 Period and the Successor 2015 Period, respectively.

Net income (loss) per common share

Basic net income (loss) per common 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 convertible preferred stock and stock options outstanding during the period, to the extent such securities would not be anti-dilutive, and is determined using the “if converted” method and “treasury stock” method, respectively.

 

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Table of Contents

J.A. Cosmetics Holdings, Inc. and subsidiaries

Notes to consolidated financial statements

 

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:

 

Standard    Description    Date of expected
adoption/adoption
   Effect on the financial
statements or other
significant matters
Standards that are not yet adopted
ASU 2014-09, Revenue from Contracts with Customers (Topic 606)    The standard will replace existing revenue recognition standards and significantly expand the disclosure requirements for revenue arrangements. It may be adopted either retrospectively or on a modified retrospective basis to new contracts and existing contracts with remaining performance obligations as of the effective date.    January 1, 2018    The Company is currently evaluating the alternative methods of adoption and the effect on its financial statements and related disclosures.
ASU 2014-12, Compensation—Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period    The standard will require that a performance target in a share-based payment award that affects vesting and that can be achieved after the requisite service period is completed, to be accounted for as a performance condition. Compensation cost would be recognized in the period in which it becomes probable that the performance target will be achieved, and the amount of compensation cost recognized should be based on the portion of the service period fulfilled. The standard may be adopted either prospectively or retrospectively as of the effective date.    January 1, 2016    The Company is currently evaluating the effect of the standard on its financial statements and related disclosures.
ASU 2016-02, Leases (Topic 842)    The standard will require lessees to recognize a right-of-use asset and a lease liability for virtually all of their leases (other than leases that meet    January 1, 2019    The Company is currently evaluating the effect of the standard on its financial statements and related disclosures.

 

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Table of Contents

J.A. Cosmetics Holdings, Inc. and subsidiaries

Notes to consolidated financial statements

 

Standard    Description    Date of expected
adoption/adoption
   Effect on the financial
statements or other
significant matters
   the definition of a short-term lease). The liability will be equal to the present value of lease payments. The asset will be based on the liability, subject to adjustment, such as for initial direct costs. Lessor accounting is similar to the current model, but updated to align with certain changes to the lessee model (e.g., certain definitions, such as initial direct costs, have been updated) and the new revenue recognition standard.      
Standards that were adopted         
ASU No. 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs    The standard requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the corresponding debt liability rather than as an asset.    December 31, 2014    The Company early adopted this ASU in connection with its annual reporting period ended December 31, 2014. This resulted in the reclassification of $ 4.3 million of debt issue costs, which had been previously reported within other assets, to offset the bank debt balance on the balance sheet.
ASU 2015-17, Income Taxes—Balance Sheet Classification of Deferred Taxes    The standard requires all deferred tax liabilities and assets to be presented in the balance sheet as noncurrent.    December 31, 2014    The Company early adopted this ASU in connection with its annual reporting period ended December 31, 2014. In light of the process simplification provided by this ASU, this resulted in the reclassification of $ 2.3 million of current deferred tax assets from current assets to long-term assets.

 

Note 3—Acquisition of JACUS and subsidiaries

On January 31, 2014 (the “Acquisition Date”), the Company acquired 100% of the outstanding shares of capital stock of JACUS, a developer and marketer of branded value-priced cosmetics, from the Sellers.

 

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Table of Contents

J.A. Cosmetics Holdings, Inc. and subsidiaries

Notes to consolidated financial statements

 

JACUS serves as the operating entity of the Company and was incorporated in the State of Delaware in November 2010. Wholesale operations of JACUS consist of sales to retailers in the United States and international distributors in various countries including Australia, Canada and France. JACUS has a warehouse distribution center in New Jersey. Products are also sold directly to consumers through e.l.f. stores located in the New York metro area and online operations. JACUS’s products are developed and marketed under the e.l.f. Cosmetics brand name.

The total purchase price was $ 271.0 million consisting of $ 239.1 million in cash ( $ 237.9 million net of cash acquired), the issuance of 29,978 shares of the Company’s convertible preferred stock and 6,126 shares of its common stock with an aggregate fair value of $ 30.0 million, and contingent consideration of $ 1.9 million related to certain pre-acquisition tax benefits payable to the Seller. As of December 31, 2015, $ 1.9 million of the tax benefit payable to the Seller remained unpaid.

To fund the cash portion of the acquisition, the Company raised, in aggregate, $ 250.0 million, of which $ 145.0 million was drawn down from two credit facilities and $ 105.0 million was contributed by TPG (through TPG Elf Holdings, LP, a wholly-owned subsidiary of TPG, and co-investors) and various other parties including certain executives of the Company and several of the credit facility lenders, in exchange for 105,063 shares of the Company’s convertible preferred stock and 21,467 shares of common stock. In connection with the arrangement of the credit facilities, the Company incurred, in aggregate, $ 5.3 million in deferred financing costs. Refer to Note 8 for further discussion of credit facilities.

Purchase price allocation

The Company has accounted for the acquisition as a business combination in accordance with ASC 805, whereby the purchase price paid to effect the acquisition was allocated to tangible assets acquired, liabilities assumed and identifiable intangible assets acquired based on their estimated fair values with the excess of the purchase consideration over the aggregate fair values recorded as goodwill. The value of goodwill was 58% of the total purchase consideration and is primarily attributable to the assembled workforce and expected future growth. The goodwill is not deductible for tax purposes.

The acquisition provided the Company with three intangible assets: (i) customer relationships with useful lives ranging from three to 10 years, (ii) favorable leases with useful lives ranging from 27 to 71 months and (iii) an indefinite-lived trademark (See Note 4—Goodwill and intangible assets). The customer relationships asset represents the value resulting from the Company’s relationships with its retail customers and e-commerce consumers. The favorable leases asset represents the value associated with the leasehold interests associated with the Company’s office and warehouse locations in New York and New Jersey. The trademark asset represents the value resulting from the popularity and recognition of the e.l.f. Cosmetics brand. The fair values of the acquired customer relationships were based on the excess earnings method and are subject to amortization on a straight-line basis over their remaining useful lives. The fair values of the acquired favorable leases were based on the difference between the actual lease rates and the-then current market rent for similar properties in those locations. The fair value of the acquired trademark was based on the relief from royalty method. In addition, the acquisition resulted in a fair market adjustment to acquired inventory of $ 1.3 million, the fair value of which was based on the expected selling price less disposal costs and a reasonable profit margin. The Company incurred $ 2.8 million in acquisition-related costs, which were expensed and included within selling, general and administrative expenses in the Successor 2014 Period.

 

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Table of Contents

J.A. Cosmetics Holdings, Inc. and subsidiaries

Notes to consolidated financial statements

 

The following table summarizes the consideration paid and the fair values of the assets acquired and liabilities assumed at the Acquisition Date (in thousands):

 

      Amount  

Tangible assets acquired

   $ 51,755   

Intangible asset—customer relationships retailers

     68,800   

Intangible asset—customer relationships e-commerce

     3,800   

Intangible asset—trademark

     63,800   

Intangible asset—favorable leases

     580   

Goodwill

     157,264   

Liabilities assumed

     (74,990
  

 

 

 

Fair value of total purchase consideration

   $ 271,009   

 

 

Unaudited pro forma financial information

In accordance with ASC 805, the following unaudited pro forma financial information presents the combined results of continuing operations for the year ended December 31, 2014, as if the acquisition had been completed on January 1, 2014. Unaudited pro forma financial information is not required to be presented for the year ended December 31, 2015 as the actual combined results of the acquisition are already reflected in the consolidated financial statements for this period. The unaudited pro forma results do not reflect any operating efficiencies or potential cost savings that may result from the consolidation of operations.

The unaudited pro forma financial information should not be relied upon as necessarily being indicative of the historical results that would have been obtained if the acquisition had actually occurred on that date or the results that will be obtained in the future.

 

(in thousands)    Year ended
December 31, 2014
 

Net sales

   $ 144,944   

Net loss

   $ (9,778

 

 

Note 4—Goodwill and intangible assets

Information regarding the Company’s goodwill and intangible assets as of December 31, 2014 is as follows (in thousands):

 

      Successor  
      Estimated
useful life
     Gross
carrying
amount
     Accumulated
amortization
    Net carrying
amount
 

Customer relationships—retailers

     10 years       $ 68,800       $ (6,307   $ 62,493   

Customer relationships—e-commerce

     3 years         3,800         (1,161     2,639   

Favorable leases

     Varies         580         (84     496   
     

 

 

 

Total finite-lived intangibles

        73,180         (7,552     65,628   

Trademarks

     Indefinite         63,800                63,800   

Goodwill

        157,264                157,264   
     

 

 

 

Total goodwill and other intangibles

      $ 294,244       $ (7,552   $ 286,692   

 

 

 

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Table of Contents

J.A. Cosmetics Holdings, Inc. and subsidiaries

Notes to consolidated financial statements

 

Information regarding the Company’s goodwill and intangible assets as of December 31, 2015 is as follows (in thousands):

 

      Successor  
      Estimated
useful life
     Gross
carrying
amount
     Accumulated
amortization
    Net carrying
amount
 

Customer relationships—retailers

     10 years       $ 68,800       $ (13,187   $ 55,613   

Customer relationships—e-commerce

     3 years         3,900         (2,436     1,464   

Favorable leases

     Varies         580         (175     405   
     

 

 

 

Total finite-lived intangibles

        73,280         (15,798     57,482   

Trademarks

     Indefinite         63,800                63,800   

Goodwill

        157,264                157,264   
     

 

 

 

Total goodwill and other intangibles

      $ 294,344       $ (15,798   $ 278,546   

 

 

The Company did not recognize any impairment charges during the Successor 2014 Period or the Successor 2015 Period. Amortization expense on the finite-lived intangible assets amounted to $ 11,000, $ 7.6 million and $ 8.2 million in the Predecessor 2014 Period, the Successor 2014 Period and Successor 2015 Period, respectively.

As a result of the acquisition, the $ 0.7 million carrying value of the Predecessor’s goodwill as of January 31, 2014, was eliminated and new goodwill was recorded by the Successor on February 1, 2014. In addition, the Predecessor’s $ 0.6 million in historical finite-lived intangible assets was stepped-up to fair value at the time of the acquisition by the Successor. The Predecessor did not recognize any impairment charges during the Predecessor 2014 Period.

The estimated future amortization expense related to the finite-lived intangible assets, assuming no impairment as of December 31, 2015, is as follows (in thousands):

 

Year ending December 31,    Amortization  

2016

   $ 8,279   

2017

     7,121   

2018

     7,007   

2019

     6,982   

2020

     6,880   

Thereafter

     21,213   
  

 

 

 

Total

   $ 57,482   

 

 

Note 5—Property and equipment

Property and equipment as of December 31, 2014 and 2015 consists of the following (in thousands):

 

      Successor  
     December 31,  
      2014     2015  

Machinery, equipment and software

   $ 924      $ 1,322   

Leasehold improvements

     1,023        1,880   

Furniture and fixtures

     417        625   

Store fixtures

     136        8,147   
  

 

 

 

Property and equipment, gross

     2,500        11,974   

Less: accumulated depreciation and amortization

     (375     (2,120
  

 

 

 

Property and equipment, net

   $ 2,125      $ 9,854   

 

 

 

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Table of Contents

J.A. Cosmetics Holdings, Inc. and subsidiaries

Notes to consolidated financial statements

 

Depreciation and amortization expense on property and equipment were $ 30,000, $ 0.4 million and $ 2.0 million in the Predecessor 2014 Period, the Successor 2014 Period and the Successor 2015 Period, respectively. Included in depreciation and amortization of property and equipment is amortization expense for store fixtures which were $ 0, $ 3,000 and $ 1.3 million for the Predecessor 2014 Period, the Successor 2014 Period and the Successor 2015 Period, respectively. There were no store fixtures during the Predecessor 2014 Period.

Note 6—Fair value of financial instruments

The fair value of foreign currency forward contracts and bank debt are categorized based upon the level of judgment associated with the inputs used to measure their fair values. Fair value is measured using inputs from the three levels of the fair value hierarchy, which are described as follows:

Level 1 —Quoted prices in active markets for identical assets or liabilities

Level 2 —Quoted prices for similar assets and liabilities in active markets or inputs that are observable

Level 3 —Inputs that are unobservable (for example, cash flow modeling inputs based on management’s assumptions)

The assets’ or liabilities’ fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The Company’s Level 2 instruments consist of foreign currency forward contracts for which fair values were based on market prices obtained from independent brokers or determined using quantitative models that use as their basis readily observable market parameters that are actively quoted and can be validated through external sources, including third-party pricing services, brokers and market transactions.

The following table sets forth the fair value of the Company’s foreign currency forward contracts and bank debt by level within the fair value hierarchy (in thousands):

 

      Successor  
      December 31, 2014  
      Fair value      Level 1      Level 2      Level 3  

Financial liabilities:

           

Foreign currency forward contracts(1)

   $ 5,961       $       $ 5,961       $   

Bank debt(2)

     152,681                 152,681           
  

 

 

 

Total financial liabilities

   $ 158,642       $       $ 158,642       $   

 

 

 

(1)   Of this amount, $ 1,858 is classified as current.

 

(2)   Of this amount, $ 12,275 is classified as current. The gross carrying amounts of the Company’s bank debt, before reduction of the debt issuance costs, approximate their fair values as the stated rates approximate market rates for loans with similar terms.

 

      Successor  
      December 31, 2015  
      Fair value      Level 1      Level 2      Level 3  

Financial liabilities:

           

Foreign currency forward contracts(1)

   $ 10,702       $       $ 10,702       $   

Bank debt(2)

     148,106                 148,106           
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial liabilities

   $ 158,808       $       $ 158,808       $   

 

 

 

(1)   Of this amount, $ 10,702 is classified as current.

 

(2)   Of this amount, $ 10,325 is classified as current. The gross carrying amounts of the Company’s bank debt, before reduction of the debt issuance costs, approximate their fair values as the stated rates approximate market rates for loans with similar terms.

 

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J.A. Cosmetics Holdings, Inc. and subsidiaries

Notes to consolidated financial statements

 

The Company did not transfer any assets measured at fair value on a recurring basis to or from Level 2 for any of the periods presented.

Note 7—Derivatives

The Company generally uses forward contracts to economically hedge the impact of the variability in exchange rates on contracts with its suppliers in China for future purchases of inventories denominated in RMB. The Company does not designate any of the forward contracts as hedges and does not apply hedge accounting. All forward contracts are recorded at fair value on the consolidated balance sheet. In the Predecessor 2014 Period, the Successor 2014 Period and the Successor 2015 Period, realized and unrealized losses of $ 0.1 million, $ 6.9 million and $ 7.9 million, respectively, from the Company’s forward contracts were recognized in other income (expense), net in the consolidated statements of operations and comprehensive income (loss).

The Company generally does not hedge the net assets of its international subsidiaries.

As of December 31, 2014 and December 31, 2015, the aggregate notional amount of the Company’s outstanding forward contracts was as follows (in thousands):

 

      Successor  
      Notional  
Derivatives not designated as hedging instruments    December 31, 2014      December 31, 2015  

Foreign currency contracts

   $ 240,500       $ 148,978   

 

 

The Company’s derivative transactions are governed by ISDA Master Agreements, which include provisions governing the setoff of assets and liabilities between the parties. When the Company has more than one outstanding derivative transaction with a single counterparty, the setoff provisions contained within these agreements generally allow the non-defaulting party the right to reduce its liability to the defaulting party by amounts eligible for setoff as well as eligible offsetting transactions with that counterparty, irrespective of the currency, place of payment or booking office. The Company’s policy is to present its derivative assets and derivative liabilities on the consolidated balance sheets on a net basis.

 

      Successor  

As of December 31, 2014

(in thousands)

  

Net amount
recognized
in the
consolidated

balance
sheet

     Gross
amounts
offset in the
consolidated
balance
sheets
     Gross amount  

Liabilities:

        

Foreign currency contracts

   $ 5,961       $       $ 5,961   
  

 

 

 

Total liabilities

   $ 5,961       $       $ 5,961   

 

 

 

      Successor  

As of December 31, 2015

(in thousands)

  

Net amount
recognized
in the
consolidated

balance
sheet

     Gross
amounts
offset in the
consolidated
balance
sheets
     Gross amount  

Liabilities:

        

Foreign currency contracts

   $ 10,702       $       $ 10,702   
  

 

 

 

Total liabilities

   $ 10,702       $       $ 10,702   

 

 

 

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J.A. Cosmetics Holdings, Inc. and subsidiaries

Notes to consolidated financial statements

 

Note 8—Debt

The Company’s outstanding debt as of December 31, 2014 and 2015 consists of the following (in thousands):

 

      Successor  
     December 31,  
      2014     2015  

Debt:

    

Revolving credit facility

   $ 9,650      $ 7,700   

Term loan

     103,031        100,406   

Second lien term loan

     40,000        40,000   
  

 

 

 

Total debt

     152,681        148,106   

Less: debt issuance costs

     (4,257     (3,187
  

 

 

 

Total debt, net of issuance costs

     148,424        144,919   

Less: current portion of debt

     (12,275     (10,325
  

 

 

 

Long-term portion of debt

   $ 136,149      $ 134,594   

 

 

Senior secured credit facility

In conjunction with the Company’s acquisition of JACUS on January 31, 2014, as discussed in Note 3, the Company entered into a 5 year, $ 125.0 million senior secured credit facility with a syndicate consisting of several large financial institutions. The facility consists of a $ 20.0 million revolving line of credit (the “Revolving Credit Facility”) and a $ 105.0 million term loan (the “Term Loan”).

The key terms of the Revolving Credit Facility and Term Loan were as follows:

All amounts under the Revolving Credit Facility are available for draw until the maturity date on January 31, 2019. The Revolving Credit Facility is collateralized by substantially all of the Company’s assets and has a commitment fee of 0.5% of unused balance, payable quarterly in arrears. The Revolving Credit Facility also provides for sub-facilities in the form of a $ 5.0 million letter of credit and a $ 2.0 million swing line loan; however, all amounts under the Revolving Credit Facility cannot exceed $ 20.0 million. The unused balance of the Revolving Credit Facility as of December 31, 2015 was $ 12.3 million.

The Term Loan will mature on January 31, 2019, and is collateralized by substantially all of the Company’s assets. The Term Loan will be repaid in quarterly installments equal to 2.5% per year of the original principal with the remaining Term Loan balance due upon the maturity date. The Term Loan can be prepaid at any time without penalty and is subject to mandatory prepayments when there is (i) excess cash flow, (ii) asset dispositions that, individually, result in net proceeds in excess of $ 1.0 million, or, in aggregate, in excess of $ 2.0 million during a year, or (iii) issuance of additional debt. The Term Loan requires an annual administrative fee of $ 50,000.

Aggregate future minimum principal payments on the Term Loan are as follows (in thousands):

 

   

Year ending December 31,

  

2016

   $ 2,625   

2017

     2,625   

2018

     2,625   

2019

     92,531   
  

 

 

 

Total

   $ 100,406   

 

 

 

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J.A. Cosmetics Holdings, Inc. and subsidiaries

Notes to consolidated financial statements

 

Both the Revolving Credit Facility and the Term Loan carry interest, at the Company’s option, at (i) a rate per annum equal to the greater of Adjusted LIBOR (subject to a minimum floor of 1.25%) plus an applicable margin or (ii) a floating base rate plus an applicable margin. The interest rate on both the Revolving Credit Facility and the Term Loan was 6.25% per annum as of December 31, 2014 and 2015.

The Company incurred costs directly related to the senior secured credit facility of $ 4.2 million, consisting primarily of underwriting fees of $ 2.5 million, an upfront fee of $ 1.3 million and legal fees of $ 0.4 million, which were recorded as a reduction of the carrying amount of the debt and are being amortized over the term of the senior secured credit facility.

The Company is also subject to certain reporting and financial covenants to remain in good standing under the senior secured credit facility. As of December 31, 2014 and 2015, the Company was in compliance with all financial covenants.

Second lien term loan

In conjunction with the above credit facility, the Company entered into a $ 40.0 million subordinated second lien term loan (the “Second Lien Term Loan”) also on January 31, 2014. The Second Lien Term Loan does not require any principal payments until maturity on July 31, 2019. The Second Lien Term Loan is secured by substantially all of the Company’s assets but subordinated to the senior security credit facility. The Second Lien Term Loan requires prepayment penalties if prepaid prior to the maturity date, and not in conjunction with a change-in-control of the Company, in the amount of 4% of amounts prepaid in year one, 2% in year two and 1% in year three, and requires prepayment penalties of 1% if prepaid on or prior to the end of year three in conjunction with a change-in-control. The Second Lien Term Loan carries interest equal to Adjusted LIBOR plus 10.0% per annum, with Adjusted LIBOR equal to the higher of (i) LIBOR for U.S. dollars, adjusted for customary Eurodollar reserve requirements, if any, and (ii) 1.0%. As of December 31, 2014 and 2015, the Second Lien Term Loan carried interest at a rate of 11% per annum.

The Company incurred costs directly related to the second lien term loan of $ 1.1 million, consisting primarily of an upfront fee of $ 0.8 million and legal fees of $ 0.3 million, which were recorded as a reduction of the carrying amount of the debt and are being amortized over the term of the second lien term loan.

The Company recognized, in aggregate, interest expense of $ 1.0 million and $ 1.1 million related to the accretion of financing costs during the Successor 2014 Period and the Successor 2015 Period, respectively, and the remaining balance of the unamortized financing costs was $ 4.3 million and $ 3.2 million as of December 31, 2014 and 2015, respectively.

The Predecessor recognized, in aggregate, interest expense of $ 0.1 million on the outstanding balance under its term loan during the Predecessor 2014 Period. The outstanding balance under this term loan was $ 29.8 million as of January 31, 2014, and was repaid by the Company at the time of the acquisition.

Note 9—Commitments and contingencies

Operating leases

The Company leases office, retail and warehouse space in New York, New Jersey, California and China from third parties under non-cancelable operating leases that provide for minimum base annual rental payments (excluding taxes and other charges). The leases expire between 2016 and 2025. Total rent expense was $ 0.1 million, $ 1.9 million and $ 3.0 million for the Predecessor 2014 Period, the Successor 2014 Period and the Successor 2015 Period, respectively.

JACUS subleases a small portion of a facility at Saddle Brook, New Jersey to a relative of a former executive officer of the Company, through 2016 with yearly rental commitments under this sublease in the range of $ 60,000 to $ 65,000.

 

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J.A. Cosmetics Holdings, Inc. and subsidiaries

Notes to consolidated financial statements

 

Future minimum lease payments under the operating leases are as follows (in thousands):

 

   

Year ending December 31,

  

2016

   $ 2,564   

2017

     2,862   

2018

     2,743   

2019

     2,595   

2020

     2,087   

Thereafter

     2,035   
  

 

 

 

Total

   $ 14,886   

 

 

Litigation

From time to time, the Company may become involved in legal proceedings, claims, and litigation arising in the ordinary course of business. Management is not currently aware of any matters that it expects will have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

Note 10—Income taxes

The following table presents the components of income (loss) before income taxes for the Predecessor 2014 Period, Successor 2014 Period and the Successor 2015 Period (in thousands):

 

      Predecessor                   Successor  
      Period from
January 1, 2014
through
January 31, 2014
                  Period from
February 1, 2014
through
December 31, 2014
    Year ended
December 31, 2015
 

Domestic

   $ 1,709            $ (13,517   $ 8,053   

Foreign

     (74           686        625   
  

 

 

         

 

 

   

 

 

 

Total

   $ 1,635            $ (12,831   $ 8,678   

 

 

 

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Table of Contents

J.A. Cosmetics Holdings, Inc. and subsidiaries

Notes to consolidated financial statements

 

The components of the provision for income taxes Predecessor 2014 Period, Successor 2014 Period and Successor 2015 Period were as follows (in thousands):

 

      Predecessor                    Successor  
      Period from
January 1, 2014
through
January 31, 2014
                   Period from
February 1, 2014
through
December 31, 2014
    Year ended
December 31, 2015
 
 

Current:

             

U.S. Federal

   $ 1,394             $ (363   $ (6,837

State

     (5            (111     (1,026

Foreign

     18               (257     (391
  

 

 

          

 

 

 

Total current

     1,407               (731     (8,254
 

Deferred:

             

U.S. Federal

     (1,881            3,881        3,710   

State

     (68            324        201   

Foreign

                   71        22   
  

 

 

          

 

 

 

Total deferred

     (1,949            4,276        3,933   
  

 

 

          

 

 

 

Total (provision) benefit for income taxes

   $ (542          $ 3,545      $ (4,321

 

 

The reconciliation of the federal income tax to the Company’s provision for income taxes is as follows (in thousands):

 

      Predecessor                   Successor  
      Period from
January 1, 2014
through
January 31, 2014
                  Period from
February 1, 2014
through
December 31, 2014
    Year ended
December 31, 2015
 

Expected provision at statutory federal rate

   $ (556         $ 4,363      $ (3,037

State tax—net of federal benefit

     (28           223        (215

Impact of foreign operations

     (7           126        13   

U.S. subpart F income

                  (281     (218

Nondeductible transaction-related costs

                  (832       

Uncertain tax positions

                  (25     (460

Others

     49              (29     (404
  

 

 

         

 

 

 

Total (provision) benefit for income taxes

   $ (542           3,545        (4,321

 

 

 

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Table of Contents

J.A. Cosmetics Holdings, Inc. and subsidiaries

Notes to consolidated financial statements

 

The following tables present the significant components of the Company’s deferred tax assets and liabilities as of December 31, 2014 and 2015 (in thousands):

 

      Successor  
     December 31,  
      2014      2015  

Deferred tax assets:

     

Compensation

   $ 1,986       $ 1,969   

Inventories

     1,014         1,604   

Accrued expenses

     175         2,120   

Stock compensation

     106         238   

Net operating losses

     32           

Other

     148         446   
  

 

 

 

Deferred tax assets

     3,461         6,377   

Deferred tax liabilities:

     

Goodwill

     771         1,614   

Fixed assets

     491         1,620   

Intangible assets

     47,479         44,493   

Other

     517         514   
  

 

 

 

Deferred tax liabilities

     49,258         48,241   
  

 

 

 

Net deferred tax liabilities

   $ 45,797       $ 41,864   

 

 

The deferred tax assets and liabilities within the same jurisdiction are reported net in the accompanying balance sheets as follows (in thousands):

 

      Successor  
     December 31,  
      2014      2015  

Noncurrent deferred tax assets

   $ 240       $ 262   

Noncurrent deferred tax liabilities

     46,037         42,126   
  

 

 

 

Net deferred tax liability

   $ 45,797       $ 41,864   

 

 

The Company had $ 0.6 million of state net operating carryforwards as of December 31, 2014 and had no state net operating carryforwards as of December 31, 2015.

 

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Table of Contents

J.A. Cosmetics Holdings, Inc. and subsidiaries

Notes to consolidated financial statements

 

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):

 

      Unrecognized
tax benefits
 

Gross UTB’s as of December 31, 2013 (Predecessor)

   $ 581   

Additions for tax positions taken in a prior year

       

Additions for tax positions taken in the current year

       

Reductions for tax positions taken in the prior year due to settlement

       

Reductions for tax positions taken in the prior year due to statutes lapsing

       
  

 

 

 

Gross UTB’s as of January 31, 2014 (Predecessor)

     581   

Additions for tax positions taken in a prior year

       

Additions for tax positions taken in the current year

     26   

Reductions for tax positions taken in the prior year due to settlement

       

Reductions for tax positions taken in the prior year due to statuses lapsing

       
  

 

 

 

Gross UTB’s as of December 31, 2014 (Successor)

     607   

Additions for tax positions taken in a prior year

     1   

Additions for tax positions taken in the current year

     648   

Reductions for tax positions taken in the prior year due to settlement

       

Reductions for tax positions taken in the prior year due to statuses lapsing

       
  

 

 

 

Gross UTB’s as of December 31, 2015 (Successor)

   $ 1,256   

 

 

If all of the Company’s unrecognized tax benefits as of December 31, 2014 and December 31, 2015 were recognized, $ 0.6 million and $ 1.0 million of unrecognized tax benefits, respectively, would affect the effective tax rate. The Company does not expect any significant changes to the amount of unrecognized tax benefits in the next twelve months.

In connection with the adoption of the above provisions, the Company recognizes interest and penalties accrued related to unrecognized tax benefits in the provision for income taxes. The Company had $ 0 and $ 31,000 of accrued gross interest and penalties as of December 31, 2014 and December 31, 2015, respectively. The Company recognized net interest expense of $ 20,000 for the Successor 2015 Period. The Company did not recognize any net interest expense during the Predecessor 2014 Period and the Successor 2014 Period.

The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. As of December 31, 2015, with few exceptions, the Company or its subsidiaries are no longer subject to examination prior to tax year 2012. Certain state returns are currently under audit by the state tax authorities. The Company does not expect the results of these audits to have a material impact on the consolidated financial statements.

Note 11—Convertible preferred stock

The Company has authorized 200,000 shares of convertible preferred stock for issuance with a par value of $ 0.01 per share. In conjunction with the acquisition of the Predecessor, 135,041 shares of convertible preferred stock were issued for a total consideration of approximately $ 135.0 million. At December 31, 2014 and 2015, 135,041 shares of convertible preferred stock were issued and outstanding.

The Company’s convertible preferred stock has been classified as temporary equity in the accompanying consolidated balance sheets in accordance with ASC 480, Distinguishing Liabilities from Equity , as the convertible preferred stock is redeemable at the option of the holder and is also redeemable, if not converted to common stock, at the time of an IPO. In conjunction with this classification, the Company has accreted the carrying value of the convertible preferred stock to reflect its maximum redemption amount as of December 31, 2014 and 2015, respectively. The maximum redemption amount is the

 

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Table of Contents

J.A. Cosmetics Holdings, Inc. and subsidiaries

Notes to consolidated financial statements

 

greater of the convertible preferred stock liquidation value (including dividends) or the as-converted value based on the per share common stock price. The Company accounts for the accretion of convertible preferred stock as a reduction from amounts available for distribution to common stockholders.

The holders of the convertible preferred stock have the following rights, preferences and privileges:

Voting

The holders of the convertible preferred stock are entitled to the number of votes equal to the number of shares of common stock into which such convertible preferred stock is convertible.

Conversion rights

Holders of preferred stock may convert all or any portion of the convertible preferred stock into common stock at any time. The number of shares of common stock to be issued upon conversion of the convertible preferred stock will be determined by multiplying the number of shares of convertible preferred stock to be converted by $ 1,000 and dividing the result by the conversion price then in effect at that time, but is subject to downward revision if the Company subsequently issues dilutive securities at a lower than market price. As of December 31, 2014 and 2015, the conversion price was equal to $ 3.62 but is subject to adjustment upon any standard stock-splits, stock dividends or recapitalization of the Company.

Dividend rights

Holders of the convertible preferred stock are entitled to receive cumulative dividends at the rate of 8% per annum of $ 1,000 plus all accumulated and unpaid dividends, if and when declared by the board of directors.

Liquidation preferences

Upon any liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, holders of the convertible preferred stock are entitled to be paid the greater of (i) the liquidation value plus all accrued and unpaid dividends (the “liquidation value”) or (ii) the amount to which the holder would be entitled to receive upon liquidation or winding-up of the Company, if all shares of convertible preferred stock converted to common stock (the “conversion value”). For the Successor 2014 Period, the Company accreted $ 10.3 million, which represents dividends at the rate of 8% per annum. For the Successor 2015 Period, the Company accreted $ 52.0 million, which represents the conversion value.

Redemption rights

The Company may redeem, at any time prior to the potential IPO, any portion of the convertible preferred stock then outstanding provided no redemption may be made for less than $ 25.0 million, and shall redeem all outstanding convertible preferred stock on occurrence of the Company’s potential IPO. Upon redemption, the Company shall pay the greater of (i) the liquidation value or ii) the conversion value.

Note 12—Stock-based compensation

The Company grants stock-based awards under its 2014 Equity Incentive Plan (the Plan). The Plan permits the grant of incentive stock options, non-statutory stock options, restricted stock and other stock- or cash-based awards to employees, officers, directors, advisors and consultants. The Plan allows for option grants of the Company’s common stock based on time, performance and market conditions. There were a total of 8,172,067 shares and 9,460,556 shares reserved for grant under the Plan as of December 31, 2014 and 2015, respectively. 1,595,553 shares and 607,276 shares remained available for future issuance under the Plan as of December 31, 2014 and 2015, respectively.

 

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Table of Contents

J.A. Cosmetics Holdings, Inc. and subsidiaries

Notes to consolidated financial statements

 

Service-based options

A summary of the Company’s stock option activity and related information is as follows:

 

      Options outstanding  
      Shares
subject to
options
outstanding
    Weighted-
average
exercise
price
     Weighted-
average
remaining
contractual
life (years)
    

Aggregate
intrinsic
values

(in thousands)

 

Balance as of January 31, 2014

                              

Granted

     3,019,449      $ 3.62         9.2       $   

Exercised

                              

Forfeited

                              
  

 

 

         

Balance as of December 31, 2014

     3,019,449      $ 3.62         9.2           

Granted

     1,491,413      $ 3.71         9.6           

Exercised

     (6,900   $ 3.62                 12   

Forfeited

     (506,460   $ 3.62                   
  

 

 

         

Balance as of December 31, 2015

     3,997,502      $ 3.66         8.7         6,550   
  

 

 

         

Vested and expected to vest(1) as of December 31, 2015

     3,433,103      $ 3.65         8.7       $ 5,636   
  

 

 

         

Exercisable as of December 31, 2015

     660,744      $ 3.62         8.3       $ 1,104   

 

 

 

(1)   The number of shares subject to options expected to vest takes into account an estimate of expected forfeitures.

The weighted-average grant date fair value of stock options granted during the Successor 2014 Period and Successor 2015 Period was $ 0.60 and $ 0.99 per share, respectively.

There was no stock-based compensation expense recognized in the Predecessor 2014 Period. Stock-based compensation cost recorded in the Successor 2014 Period and in the Successor 2015 Period was $ 0.3 million and $ 0.5 million, respectively.

As of December 31, 2015, there was $ 1.9 million of total unrecognized compensation cost related to non-vested share-based compensation, which is expected to be recognized over the remaining weighted-average vesting period of 3.8 years.

The intrinsic value of options vested and expected to vest and become exercisable is calculated based on the difference between the exercise price and the fair value of the Company’s common stock as of December 31, 2014 and 2015.

During 2014, the Company estimated the grant date fair value of stock options granted pursuant to the Plan by first computing the fair value using a Black-Scholes option-pricing model under three potential liquidity scenarios and then applying a probability weighting of each scenario. The estimated grant date fair value includes the following weighted-average assumptions as of December 31, 2014 and 2015, with each assumption reflecting the weighting that was assigned to each scenario:

 

      Successor  
     December 31,  
      2014      2015  

Estimated fair values of common stock

   $ 2.33       $ 5.29   

Expected term (in years)

     4.7         4.1   

Expected volatility

     45.00%         40.92%   

Risk-free interest rate

     1.34%         1.51%   

Expected dividend yield

     0%         0%   

 

 

 

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Table of Contents

J.A. Cosmetics Holdings, Inc. and subsidiaries

Notes to consolidated financial statements

 

The determination of the fair value of stock options on the date of grant using a Black-Scholes option-pricing model is affected by the estimated fair value of the underlying common stock, as well as assumptions regarding a number of variables that are complex, subjective and generally require significant judgment. The assumptions used in the Black-Scholes option-pricing model to calculate the fair value of stock options were:

Fair value of common stock

The fair value of shares of common stock underlying the stock options has historically been the responsibility of and determined by the Company’s board of directors, with input from management. Because there is no public market for the Company’s common stock the board of directors determined the fair value of common stock at the time of grant of the option by considering a number of objective and subjective factors including independent third-party valuations of the Company’s common stock, operating and financial performance, the lack of liquidity of capital stock and general and industry specific economic outlook, among other factors.

Expected term

The expected term of the options represents the period of time that the options are expected to be outstanding. Options granted have a maximum contractual life of 10 years. The Company estimated the expected term of the option based on the estimated timing of potential liquidity events.

Expected volatility

As the Company does not have a trading history for its common stock, the expected stock price volatility for the common stock was estimated by taking the average historic price volatility for industry peers based on daily price observations over a period equivalent to the expected term of the stock option grants. Industry peers consist of several public companies within the same industry, which are of similar size, complexity and stage of development. The Company intends to continue to consistently apply this process using the same or similar public companies until a sufficient amount of historical information regarding the volatility of its own share price becomes available, or unless circumstances change such that the identified companies are no longer similar to the Company, in which case, more suitable companies whose share prices are publicly available would be used in the calculation.

Risk-free interest rate

The risk-free interest rate was based on the U.S. Treasury rate, with maturities similar to the expected term of the options.

Expected dividend yield

The Company does not anticipate paying any dividends in the foreseeable future. As such, the Company uses an expected dividend yield of zero.

In addition to the Black-Scholes assumptions discussed immediately above, the forfeiture rate of stock options is estimated at the time of grant and revised in subsequent periods if actual forfeitures differ from those estimates. The Company records stock-based compensation expense only for those awards that are expected to vest.

 

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Table of Contents

J.A. Cosmetics Holdings, Inc. and subsidiaries

Notes to consolidated financial statements

 

Performance-based options

 

      Options outstanding  
      Shares
subject to
options
outstanding
    Weighted-
average
exercise
price
     Weighted-
average
remaining
contractual
life (years)
    

Aggregate
intrinsic
values

(in thousands)

 

Balance as of January 31, 2014

                              

Granted

     3,557,057      $ 3.62         9.2       $   

Exercised

                              

Forfeited

                              
  

 

 

 

Balance as of December 31, 2014

     3,557,057      $ 3.62         9.2           

Granted

     1,482,114      $ 3.67         9.6           

Exercised

                              

Forfeited

     (190,302   $ 3.62                   
  

 

 

 

Balance as of December 31, 2015

     4,848,869      $ 3.64         8.6       $ 8,036   

 

 

For the Company’s performance-based options, in addition to the service condition, the ultimate number of shares to be earned depends on the achievement of both a performance and market condition. The performance condition is based on the occurrence of a liquidity event (e.g., initial public offering or change-in-control transaction). The market condition is based upon the achievement of a minimum rate of return from the liquidity event. In regards to the performance condition, awards granted prior to August 2015 generally provided that if the liquidity event occurs prior to January 31, 2016, the option holder is entitled to an additional number of shares assuming the minimum rate of return is achieved. No liquidity event occurred prior to January 31, 2016.

The weighted-average grant date fair value of performance-based options granted during the Successor 2014 Period and Successor 2015 Period was $ 0.40 and $ 0.50 per share, respectively.

The fair values were determined using a Monte Carlo simulation model, based on rate of return from a potential liquidity event that ranges from 3.0x to 6.5x. The rate of return is defined as the aggregate amount of distribution, dividends and sales proceeds received by equity holders, in a liquidity event, divided by the aggregate amount of original capital contribution made by these equity holders as of January 31, 2014. The model assumed a 16% chance of a change-in-control in the near term (nine months), a 24% chance of a change-in-control in the long term and a 60% chance of an initial public offering.

Because the achievement of the performance condition is not probable until a liquidity event (e.g., initial public offering or a change-in-control transaction) has occurred, no compensation expense was recognized during the Successor 2014 Period and the Successor 2015 Period, related to these performance-based options. As of December 31, 2015, there was $ 1.7 million of unrecognized stock-based compensation related to unvested performance-based awards.

Phantom shares

On November 14, 2014, the Company adopted the J.A. Cosmetics Holdings, Inc. 2014 Phantom Equity Plan (the “Phantom Plan”). The Phantom Plan authorizes the grant of up to 220,800 units of phantom equity to employees, directors and consultants of the Company and any of its subsidiaries. The phantom shares each represent a contractual right to payment of compensation in the future based on the amounts distributable to a holder of the Company’s common stock in connection with a sale of the Company (defined below), less the exercise price. The phantom shares do not represent shares of the Company’s common stock, and a recipient of phantom shares does not receive an ownership interest in the Company, stockholder voting rights or other incidents of ownership to the Company’s common stock.

 

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Table of Contents

J.A. Cosmetics Holdings, Inc. and subsidiaries

Notes to consolidated financial statements

 

The phantom shares vest immediately on sale of the majority of the Company’s outstanding common stock or substantially all of the Company’s assets (“sale of the Company”), and the phantom stockholder remains continuously employed by the Company from the date of grant through the date of a sale of the Company. Upon a sale of the Company, holders of a vested phantom share will receive a one-time cash payment in an amount equal to the difference between the fair market value of the amounts to be received by a holder of a share of the Company’s common stock in connection with the sale of the Company and the fair market value of a share of the Company’s common stock on the grant date, as set forth in the phantom shares award agreement. During the Successor 2014 Period and the Successor 2015 Period, the Company granted 131,100 and 62,100 phantom shares, respectively. As a cash payment is triggered only upon a sale of the Company, no compensation expense was recognized during the Successor 2014 Period and the Successor 2015 Period, related to these phantom shares. As of December 31, 2015, there was $ 0.3 million of unrecognized stock-based compensation related to the phantom shares; that cost is expected to be recognized upon sale of the Company.

Note 13—Employee benefit plan

The Company maintains a defined contribution 401(k) profit-sharing plan (the “401(k) Plan”) for eligible employees who are over the age of 21. Participants may make voluntary contributions up to the maximum amount allowable by law. The Company may make contributions to the 401(k) Plan on a discretionary basis which vest to the participants 100%. The Company elected not to make any contributions to the 401(k) Plan during the Successor 2014 Period. The Company made $ 18,000 of matching contributions to the 401(k) Plan during the Successor 2015 Period. The Predecessor elected not to make any contributions to the 401(k) Plan during the Predecessor 2014 Period.

Note 14—Related-party transactions

Successor

The Company rents office space in Shanghai, China from a lessor who is also an employee of the Company. During the Successor 2014 Period, the Company incurred $ 0.4 million in rent expense to this lessor, which is included under selling, general and administrative expenses. As of December 31, 2014, the Company had a $ 32,000 security deposit included in other current assets related to this lease. Further, as of December 31, 2014, the Company owed $ 0.8 million for consulting services to entities owned by this employee. In 2015, the employee ceased employment with the Company, and the lease was terminated; therefore these transactions were no longer disclosed as related-party transactions during the Successor 2015 Period.

Cosmopack and Promotions Plus, each a related party entity owned by a relative of a former executive officer, manage the Company’s distribution and fulfillment operations for the New Jersey warehouse and charge the Company for these services. During the Successor 2014 Period, the Company incurred $ 3.7 million for these services, which is reflected in selling, general and administrative expenses in the consolidated statement of operations. At December 31, 2014, the Company owed $ 0.3 million to these entities, and the balances have been included in due to related parties in the consolidated balance sheet. The former executive officer was an employee until December 31, 2014.

During the Successor 2014 Period and the Successor 2015 Period, the Company incurred $ 0.8 million and $ 0.9 million, respectively, in management and consulting fees to its majority stockholder, TPG. Amounts owed are included in due to related parties in the consolidated balance sheet.

Predecessor

The Predecessor rented office space in Shanghai, China from a lessor who is also an employee of JACUS. During the Predecessor 2014 Period, the Predecessor incurred $ 36,000 in rent expense to this lessor, which is included under selling, general and administrative expenses.

Cosmopack and Promotions Plus, each a related party entity owned by a relative of a former executive officer, manage JACUS’s distribution and fulfillment operations for the New Jersey warehouse and charges JACUS for these services. During the Predecessor 2014 Period, the Predecessor incurred $ 0.4 million for these services, which is reflected in selling, general

 

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Table of Contents

J.A. Cosmetics Holdings, Inc. and subsidiaries

Notes to consolidated financial statements

 

and administrative expenses in the consolidated statement of operations. The former executive officer was an employee until December 31, 2014.

Note 15—Net income (loss) per share

The following is a reconciliation of the numerator and denominator in the basic and diluted net income (loss) per common share computations (in thousands, except share data):

 

      Predecessor                   Successor  
      Period from
January 1,
2014
through
January 31,
2014
                  Period from
February 1,
2014 through
December 31,
2014
    Year ended
December 31,
2015
 
 

Numerator:

            

Net income (loss)

   $ 1,093            $ (9,286   $ 4,357   
 

Adjustments to numerator:

            

Convertible preferred stock—dividends

                  (10,287     (51,967
  

 

 

         

 

 

 

Net income (loss) available to common shareholders

     1,093              (19,573     (47,610
 

Denominator:

            

Weighted average number of shares outstanding—Basic

     1,000              27,593        30,523   

Weighted average number of shares outstanding—Diluted

     1,005              27,593        30,523   
 

Net income (loss) per common share:

            

Basic

   $ 1,093            $ (709   $ (1,560

Diluted

   $ 1,088            $ (709   $ (1,560
 

Anti-dilutive securities excluded from diluted EPS:

            

Service-based stock options

                  3,019,451        3,997,503   

Common shares underlying convertible preferred stock

                  37,271,375        37,271,375   
  

 

 

         

 

 

 

Total

                  40,290,826        41,268,878   

 

 

 

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Table of Contents

J.A. Cosmetics Holdings, Inc. and subsidiaries

Notes to consolidated financial statements

 

Unaudited pro forma net income per share

The unaudited pro forma net income per share reflects (i) the application of the proceeds from the sale of 4,000,000 shares from the proposed IPO (assuming the mid-point of the IPO price range) that are necessary to cover a portion of the $ 72 million dividend paid to stockholders on June 7, 2016, which was in excess of the Company’s historical earnings and (ii) the effect of conversion of the outstanding convertible preferred stock into common stock at the applicable conversion prices immediately prior to, and conditioned upon, the closing of this initial public offering.

The following table sets forth the computation of the Company’s unaudited pro forma basic and diluted net income per share of common stock (in thousands except share and per share data):

 

      Year ended
December 31,
2015
(unaudited)
 

Numerator:

  

Net income attributable to common stockholders—basic and diluted

   $ 4,357   

Denominator:

  

Basic:

  

Weighted-average number of shares outstanding—Basic

     30,523   

Add: Assumed conversion of convertible preferred stock

     37,271,375   

Add: Common shares offered hereby to fund the dividend in excess of earnings

     4,000,000   
  

 

 

 

Pro forma weighted average number of shares outstanding—Basic

     41,301,898   
  

 

 

 

Diluted:

  

Pro forma weighted average number of shares outstanding—Basic

     41,301,898   

Add: Weighted-average effect of dilutive securities:

  

Service-based stock options

     1,670,134   
  

 

 

 

Pro forma weighted average number of shares outstanding—Diluted

     42,972,032   

Pro forma net income per share:

  

Basic

   $ 0.11   

Diluted

   $ 0.10   

 

 

Note 16—Subsequent events

Management evaluates events occurring subsequent to the date of the financial statements in determining the accounting for and disclosure of transactions and events that affect the financial statements. Subsequent events have been evaluated through April 28, 2016, which is the date that the financial statements were issued.

The Plan was amended in January 2016 to allow certain employees to exercise options prior to vesting (“early exercise”). Upon termination of employment prior to full vesting, unvested shares acquired through early exercise are forfeited and are repurchased by the Company at lower of the exercise price and fair market value. Therefore, such unvested options are treated as outstanding.

In connection with the plan amendment in January 2016, the Company also extended loans to certain key management personnel (the “Debtors’”) totaling $ 10.4 million (the “2016 Notes”). The 2016 Notes served as financing for the Debtors’ 2016 exercise of previously issued stock options. The 2016 Notes are secured by the underlying shares and are full recourse to the respective Debtor’s personal assets. The 2016 Notes carry interest at between 0.75% and 0.81% per annum, due

 

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Table of Contents

J.A. Cosmetics Holdings, Inc. and subsidiaries

Notes to consolidated financial statements

 

semi-annually, and mature in January 2018 or earlier upon the occurrence of certain events specified in the Note agreements. Amounts due from employees in relation to the 2016 Notes will be reduced from stockholders’ equity. Cash received from Debtors for early exercise of unvested options is treated as a liability. Amounts so recorded are transferred into common stock and additional paid-in capital as the shares vest.

The Company entered into new lease agreements for e.l.f. stores with a minimum future lease commitment amount of $ 6.1 million.

The Company entered into agreements with third parties to manage distribution and fulfillment operations at its Ontario, California warehouse. In addition to reimbursing the third parties for costs incurred to perform these services, the Company is obligated to pay fixed amounts totaling $ 0.7 million towards these services over a period of 14 months.

With effect from April 26, 2016, the name of the Company was changed from J.A. Cosmetics Holdings, Inc. to e.l.f. Beauty, Inc.

 

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Table of Contents

e.l.f. Beauty, Inc. and subsidiaries

Condensed consolidated balance sheets

(unaudited)

(in thousands, except share and per share data)

 

                    Supplemental
pro forma
 
      December 31,
2015
    June 30,
2016
   

June 30,

2016(1)

 

Assets

      

Current assets:

      

Cash

   $ 14,004      $ 3,763      $ 3,763   

Accounts receivable, net

     22,475        21,611        21,611   

Inventories

     31,261        32,371        32,371   

Prepaid expenses and other current assets

     2,978        10,574        10,574   
  

 

 

 

Total current assets

     70,718        68,319        68,319   

Property and equipment, net

     9,854        14,281        14,281   

Intangible assets, net

     121,282        117,144        117,144   

Goodwill

     157,264        157,264        157,264   

Deferred tax assets

     262        262        262   

Other assets

     1,692        1,719        1,719   
  

 

 

 

Total assets

   $ 361,072      $ 358,989      $ 358,989   
  

 

 

 

Liabilities, convertible preferred stock and stockholders’ equity (deficit)

      

Current liabilities:

      

Current portion of long-term debt and capital lease obligations

   $ 10,325      $ 6,583      $ 6,583   

Accounts payable

     11,114        21,470        21,470   

Accrued expenses and other current liabilities

     13,713        15,079        15,079   

Foreign currency forward contracts

     10,702        5,417        5,417   
  

 

 

 

Total current liabilities

     45,854        48,549        48,549   

Long-term debt and capital lease obligations

     134,594        197,074        197,074   

Deferred tax liabilities

     42,126        40,215        38,700   

Other long-term liabilities

     1,601        9,551        9,551   
  

 

 

 

Total liabilities

     224,175        295,389        293,874   

Commitments and contingencies (Note 7)

      

Convertible preferred stock, par value of $ 0.01 per share; 200,000 shares authorized and 135,041 shares issued and outstanding as of June 30, 2016 and December 31, 2015; liquidation preference of $ 262,385 and $ 197,295 as of June 30, 2016 and December 31, 2015, respectively

     197,295        262,385          

Stockholders’ equity (deficit):

      

Common stock, par value of $ 0.01 per share; 13,800,000 shares authorized as of June 30, 2016 and December 31, 2015; 3,108,458 and 34,493 shares issued and outstanding as of June 30, 2016 and December 31, 2015, respectively

            8        381   

Additional paid-in capital

     6,785        1,040        267,382   

Employee loan receivable

            (6,390     (6,390

Accumulated deficit

     (67,183     (193,443     (196,258
  

 

 

 

Total stockholders’ equity (deficit)

     (60,398     (198,785     65,115   
  

 

 

 

Total liabilities, convertible preferred stock and stockholders’ equity (deficit)

   $ 361,072      $ 358,989      $ 358,989   

 

 

 

(1)     The Supplemental Pro Forma Condensed Consolidated Balance Sheet as of June 30, 2016 reflects the conversion of all of our outstanding shares of convertible preferred stock into an aggregate of 37,271,375 shares of common stock immediately prior to the consummation of the initial public offering (“IPO”) and the recognition of incremental compensation expense related to the acceleration of vesting on certain time-based vesting awards and satisfaction of the performance condition on certain performance-based vesting awards (the “IPO related transactions”).

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

 

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Table of Contents

e.l.f. Beauty, Inc. and subsidiaries

Condensed consolidated statements of operations

(unaudited)

(in thousands, except share and per share data)

 

      Six months ended June 30,  
      2015     2016  

Net sales

   $ 75,194      $ 96,820   

Cost of sales

     35,896        42,383   
  

 

 

 

Gross profit

     39,298        54,437   

Selling, general, and administrative expenses

     31,168        47,804   
  

 

 

 

Operating income

     8,130        6,633   

Other income, net

     3,254        1,964   

Interest expense, net

     (6,281     (6,396
  

 

 

 

Income before provision for income taxes

     5,103        2,201   

Income tax provision

     (2,425     (1,112
  

 

 

 

Net income

   $ 2,678      $ 1,089   
  

 

 

 

Comprehensive income

   $ 2,678      $ 1,089   
  

 

 

 

Net loss per share—basic (Note 9):

   $ (116   $ (200

Net loss per share—diluted (Note 9):

   $ (116   $ (200

Weighted average number of shares outstanding—basic (Note 9):

     27,593        651,268   

Weighted average number of shares outstanding—diluted (Note 9):

     27,593        651,268   

Pro forma net loss per share—basic (Note 9):

     $ 0.03   

Pro forma net loss per share—diluted (Note 9):

     $ 0.02   

Pro forma weighted average number of shares outstanding—basic (Note 9):

       41,922,643   

Pro forma weighted average number of shares outstanding—diluted (Note 9):

       44,614,061   

 

 

 

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

 

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Table of Contents

e.l.f. Beauty, Inc. and subsidiaries

Condensed consolidated statements of preferred stock and stockholders’ equity

(unaudited)

(in thousands, except share data)

 

    

 

Preferred stock

          

 

Common stock

   

Employee

note
receivable

   

Additional

paid-in

capital

   

Retained

earnings

(accumulated

deficit)

   

Total

stockholders’

deficit

 
    Shares     Amount           Shares     Amount          
                   

Balance as of December 31, 2015

    135,041      $ 197,295            34,493      $      $      $ 6,785      $ (67,183   $ (60,398

Net income

                                                  1,089        1,089   

Convertible preferred stock accretion

           65,090                                        (65,090     (65,090

Stock-based compensation

                                           1,155               1,155   

Issuance of employee note receivable

                                    (10,448                   (10,448

Accrued interest on employee note receivable

                                    (31     31                 

Vesting of early exercised stock options

                      609,412        6               2,202               2,208   

Exercise of stock options

                      190,164        2               668               669   

Dividend paid

                                           (9,801     (62,259     (72,060

Repayment of employee note receivable

                                    4,060                      4,060   

Payment of interest on employee note receivable

                                    30                      30   
 

 

 

 

Balance as of June 30, 2016

    135,041      $ 262,385            834,069      $ 8      $ (6,390   $ 1,040      $ (193,443   $ (198,785

 

 

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

 

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Table of Contents

e.l.f. Beauty, Inc. and subsidiaries

Condensed consolidated statements of cash flows

(unaudited)

(in thousands)

 

      Six months ended June 30,  
                  2015                 2016  

Cash flows from operating activities:

    

Net income

   $ 2,678      $ 1,089   

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

    

Depreciation of property and equipment

     478        2,092   

Amortization of intangible assets

     4,117        4,138   

Allowance for doubtful accounts

     23        17   

Amortization of debt issuance costs and discount on debt

     535        571   

Loss on disposal of property and equipment

            219   

Stock-based compensation expense

     198        1,155   

Compensation expense paid to seller

     489          

Gain on foreign currency forward contracts

     (2,814     (5,284

Deferred income taxes

     (2,127     (1,912

Changes in operating assets and liabilities:

    

Accounts receivable

     9,560        847   

Inventories

     (12,303     (1,110

Prepaid expenses and other current assets

     (1,320     (3,073

Other assets

     (85     (27

Accounts payable and accrued expenses

     6,275        7,855   

Other liabilities

     536        1,281   

Due to related parties

     (409       
  

 

 

 

Net cash provided by operating activities

     5,831        7,858   

Cash flows from investing activities:

    

Purchase of property and equipment

     (3,649     (2,910

Proceeds from sale of property and equipment

            84   

Acquisition of intangible assets

     (100       
  

 

 

 

Net cash used in investing activities

     (3,749     (2,826

Cash flows from financing activities:

    

Proceeds from revolving line of credit

     12,450        2,000   

Repayment of revolving line of credit

     (15,400     (7,700

Deferred offering costs paid

            (3,139

Proceeds from long term debt

            62,294   

Repayment of long term debt

     (1,313     (1,313

Cash received from issuance of common stock

            669   

Dividend paid

            (68,000

Other, net

            (85
  

 

 

 

Net cash used in financing activities

     (4,263     (15,274

Net decrease in cash

     (2,181     (10,242

Cash—beginning of period

     4,668        14,004   
  

 

 

 

Cash—end of period

   $ 2,487      $ 3,763   
  

 

 

 

Supplemental disclosure of cash flow information:

    

Cash paid for interest

     5,658        5,729   

Cash paid for income taxes

     5,022        4,645   

Supplemental disclosure of noncash investing and financing activities:

    

Accretion of preferred stock to maximum redemption value

     5,881        65,090   

Deferred offering costs included in accounts payable and accrued expenses

            1,383   

Property and equipment acquired under capital leases

            3,000   

Property and equipment purchases included in accounts payable and accrued expenses

     658        913   

Vesting of shares related to early exercise of common stock options

            2,208   

Note receivable issued to finance early exercise of common stock

            (10,448

Net repayment of note receivable with dividend proceeds

            4,060   

 

 

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

 

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Table of Contents

e.l.f. Beauty, Inc. and subsidiaries

Notes to condensed consolidated financial statements (unaudited)

Note 1—Nature of operations

e.l.f. Beauty, Inc. and subsidiaries (the “Company,” “we,” “us,” “its” and “our”) was formed as a Delaware corporation on December 20, 2013 under the name J.A. Cosmetics Holdings, Inc. In April 2016, the Company changed its name to e.l.f. Beauty, Inc. The Company and its subsidiaries conduct business under the name e.l.f. Cosmetics, and offer high-quality, prestige-inspired products for eyes, lips and face to consumers through its retail customers, e.l.f. stores and e-commerce channels.

On September 5, 2016, the Board of Directors of the Company approved a 2.76:1 forward stock split of the Company’s common stock which will be effective immediately prior to the effectiveness of the registration statement of which this prospectus is a part. All common shares, stock options, and per share information presented in the financial statements have been adjusted to reflect the stock split on a retroactive basis for all periods presented. There will be no change in the par value of the Company’s common stock. The ratio by which shares of preferred stock are convertible into shares of common stock will be adjusted to reflect the effects of the stock split.

Recapitalization

On June 7, 2016, the Company incurred an incremental $ 64 million in term loan borrowings under the Senior Secured Credit Facility to fund, in part, a $ 72 million special dividend to stockholders, and increased the total availability under the Revolving Credit Facility to $ 25 million. In connection with the incremental borrowings, certain covenants were amended to reflect the increased leverage. All common stockholders, including individuals that received shares of restricted common stock in connection with the early exercise of certain unvested stock options, received a dividend of $ 1.79 per share. The $ 4 million in dividend payments made to restricted common stockholders was immediately used by them to pay down their outstanding borrowings from the Company, pursuant to their underlying recourse note agreements. Accordingly, the net cash outflow related to the dividend was $ 68 million. See Note 8 to the Unaudited Condensed Consolidated Financial Statements included elsewhere in this prospectus for more information regarding the early exercise of unvested stock options by restricted common stockholders.

Finally, in connection with the special dividend, the Company modified all stock options outstanding and reduced the exercise price by $ 1.79 per share in order to protect the option holders from dilution that would have otherwise resulted from the dividend recapitalization transaction. This constituted a modification in accordance with ASC 718, Compensation—stock compensation and, accordingly, $ 0.7 million of incremental stock-based compensation expense was recorded during the three months ended June 30, 2016.

Note 2—Summary of significant accounting policies

Basis of presentation

The accompanying unaudited condensed consolidated financial statements and related notes have been prepared in accordance with U.S. generally accepted accounting principles (“US GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). In the opinion of the Company, these interim financial statements contain all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of its financial position as of June 30, 2016, and its results of operations for the six months ended June 30, 2016, and cash flows for the six months ended June 30, 2016. The condensed consolidated balance sheet at December 31, 2015, was derived from audited annual financial statements, but does not contain all of the footnote disclosures from the annual financial statements. All intercompany balances and transactions have been eliminated in consolidation.

These interim condensed consolidated financial statements should be read in conjunction with the audited Consolidated Financial Statements as of and for the year ended December 31, 2015 and related notes included in this prospectus. Operating results for the interim periods are not necessarily indicative of the results that may be expected for the full year.

Use of estimates

The preparation of the accompanying financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from these estimates.

 

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Table of Contents

e.l.f. Beauty, Inc. and subsidiaries

Notes to condensed consolidated financial statements (unaudited)

 

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.

Significant accounting policies

The Company made no changes to the significant accounting policies that were disclosed in Note 2, “Summary of significant accounting policies,” to the audited Consolidated Financial Statements as of and for the year ended December 31, 2015 included in this prospectus. The Company has prepared the accompanying unaudited condensed consolidated financial statements on the same basis as the audited financial statements included in this prospectus.

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:

 

Standard    Description   

Date of expected

adoption/adoption

   Effect on the financial
statements or other
significant matters
Standards that are not yet adopted
ASU 2014-09, Revenue from Contracts with Customers
(Topic 606)
   The standard will replace existing revenue recognition standards and significantly expand the disclosure requirements for revenue arrangements. It may be adopted either retrospectively or on a modified retrospective basis to new contracts and existing contracts with remaining performance obligations as of the effective date.    January 1, 2018    The Company is currently evaluating the alternative methods of adoption and the effect on its financial statements and related disclosures.
ASU No. 2015-14 , Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date    In August 2015, the FASB issued ASU 2015-14, which deferred the effective date from annual periods beginning on or after December 15, 2016 to annual periods beginning on or after December 15, 2017.      

 

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e.l.f. Beauty, Inc. and subsidiaries

Notes to condensed consolidated financial statements (unaudited)

 

Standard    Description   

Date of expected

adoption/adoption

   Effect on the financial
statements or other
significant matters

ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)

 

ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing

 

ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients

   In March, April and May 2016, the FASB issued ASU 2016-08, ASU 2016-10 and ASU 2016-12. These standards provide supplemental adoption guidance and clarification to ASU 2014-09, and must be adopted concurrently with the adoption of ASU 2014-09.      
ASU 2016-02, Leases (Topic 842)    The standard will require lessees to recognize a right-of-use asset and a lease liability for virtually all of their leases (other than leases that meet the definition of a short-term lease). The liability will be equal to the present value of lease payments. The asset will be based on the liability, subject to adjustment, such as for initial direct costs. Lessor accounting is similar to the current model, but updated to align with certain changes to the lessee model (e.g., certain definitions, such as initial direct costs, have been updated) and the new revenue recognition standard. It requires a modified retrospective approach for all leases existing at, or entered into after, the date of initial application.    January 1, 2019    The Company is currently evaluating the effect of the standard on its financial statements and related disclosures.

 

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e.l.f. Beauty, Inc. and subsidiaries

Notes to condensed consolidated financial statements (unaudited)

 

Standard    Description   

Date of expected

adoption/adoption

   Effect on the financial
statements or other
significant matters
Standards that were adopted         
ASU 2014-12, Compensation—Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period    The standard will require that a performance target in a share-based payment award that affects vesting and that can be achieved after the requisite service period is completed to be accounted for as a performance condition. Compensation cost would be recognized in the period in which it becomes probable that the performance target will be achieved, and the amount of compensation cost recognized should be based on the portion of the service period fulfilled. The standard may be adopted either prospectively or retrospectively as of the effective date.    January 1, 2016    The Company prospectively adopted this standard in the first quarter of 2016. The standard had no effect on the Company’s consolidated financial statements, as its historical practice complies with the new requirements.
ASU 2016-09, Improvements to Employee Share-Based Payment Accounting    The standard simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows.    January 1, 2016    The Company early adopted this standard in the first quarter of 2016. The amendments were applied on a modified retrospective basis except for amendments requiring recognition of excess tax benefits and deficiencies in the income statement, which was applied prospectively. The standard did not have a material effect on the Company’s consolidated financial statements.

 

Note 3—Derivative instruments

The Company generally uses forward contracts that are not designated as hedging instruments to hedge economically the impact of the variability in exchange rates on contracts with its suppliers in China for future purchases of inventories denominated in Chinese renminbi (“RMB”). The Company generally does not hedge the net assets of its international

 

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e.l.f. Beauty, Inc. and subsidiaries

Notes to condensed consolidated financial statements (unaudited)

 

subsidiaries. All forward contracts are recorded at fair value on the consolidated balance sheet at the end of each reporting period. The Company does not enter into derivative instruments for non-risk management purposes.

Realized and unrealized gains (losses) from forward contracts are recognized in other income (expense) in the condensed consolidated statements of operations and were $ 2.5 million in the six months ended June 30, 2015, and $ 1.3 million in the six months ended June 30, 2016.

The table below details outstanding foreign currency forward contracts where the notional value is determined using contract exchange rates (in thousands):

 

      December 31, 2015     June 30, 2016  
      Notional value      Fair value     Notional value      Fair value  

Foreign currency contracts

     148,978         (10,702     78,500         (5,417

 

 

The Company’s derivative transactions are governed by ISDA Master Agreements, which include provisions governing the setoff of assets and liabilities between the parties. When the Company has more than one outstanding derivative transaction with a single counterparty, the setoff provisions contained within these agreements generally allow the non-defaulting party the right to reduce its liability to the defaulting party by amounts eligible for setoff as well as eligible offsetting transactions with that counterparty, irrespective of the currency, place of payment, or booking office. The Company’s policy is to present its derivative assets and derivative liabilities on the consolidated balance sheets on a net basis. As of December 31, 2015 and June 30, 2016, all of the Company’s derivative instruments were in a net liability position.

Note 4—Fair value measurements

Assets and liabilities recorded at fair value on a recurring basis in the balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair values. Fair value is measured using inputs from the three levels of the fair value hierarchy, which are described as follows:

Level 1 —Quoted prices in active markets for identical assets or liabilities

Level 2 —Quoted prices for similar assets and liabilities in active markets or inputs that are observable

Level 3 —Inputs that are unobservable (for example, cash flow modeling inputs based on management’s assumptions)

The assets’ or liabilities’ fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Fair value of the Company’s foreign currency forward contracts is based on market prices obtained from independent brokers or determined using quantitative models that use as their basis readily observable market parameters that are actively quoted and can be validated through external sources, including third-party pricing services, brokers and market transactions. The gross carrying amounts of the Company’s long-term debt, before reduction of the debt issuance costs, and capital lease obligations approximate their fair values as the stated rates approximate market rates for loans with similar terms.

The following table sets forth the fair value of the Company’s financial liabilities by level within the fair value hierarchy at December 31, 2015 (in thousands):

 

      Fair Value      Level 1      Level 2      Level 3  

Financial liabilities:

           

Foreign currency forward contracts

   $ 10,702       $       $ 10,702       $   

Long-term debt, including current portion(1)

     148,106                 148,106           
  

 

 

 

Total financial liabilities

   $ 158,808       $       $ 158,808       $   

 

 

 

(1)   Of this amount, $ 10,325 is classified as current.

 

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e.l.f. Beauty, Inc. and subsidiaries

Notes to condensed consolidated financial statements (unaudited)

 

The following table sets forth the fair value of the Company’s financial liabilities by level within the fair value hierarchy at June 30, 2016 (in thousands):

 

      Fair Value      Level 1      Level 2      Level 3  

Financial liabilities:

           

Foreign currency forward contracts

   $ 5,417       $       $ 5,417       $   

Long-term debt, including current portion(1)

     206,368                 206,368           
  

 

 

 

Total financial liabilities

   $ 211,785       $       $ 211,785       $   

 

 

 

(1)   Of this amount, $ 6,583 is classified as current.

The Company did not transfer any assets measured at fair value on a recurring basis to or from Level 2 for any of the periods presented.

Note 5—Goodwill and intangible assets

Information regarding the Company’s goodwill and intangible assets as of December 31, 2015, is as follows (in thousands):

 

      Estimated
useful life
     Gross carrying
amount
     Accumulated
amortization
    Net carrying
amount
 

Customer relationships—retailers

     10 years       $ 68,800       $ (13,187   $ 55,613   

Customer relationships—e-commerce

     3 years         3,900         (2,436     1,464   

Favorable leases, net

     Varies         580         (175     405   
     

 

 

 

Total finite-lived intangibles

        73,280         (15,798     57,482   

Trademarks

     Indefinite         63,800                63,800   

Goodwill

        157,264                157,264   
     

 

 

 

Total goodwill and other intangibles

      $ 294,344       $ (15,798   $ 278,546   

 

 

Information regarding the Company’s goodwill and intangible assets as of June 30, 2016, is as follows (in thousands):

 

      Estimated
useful life
     Gross carrying
amount
     Accumulated
amortization
    Net carrying
amount
 

Customer relationships—retailers

     10 years       $ 68,800       $ (16,627   $ 52,173   

Customer relationships—e-commerce

     3 years         3,900         (3,086     814   

Favorable leases, net

     Varies         580         (223     357   
  

 

 

 

Total finite-lived intangibles

        73,280         (19,936     53,344   

Trademarks

     Indefinite         63,800                63,800   

Goodwill

        157,264                157,264   
  

 

 

 

Total goodwill and other intangibles

      $ 294,344       $ (19,936   $ 274,408   

 

 

Amortization expense related to intangible assets was $ 4.1 million in the six months ended June 30, 2015 and 2016. Trademark assets have been classified as indefinite-lived intangible assets and, accordingly, are not subject to amortization.

 

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e.l.f. Beauty, Inc. and subsidiaries

Notes to condensed consolidated financial statements (unaudited)

 

Future amortization expense for intangible assets as of June 30, 2016 is as follows (in thousands):

 

Remainder of 2016

   $ 4,141   

2017

     7,121   

2018

     7,007   

2019

     6,982   

2020

     6,880   

Thereafter

     21,213   
  

 

 

 

Total

   $ 53,344   

 

 

No impairments of goodwill or intangible assets were recorded in the six months ended June 30, 2015 and 2016.

Note 6—Debt

The Company’s outstanding debt as of December 31, 2015 and June 30, 2016 consisted of the following (in thousands):

 

      December 31, 2015     June 30, 2016  

Debt:

    

Revolving credit facility(1)

   $ 7,700      $ 2,000   

Term loan(1)

     100,406        161,430   

Second lien term loan(2)

     40,000        40,000   

Capital lease obligations(3)

            2,938   
  

 

 

 

Total debt

     148,106        206,368   

Less: debt issuance costs

     (3,187     (2,711
  

 

 

 

Total debt, net of issuance costs

     144,919        203,657   

Less: current portion

     (10,325     (6,583
  

 

 

 

Long-term portion of debt

   $ 134,594      $ 197,074   

 

 

 

(1)   See Note 8, “Debt,” to the Consolidated Financial Statements included in this prospectus for certain details regarding the Senior Secured Credit Facility. On June 7, 2016, the Company incurred an incremental $ 64 million in term loan borrowings under the Senior Secured Credit Facility to fund, in part, the payment of a $ 72.0 million special dividend to stockholders, and increased the total availability under the Revolving Credit Facility to $ 25 million. In connection with the incremental borrowings, certain covenants were amended to reflect the increased leverage. As of June 30, 2016, the Senior Secured Credit Facility consisted of (i) a $ 169.0 million Term Loan due January 31, 2019 and (ii) a $ 25.0 million Revolving Credit Facility, which had amounts available for draw until the maturity date on January 31, 2019 and for which the unused balance as of June 30, 2016 was $ 22.8 million.

 

(2)   See Note 8, “Debt,” to the Consolidated Financial Statements included in this prospectus for certain details regarding the Company’s $ 40.0 million Second Lien Term Loan, which matures on and does not require principal payments until July 31, 2019.

 

(3)   In connection with the transition of a warehouse and distribution center from New Jersey to California, the Company entered into certain capital leases during the six months ended June 30, 2016. The capital leases are primarily related to equipment and fixtures required to prepare the new facility for use.

Note 7—Commitments and contingencies

Operating leases

The Company leases office, retail and warehouse space in New York, New Jersey, California and China from third parties under non-cancelable operating leases that provide for minimum base rental payments (excluding taxes and other charges). The leases expire between 2016 and 2026. Total rent expense was $ 1.5 million for the six months ended June 30, 2015, and $ 1.9 million in the six months ended June 30, 2016.

 

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e.l.f. Beauty, Inc. and subsidiaries

Notes to condensed consolidated financial statements (unaudited)

 

Future minimum lease payments under the operating leases are as follows (in thousands):

 

Remainder of 2016

   $ 1,781   

2017

     3,806   

2018

     3,714   

2019

     3,595   

2020

     3,117   

Thereafter

     8,355   
  

 

 

 

Total

   $ 24,368   

 

 

Legal contingencies

From time to time, the Company may become involved in legal proceedings, claims and litigation arising in the ordinary course of business. Management is not currently aware of any matters that it expects will have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

Note 8—Stock-based compensation

Stock options granted pursuant to the Company’s 2014 Equity Incentive Plan (the “Plan”) permit certain management-level option holders and directors to elect to exercise unvested options prior to vesting (“early exercise”). In the event of termination of the option holder’s employment or directorship, all unvested shares issued upon the early exercise, so long as they remain unvested, are subject to repurchase by the Company at the lower of the original exercise price or the fair market value of a share of common stock on the date of termination.

Consistent with authoritative guidance, early exercises are not considered substantive exercises for accounting purposes. Cash received for the exercise of unvested options is recorded as a liability, which is released to additional paid-in capital at each reporting date as the shares vest. During the six months ended June 30, 2016, 2,612,215 options were early exercised prior to vesting. From the date of exercise through June 30, 2016, an additional 310,226 options subject to early exercise vested and 27,600 options subject to early exercise were forfeited and repurchased by the Company in connection with the resignation of a Board member. As of June 30, 2016, the Company recorded a liability of $ 8.2 million related to 2,274,389 shares that remained subject to a potential repurchase obligation of the Company. The portion of the liability related to shares expected to vest within the next twelve months, or $ 1.6 million, is included in accrued expenses and other current liabilities with the remaining $ 6.7 million included in other long-term liabilities.

In connection with certain of these early exercises, the Company also extended loans to certain key management personnel (the “Debtors”) totaling $ 10.4 million (the “2016 Notes”). The 2016 Notes served as financing for the Debtors’ 2016 exercise of both vested and unvested options. The 2016 Notes are secured by the underlying shares and are full recourse to the respective Debtor’s personal assets. The 2016 Notes carry interest at between 0.75% and 0.81% per annum, due semi-annually, and mature in January 2018 or earlier upon the occurrence of certain events specified in the 2016 Note agreements. Amounts due from employees in relation to the 2016 Notes have been recorded as a reduction in stockholders’ equity. Upon early exercise, the option holders received shares of restricted common stock and, as such, participated in the June 2016 special dividend. Pursuant to the terms of the 2016 Notes, the proceeds from the dividend were required to be used to pay down the outstanding principal balance. Accordingly, as of June 30, 2016, the outstanding balance was reduced by $ 4.1 million to $ 6.4 million in connection with such repayment.

In June 2016, the Company modified all stock options outstanding and reduced the exercise price by $ 1.79 per share in order to protect the option holders from dilution that would have otherwise resulted from the dividend recapitalization transaction. A total of 43 individuals, including three board members, held options that were modified. As the Company was not obligated to provide anti-dilution protection under the Plan, this constituted a modification, as defined by ASC 718 Compensation-stock compensation , which requires calculation of the incremental fair value of the new award. During the six months ended June 30, 2016, the Company recognized incremental compensation cost of $ 0.7 million related to the vested portion of the modified awards. An additional $ 1.6 million in incremental compensation cost is expected to be recognized

 

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e.l.f. Beauty, Inc. and subsidiaries

Notes to condensed consolidated financial statements (unaudited)

 

over the remaining requisite service period for service-based options, and an additional $ 0.3 million in incremental compensation cost is expected to be recognized when the performance condition is met for performance-based options.

Service-based options

The following table summarizes the activities for service-based stock options for the six months ended June 30, 2016:

 

      Options
outstanding
    Weighted-average
exercise price(1)
    

Weighted-average
remaining

contractual life

(in years)

    

Aggregate
intrinsic values

(in thousands)

 

Balance as of December 31, 2015

     3,997,502      $ 3.66         

Granted

     324,300        5.29         

Exercised

     (799,576     3.60         

Forfeited

     (176,640     4.02         

Cancelled

     (41,400     3.62         
  

 

 

       

Balance as of June 30, 2016

     3,304,186      $ 2.85         8.5       $ 16,615   
  

 

 

       

Exercisable, June 30, 2016

     385,848      $ 1.84         8.0       $ 2,008   

 

 

 

(1)   The weighted-average exercise prices incorporate the impact of the $ 1.79 exercise price modification for any activity occurring subsequent to the June 7, 2016 modification date.

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the fair market value of a share of common stock of $ 7.04 on June 30, 2016.

Stock-based compensation cost related to service-based options was $ 0.2 million in the six months ended June 30, 2015, and $ 0.4 million in the six months ended June 30, 2016, excluding the portion attributable to the exercise price modification. All stock-based compensation expense is recorded in selling, general and administrative expenses. As of June 30, 2016, there was $ 4.0 million in unrecognized stock-based compensation cost related to unvested service-based stock options, including $ 1.6 million attributable to the exercise price modification, which is expected to be recognized over a weighted-average period of 3.6 years and the remaining $ 2.5 million expected to be recognized over a weighted-average period of 3.8 years.

Performance-based options

For the Company’s performance-based options, in addition to the service condition, the ultimate number of shares to be earned depends on the achievement of both a performance and market condition. The performance condition is based on the occurrence of a liquidity event (i.e., initial public offering or change-in-control transaction). The market condition is based upon the achievement of a minimum rate of return from the liquidity event.

The following table summarizes the activities for performance-based stock options for the six months ended June 30, 2016:

 

      Options
outstanding
    Weighted-average
exercise price(1)
    

Weighted-average
remaining
contractual life

(in years)

    

Aggregate
intrinsic values

(in thousands)

 

Balance as of December 31, 2015

     4,848,869      $ 3.64         

Granted

     144,900        5.29         

Exercised

                    

Forfeited

     (1,220,451     3.65         

Cancelled

     (6,900     3.62         
  

 

 

       

Balance as of June 30, 2016

     3,766,418      $ 2.24         8.2       $ 19,337   

 

 

 

(1)   The weighted-average exercise prices incorporate the impact of the $ 1.79 exercise price modification for any activity occurring subsequent to the June 7, 2016 modification date.

 

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Notes to condensed consolidated financial statements (unaudited)

 

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the fair market value of a share of common stock of $ 7.04 on June 30, 2016.

In regard to the performance condition, if the liquidity event occurred on or prior to January 31, 2016, an additional number of options would have vested, assuming the minimum rate of return was achieved. During the six months ended June 30, 2016, a total of 919,611 performance-based options did not vest and were forfeited because a liquidity event did not occur on or prior to January 31, 2016. The remaining forfeitures occurred in connection with the termination of employment of certain employees.

Because the achievement of the performance condition is not probable until a liquidity event (i.e., initial public offering or change-in-control transaction) has occurred, no compensation expense was recognized during the six months ended June 30, 2016 related to these performance-based options. As of June 30, 2016, there was $ 1.9 million in unrecognized stock-based compensation cost related to unvested performance-based stock options, including $ 0.3 million attributable to the exercise price modification.

Note 9—Net loss per share

The Company computes basic earnings per share using the weighted average number of common shares outstanding. As the Company incurred a net loss attributable to common stockholders during both the six months ended June 30, 2015 and the six months ended June 30, 2016, basic and diluted weighted average shares outstanding are the same. The following is a reconciliation of the numerator and denominator in the basic and diluted net loss per common share computations (in thousands, except share and per share data):

 

      Six months ended June 30,  
      2015     2016  

Numerator:

    

Net income

   $ 2,678      $ 1,089   

Adjustments to numerator:

    

Dividend paid to preferred stockholders

   $      $ (66,531

Accretion of convertible preferred stock to maximum redemption value

     (5,881     (65,090
  

 

 

 

Net loss attributable to common stockholders—basic and diluted

   $ (3,203   $ (130,532
  

 

 

 

Denominator:

    

Weighted average number of common shares outstanding—basic

     27,593        651,268   

Weighted average number of common shares outstanding—diluted

     27,593        651,268   

Net loss per share:

    

Basic

   $ (116.04   $ (200.43

Diluted

   $ (116.04   $ (200.43

Anti-dilutive securities excluded from diluted EPS:

    

Service-based stock options

     3,343,751        3,304,186   

Common shares underlying convertible preferred stock

     37,271,375        37,271,375   
  

 

 

 

Total

     40,615,126        40,575,561   

 

 

 

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e.l.f. Beauty, Inc. and subsidiaries

Notes to condensed consolidated financial statements (unaudited)

 

Pro forma net income per share

Pro forma net income per share reflects (i) the application of the proceeds from the sale of 4,000,000 shares from the proposed IPO (assuming the mid-point of the IPO price range) that are necessary to cover a portion of the $ 72.0 million dividend paid to stockholders on June 7, 2016, which was in excess of the Company’s historical earnings and (ii) the effect of conversion of the outstanding convertible preferred stock into common stock at the applicable conversion prices immediately prior to, and conditioned upon, the closing of the Company’s initial public offering.

The following table sets forth the computation of the Company’s unaudited pro forma basic and diluted net income per share of common stock (in thousands except share and per share data):

 

      Six months ended
June 30, 2016
 

Numerator:

  

Net income attributable to common stockholders—basic and diluted

   $ 1,089   

Denominator:

  

Basic:

  

Weighted-average number of shares outstanding—basic

     651,268   

Add: Assumed conversion of convertible preferred stock

     37,271,375   

Add: Common shares offered hereby to fund the dividend in excess of earnings

     4,000,000   
  

 

 

 

Pro forma weighted average number of shares outstanding—basic

     41,922,643   
  

 

 

 

Diluted:

  

Pro forma weighted average number of shares outstanding—Diluted

     41,922,643   

Add: Weighted-average effect of dilutive securities:

  

Service-based stock options

     2,691,417   
  

 

 

 

Pro forma weighted average number of shares outstanding—Diluted

     44,614,061   

Pro forma net income per share:

  

Basic

   $ 0.03   

Diluted

   $ 0.02   

 

 

Note 10—Related party transactions

During the six months ended June 30, 2015, the Company incurred $ 0.3 million in management and consulting fees to its majority stockholder, TPG. During the six months ended June 30, 2016, the Company incurred $ 0.5 million in management and consulting fees to TPG. The amounts due to TPG as of both June 30, 2015 and 2016 were immaterial.

As disclosed in Note 8, during the six months ended June 30, 2016, the Company extended loans to certain key management personnel totaling $ 10.4 million.

Note 11—Subsequent events

Management evaluates events occurring subsequent to the date of the financial statements in determining the accounting for and disclosure of transactions and events that affect the financial statements. Subsequent events have been evaluated through August 10, 2016, which is the date that the financial statements were issued.

The Company entered into new lease agreements for e.l.f. stores with a minimum future lease commitment amount of $ 2.4 million. Certain of these leases also provide for the payment of contingent rent based on a percentage of sales.

 

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e.l.f. Beauty, Inc. and subsidiaries

Notes to condensed consolidated financial statements (unaudited)

 

In January 2016, the Company extended loans to certain key management personnel (the “Debtors’”) totaling $ 10.4 million (the “2016 Notes”). The 2016 Notes served as financing for the Debtors’ 2016 exercise of previously issued stock options. In July 2016, the Company provided an additional loan totaling $ 1.5 million (the “July 2016 Add-On Note”) to one of the Debtors to finance the exercise of an additional 808,028 options at an exercise price of $ 1.84 per option. The July 2016 Add-On Note carries interest at 0.71% per annum, due semi-annually, and matures in July 2018 or earlier upon the occurrence of certain events specified in the Note agreement. All other terms and conditions of the July 2016 Add-On Note are identical to the 2016 Notes. Amounts due from the Debtor in relation to the July 2016 Add-On Note will be reduced from stockholders’ equity. Cash received from the Debtor for early exercise of unvested options is treated as a liability. Amounts so recorded are transferred into common stock and additional paid-in capital as the shares vest.

 

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Part II

Information not required in prospectus

Item 13. Other expenses of issuance and distribution.

The following table sets forth the expenses payable by the Registrant expected to be incurred in connection with the issuance and distribution of the shares of common stock being registered hereby (other than underwriting discounts and commissions). All of such expenses are estimates, other than the filing and listing fees payable to the Securities and Exchange Commission (the “SEC”), the Financial Industry Regulatory Authority, Inc. (“FINRA”) and the New York Stock Exchange (the “NYSE”) listing fee.

 

Item    Amount to
be paid
 

SEC registration fee

   $ 15,441   

FINRA filing fee

     23,500   

NYSE listing fee

     200,000   

Printing and engraving expenses

     700,000   

Legal fees and expenses

     1,500,000   

Accounting fees and expenses

     1,000,000   

Blue Sky, qualification fees and expenses

     10,000   

Transfer agent fees and expenses

     2,500   

Miscellaneous expenses

     48,559   
  

 

 

 

Total

   $ 3,500,000   

 

 

Item 14. Indemnification of directors and officers.

Section 102(b)(7) of the Delaware General Corporation Law ( the “DGCL”) allows a corporation to provide in its certificate of incorporation that a director of the corporation will not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except where the director breached the duty of loyalty, failed to act in good faith, engaged in intentional misconduct or knowingly violated a law, authorized the payment of a dividend or approved a stock repurchase in violation of Delaware corporate law or obtained an improper personal benefit. Our amended and restated certificate of incorporation will provide for this limitation of liability.

Section 145 of the DGCL (“Section 145”), provides, among other things, that a Delaware corporation may indemnify any person who was, is or is threatened to be made, party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of such corporation), by reason of the fact that such person is or was an officer, director, employee or agent of such corporation or is or was serving at the request of such corporation as a director, officer, employee or agent of another corporation or enterprise. The indemnity may include expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding, provided such person acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the corporation’s best interests and, with respect to any criminal action or proceeding, had no reasonable cause to believe that his or her conduct was illegal. A Delaware corporation may indemnify any persons who were or are a party to any threatened, pending or completed action or suit by or in the right of the corporation by reason of the fact that such person is or was a director, officer, employee or agent of another corporation or enterprise. The indemnity may include expenses (including attorneys’ fees) actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit, provided such person acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the corporation’s best interests, provided further that no indemnification is permitted without judicial approval if the officer, director, employee or agent is adjudged to be liable to the corporation. Where an officer or director is successful on the merits or otherwise in the defense of any action referred to above, the corporation must indemnify him against the expenses which such officer or director has actually and reasonably incurred.

 

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Section 145 further authorizes a corporation to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or enterprise, against any liability asserted against him or her and incurred by him or her in any such capacity, or arising out of his or her status as such, whether or not the corporation would otherwise have the power to indemnify him or her under Section 145.

Our amended and restated certificate of incorporation will include a provision that, to the fullest extent permitted by the DGCL, eliminates the personal liability of directors to us or our stockholders for monetary damages for any breach of fiduciary duty as a director. The effect of these provisions will be to eliminate the rights of us and our stockholders, through stockholders’ derivative suits on our behalf, to recover monetary damages from a director for breach of fiduciary duty as a director, including breaches resulting from grossly negligent behavior. However, exculpation will not apply to any director if the director has acted in bad faith, knowingly or intentionally violated the law, authorized illegal dividends or redemptions or derived an improper benefit from his or her actions as a director. Further, our amended and restated certificate of incorporation and our amended and restated bylaws will provide that we must indemnify and advance expenses to our directors and officers to the fullest extent authorized by the DGCL. We also will be expressly authorized to carry directors’ and officers’ liability insurance providing indemnification for our directors, officers and certain employees for some liabilities.

Section 174 of the DGCL provides, among other things, that a director, who willfully or negligently approves of an unlawful payment of dividends or an unlawful stock purchase or redemption, may be held jointly and severally liable for such actions. A director who was either absent when the unlawful actions were approved or dissented at the time may avoid liability by causing his or her dissent to such actions to be entered in the books containing the minutes of the meetings of the board of directors at the time such action occurred or immediately after such absent director receives notice of the unlawful acts.

The indemnification rights set forth above shall not be exclusive of any other right which an indemnified person may have or hereafter acquire under any statute, provision of our amended and restated certificate of incorporation, our amended and restated bylaws, agreement, vote of stockholders or disinterested directors or otherwise.

We expect to maintain standard policies of insurance that provide coverage (i) to our directors and officers against loss rising from claims made by reason of breach of duty or other wrongful act and (ii) to us with respect to indemnification payments that we may make to such directors and officers.

The proposed form of Underwriting Agreement to be filed as Exhibit 1.1 to this Registration Statement provides for indemnification to us, our directors and officers and the selling stockholders by the underwriters, and to the underwriters by us and the selling stockholders, against certain liabilities.

Item 15. Recent sales of unregistered securities.

The following list sets forth information as to all securities the Company has sold since December 20, 2013, which were not registered under the Securities Act of 1933, as amended (the “Securities Act”):

 

1.   In connection with the Company’s acquisition of 100% of the outstanding shares of capital stock of e.l.f. Cosmetics, Inc. on January 31, 2014, the Company issued 135,041 shares of preferred stock at a price per share of $ 1,000.00 and 27,593 shares of common stock at a price per share of $ 3.62 in exchange for cash consideration of $ 125.1 million and shares of Class A common stock of e.l.f. Cosmetics, Inc. from certain then-existing stockholders of e.l.f. Cosmetics, Inc.

 

2.   The Company granted stock options and stock awards to employees, directors and consultants under the Company’s 2014 Equity Incentive Plan, covering an aggregate of 10,484,030 shares of common stock, at a weighted-average exercise price of $ 3.08 per share (as adjusted for the special dividend declared on June 7, 2016). Of these, options covering an aggregate of 2,186,040 shares were cancelled without being exercised.

 

3.   The Company issued a total of 3,984,389 shares of common stock at a weighted average price per share of $ 3.23 for total cash proceeds of $ 12.9 million upon the exercise of stock options.

The issuances of the securities described in paragraph (1) were exempt from the registration requirements of the Securities Act as transactions by an issuer not involving a public offering in reliance on Section 4(a)(2) of the Securities Act.

The sales and issuances of securities in the transactions described in paragraphs (2) and (3) above were exempt from the registration requirements of the Securities Act as transactions by an issuer not involving a public offering in reliance on Section 4(a)(2) of the Securities Act and under Rule 701 promulgated under the Securities Act, in that they were offered and sold either pursuant to written compensatory plans or written contracts relating to compensation, as provided by Rule 701.

 

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No sales involved underwriters, underwriting discounts or commissions or public offerings of securities of the Company.

Item 16. Exhibits and financial statement schedules.

(a) Exhibits

See the Exhibit Index attached to this registration statement, which is incorporated by reference herein.

(b) Financial statement schedule

All schedules are omitted because the required information is either not present, not present in material amounts or presented within our audited consolidated financial statements included elsewhere in this prospectus and are incorporated herein by reference.

Item 17. Undertakings

 

(1)   Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

 

(2)   The undersigned Registrant hereby undertakes that:

 

  (A)   For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b) (1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.

 

  (B)   For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

 

(3)   The undersigned Registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreements certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser.

 

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Signatures

Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this Amendment No. 1 to the Registration Statement or amendment thereto to be signed on its behalf by the undersigned, thereunto duly authorized, in Oakland, California, on the 12th day of September, 2016.

 

e.l.f. Beauty, Inc.

By: 

 

/s/ Tarang P. Amin

 

Name:     Tarang P. Amin

 

Title:       Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1933, as amended, this Amendment No. 1 to the Registration Statement or amendment thereto has been signed by the following persons in the capacities indicated on the 12th day of September, 2016.

 

Signature

  

Title

/s/ Tarang P. Amin

Tarang P. Amin

  

Chief Executive Officer, Chairman and Director

(Principal Executive Officer)

/s/ John P. Bailey

John P. Bailey

  

President and Chief Financial Officer

(Principal Financial and Accounting Officer)

*

Lauren Cooks Levitan

  

Director

*

William E. McGlashan, Jr.

  

Director

*

Joseph A. Shamah

  

Director

*

Sabrina L. Simmons

  

Director

*

Maureen C. Watson

  

Director

*

Richard G. Wolford

  

Director

 

* By:  

/s/ Tarang P. Amin

 

Tarang P. Amin

 

Attorney-in-Fact

Power of attorney

KNOW ALL PERSONS BY THESE PRESENTS, that Kirk L. Perry hereby constitutes and appoints Tarang P. Amin, John P. Bailey and Scott K. Milsten, and each of them acting individually, as his true and lawful attorneys-in-fact and agents, each with full power of substitution, for him in any and all capacities, to sign any and all amendments to this Registration Statement, including post-effective amendments or any abbreviated registration statement and any amendments thereto filed pursuant to Rule 462(b) increasing the number of securities for which registration is sought, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, with full power of each to act alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully for all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement or amendment thereto has been signed by the following person in the capacity indicated on the 12th day of September, 2016.

 

Signature

  

Title

/s/ Kirk L. Perry

Kirk L. Perry

  

Director


Table of Contents

Exhibit index

 

Exhibit
number
  

Exhibit description

  1.1    Form of Underwriting Agreement.
  3.1†    Amended and Restated Certificate of Incorporation, as amended, currently in effect.
  3.2    Form of Second Certificate of Amendment to Amended and Restated Certificate of Incorporation, to be in effect prior to the effectiveness of the Registration Statement.
  3.3†    Form of Amended and Restated Certificate of Incorporation, to be in effect immediately prior to the consummation of this offering.
  3.4†    Second Amended and Restated Bylaws, as amended, currently in effect.
  3.5†    Form of Amended and Restated Bylaws, to be in effect immediately prior to the consummation of this offering.
  4.1    Reference is made to exhibits 3.1 through 3.5.
  4.2†    Registration Rights Agreement, dated as of January 31, 2014, by and among the Registrant and certain stockholders party thereto.
  4.3   

Form of Amended and Restated Stockholders Agreement, by and among the Registrant and certain equityholders party thereto, to be in effect prior to the effectiveness of the Registration Statement on Form 8-A relating to the registration pursuant to Section 12(b) of the Securities Exchange Act of 1934 of the securities issued pursuant to this offering.

  4.4    Form of Common Stock Certificate.
  5.1    Opinion of Latham & Watkins LLP.
10.1†    Standard Multi-Tenant Office Lease, dated as of March 31, 2014, by and between 1007 Clay Street Properties LLC and e.l.f. Cosmetics, Inc. (formerly known as J.A. Cosmetics US, Inc.).
10.2†    Addendum to Standard Multi-Tenant Office Lease, dated as of March 31, 2014, by and between 1007 Clay Street Properties LLC and e.l.f. Cosmetics, Inc. (formerly known as J.A. Cosmetics US, Inc.).
10.3†    Standard Multi-Tenant Office Lease, dated as of October 5, 2015, by and between 1007 Clay Street Properties LLC and e.l.f. Cosmetics, Inc. (formerly known as J.A. Cosmetics US, Inc.).
10.4†    Addendum to Standard Multi-Tenant Office Lease, dated as of October 22, 2015, by and between 1007 Clay Street Properties LLC and e.l.f. Cosmetics, Inc. (formerly known as J.A. Cosmetics US, Inc.).
10.5†    Standard Industrial/Commercial Multi-Tenant Lease, dated as of December 9, 2015, by and between Jurupa Gateway LLC and e.l.f. Cosmetics, Inc. (formerly known as J.A. Cosmetics US, Inc.).
10.6(a)†    Credit Agreement, dated as of January 31, 2014, by and among the Registrant, Bank of Montreal, as administrative agent, swingline lender and l/c issuer, and the other parties thereto.
10.6(b)†    First Amendment to Credit Agreement, dated as of June 7, 2016, by and among e.l.f. Cosmetics, Inc. (formerly known as J.A. Cosmetics US, Inc.), the Registrant, certain of the Registrant’s U.S. subsidiaries, Bank of Montreal, as administrative agent and lender, and the other parties thereto.
10.7†    Joinder Agreement to the Credit Agreement, dated as of January 31, 2014, by and among the Registrant, e.l.f. Cosmetics, Inc. (formerly known as J.A. Cosmetics US, Inc.), certain of the Registrant’s U.S. subsidiaries, and Bank of Montreal, as administrative agent.
10.8(a)†    Second Lien Credit Agreement, dated as of January 31, 2014, by and among the Registrant, U.S. Bank National Association, as collateral agent, and the other parties thereto.
10.8(b)†    First Amendment to Second Lien Credit Agreement, dated as of August 14, 2014, by and among e.l.f. Cosmetics, Inc. (formerly known as J.A. Cosmetics US, Inc.), the Registrant, certain of the Registrant’s U.S. subsidiaries, U.S. Bank National Association, as collateral agent, and other parties thereto.
10.8(c)†    Second Amendment to Second Lien Credit Agreement, dated as of June 7, 2016, by and among e.l.f. Cosmetics, Inc. (formerly known as J.A. Cosmetics US, Inc.), the Registrant, certain of the Registrant’s U.S. subsidiaries, U.S. Bank National Association, as collateral agent, and the other parties thereto.
10.9†    Joinder to Second Lien Credit Agreement, dated as of January 31, 2014, by and among the Registrant, e.l.f. Cosmetics, Inc. (formerly known as J.A. Cosmetics US, Inc.), certain of the Registrant’s U.S. subsidiaries, U.S. Bank National Association, as collateral agent, and the other parties thereto.


Table of Contents
Exhibit
number
  

Exhibit description

10.10(a)†    Subordination and Intercreditor Agreement, dated as of January 31, 2014, by and among the Registrant, Bank of Montreal, as lender and administrative agent to the senior lenders, U.S. Bank National Association, as collateral agent for the second lien lenders, and the other parties thereto.
10.10(b)†    Consent Under, Reaffirmation of and First Amendment to Subordination and Intercreditor Agreement, dated as of August 26, 2014, by and among the Registrant, e.l.f. Cosmetics, Inc. (formerly known as J.A. Cosmetics US, Inc.), certain of the Registrant’s U.S. subsidiaries, Bank of Montreal, as administrative agent for the senior lenders, U.S. Bank National Association, as collateral agent for the second lien lenders, and the other parties thereto.
10.10(c)†    Consent Under, Reaffirmation of and Second Amendment to Subordination and Intercreditor Agreement, dated as of June 7, 2016, by and among the Registrant, e.l.f. Cosmetics, Inc. (formerly known as J.A. Cosmetics US, Inc.), certain of the Registrant’s U.S. subsidiaries, Bank of Montreal, as administrative agent for the senior lenders, U.S. Bank National Association, as collateral agent for the second lien lenders, and the other parties thereto.
10.11†    Joinder Agreement to the Subordination and Intercreditor Agreement, dated as of January 31, 2014, by and among the Registrant, e.l.f. Cosmetics, Inc. (formerly known as J.A. Cosmetics US, Inc.), certain of the Registrant’s U.S. subsidiaries, Bank of Montreal, as lender and administrative agent to the senior lenders, U.S. Bank National Association, as collateral agent for the second lien lenders, and the other parties thereto.
10.12#†    2014 Equity Incentive Plan of the Registrant.
10.13#†    Forms of stock option award agreements used under the 2014 Equity Incentive Plan of the Registrant.
10.14#†    2014 Phantom Equity Plan of the Registrant.
10.15#†    Form of phantom shares award agreement used under the 2014 Phantom Equity Plan of the Registrant.
10.16#    2016 Equity Incentive Plan of the Registrant.
10.17#    Form of Stock Option Grant under the 2016 Equity Incentive Plan of the Registrant.
10.18#    2016 Employee Stock Purchase Plan of the Registrant.
10.19#†    Employment Agreement, dated as of January 31, 2014, by and among Tarang Amin, e.l.f. Cosmetics, Inc. (formerly known as J.A. Cosmetics US, Inc.) and the Registrant.
10.20#†    Employment Agreement, dated as of August 13, 2015, by and among John Bailey, e.l.f. Cosmetics, Inc. (formerly known as J.A. Cosmetics US, Inc.) and the Registrant.
10.21#†    Employment Agreement, dated as of January 31, 2014, by and among Scott Milsten, e.l.f. Cosmetics, Inc. (formerly known as J.A. Cosmetics US, Inc.) and the Registrant.
10.22#†    Employment Agreement, dated as of February 2, 2014, by and among Richard Baruch, Jr., e.l.f. Cosmetics, Inc. (formerly known as J.A. Cosmetics US, Inc.) and the Registrant.
10.23#    Amended and Restated Employment Agreement, dated as of September 7, 2016, by and among Erin Daley, e.l.f. Cosmetics, Inc. and the Registrant.
10.24#†    Employment Agreement, dated as of July 8, 2016, by and between Jonathan T. Fieldman, e.l.f. Cosmetics, Inc. and the Registrant.
10.25#†    Form of Indemnification Agreement for directors and officers.
10.26#    Non-Employee Director Compensation Program.
10.27#    Form of Restricted Stock Unit under the 2016 Equity Incentive Plan of the Registrant.
10.28#    Amendment to 2014 Phantom Equity Plan of the Registrant, dated as of September 5, 2016.
21.1†    List of the Registrant’s Significant Subsidiaries.
23.1    Consent of independent registered public accounting firm.
23.2    Consent of Latham & Watkins LLP (included in Exhibit 5.1).
23.3†    Consent of Calimesa Consulting Partners, LLC.
23.4†    Consent of MetrixLab.


Table of Contents
Exhibit
number
  

Exhibit description

24.1†    Power of Attorney granted by Mses. Levitan, Simmons and Watson and Messrs. Amin, Bailey, McGlashan, Shamah and Wolford. Reference is made to the signature page to the Registration Statement.
24.2    Power of Attorney granted by Mr. Perry. Reference is made to the signature page to the Registration Statement.

 

  Previously filed.

 

#   Indicates management contract or compensatory plan.

Exhibit 1.1

Underwriting Agreement

[●], 2016

J.P. Morgan Securities LLC

Morgan Stanley & Co. LLC

As Representatives of the

several Underwriters listed

in Schedule 1 hereto

c/o J.P. Morgan Securities LLC

383 Madison Avenue

New York, New York 10179

c/o Morgan Stanley & Co. LLC

1585 Broadway

New York, NY 10036

Ladies and Gentlemen:

e.l.f. Beauty, Inc., a Delaware corporation (the “Company”), proposes to issue and sell to the several underwriters listed in Schedule 1 hereto (the “Underwriters”), for whom you are acting as representatives (the “Representatives”), an aggregate of [●] shares of common stock, par value $[●] per share, of the Company (the “Common Stock”), and certain stockholders of the Company named in Schedule 2 hereto (the “Selling Stockholders”) propose to sell to the several Underwriters an aggregate of [●] shares of Common Stock of the Company (collectively, the “Underwritten Shares”). In addition, the Selling Stockholders propose to sell, at the option of the Underwriters, up to an additional [●] shares of Common Stock of the Company (collectively, the “Option Shares”). The Underwritten Shares and the Option Shares are herein referred to as the “Shares”. The shares of Common Stock of the Company to be outstanding after giving effect to the sale of the Shares are referred to herein as the “Stock”.

Morgan Stanley & Co. LLC ( “Morgan Stanley”) has agreed to reserve a portion of the Shares to be purchased by it under this Agreement for sale to the Company’s directors, officers, employees and business associates and other parties related to the Company (collectively, “Participants”), as set forth in the Prospectus (as hereinafter defined) under the heading “Underwriting” (the “Directed Share Program”). The Shares to be sold by Morgan Stanley and its affiliates pursuant to the Directed Share Program, at the direction of the Company, are referred to hereinafter as the “Directed Shares”. Any Directed Shares not orally confirmed for purchase by any Participant by the end of the business day on which this Agreement is executed will be offered to the public by the Underwriters as set forth in the Prospectus.


The Company and the Selling Stockholders hereby confirm their agreement with the several Underwriters concerning the purchase and sale of the Shares, as follows:

1. Registration Statement . The Company has prepared and filed with the Securities and Exchange Commission (the “Commission”) under the Securities Act of 1933, as amended, and the rules and regulations of the Commission thereunder (collectively, the “Securities Act”), a registration statement (File No. 333-213333 ), including a prospectus, relating to the Shares. Such registration statement, as amended at the time it became effective, including the information, if any, deemed pursuant to Rule 430A under the Securities Act to be part of the registration statement at the time of its effectiveness (“Rule 430 Information”), is referred to herein as the “Registration Statement”; and as used herein, the term “Preliminary Prospectus” means each prospectus included in such registration statement (and any amendments thereto) before effectiveness, any prospectus filed with the Commission pursuant to Rule 424(a) under the Securities Act and the prospectus included in the Registration Statement at the time of its effectiveness that omits Rule 430 Information, and the term “Prospectus” means the prospectus in the form first used (or made available upon request of purchasers pursuant to Rule 173 under the Securities Act) in connection with confirmation of sales of the Shares. If the Company has filed an abbreviated registration statement pursuant to Rule 462(b) under the Securities Act (the “Rule 462 Registration Statement”), then any reference herein to the term “Registration Statement” shall be deemed to include such Rule 462 Registration Statement. Capitalized terms used but not defined herein shall have the meanings given to such terms in the Registration Statement and the Prospectus.

At or prior to the Applicable Time (as defined below), the Company had prepared the following information (collectively with the pricing information set forth on Annex A, the “Pricing Disclosure Package”): a Preliminary Prospectus dated [●], 2016 and each “free-writing prospectus” (as defined pursuant to Rule 405 under the Securities Act) listed on Annex A hereto.

“Applicable Time” means [●] [A/P].M., New York City time, on [●], 2016.

2. Purchase of the Shares by the Underwriters . (a) The Company agrees to issue and sell, and each of the Selling Stockholders agrees, severally and not jointly, to sell, the Underwritten Shares to the several Underwriters as provided in this underwriting agreement (this “Agreement”), and each Underwriter, on the basis of the representations, warranties and agreements set forth herein and subject to the conditions set forth herein, agrees, severally and not jointly, to purchase at a price per share (the “Purchase Price”) of $[●] from the Company the respective number of Underwritten Shares set forth opposite such Underwriter’s name in Schedule 1 hereto and from each of the Selling Stockholders the number of Underwritten Shares (to be adjusted by you so as to eliminate fractional shares) determined by multiplying the aggregate number of Underwritten Shares to be sold by each of the Selling Stockholders as set forth opposite their respective names in Schedule 2 hereto by a fraction, the numerator of which is the aggregate number of Underwritten Shares to be purchased by such Underwriter as set forth opposite the name of such Underwriter in Schedule 1 hereto and the denominator of which is the aggregate number of Underwritten Shares to be purchased by all the Underwriters from all of the Selling Stockholders hereunder.

In addition, each of the Selling Stockholders agrees, severally and not jointly, as and to the extent indicated in Schedule 2 hereto, to sell, the Option Shares to the several Underwriters as provided in this Agreement, and the Underwriters, on the basis of the representations, warranties and agreements set forth herein and subject to the conditions set forth herein, shall have the option to purchase, severally and not jointly, from each Selling Stockholder at the Purchase Price

 

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less an amount per share equal to any dividends or distributions declared by the Company and payable on the Underwritten Shares but not payable on the Option Shares. If any Option Shares are to be purchased, the number of Option Shares to be purchased by each Underwriter shall be the number of Option Shares which bears the same ratio to the aggregate number of Option Shares being purchased as the number of Underwritten Shares set forth opposite the name of such Underwriter in Schedule 1 hereto (or such number increased as set forth in Section 12 hereof) bears to the aggregate number of Underwritten Shares being purchased from the Selling Stockholders by the several Underwriters, subject, however, to such adjustments to eliminate any fractional Shares as the Representatives in their sole discretion shall make. Any such election to purchase Option Shares shall be made in proportion to the maximum number of Option Shares to be sold by the Company and by each Selling Stockholder as set forth in Schedule 2 hereto.

The Underwriters may exercise the option to purchase Option Shares at any time in whole, or from time to time in part, on or before the thirtieth day following the date of the Prospectus, by written notice from the Representatives to the Company and each of the Selling Stockholders. Such notice shall set forth the aggregate number of Option Shares as to which the option is being exercised and the date and time when the Option Shares are to be delivered and paid for, which may be the same date and time as the Closing Date (as hereinafter defined) but shall not be earlier than the Closing Date nor later than the tenth full business day (as hereinafter defined) after the date of such notice (unless such time and date are postponed in accordance with the provisions of Section 12 hereof). Any such notice shall be given at least two business days prior to the date and time of delivery specified therein.

(b) The Company and the Selling Stockholders understand that the Underwriters intend to make a public offering of the Shares as soon after the effectiveness of this Agreement as in the judgment of the Representatives is advisable, and initially to offer the Shares on the terms set forth in the Prospectus. The Company and the Selling Stockholders acknowledge and agree that the Underwriters may offer and sell Shares to or through any affiliate of an Underwriter.

(c) Payment for the Shares shall be made by wire transfer in immediately available funds to the accounts specified by the Company, and each of the Selling Stockholders, to the Representatives in the case of the Underwritten Shares, at the offices of Ropes & Gray LLP at 10:00 A.M., New York City time, on [●], 2016, or at such other time or place on the same or such other date, not later than the fifth business day thereafter, as the Representatives, the Company and the Selling Stockholders may agree upon in writing or, in the case of the Option Shares, on the date and at the time and place specified by the Representatives in the written notice of the Underwriters’ election to purchase such Option Shares. The time and date of such payment for the Underwritten Shares is referred to herein as the “Closing Date” and the time and date for such payment for the Option Shares, if other than the Closing Date, is herein referred to as the “Additional Closing Date”.

Payment for the Shares to be purchased on the Closing Date or the Additional Closing Date, as the case may be, shall be made against delivery to the Representatives for the respective accounts of the several Underwriters of the Shares to be purchased on such date or the Additional Closing Date, as the case may be, with any transfer taxes payable in connection with the sale of such Shares duly paid by the Company and the Selling Stockholders, as applicable. Delivery of the Shares shall be made through the facilities of The Depository Trust Company (“DTC”) unless

 

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the Representatives shall otherwise instruct. The certificates for the Shares will be made available for inspection and packaging by the Representatives at the office of DTC or its designated custodian not later than 1:00 P.M., New York City time, on the business day prior to the Closing Date or the Additional Closing Date, as the case may be.

(d) Each of the Company and each Selling Stockholder acknowledges and agrees that the Underwriters are acting solely in the capacity of an arm’s length contractual counterparty to the Company and the Selling Stockholders with respect to the offering of Shares contemplated hereby (including in connection with determining the terms of the offering) and not as a financial advisor or a fiduciary to, or an agent of, the Company, the Selling Stockholders or any other person. Additionally, neither of the Representatives nor any other Underwriter is advising the Company, the Selling Stockholders or any other person as to any legal, tax, investment, accounting or regulatory matters in any jurisdiction. The Company and the Selling Stockholders shall consult with their own advisors concerning such matters and each shall be responsible for making its own independent investigation and appraisal of the transactions contemplated hereby, and the Underwriters shall have no responsibility or liability to the Company or the Selling Stockholders with respect thereto. Any review by the Underwriters of the Company, the transactions contemplated hereby or other matters relating to such transactions will be performed solely for the benefit of the Underwriters and shall not be on behalf of the Company or the Selling Stockholders.

3. Representations and Warranties of the Company . The Company represents and warrants to each Underwriter and the Selling Stockholders that:

(a) Preliminary Prospectus.  No order preventing or suspending the use of any Preliminary Prospectus has been issued by the Commission, and each Preliminary Prospectus included in the Pricing Disclosure Package, at the time of filing thereof, complied in all material respects with the Securities Act, and no Preliminary Prospectus, at the time of filing thereof, contained any untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that the Company makes no representation and warranty with respect to any statements or omissions made in reliance upon and in conformity with (i) information relating to any Underwriter furnished to the Company in writing by such Underwriter through the Representatives expressly for use in any Preliminary Prospectus, it being understood and agreed that the only such information furnished by any Underwriter consists of the information described as such in Section 9(c) hereof or (ii) information relating to any Selling Stockholder furnished to the Company in writing by such Selling Stockholder expressly for use in any Preliminary Prospectus, it being understood and agreed that the only such information furnished by any Selling Stockholder consists of the information described as such in Section 9(b) hereof.

(b) Pricing Disclosure Package . The Pricing Disclosure Package as of the Applicable Time did not, and as of the Closing Date and as of the Additional Closing Date, as the case may be, will not, contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that the Company

 

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makes no representation and warranty with respect to any statements or omissions made in reliance upon and in conformity with (i) information relating to any Underwriter furnished to the Company in writing by such Underwriter through the Representatives expressly for use in such Pricing Disclosure Package, it being understood and agreed that the only such information furnished by any Underwriter consists of the information described as such in Section 9(c) hereof or (ii) information relating to any Selling Stockholder furnished to the Company in writing by and on behalf of such Selling Stockholder expressly for use in the Pricing Disclosure Package, it being understood and agreed that the only such information furnished by any Selling Stockholder consists of the information described as such in Section 9(b). No statement of material fact included in the Prospectus has been omitted from the Pricing Disclosure Package and no statement of material fact included in the Pricing Disclosure Package that is required to be included in the Prospectus has been omitted therefrom.

(c) Issuer Free Writing Prospectus.   Other than the Registration Statement, the Preliminary Prospectus and the Prospectus, the Company (including its agents and representatives, other than the Underwriters in their capacity as such) has not prepared, used, authorized, approved or referred to and will not prepare, use, authorize, approve or refer to any “written communication” (as defined in Rule 405 under the Securities Act) that constitutes an offer to sell or solicitation of an offer to buy the Shares (each such communication by the Company or its agents and representatives (other than a communication referred to in clause (i) below) an “Issuer Free Writing Prospectus”) other than (i) any document not constituting a prospectus pursuant to Section 2(a)(10)(a) of the Securities Act or Rule 134 under the Securities Act or (ii) the documents listed on Annex A hereto, each electronic road show and any other written communications approved in writing in advance by the Representatives. Each such Issuer Free Writing Prospectus complied in all material respects with the Securities Act, has been or will be (within the time period specified in Rule 433) filed in accordance with the Securities Act (to the extent required thereby) and does not conflict with the information contained in the Registration Statement or the Pricing Disclosure Package, and, when taken together with the Preliminary Prospectus accompanying, or delivered prior to delivery of, such Issuer Free Writing Prospectus, did not, and as of the Closing Date and as of the Additional Closing Date, as the case may be, will not, contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that the Company makes no representation and warranty with respect to any statements or omissions made in each such Issuer Free Writing Prospectus or Preliminary Prospectus in reliance upon and in conformity with (i) information relating to any Underwriter furnished to the Company in writing by such Underwriter through the Representatives expressly for use in such Issuer Free Writing Prospectus or Preliminary Prospectus and any amendment or supplement thereto, it being understood and agreed that the only such information furnished by any Underwriter consists of the information described as such in Section 9(c) hereof or (ii) information relating to any Selling Stockholder furnished to the Company in writing by and on behalf of such Selling Stockholder expressly for use in such Issuer Free Writing Prospectus or Preliminary Prospectus and any amendment or supplement thereto, it being understood and agreed that the only such information furnished by any Selling Stockholder consists of the information described as such in Section 9(b) hereof.

 

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(d) Emerging Growth Company . From the time of initial confidential submission of the Registration Statement to the Commission (or, if earlier, the first date on which the Company engaged directly or through any person authorized to act on its behalf in any Testing-the-Waters Communication) through the date hereof, the Company has been and is an “emerging growth company,” as defined in Section 2(a) of the Securities Act (an “Emerging Growth Company”). “Testing-the-Waters Communication” means any oral or written communication with potential investors undertaken in reliance on Section 5(d) of the Securities Act.

(e) Testing-the-Waters Materials.   The Company (i) has not alone engaged in any Testing-the-Waters Communications other than Testing-the-Waters Communications with the consent of the Representatives with entities that are qualified institutional buyers within the meaning of Rule 144A under the Securities Act or institutions that are accredited investors within the meaning of Rule 501 under the Securities Act and (ii) has not authorized anyone other than the Representatives to engage in Testing-the-Waters Communications. The Company reconfirms that the Representatives have been authorized to act on its behalf in undertaking Testing-the-Waters Communications by virtue of a writing substantially in the form of Exhibit A hereto. The Company has not distributed or approved for distribution any Written Testing-the-Waters Communications other than those listed on Annex B hereto. “Written Testing-the-Waters Communication” means any Testing-the-Waters Communication that is a written communication within the meaning of Rule 405 under the Securities Act. Any individual Written Testing-the-Waters Communication does not conflict with the information contained in the Registration Statement or the Pricing Disclosure Package, complied in all material respects with the Securities Act, and when taken together with the Pricing Disclosure Package as of the Applicable Time, did not, and as of the Closing Date and as of the Additional Closing Date, as the case may be, will not, contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that the Company makes no representation and warranty with respect to any statements or omissions made in reliance upon and in conformity with (i) information relating to any Underwriter furnished to the Company in writing by such Underwriter through the Representatives expressly for use in such Written Testing-the-Waters Communication and the Pricing Disclosure Package and any amendment or supplement thereto, it being understood and agreed that the only such information furnished by any Underwriter consists of the information described as such in Section 9(c) hereof or (ii) information relating to any Selling Stockholder furnished to the Company in writing by and on behalf of such Selling Stockholder expressly for use in such Written Testing-the-Waters Communication and the Pricing Disclosure Package and any amendment or supplement thereto, it being understood and agreed that the only such information furnished by any Selling Stockholder consists of the information described as such in Section 9(b) hereof.

 

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(f) Registration Statement and Prospectus.  The Registration Statement has been declared effective by the Commission. No order suspending the effectiveness of the Registration Statement has been issued by the Commission, and no proceeding for that purpose or pursuant to Section 8A of the Securities Act against the Company or related to the offering of the Shares has been initiated or, to the Company’s knowledge, threatened by the Commission; as of the applicable effective date of the Registration Statement and any post-effective amendment thereto, the Registration Statement and any such post-effective amendment complied and will comply in all material respects with the Securities Act, and did not and will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading; and as of the date of the Prospectus and any amendment or supplement thereto and as of the Closing Date and as of the Additional Closing Date, as the case may be, the Prospectus will not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that the Company makes no representation and warranty with respect to any statements or omissions made in reliance upon and in conformity with (i) information relating to any Underwriter furnished to the Company in writing by such Underwriter through the Representatives expressly for use in the Registration Statement and the Prospectus and any amendment or supplement thereto, it being understood and agreed that the only such information furnished by any Underwriter consists of the information described as such in Section 9(c) hereof or (ii) information relating to any Selling Stockholder furnished to the Company in writing by and on behalf of such Selling Stockholder expressly for use in the Registration Statement and the Prospectus and any amendment or supplement thereto, it being understood and agreed that the only such information furnished by any Selling Stockholder consists of the information described as such in Section 9(b) hereof.

(g) Financial Statements.  The financial statements (including the related notes thereto) of the Company and its consolidated subsidiaries included in the Registration Statement, the Pricing Disclosure Package and the Prospectus comply in all material respects with the applicable requirements of the Securities Act and present fairly in all material respects the financial position of the Company and its consolidated subsidiaries as of the dates indicated and the results of their operations and the changes in their cash flows for the periods specified; such financial statements have been prepared in conformity with generally accepted accounting principles in the United States applied on a consistent basis throughout the periods covered thereby, except in the case of unaudited financial statements, which are subject to normal year-end adjustments and do not contain certain footnotes as permitted by the applicable rules of the Commission; and the other historical financial information of the Company and its consolidated subsidiaries included in the Registration Statement, the Pricing Disclosure Package and the Prospectus has been derived from the accounting records of the Company and its consolidated subsidiaries and presents fairly in all material respects the information shown thereby. The pro forma financial information and the related notes, if any, included in the Registration Statement, the Pricing Disclosure Package and the Prospectus have been properly compiled and prepared in all material respects in accordance with the applicable requirements of the Securities Act and the Securities Act Regulations and present fairly the

 

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information shown therein, and the assumptions used in the preparation thereof are reasonable and the adjustments used therein are appropriate to give effect to the transactions and circumstances referred to therein.

(h) No Material Adverse Change.  Since the date of the most recent financial statements of the Company included in the Registration Statement, the Pricing Disclosure Package and the Prospectus, (i) there has not been any change in the capital stock (other than the issuance of shares of Common Stock upon the exercise of stock options described as outstanding in, or the grant of stock options and awards under existing equity incentive plans described in, the Registration Statement, the Pricing Disclosure Package and the Prospectus), any material change in short-term debt or long-term debt of the Company or any of its subsidiaries, or any dividend or distribution of any kind declared, set aside for payment, paid or made by the Company on any class of capital stock, or any material adverse change, or any development involving a prospective material adverse change, in or affecting the business, properties, management, financial position, stockholders’ equity or results of operations of the Company and its subsidiaries taken as a whole; (ii) neither the Company nor any of its subsidiaries has entered into any transaction or agreement (whether or not in the ordinary course of business) that is material to the Company and its subsidiaries taken as a whole or incurred any liability or obligation, direct or contingent, that is material to the Company and its subsidiaries taken as a whole; and (iii) neither the Company nor any of its subsidiaries has sustained any material loss or interference with its business that is material to the Company and its subsidiaries taken as a whole and that is either from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor disturbance or dispute or any action, order or decree of any court or arbitrator or governmental or regulatory authority, except in each case as otherwise disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus.

(i) Organization and Good Standing.  The Company and each of its subsidiaries have been duly organized and are validly existing and in good standing under the laws of their respective jurisdictions of organization, are duly qualified to do business and are in good standing in each jurisdiction in which their respective ownership or lease of property or the conduct of their respective businesses requires such qualification, and have all power and authority necessary to own or hold their respective properties and to conduct the businesses in which they are engaged, except where the failure to be so organized, existing, qualified or in good standing or have such power or authority would not reasonably be expected to, individually or in the aggregate, have a material adverse effect on the business, properties, management, financial position, stockholders’ equity or results of operations of the Company and its subsidiaries taken as a whole or on the performance by the Company of its obligations under this Agreement (a “Material Adverse Effect”). The Company’s subsidiaries listed in Schedule 3 to this Agreement are the only significant subsidiaries of the Company.

(j) Capitalization.  The Company has an authorized capitalization as set forth in the Registration Statement, the Pricing Disclosure Package and the Prospectus under the heading “Capitalization”; all the outstanding shares of capital stock of the Company

 

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(including the Shares to be sold by the Selling Stockholders) have been duly authorized and validly issued and are fully paid and non-assessable and are not subject to any pre-emptive or similar rights; except as described in or expressly contemplated by the Pricing Disclosure Package and the Prospectus, there are no outstanding rights (including, without limitation, pre-emptive rights), warrants or options to acquire, or instruments convertible into or exchangeable for, any shares of capital stock or other equity interest in the Company or any of its subsidiaries, or any contract, commitment, agreement, understanding or arrangement of any kind relating to the issuance of any capital stock of the Company or any such subsidiary, any such convertible or exchangeable securities or any such rights, warrants or options; the capital stock of the Company conforms in all material respects to the description thereof contained in the Registration Statement, the Pricing Disclosure Package and the Prospectus; and all the outstanding shares of capital stock or other equity interests of each subsidiary owned, directly or indirectly, by the Company have been duly and validly authorized and issued, are fully paid and non-assessable and are owned directly or indirectly by the Company, free and clear of any lien, charge, encumbrance, security interest, restriction on voting or transfer or any other claim of any third party other than as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, including liens, encumbrances and restrictions imposed in connection with or permitted under the debt instruments described under the heading “Description of Certain Indebtedness”.

(k) Stock Options.   With respect to the stock options (the “Stock Options”) granted pursuant to the stock-based compensation plans of the Company and its subsidiaries (the “Company Stock Plans”), except as would not reasonably be expected to have a Material Adverse Effect, (i) each Stock Option intended to qualify as an “incentive stock option” under Section 422 of the Code so qualifies, (ii) each grant of a Stock Option was duly authorized no later than the date on which the grant of such Stock Option was by its terms to be effective (the “Grant Date”) by all necessary corporate action, including, as applicable, approval by the board of directors of the Company (or a duly constituted and authorized committee thereof) and any required stockholder approval by the necessary number of votes or written consents, and the award agreement governing such grant (if any) was duly executed and delivered by each party thereto, (iii) each such grant was made in accordance with the terms of the Company Stock Plans and (iv) each such grant was properly accounted for in accordance with U.S. generally accepted accounting principles in the financial statements (including the related notes) of the Company.

(l) Due Authorization.  The Company has full right, power and authority to execute and deliver this Agreement and to perform its obligations hereunder; and all action required to be taken for the due and proper authorization, execution and delivery by it of this Agreement and the consummation by it of the transactions contemplated hereby has been duly and validly taken.

(m) Underwriting Agreement. This Agreement has been duly authorized, executed and delivered by the Company.

(n) The Shares.   The Shares to be issued and sold by the Company hereunder have been duly authorized by the Company and, when issued and delivered and paid for

 

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as provided herein, will be duly and validly issued, will be fully paid and nonassessable and will conform to the descriptions thereof in the Registration Statement, the Pricing Disclosure Package and the Prospectus; and the issuance of the Shares is not subject to any preemptive or similar rights.

(o) No Violation or Default.  Neither the Company nor any of its subsidiaries is (i) in violation of its charter or by-laws or similar organizational documents; (ii) in default, and no event has occurred that, with notice or lapse of time or both, would constitute such a default, in the due performance or observance of any term, covenant or condition contained in any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries is bound or to which any of the property or assets of the Company or any of its subsidiaries is subject; or (iii) in violation of any law or statute applicable to the Company or any of its subsidiaries or any judgment, order, rule or regulation of any court or arbitrator or governmental or regulatory authority having jurisdiction over the Company or any of its subsidiaries, except, in the case of clauses (ii) and (iii) above, for any such default or violation that would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.

(p) No Conflicts.   The execution, delivery and performance by the Company of this Agreement, the issuance and sale of the Shares by the Company and the consummation by the Company of the transactions contemplated by this Agreement or the Pricing Disclosure Package and the Prospectus will not (i) conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of its subsidiaries pursuant to, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries is bound or to which any of the property or assets of the Company or any of its subsidiaries is subject, (ii) result in any violation of the provisions of the charter or by-laws or similar organizational documents of the Company or any of its subsidiaries or (iii) result in the violation of any law or statute applicable to the Company or any of its subsidiaries or any judgment, order, rule or regulation of any court or arbitrator or governmental or regulatory authority having jurisdiction over the Company or any of its subsidiaries, except, in the case of clauses (i) and (iii) above, for any such conflict, breach, violation or default that would not reasonably be expected to, individually or in the aggregate, have a Material Adverse Effect.

(q) No Consents Required.  No consent, approval, authorization, order, license, registration or qualification of or with any court or arbitrator or governmental or regulatory authority is required for the execution, delivery and performance by the Company of this Agreement, the issuance and sale of the Shares and the consummation of the transactions contemplated by this Agreement, except for (i) the registration of the Shares under the Securities Act and such consents, approvals, authorizations, orders and registrations or qualifications as may be required by the Financial Industry Regulatory Authority, Inc. (“FINRA”) and under applicable state securities laws in connection with the purchase

 

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and distribution of the Shares by the Underwriters or (ii) such consents, approvals, authorizations, orders, licenses, registrations or qualifications as shall have been obtained or made prior to the Closing Date.

(r) Legal Proceedings.  Except as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, there are no legal, governmental or regulatory investigations, actions, suits or proceedings pending to which the Company or any of its subsidiaries is a party or to which any property of the Company or any of its subsidiaries is the subject that, individually or in the aggregate, if determined adversely to the Company or any of its subsidiaries, would reasonably be expected to have a Material Adverse Effect; no such investigations, actions, suits or proceedings are, to the knowledge of the Company, threatened or contemplated by any governmental or regulatory authority or threatened by others; and (i) there are no current or pending legal, governmental or regulatory actions, suits or proceedings that are required under the Securities Act to be described in the Registration Statement, the Pricing Disclosure Package or the Prospectus that are not so described in the Registration Statement, the Pricing Disclosure Package and the Prospectus and (ii) there are no contracts or other documents that are required under the Securities Act to be filed as exhibits to the Registration Statement or described in the Registration Statement, the Pricing Disclosure Package or the Prospectus that are not so filed as exhibits to the Registration Statement or described in the Registration Statement, the Pricing Disclosure Package and the Prospectus.

(s) Independent Accountants . Deloitte & Touche LLP, who have certified certain consolidated financial statements of the Company and its subsidiaries is an independent registered public accounting firm with respect to the Company and its subsidiaries within the applicable rules and regulations adopted by the Commission and the Public Company Accounting Oversight Board (United States) and as required by the Securities Act.

(t) Title to Real and Personal Property.  The Company and its subsidiaries have good and marketable title in fee simple (in the case of real property) to, or have valid and marketable rights to lease or otherwise use, all items of real and personal property and assets that are material to the respective businesses of the Company and its subsidiaries, in each case free and clear of all liens, encumbrances, claims and defects and imperfections of title except those that (i) are otherwise disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus, (ii) do not materially interfere with the use made and proposed to be made of such property by the Company and its subsidiaries or (iii) could not reasonably be expected, individually or in the aggregate, to have a Material Adverse Effect.

(u) Title to Intellectual Property.  Except where the failure of any of the following representations to be true would not reasonably be expected to have a Material Adverse Effect on the Company and its subsidiaries, taken as a whole: (i) the Company and its subsidiaries own or possess, or can acquire on commercially reasonable terms, adequate rights to use all patents, patent applications, copyrights, trademarks, service marks, trade names, trademark registrations, service mark registrations, licenses and know-how (including trade secrets and other unpatented and/or unpatentable proprietary

 

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or confidential information, systems or procedures) necessary for the conduct of their respective businesses as currently conducted and as currently proposed to be conducted in the Registration Statement, the Pricing Disclosure Package and the Prospectus, and the conduct of their respective businesses will not conflict in any material respect with any such rights of others; and (ii) neither the Company nor any of its subsidiaries has received any notice of any claim of infringement or misappropriation of any such rights of others by the Company or any of its subsidiaries.

(v) No Undisclosed Relationships.  No relationship, direct or indirect, exists between or among the Company or any of its subsidiaries, on the one hand, and the directors, officers, stockholders, customers or suppliers of the Company or any of its subsidiaries, on the other, that is required by the Securities Act to be described in the Registration Statement and the Prospectus and that is not so described in such documents and in the Pricing Disclosure Package.

(w) Investment Company Act.  The Company is not and, after giving effect to the offering and sale of the Shares and the application of the proceeds thereof received by the Company as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, will not be required to register as an “investment company” or an entity “controlled” by an “investment company” within the meaning of the Investment Company Act of 1940, as amended, and the rules and regulations of the Commission thereunder (collectively, the “Investment Company Act”).

(x) Taxes.  The Company and its subsidiaries have paid all federal, state, local and foreign taxes and filed all tax returns required to be paid or filed through the date hereof (except in any case in which failure to pay or file (as applicable) would not reasonably be expected to have a Material Adverse Effect, and except for any taxes being contested in good faith); and except as otherwise disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus, there is no tax deficiency that has been asserted against the Company or any of its subsidiaries or any of their respective properties or assets (except for any tax deficiency that is currently being contested in good faith or as would not reasonably be expected to have a Material Adverse Effect).

(y) Licenses and Permits.  The Company and its subsidiaries possess all licenses, certificates, permits and other authorizations issued by, and have made all declarations and filings with, the appropriate federal, state, local or foreign governmental or regulatory authorities that are necessary for the ownership or lease of their respective properties or the conduct of their respective businesses as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, except where the failure to possess or make the same would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect; and except as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, neither the Company nor any of its subsidiaries has received notice of any revocation or modification of any such license, certificate, permit or authorization or has any reason to believe that any such license, certificate, permit or authorization will not be renewed in the ordinary course, in each case, except where such revocation or modification would not reasonably be expected to have a Material Adverse Effect.

 

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(z) No Labor Disputes.  No labor disturbance by or dispute with employees of the Company or any of its subsidiaries exists or, to the knowledge of the Company, is contemplated or threatened, and the Company is not aware of any existing or imminent labor disturbance by, or dispute with, the employees of any of its or its subsidiaries’ principal suppliers, contractors or customers, except, in each case, as would not reasonably be expected to have a Material Adverse Effect.

(aa) Compliance with and Liability under Environmental Laws.  (i) The Company and its subsidiaries (a) are in compliance with any and all applicable federal, state, local and foreign laws, rules, regulations, requirements, decisions, judgments, decrees, orders and the common law relating to pollution or the protection of the environment, natural resources or human health or safety, including those relating to the generation, storage, treatment, use, handling, transportation, Release or threat of Release of Hazardous Materials (collectively, “Environmental Laws”), (b) have received and are in compliance with all permits, licenses, certificates or other authorizations or approvals required of them under applicable Environmental Laws to conduct their respective businesses, (c) have not received notice of any actual or alleged liability under or relating to, or actual or alleged violation of, any Environmental Laws, including for the investigation or remediation of any Release or threat of Release of Hazardous Materials, and have no knowledge of any event or condition that would reasonably be expected to result in any such notice, (d) are not conducting or paying for, in whole or in part, any investigation, remediation or other corrective action pursuant to any Environmental Law at any location, and (e) are not a party to any order, decree or agreement that imposes any obligation or liability under any Environmental Law; and (ii) except as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, (a) there are no proceedings that are pending, or that are known by the Company to be threatened by a governmental entity, against the Company or any of its subsidiaries under any Environmental Laws in which a governmental entity is also a party, other than such proceedings regarding which it is reasonably believed no monetary sanctions of $100,000 or more will be imposed against the Company or any of its subsidiaries, and (b) none of the Company and its subsidiaries anticipates material capital expenditures relating to any Environmental Laws.

(bb) Hazardous Materials . There has been no storage, generation, transportation, use, handling, treatment, Release or threat of Release of Hazardous Materials by, relating to or caused by the Company or any of its subsidiaries (or, to the knowledge of the Company and its subsidiaries, any other entity (including any predecessor) for whose acts or omissions the Company or any of its subsidiaries is or could reasonably be expected to be liable) at, on, under or from any property or facility now or previously owned, operated or leased by the Company or any of its subsidiaries, or at, on, under or from any other property or facility, in violation of any Environmental Laws or in a manner or amount or to a location that would reasonably be expected to result in any liability under any Environmental Law, except for any violation or liability which would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. “Hazardous Materials” means any material, chemical, substance, waste, pollutant, contaminant, compound, mixture, or constituent thereof, in any form or amount, including petroleum (including crude oil or any fraction thereof) and petroleum products, natural gas liquids,

 

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asbestos and asbestos containing materials, naturally occurring radioactive materials, brine, and drilling mud, regulated or which can give rise to liability under any Environmental Law. “Release” means any spilling, leaking, seepage, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping, disposing, depositing, dispersing, or migrating in, into or through the environment, or in, into, from or through any building or structure.

(cc) Compliance with ERISA.  (i) Each employee benefit plan, within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), for which the Company or any member of its “Controlled Group” (defined as any organization which is a member of a controlled group of corporations within the meaning of Section 414 of the Internal Revenue Code of 1986, as amended (the “Code”)) has any liability (each, a “Plan”) has been maintained in compliance with its terms and the requirements of any applicable statutes, orders, rules and regulations, including but not limited to, ERISA and the Code, except for noncompliance that would not reasonably be expected to have a Material Adverse Effect; (ii) no prohibited transaction, within the meaning of Section 406 of ERISA or Section 4975 of the Code, has occurred with respect to any Plan, excluding transactions effected pursuant to a statutory or administrative exemption, that would reasonably be expected to result in a Material Adverse Effect; (iii) no Plan is subject to the funding rules of Section 412 of the Code or Section 302 of ERISA; (iv) the fair market value of the assets of each Plan that is required under applicable law to be funded exceeds the present value of all benefits accrued under such Plan (determined based on those assumptions used to fund such Plan); (v) no “reportable event” (within the meaning of Section 4043(c) of ERISA) has occurred or is reasonably expected to occur that either has resulted, or would reasonably be expected to result, in material liability to the Company or its subsidiaries, excluding any reportable event for which the notice requirements have been waived; (vi) neither the Company nor any member of the Controlled Group has incurred, nor reasonably expects to incur, any material liability under Title IV of ERISA; and (vii) to the knowledge of the Company, there is no pending audit or investigation by the Internal Revenue Service, the U.S. Department of Labor, the Pension Benefit Guaranty Corporation or any other governmental agency or any foreign regulatory agency with respect to any Plan that would reasonably be expected to have a Material Adverse Effect. None of the following events has occurred or is reasonably likely to occur: (x) a material increase in the aggregate amount of contributions required to be made to all Plans by the Company or its subsidiaries in the current fiscal year of the Company and its subsidiaries compared to the amount of such contributions made in the Company and its subsidiaries’ most recently completed fiscal year; or (y) a material increase in the Company and its subsidiaries’ “accumulated post-retirement benefit obligations” (within the meaning of Statement of Financial Accounting Standards 106) compared to the amount of such obligations in the Company and its subsidiaries’ most recently completed fiscal year.

(dd) Disclosure Controls . The Company and its subsidiaries maintain an effective system of “disclosure controls and procedures” (as defined in Rule 13a-15(e) of the Exchange Act of 1934, as amended (the “Exchange Act”)) that complies with the applicable requirements of the Exchange Act and that has been designed to ensure that information

 

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required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms, including controls and procedures designed to ensure that such information is accumulated and communicated to the Company’s management as appropriate to allow timely decisions regarding required disclosure.

(ee) Accounting Controls.  The Company and its subsidiaries maintain systems of “internal control over financial reporting” (as defined in Rule 13a-15(f) of the Exchange Act) that comply with the requirements of the Exchange Act and have been designed by, or under the supervision of, their respective principal executive and principal financial officers, or persons performing similar functions, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles, including, but not limited to, internal accounting controls sufficient to provide reasonable assurance that: (i) transactions are executed in accordance with management’s general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability; (iii) access to assets is permitted only in accordance with management’s general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. Except as disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus, there are no material weaknesses in the Company’s internal controls. The Company’s auditors and the Audit Committee of the Board of Directors of the Company have been advised of: (x) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which have adversely affected or are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and (y) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal controls over financial reporting.

(ff) Insurance.   The Company and its subsidiaries have insurance covering their respective properties, operations, personnel and businesses, including business interruption insurance, which insurance is in amounts and insures against such losses and risks as are customary for businesses such as the Company’s and its subsidiaries’; and neither the Company nor any of its subsidiaries has (i) received notice from any insurer or agent of such insurer that capital improvements or other expenditures are required or necessary to be made in order to continue such insurance or (ii) any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage at reasonable cost from similar insurers as may be necessary to continue its business.

(gg) No Unlawful Payments.  Neither the Company nor any of its subsidiaries, nor any director or officer of the Company or any of its subsidiaries nor, to the knowledge of the Company, any employee, affiliate, agent or other person acting on behalf of the Company or any of its subsidiaries: (i) has used any corporate funds for any

 

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unlawful contribution, unlawful gift, unlawful entertainment or other unlawful expense relating to political activity; (ii) has made or taken an act in furtherance of an offer, promise or authorization of any direct or indirect unlawful payment or benefit to any foreign or domestic government official or employee, including of any government-owned or controlled entity or of a public international organization, or any person acting in an official capacity for or on behalf of any of the foregoing, or any political party or party official or candidate for political office; (iii) has violated or is in violation of any applicable provision of the U.S. Foreign Corrupt Practices Act of 1977, as amended, or any applicable law or regulation implementing the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, or committed an offence under the Bribery Act 2010 of the United Kingdom, or any other applicable anti-bribery or anti-corruption law; or (iv) has made, offered, agreed, requested or taken an act in furtherance of any unlawful bribe or other unlawful benefit, including, without limitation, any rebate, payoff, influence payment, kickback or other unlawful or improper payment or benefit. The Company and its subsidiaries have instituted, maintain and enforce, policies and procedures designed to promote and ensure compliance with all applicable anti-bribery and anti-corruption laws and with the representation and warranty contained herein.

(hh) Compliance with Anti-Money Laundering Laws . The operations of the Company and its subsidiaries are and have been conducted at all times in compliance with applicable financial recordkeeping and reporting requirements, the applicable money laundering statutes of all jurisdictions where the Company or any of its subsidiaries conducts business, the rules and regulations thereunder and any related or similar rules, regulations or guidelines, issued, administered or enforced by any governmental agency (collectively, the “Anti-Money Laundering Laws”), and no action, suit or proceeding by or before any court or governmental agency, authority or body or any arbitrator involving the Company or any of its subsidiaries with respect to the Anti-Money Laundering Laws is pending or, to the best knowledge of the Company, threatened.

(ii) No Conflicts with Sanctions Laws.   Neither the Company nor any of its subsidiaries, directors, officers, nor, to the knowledge of the Company, any employees, affiliates or agents of the Company or any of its subsidiaries is, or is owned or controlled by an individual or entity (“Person”) that is, (i) currently the subject or the target of any sanctions administered or enforced by the U.S. government (including, without limitation, the Office of Foreign Assets Control of the U.S. Department of the Treasury (“OFAC”) or the U.S. Department of State and including, without limitation, the designation as a “specially designated national” or “blocked person”), the United Nations Security Council (“UNSC”), the European Union, or Her Majesty’s Treasury (“HMT”) or other relevant sanctions authority (collectively, “Sanctions”), nor (ii) the Company, any of its subsidiaries located, organized or resident in a country or territory that is the subject or target of Sanctions, including Cuba, Iran, North Korea, Sudan, Syria and Crimea (each, a “Sanctioned Country”); and the Company will not directly or indirectly use the proceeds of the offering of the Shares hereunder, or lend, contribute or otherwise make available such proceeds to any subsidiary, joint venture partner or other person or entity (x) to fund or facilitate any activities of or business with any person that, at the time of such funding or facilitation, is the subject or target of Sanctions, (y) to fund or facilitate any activities

 

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of or business in any Sanctioned Country or (z) in any other manner that will result in a violation by any person (including any person participating in the transactions, whether as underwriter, advisor, investor or otherwise) of Sanctions. For the past five years, the Company and its subsidiaries have not knowingly engaged in and are not now knowingly engaged in any dealings or transactions with any person that at the time of the dealing or transaction is or was the subject or the target of Sanctions or with any Sanctioned Country.

(jj) No Restrictions on Subsidiaries . Except as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, no subsidiary of the Company is currently prohibited, directly or indirectly, under any agreement or other instrument to which it is a party or is subject, from paying any dividends to the Company, from making any other distribution on such subsidiary’s capital stock, from repaying to the Company any loans or advances to such subsidiary from the Company or from transferring any of such subsidiary’s properties or assets to the Company or any other subsidiary of the Company.

(kk) No Broker’s Fees.  Neither the Company nor any of its subsidiaries is a party to any contract, agreement or understanding with any person (other than this Agreement) that would give rise to a valid claim against the Company or any of its subsidiaries or any Underwriter for a brokerage commission, finder’s fee or like payment in connection with the offering and sale of the Shares.

(ll) No Registration Rights . Except such rights that have been duly waived or satisfied, no person has the right to require the Company or any of its subsidiaries to register any securities for sale under the Securities Act by reason of the filing of the Registration Statement with the Commission, the issuance and sale of the Shares by the Company or, to the knowledge of the Company, the sale of the Shares to be sold by the Selling Stockholders hereunder.

(mm) No Stabilization.  The Company has not taken, directly or indirectly, without giving effect to activities by the Underwriters, any action designed to, or that would reasonably be expected to, cause or result in any stabilization or manipulation of the price of the Shares.

(nn) Margin Rules . The application of the proceeds received by the Company from the issuance, sale and delivery of the Shares as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus will not violate Regulation T, U or X of the Board of Governors of the Federal Reserve System or any other regulation of such Board of Governors.

(oo) Forward-Looking Statements.  No forward-looking statement (within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act) contained in the Registration Statement, the Pricing Disclosure Package or the Prospectus has been made or reaffirmed without a reasonable basis or has been disclosed other than in good faith.

 

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(pp) Statistical and Market Data.  Nothing has come to the attention of the Company that has caused the Company to believe that the statistical and market-related data included in the Registration Statement, the Pricing Disclosure Package and the Prospectus is not based on or derived from sources that are reliable and accurate in all material respects.

(qq) Sarbanes-Oxley Act . There is and has been no failure on the part of the Company or, to the knowledge of the Company, any of the Company’s directors or officers, in their capacities as such, to comply in all material respects with any provision of the Sarbanes-Oxley Act of 2002, as amended, and the rules and regulations promulgated in connection therewith (the “Sarbanes-Oxley Act”), applicable as of the effective date of the Registration Statement, including Section 402 related to loans and Sections 302 and 906 related to certifications.

(rr) Status under the Securities Act . At the time of filing the Registration Statement and any post-effective amendment thereto, at the earliest time thereafter that the Company or any offering participant made a bona fide offer (within the meaning of Rule 164(h)(2) under the Securities Act) of the Shares and at the date hereof, the Company was not and is not an “ineligible issuer,” as defined in Rule 405 under the Securities Act. The Company has paid the registration fee for this offering pursuant to Rule 456(b)(1) under the Securities Act or will pay such fee within the time period required by such rule (without giving effect to the proviso therein) and in any event prior to the Closing Date.

(ss) Directed Share Program . The Registration Statement, the Pricing Disclosure Package and the Prospectus, any Preliminary Prospectus and any Issuer Free Writing Prospectuses comply, and any further amendments or supplements thereto will comply, with any applicable laws or regulations of foreign jurisdictions in which the Pricing Disclosure Package, the Prospectus, any Preliminary Prospectus and any Issuer Free Writing Prospectus, as amended or supplemented, if applicable, are distributed in connection with the Directed Share Program.

(tt) Directed Share Program Consent. No consent, approval, authorization or order of, or qualification with, any governmental body or agency, other than those obtained, is required in connection with the offering of the Directed Shares in any jurisdiction where the Directed Shares are being offered.

(uu) Offers under Directed Share Program . The Company has not offered, or caused Morgan Stanley or any Morgan Stanley Entity as defined in Section 9 to offer, Shares to any person pursuant to the Directed Share Program with the specific intent to unlawfully influence (i) a customer or supplier of the Company to alter the customer’s or supplier’s level or type of business with the Company, or (ii) a trade journalist or publication to write or publish favorable information about the Company or its products.

 

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4. Representations and Warranties of the Selling Stockholders . Each of the Selling Stockholders severally and not jointly represents and warrants to each Underwriter and the Company that:

(a) Required Consents; Authority . All consents, approvals, authorizations and orders necessary for the execution and delivery by such Selling Stockholder of this Agreement and for the sale and delivery of the Shares to be sold by such Selling Stockholder hereunder, have been obtained except (i) such as has been obtained or will be obtained prior to the Closing Date, (ii) such as may be required by the Securities Act, the Exchange Act, the rules of the New York Stock Exchange (the “Exchange”), FINRA or the securities or Blue Sky laws of the various states in connection with the offer and sale of the Shares or (iii) such that would not reasonably be expected to have a material adverse effect on the ability of such Selling Stockholder to consummate the transactions contemplated by this Agreement; and such Selling Stockholder has full right, power and authority to enter into this Agreement and to sell, assign, transfer and deliver the Shares to be sold by such Selling Stockholder hereunder; this Agreement has been duly authorized, executed and delivered by such Selling Stockholder.

(b) No Conflicts . The execution, delivery and performance by such Selling Stockholder of this Agreement, the sale of the Shares to be sold by such Selling Stockholder and the consummation by such Selling Stockholder of the transactions contemplated herein or therein will not (i) conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of such Selling Stockholder pursuant to, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which such Selling Stockholder is a party or by which such Selling Stockholder is bound or to which any of the property or assets of such Selling Stockholder is subject, (ii) result in any violation of the provisions of the charter or by-laws or similar organizational documents of such Selling Stockholder or (iii) result in the violation of any law or statute or any judgment, order, rule or regulation of any court or arbitrator or governmental or regulatory agency, except in the case of clauses (i) and (iii) where such conflict, breach, violation, default, lien, charge or encumbrance would not, singly or in the aggregate, have a material adverse effect on such Selling Stockholder’s ability to perform its obligations under this Agreement.

(c) Title to Shares.  Such Selling Stockholder has good and valid title to the Shares to be sold at the Closing Date or the Additional Closing Date, as the case may be, by such Selling Stockholder hereunder, free and clear of all liens, encumbrances, equities or adverse claims; such Selling Stockholder will have, immediately prior to the Closing Date or the Additional Closing Date, as the case may be, good and valid title to the Shares to be sold at the Closing Date or the Additional Closing Date, as the case may be, by such Selling Stockholder, free and clear of all liens, encumbrances, equities or adverse claims; and, upon delivery of the certificates representing such Shares and payment therefor pursuant hereto, good and valid title to such Shares, free and clear of all liens, encumbrances, equities or adverse claims, will pass to the several Underwriters.

(d) No Stabilization.  Such Selling Stockholder has not taken and will not take, directly or indirectly, any action designed to or that could reasonably be expected to cause or result in any stabilization or manipulation of the price of the Shares.

 

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(e) Pricing Disclosure Package . The Pricing Disclosure Package, at the Applicable Time did not, and as of the Closing Date and as of the Additional Closing Date, as the case may be, will not, contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that such Selling Stockholder’s representations and warranties under this Section 4(e) are limited solely to statements or omissions made in reliance upon and in conformity with the Selling Stockholder Information (as defined below) furnished by such Selling Stockholder. Each Underwriter, the Company and each Selling Stockholder agree that “Selling Stockholder Information” consists solely of the information furnished by such Selling Stockholder for use in connection with the offering, which solely consists of (i) the name of such Selling Stockholder, (ii) the number of shares of common stock owned by such Selling Stockholder prior to the completion of this offering, (iii) the information set forth in the applicable footnote relating to such Selling Stockholder under the beneficial ownership table and (iv) the number of Shares to be offered by such Selling Stockholder, in each case as set forth under the caption “Principal and Selling stockholders”, in each of the Pricing Disclosure Package (including any Pricing Disclosure Package that is subsequently amended), the Registration Statement and the Prospectus (or any amendment or supplement thereto).

(f) Issuer Free Writing Prospectus and Written Testing-the-Waters Communication.   Other than the Registration Statement, the Preliminary Prospectus and the Prospectus, such Selling Stockholder (including its agents and representatives, other than the Underwriters in their capacity as such) has not prepared, used, authorized, approved or referred to and will not prepare, use, authorize, approve or refer to any Issuer Free Writing Prospectus or Written Testing-the-Waters Communication, other than (i) any document not constituting a prospectus pursuant to Section 2(a)(10)(a) of the Securities Act or Rule 134 under the Securities Act or (ii) the documents listed on Annex A or Annex B hereto, each electronic road show and any other written communications approved in writing in advance by the Company and the Representatives.

(g) Registration Statement and Prospectus.  As of the applicable effective date of the Registration Statement and any post-effective amendment thereto, the Registration Statement and any such post-effective amendment complied and will comply in all material respects with the Securities Act, and did not and will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading; and as of the date of the Prospectus and any amendment or supplement thereto and as of the Closing Date and as of the Additional Closing Date, as the case may be, the Prospectus will not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that such Selling Stockholder’s representations and warranties under this Section 4(g) are limited solely to statements or omissions made in reliance upon and in conformity with the Selling Stockholder Information furnished by such Selling Stockholder.

 

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(h) Delivery . Each of the Selling Stockholders specifically agrees that the Shares represented by the certificates are subject to the interests of the Underwriters hereunder. Each of the Selling Stockholders specifically agrees that the obligations of such Selling Stockholder hereunder shall not be terminated by operation of law, whether by the death or incapacity of any individual Selling Stockholder, or, in the case of an estate or trust, by the death or incapacity of any executor or trustee or the termination of such estate or trust, or in the case of a partnership, corporation or similar organization, by the dissolution of such partnership, corporation or organization, or by the occurrence of any other event. If any individual Selling Stockholder or any such executor or trustee should die or become incapacitated, or if any such estate or trust should be terminated, or if any such partnership, corporation or similar organization should be dissolved, or if any other such event should occur, before the delivery of the Shares hereunder, certificates representing such Shares shall be delivered by or on behalf of such Selling Stockholder in accordance with the terms and conditions of this Agreement.

5. Further Agreements of the Company . The Company covenants and agrees with each Underwriter that:

(a) Required Filings.  The Company will file the final Prospectus with the Commission within the time periods specified by Rule 424(b) and Rule 430A under the Securities Act, will file any Issuer Free Writing Prospectus to the extent required by Rule 433 under the Securities Act and will to furnish copies of the Prospectus and each Issuer Free Writing Prospectus (to the extent not previously delivered) to the Underwriters in New York City as soon as is reasonably practicable following the date of this Agreement in such quantities as the Representatives may reasonably request.

(b) Delivery of Copies.  The Company will deliver, if requested, without charge, (i) to the Representatives, three copies of the Registration Statement as originally filed and each amendment thereto, in each case including all exhibits and consents filed therewith; and (ii) to each Underwriter (A) a conformed copy of the Registration Statement as originally filed and each amendment thereto (without exhibits) and (B) during the Prospectus Delivery Period (as defined below), as many copies of the Prospectus (including all amendments and supplements thereto and each Issuer Free Writing Prospectus) as the Representatives may reasonably request. As used herein, the term “Prospectus Delivery Period” means such period of time after the first date of the public offering of the Shares as in the opinion of counsel for the Underwriters a prospectus relating to the Shares is required by law to be delivered (or required to be delivered but for Rule 172 under the Securities Act) in connection with sales of the Shares by any Underwriter or dealer.

(c) Amendments or Supplements, Issuer Free Writing Prospectuses.  Before using, authorizing, approving, referring to or filing any Issuer Free Writing Prospectus, and before filing any amendment or supplement to the Registration Statement or the Prospectus, the Company will furnish to the Representatives and counsel for the Underwriters a copy of the proposed Issuer Free Writing Prospectus, amendment or supplement for review and will not prepare, use, authorize, approve, refer to or file any such Issuer Free Writing Prospectus or file any such proposed amendment or supplement to which the Representatives reasonably object.

 

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(d) Notice to the Representatives.  The Company will advise the Representatives promptly, and confirm such advice in writing (which may be by electronic mail): (i) when the Registration Statement has become effective; (ii) when any amendment to the Registration Statement has been filed or becomes effective; (iii) when any supplement to the Prospectus, any Issuer Free Writing Prospectus or any Written Testing-the-Waters Communication or any amendment to the Prospectus has been filed or distributed; (iv) of any request by the Commission for any amendment to the Registration Statement or any amendment or supplement to the Prospectus or the receipt of any comments from the Commission relating to the Registration Statement or any other request by the Commission for any additional information including, but not limited to, any request for information concerning any Testing-the-Waters Communication; (v) of the issuance by the Commission of any order suspending the effectiveness of the Registration Statement or preventing or suspending the use of any Preliminary Prospectus, any of the Pricing Disclosure Package, the Prospectus or any Written Testing-the-Waters Communication or the initiation or threatening of any proceeding, if the Company gains knowledge of such proceeding, for that purpose or pursuant to Section 8A of the Securities Act; (vi) of the occurrence of any event or development within the Prospectus Delivery Period as a result of which the Prospectus, the Pricing Disclosure Package, any Issuer Free Writing Prospectus or any Written Testing-the-Waters Communication as then amended or supplemented would include any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances existing when the Prospectus, the Pricing Disclosure Package, any such Issuer Free Writing Prospectus or any Written Testing-the-Waters Communication is delivered to a purchaser, not misleading; and (vii) of the receipt by the Company of any notice with respect to any suspension of the qualification of the Shares for offer and sale in any jurisdiction or if the Company gains knowledge of such, the initiation or threatening of any proceeding for such purpose; and the Company will use its best efforts to prevent the issuance of any such order suspending the effectiveness of the Registration Statement, preventing or suspending the use of any Preliminary Prospectus, any of the Pricing Disclosure Package or the Prospectus or any Written Testing-the-Waters Communication or suspending any such qualification of the Shares and, if any such order is issued, will use its reasonable best efforts to obtain as soon as possible the withdrawal thereof.

(e) Ongoing Compliance.  (1) If during the Prospectus Delivery Period (i) any event or development shall occur or condition shall exist as a result of which the Prospectus as then amended or supplemented would include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances existing when the Prospectus is delivered to a purchaser, not misleading or (ii) it is necessary to amend or supplement the Prospectus to comply with law, the Company will promptly notify the Underwriters thereof and forthwith prepare and, subject to paragraph (c) above, file with the Commission and furnish to the Underwriters and to such dealers as the Representatives may designate such amendments or supplements to the Prospectus as may be necessary so that the statements in the Prospectus

 

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as so amended or supplemented will not, in the light of the circumstances existing when the Prospectus is delivered to a purchaser, be misleading or so that the Prospectus will comply with the Securities Act and (2) if at any time prior to the Closing Date (i) any event or development shall occur or condition shall exist as a result of which the Pricing Disclosure Package as then amended or supplemented would include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances existing when the Pricing Disclosure Package is delivered to a purchaser, not misleading or (ii) it is necessary to amend or supplement the Pricing Disclosure Package to comply with the Securities Act, the Company will promptly notify the Underwriters thereof and forthwith prepare and, subject to paragraph (c) above, file with the Commission (to the extent required) and furnish to the Underwriters and to such dealers as the Representatives may designate, such amendments or supplements to the Pricing Disclosure Package as may be necessary so that the statements in the Pricing Disclosure Package as so amended or supplemented will not, in the light of the circumstances existing when the Pricing Disclosure Package is delivered to a purchaser, be misleading or so that the Pricing Disclosure Package will comply with law.

(f) Blue Sky Compliance. If required by applicable law, the Company will qualify the Shares for offer and sale under the securities or Blue Sky laws of such jurisdictions as the Representatives shall reasonably request and will continue such qualifications in effect so long as required for distribution of the Shares; provided that the Company shall not be required to (i) qualify as a foreign corporation or other entity or as a dealer in securities in any such jurisdiction where it would not otherwise be required to so qualify, (ii) file any general consent to service of process in any such jurisdiction or (iii) subject itself to taxation in any such jurisdiction if it is not otherwise so subject.

(g) Earning Statement. The Company will make generally available to its security holders and the Representatives as soon as practicable an earnings statement that satisfies the provisions of Section 11(a) of the Securities Act and Rule 158 of the Commission promulgated thereunder covering a period of at least twelve months beginning with the first fiscal quarter of the Company occurring after the “effective date” (as defined in Rule 158) of the Registration Statement.

(h) Clear Market. For a period of 180 days after the date of the Prospectus, the Company will not (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, or file with the Commission a registration statement under the Securities Act relating to, any shares of Stock or any securities convertible into or exercisable or exchangeable for Stock, or publicly disclose the intention to make any offer, sale, pledge, disposition or filing, or (ii) enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of the Stock or any such other securities, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of Stock or such other securities, in cash or otherwise, without the prior written consent of the Representatives, other than (1) the Shares to be sold hereunder, (2) any shares of Stock of the Company awarded, issued upon the exercise of options or purchase rights, issued upon

 

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vesting of equity awards and/or settlement of other awards granted under the Company Stock Plans, (3) the filing by the Company of registration statements on Form S-8 with respect to benefit plans described in the Registration Statement, the Pricing Disclosure Package and the Prospectus and (4) the issuance by the Company of Common Stock and securities convertible or exercisable or exchangeable for Common Stock, in an aggregate amount not to exceed 5% of the Company’s outstanding securities, determined as of the Closing Date, in connection with one more acquisitions of a company or a business, securities, property or assets of another person or entity, joint ventures, commercial relationships or strategic alliances.

If the Representatives, in their sole discretion, agree to release or waive the restrictions set forth in Section 6(a) or a lock-up letter described in Section 8(m) hereof for an officer or director of the Company and provide the Company with notice of the impending release or waiver substantially in the form of Exhibit B hereto at least three business days before the effective date of the release or waiver, the Company agrees to announce the impending release or waiver by a press release substantially in the form of Exhibit C hereto through a major news service at least two business days before the effective date of the release or waiver.

(i) Use of Proceeds. The Company will apply the net proceeds from the sale of the Shares as described in the Prospectus under the heading “Use of Proceeds”.

(j) No Stabilization. The Company will not take, directly or indirectly, without giving effect to activities by the Underwriters, any action designed to or that would reasonably be expected to cause or result in any stabilization or manipulation of the price of the Stock.

(k) Exchange Listing. The Company will use its best efforts to list, subject to notice of issuance, the Shares on the Exchange.

(l) Reports. Until the third anniversary of the date hereof, the Company will furnish to the Representatives, as soon as commercially reasonable after they are available, copies of all reports or other communications (financial or other) furnished to holders of the Shares, and copies of any reports and financial statements furnished to or filed with the Commission or any national securities exchange or automatic quotation system; provided the Company will be deemed to have furnished such reports and financial statements to the Representatives to the extent they are filed on the Commission’s Electronic Data Gathering, Analysis, and Retrieval system.

(m) Record Retention . The Company will, pursuant to reasonable procedures developed in good faith, retain copies of each Issuer Free Writing Prospectus that is not filed with the Commission in accordance with Rule 433 under the Securities Act.

(n) Filings. The Company will file with the Commission such reports as may be required by Rule 463 under the Securities Act.

 

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(o) Emerging Growth Company . The Company will promptly notify the Representatives if the Company ceases to be an Emerging Growth Company at any time prior to the later of (i) completion of the distribution of Shares within the meaning of the Securities Act and (ii) completion of the 180-day restricted period referred to in Section 5(h) hereof.

(p) Directed Share Program . The Company will comply with all applicable securities and other laws, rules and regulations in each jurisdiction in which the Directed Shares are offered in connection with the Directed Share Program.

6. Further Agreements of the Selling Stockholders . Each of the Selling Stockholders covenants and agrees with each Underwriter that:

(a) Lock-Up Agreements. Such Selling Stockholder has duly executed and delivered to the Representatives a lock-up agreement substantially in the form of Exhibit D hereto.

(b) No Stabilization. Such Selling Stockholder will not take, directly or indirectly, any action designed to or that could reasonably be expected to cause or result in any stabilization or manipulation of the price of the Stock.

(c) Tax Form. It will deliver to the Representatives prior to or at the Closing Date a properly completed and executed United States Treasury Department Form W-9 or applicable Form W-8 (or other applicable form or statement specified by the Treasury Department regulations in lieu thereof) in order to facilitate the Underwriters’ documentation of their compliance with the reporting and withholding provisions of the Code with respect to the transactions herein contemplated.

7. Certain Agreements of the Underwriters . Each Underwriter hereby represents and agrees that:

(a) It has not used, authorized use of, referred to or participated in the planning for use of, and will not use, authorize use of, refer to or participate in the planning for use of, any “free writing prospectus”, as defined in Rule 405 under the Securities Act (which term includes use of any written information furnished to the Commission by the Company and not incorporated by reference into the Registration Statement and any press release issued by the Company) other than (i) a free writing prospectus that contains no “issuer information” (as defined in Rule 433(h)(2) under the Securities Act) that was not included (including through incorporation by reference) in the Preliminary Prospectus or a previously filed Issuer Free Writing Prospectus, (ii) any Issuer Free Writing Prospectus listed on Annex A or prepared pursuant to Section 3(c) or Section 4(c) above (including any electronic road show approved in advance by the Company), or (iii) any free writing prospectus prepared by such underwriter and approved by the Company in advance in writing (each such free writing prospectus referred to in clauses (i) or (iii), an “Underwriter Free Writing Prospectus”).

 

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(b) It has not and will not, without the prior written consent of the Company, use any free writing prospectus that contains the final terms of the Shares unless such terms have previously been included in a free writing prospectus filed with the Commission; provided that Underwriters may use a term sheet substantially in the form of Annex C hereto without the consent of the Company; provided further that any Underwriter using such term sheet shall notify the Company, and provide a copy of such term sheet to the Company, prior to, or substantially concurrently with, the first use of such term sheet.

(c) It is not subject to any pending proceeding under Section 8A of the Securities Act with respect to the offering (and will promptly notify the Company and the Selling Stockholders if any such proceeding against it is initiated during the Prospectus Delivery Period).

8. Conditions of Underwriters’ Obligations. The obligation of each Underwriter to purchase the Underwritten Shares on the Closing Date or the Option Shares on the Additional Closing Date, as the case may be, as provided herein is subject to the performance by the Company and each of the Selling Stockholders of their respective covenants and other obligations hereunder and to the following additional conditions:

(a) Registration Compliance; No Stop Order. No order suspending the effectiveness of the Registration Statement shall be in effect, and no proceeding for such purpose or pursuant to Section 8A under the Securities Act shall be pending before or threatened by the Commission; the Prospectus and each Issuer Free Writing Prospectus shall have been timely filed with the Commission under the Securities Act (in the case of an Issuer Free Writing Prospectus, to the extent required by Rule 433 under the Securities Act) and in accordance with Section 5(a) hereof; and all requests by the Commission for additional information shall have been complied with to the reasonable satisfaction of the Representatives.

(b) Representations and Warranties. The respective representations and warranties of the Company and the Selling Stockholders contained herein shall be true and correct on the date hereof and on and as of the Closing Date or the Additional Closing Date, as the case may be; and the statements of the Company and its officers and of each of the Selling Stockholders made in any certificates delivered pursuant to this Agreement shall be true and correct on and as of the Closing Date or the Additional Closing Date, as the case may be.

(c) Rated Securities . There are no debt securities or preferred stock of, or guaranteed by, the Company or any of its subsidiaries that are rated by a “nationally recognized statistical rating organization”, as such term is defined under Section 3(a)(62) under the Exchange Act.

(d) No Material Adverse Change. No event or condition of a type described in Section 3(h) hereof shall have occurred or shall exist, which event or condition is not described in the Pricing Disclosure Package (excluding any amendment or supplement thereto) and the Prospectus (excluding any amendment or supplement thereto) and the effect of which in the judgment of the Representatives makes it impracticable or inadvisable

 

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to proceed with the offering, sale or delivery of the Shares on the Closing Date or the Additional Closing Date, as the case may be, on the terms and in the manner contemplated by this Agreement, the Pricing Disclosure Package and the Prospectus.

(e) Officer’s Certificate. The Representatives shall have received on and as of the Closing Date or the Additional Closing Date, as the case may be, (x) a certificate, on behalf of the Company, of the chief financial officer or chief accounting officer of the Company and one additional senior executive officer of the Company who is satisfactory to the Representatives (i) confirming that such officers have carefully reviewed the Registration Statement, the Pricing Disclosure Package and the Prospectus and, to the knowledge of such officers, the representations of the Company set forth in Sections 3(b) and 3(f) hereof are true and correct, (ii) confirming that the other representations and warranties of the Company in this Agreement are true and correct and that the Company has complied in all material respects with all agreements and satisfied all conditions on its part to be performed or satisfied hereunder at or prior to the Closing Date or the Additional Closing Date, as the case may be, and (iii) to the effect set forth in paragraphs (a) and (d) above and (y) a certificate of each of the Selling Stockholders, in form and substance reasonably satisfactory to the Representatives, (A) confirming that the representations of such Selling Stockholder set forth in Sections 4(e), 4(f) and 4(g) hereof is true and correct and (B) confirming that the other representations and warranties of such Selling Stockholder in this agreement are true and correct and that such Selling Stockholder has complied with all agreements and satisfied all conditions on its part to be performed or satisfied hereunder at or prior to such Closing Date.

(f) Comfort Letters. (i) On the date of this Agreement and on the Closing Date or the Additional Closing Date, as the case may be, Deloitte & Touche LLP shall have furnished to the Representatives, at the request of the Company, letters, dated the respective dates of delivery thereof and addressed to the Underwriters, in form and substance reasonably satisfactory to the Representatives, containing statements and information of the type customarily included in accountants’ “comfort letters” to underwriters with respect to the financial statements and certain financial information contained in the Registration Statement, the Pricing Disclosure Package and the Prospectus; provided, that the letter delivered on the Closing Date shall use a “cut-off” date no more than three business days prior to such Closing Date.

(ii) On the date of this Agreement and on the Closing Date or the Additional Closing Date, as the case may be, the Company shall have furnished to the Representatives a certificate, dated the respective dates of delivery thereof and addressed to the Underwriters, of its chief financial officer with respect to certain financial data contained in the Pricing Disclosure Package and the Prospectus, in form and substance reasonably satisfactory to the Representatives.

(g) Opinion and 10b-5 Statement of Counsel for the Company. Latham & Watkins LLP, counsel for the Company, shall have furnished to the Representatives, at the request of the Company, their written opinion and negative assurance letter, dated the Closing Date or the Additional Closing Date, as the case may be, and addressed to the Underwriters, in form and substance reasonably satisfactory to the Representatives.

 

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(h) Opinion of Counsel for the Selling Stockholders. Kirkland & Ellis LLP, counsel for TPG elf Holdings, L.P. (“TPG”) as a Selling Stockholder, and Sills Cummins & Gross P.C., counsel for J.A. Cosmetics Corp. as a Selling Stockholder, shall each have furnished to the Representatives, at the request of the Selling Stockholders, their written opinion, dated the Closing Date, or the Additional Closing Date, as the case may be, and addressed to the Underwriters, in form and substance reasonably satisfactory to the Representatives.

(i) Opinion and 10b-5 Statement of Counsel for the Underwriters. The Representatives shall have received on and as of the Closing Date or the Additional Closing Date, as the case may be, an opinion and 10b-5 statement of Ropes & Gray LLP, counsel for the Underwriters, with respect to such matters as the Representatives may reasonably request, and such counsel shall have received such documents and information as they may reasonably request to enable them to pass upon such matters.

(j) No Legal Impediment to Issuance and/or Sale. No action shall have been taken and no statute, rule, regulation or order shall have been enacted, adopted or issued by any federal, state or foreign governmental or regulatory authority that would, as of the Closing Date or the Additional Closing Date, as the case may be, prevent the issuance or sale of the Shares by the Company or the sale of the Shares by the Selling Stockholders; and no injunction or order of any federal, state or foreign court shall have been issued that would, as of the Closing Date or the Additional Closing Date, as the case may be, prevent the issuance or sale of the Shares by the Company or the sale of the Shares by the Selling Stockholders.

(k) Good Standing . The Representatives shall have received on and as of the Closing Date or the Additional Closing Date, as the case may be, satisfactory evidence of the good standing of the Company and its subsidiaries in their respective jurisdictions of organization and their good standing as foreign entities in such other jurisdictions as the Representatives may reasonably request, in each case in writing or any standard form of telecommunication from the appropriate governmental authorities of such jurisdictions.

(l) Exchange Listing. The Shares to be delivered on the Closing Date or the Additional Closing Date, as the case may be, shall have been approved for listing on the Exchange, subject to official notice of issuance.

(m) Lock-up Agreements . The “lock-up” agreements, each substantially in the form of Exhibit D hereto, between you and certain shareholders, officers and directors of the Company relating to sales and certain other dispositions of shares of Stock or certain other securities, delivered to you on or before the date hereof, shall be in full force and effect on the Closing Date or the Additional Closing Date, as the case may be.

(n) Additional Documents. On or prior to the Closing Date or the Additional Closing Date, as the case may be, the Company and the Selling Stockholders shall have furnished to the Representatives such further certificates and documents as the Representatives may reasonably request.

 

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All opinions, letters, certificates and evidence mentioned above or elsewhere in this Agreement shall be deemed to be in compliance with the provisions hereof only if they are in form and substance reasonably satisfactory to counsel for the Underwriters.

9. Indemnification and Contribution .

(a) Indemnification of the Underwriters by the Company. The Company agrees to indemnify, defend and hold harmless each Underwriter, its affiliates, directors and officers and each person, if any, who controls such Underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, from and against any and all losses, claims, damages and liabilities (including, without limitation, legal fees and other expenses incurred in connection with any suit, action or proceeding or any claim asserted, as such fees and expenses are incurred), joint or several, that arise out of, or are based upon, (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein, not misleading, or (ii) any untrue statement or alleged untrue statement of a material fact contained in the Prospectus (or any amendment or supplement thereto), any Issuer Free Writing Prospectus[, any “issuer information” filed or required to be filed pursuant to Rule 433(d) under the Securities Act], any Written Testing-the-Waters Communication, or any Pricing Disclosure Package [(including any Pricing Disclosure Package that has subsequently been amended)], or caused by any omission or alleged omission to state therein a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, in each case except insofar as such losses, claims, damages or liabilities arise out of, or are based upon, any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with (i) any information relating to any Underwriter furnished to the Company in writing by such Underwriter through the Representatives expressly for use therein, it being understood and agreed that the only such information furnished by any Underwriter consists of the information described as such in subsection (c) below and (ii) any information relating to any Selling Stockholder furnished to the Company in writing by and on behalf of such Selling Stockholder expressly for use therein, it being understood and agreed that the only such information furnished by any Selling Stockholder consists of the information described as such in subsection (b) below.

(b) Indemnification of the Underwriters by the Selling Stockholders. Each of the Selling Stockholders severally and not jointly in proportion to the number of Shares to be sold by such Selling Stockholder hereunder agrees to indemnify, defend and hold harmless each Underwriter, its affiliates, directors and officers and each person, if any, who controls such Underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act to the same extent as the indemnity set forth in paragraph (a) above but only to the extent that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with the Selling Stockholder Information furnished by such Selling Stockholder. The liability of each Selling Stockholder under the indemnity and contribution agreements contained in this Section 11 shall be limited to an amount equal to (i) the number of Shares sold by such Selling Stockholder under this Agreement multiplied by (ii) the Public Offering Price (minus related underwriting discounts and commissions).

 

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(c) Indemnification of the Company and the Selling Stockholders. Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, its directors, its officers who signed the Registration Statement and each person, if any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act and each of the Selling Stockholders to the same extent as the indemnity set forth in paragraph (a) above, but only with respect to any losses, claims, damages or liabilities that arise out of, or are based upon, any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with any information relating to such Underwriter furnished to the Company in writing by such Underwriter through the Representatives expressly for use in the Registration Statement, the Prospectus (or any amendment or supplement thereto), any Issuer Free Writing Prospectus, any Written Testing-the-Waters Communication, or any Pricing Disclosure Package [(including any Pricing Disclosure Package that has subsequently been amended)], it being understood and agreed upon that the only such information furnished by any Underwriter consists of the following information in the Prospectus furnished on behalf of each Underwriter: (i) the concession and reallowance figures appearing in the first and second sentences of the third paragraph under the caption “Underwriting” and (ii) the information contained in the eighth, thirteenth, fourteenth and fifteenth paragraphs under the caption “Underwriting” relating to distributions, price stabilization, short positions and penalty bids.

(d) Notice and Procedures. If any suit, action, proceeding (including any governmental or regulatory investigation), claim or demand shall be brought or asserted against any person in respect of which indemnification may be sought pursuant to the preceding paragraphs of this Section 9, such person (the “Indemnified Person”) shall promptly notify the person against whom such indemnification may be sought (the “Indemnifying Person”) in writing; provided that the failure to notify the Indemnifying Person shall not relieve it from any liability that it may have under the preceding paragraphs of this Section 9 except to the extent that it has been materially prejudiced (through the forfeiture of substantive rights or defenses) by such failure; and provided further that the failure to notify the Indemnifying Person shall not relieve it from any liability that it may have to an Indemnified Person otherwise than under the preceding paragraphs of this Section 9. If any such proceeding shall be brought or asserted against an Indemnified Person and it shall have notified the Indemnifying Person thereof, the Indemnifying Person shall be entitled to participate therein, and to the extent it wishes, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel reasonably satisfactory to the Indemnified Person to represent the Indemnified Person in such proceeding and shall pay the reasonable fees and expenses of such counsel related to such proceeding promptly and, after notice from the Indemnifying Person to such Indemnified Person of its election so to assume the defense thereof, the Indemnifying Person shall not be liable to such Indemnified Person under the preceding paragraphs of this Section 9, as the case may be, for any legal expenses of other counsel or any other expenses, in each case subsequently incurred by such Indemnified Person, in connection with the defense thereof other than reasonable costs of investigation. In any such proceeding, any Indemnified Person shall have the right to retain its own counsel, but the reasonably incurred fees and expenses of such counsel shall be at the expense of such Indemnified Person unless (i) the Indemnifying Person and the Indemnified Person shall have mutually agreed to the contrary; (ii) the Indemnifying Person has failed within a reasonable time to retain counsel reasonably satisfactory to the Indemnified Person; (iii) the Indemnified Person shall have reasonably concluded, based on the advice of counsel, that there may be legal defenses available to it that are different

 

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from or in addition to those available to the Indemnifying Person; or (iv) the named parties in any such proceeding (including any impleaded parties) include both the Indemnifying Person and the Indemnified Person and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interest between them. It is understood and agreed that the Indemnifying Person shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the fees and expenses of more than one separate firm (in addition to any local counsel) for all Indemnified Persons, and that all such fees and expenses shall be paid or reimbursed promptly. Any such separate firm for any Underwriter, its affiliates, directors and officers and any control persons of such Underwriter shall be designated in writing by J.P. Morgan Securities LLC, any such separate firm for the Company, its directors, its officers who signed the Registration Statement, affiliates and any control persons of the Company shall be designated in writing by the Company and any such separate firm for the Selling Stockholders shall be designated in writing by TPG. The Indemnifying Person shall not be liable for any settlement of any proceeding effected without its written consent (which shall not be unreasonably withheld, delayed or conditioned), but if settled with such consent or if there be a final judgment for the plaintiff, the Indemnifying Person agrees to indemnify each Indemnified Person from and against any loss or liability by reason of such settlement or judgment. No Indemnifying Person shall, without the written consent of the Indemnified Person (which shall not be unreasonably withheld, delayed or conditioned), effect any settlement of any pending or threatened proceeding in respect of which any Indemnified Person is or could have been a party and indemnification could have been sought hereunder by such Indemnified Person, unless such settlement (x) includes an unconditional release of such Indemnified Person, in form and substance reasonably satisfactory to such Indemnified Person, from all liability on claims that are the subject matter of such proceeding and (y) does not include any statement as to or any admission of fault, culpability or a failure to act by or on behalf of any Indemnified Person.

(e) Contribution.  If the indemnification provided for in paragraphs (a), (b) and (c) above is unavailable to an Indemnified Person or insufficient in respect of any losses, claims, damages or liabilities referred to therein, then each Indemnifying Person under such paragraph, in lieu of indemnifying such Indemnified Person thereunder, shall contribute to the amount paid or payable by such Indemnified Person as a result of such losses, claims, damages or liabilities (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Selling Stockholders, on the one hand, and the Underwriters on the other, from the offering of the Shares or (ii) if the allocation provided by clause (i) is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) but also the relative fault of the Company and the Selling Stockholders, on the one hand, and the Underwriters on the other, in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Selling Stockholders, on the one hand, and the Underwriters on the other, shall be deemed to be in the same respective proportions as the net proceeds (before deducting expenses) received by the Company and the Selling Stockholders from the sale of the Shares and the total underwriting discounts and commissions received by the Underwriters in connection therewith, in each case as set forth in the table on the cover of the Prospectus, bear to the aggregate offering price of the Shares. The relative fault of the Company and the Selling Stockholders, on the one hand, and the Underwriters on the other, shall be determined by reference to, among other things, whether the untrue or alleged untrue

 

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statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company and the Selling Stockholders or by the Underwriters and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission.

(f) Limitation on Liability.  The Company, the Selling Stockholders and the Underwriters agree that it would not be just and equitable if contribution pursuant to paragraph (e) above were determined by pro rata allocation (even if the Selling Stockholders or the Underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in paragraph (e) above. The amount paid or payable by an Indemnified Person as a result of the losses, claims, damages and liabilities referred to in paragraph (e) above shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such Indemnified Person in connection with any such action or claim. Notwithstanding the provisions of paragraphs (e) and (f), in no event shall (i) an Underwriter be required to contribute any amount in excess of the amount by which the total underwriting discounts and commissions received by such Underwriter with respect to the offering of the Shares exceeds the amount of any damages that such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission or (ii) the aggregate liability of a Selling Stockholder under Section 9(b) and Section 9(e) exceed the limit set forth in Section 9(b). No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters’ obligations to contribute pursuant to paragraphs (e) and (f) are several in proportion to their respective purchase obligations hereunder and not joint.

(g) Non-Exclusive Remedies.   The remedies provided for in this Section 9 paragraphs (a) through (f) are not exclusive and shall not limit any rights or remedies which may otherwise be available to any Indemnified Person at law or in equity.

(h) Directed Share Program Indemnification . The Company agrees to indemnify, defend and hold harmless Morgan Stanley, each person, if any, who controls Morgan Stanley within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act and each affiliate of Morgan Stanley within the meaning of Rule 405 of the Securities Act ( “Morgan Stanley Entities”) from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred in connection with defending or investigating any such action or claim) (i) caused by any untrue statement or alleged untrue statement of a material fact contained in any material prepared by or with the consent of the Company for distribution to Participants in connection with the Directed Share Program or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; (ii) caused by the failure of any Participant to pay for and accept delivery of Directed Shares that the Participant agreed to purchase; or (iii) related to, arising out of, or in connection with the Directed Share Program, other than losses, claims, damages or liabilities (or expenses relating thereto) that are finally judicially determined to have resulted from the bad faith or gross negligence of Morgan Stanley Entities.

 

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(i) In case any proceeding (including any governmental investigation) shall be instituted involving any Morgan Stanley Entity in respect of which indemnity may be sought pursuant to paragraph (h) above, the Morgan Stanley Entity seeking indemnity, shall promptly notify the Company in writing and the Company, shall be entitled to participate therein, and to the extent it wishes, jointly with any other indemnifying party similar notified, to assume the defense thereof, with counsel reasonably satisfactory to the Morgan Stanley Entity to represent the Morgan Stanley Entity and any others the Company may designate in such proceeding and shall pay the reasonable fees and expenses of such counsel related to such proceeding promptly and, after notice from the Company to such Morgan Stanley Entity of its election so to assume the defense thereof, the Company shall not be liable to such Morgan Stanley Entity under this Section 9(h) for any legal expenses of other counsel or any other expenses, in each case subsequently incurred by such Morgan Stanley Entity, in connection with the defense thereof other than reasonable costs of investigation. In any such proceeding, any Morgan Stanley Entity shall have the right to retain its own counsel, but the reasonably incurred fees and expenses of such counsel shall be at the expense of such Morgan Stanley Entity unless (i) the Company and such Morgan Stanley Entity shall have mutually agreed to the contrary, (ii) the Company has failed within a reasonable time to retain counsel reasonably satisfactory to such Morgan Stanley Entity, (iii) the Morgan Stanley Entity shall have reasonably concluded, based on the advice of counsel, that there may be legal defenses available to it that are different from or in addition to those available to the Company or (iv) the named parties to any such proceeding (including any impleaded parties) include both the Company and the Morgan Stanley Entity and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. The Company shall not, in respect of the legal expenses of the Morgan Stanley Entities in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the fees and expenses of more than one separate firm (in addition to any local counsel) for all Morgan Stanley Entities. Any such separate firm for the Morgan Stanley Entities shall be designated in writing by Morgan Stanley. The Company shall not be liable for any settlement of any proceeding effected without its written consent (which shall not be unreasonably withheld, delayed or conditioned), but if settled with such consent or if there be a final judgment for the plaintiff, the Company agrees to indemnify the Morgan Stanley Entities from and against any loss or liability by reason of such settlement or judgment. The Company shall not, without the prior written consent of Morgan Stanley (which shall not be unreasonably withheld, delayed or conditioned), effect any settlement of any pending or threatened proceeding in respect of which any Morgan Stanley Entity is or could have been a party and indemnity could have been sought hereunder by such Morgan Stanley Entity, unless (x) such settlement includes an unconditional release of the Morgan Stanley Entity, in form and substance reasonably satisfactory to such Morgan Stanley Entity, from all liability on claims that are the subject matter of such proceeding and (y) does not include any statement as to or any admission of fault, culpability or a failure to act by or on behalf of the Morgan Stanley Entity.

(j) To the extent the indemnification provided for in paragraph (h) above is unavailable to a Morgan Stanley Entity or insufficient in respect of any losses, claims, damages or liabilities referred to therein, then the Company in lieu of indemnifying the Morgan Stanley Entity thereunder, shall contribute to the amount paid or payable by the Morgan Stanley Entity as a result of such losses, claims, damages or liabilities (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Morgan Stanley Entities

 

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on the other hand from the offering of the Directed Shares or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company on the one hand and of the Morgan Stanley Entities on the other hand in connection with any statements or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Morgan Stanley Entities on the other hand in connection with the offering of the Directed Shares shall be deemed to be in the same respective proportions as the net proceeds from the offering of the Directed Shares (before deducting expenses) and the total underwriting discounts and commissions received by the Morgan Stanley Entities for the Directed Shares, bear to the aggregate public offering price of the Directed Shares. If the loss, claim, damage or liability is caused by an untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact, the relative fault of the Company on the one hand and the Morgan Stanley Entities on the other hand shall be determined by reference to, among other things, whether the untrue or alleged untrue statement or the omission or alleged omission relates to information supplied by the Company or by the Morgan Stanley Entities and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission.

(k) The Company and the Morgan Stanley Entities agree that it would not be just or equitable if contribution pursuant to paragraphs (h)-(j) above were determined by pro rata allocation (even if the Morgan Stanley Entities were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in paragraph (j) above. The amount paid or payable by the Morgan Stanley Entities as a result of the losses, claims, damages and liabilities referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by the Morgan Stanley Entities in connection with investigating or defending any such action or claim. Notwithstanding the provisions of paragraph (h)-(k) above, no Morgan Stanley Entity shall be required to contribute any amount in excess of the amount by which the total price at which the Directed Shares distributed to the public were offered to the public exceeds the amount of any damages that such Morgan Stanley Entity has otherwise been required to pay. The remedies provided for in paragraphs (h) through (l) are not exclusive and shall not limit any rights or remedies which may otherwise be available to any indemnified party at law or in equity.

(l) The indemnity and contribution provisions contained in paragraphs (h) through (l) shall remain operative and in full force and effect regardless of (i) any termination of this Agreement, (ii) any investigation made by or on behalf of any Morgan Stanley Entity or the Company, its officers or directors or any person controlling the Company and (iii) acceptance of and payment for any of the Directed Shares.

(m) External Agreements.   The provisions contained in this Section 9 shall not affect any agreement among the Company and the Selling Stockholders with respect to indemnification or contribution.

10. Effectiveness of Agreement . This Agreement shall become effective upon the execution and delivery hereof by the parties hereto.

 

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11. Termination . This Agreement may be terminated in the absolute discretion of the Representatives, by notice to the Company and the Selling Stockholders, if after the execution and delivery of this Agreement and prior to the Closing Date or, in the case of the Option Shares, prior to the Additional Closing Date (i) trading generally shall have been suspended or materially limited on or by any of the New York Stock Exchange or The Nasdaq Stock Market; (ii) trading of any securities issued or guaranteed by the Company shall have been suspended on any exchange or in any over-the-counter market; (iii) a general moratorium on commercial banking activities shall have been declared by federal or New York State authorities; or (iv) there shall have occurred any outbreak or escalation of hostilities or any change in financial markets or any calamity or crisis, either within or outside the United States, that, in the judgment of the Representatives, is material and adverse and makes it impracticable or inadvisable to proceed with the offering, sale or delivery of the Shares on the Closing Date or the Additional Closing Date, as the case may be, on the terms and in the manner contemplated by this Agreement, the Pricing Disclosure Package and the Prospectus.

12. Defaulting Underwriter .

(a) If, on the Closing Date or the Additional Closing Date, as the case may be, any Underwriter defaults on its obligation to purchase the Shares that it has agreed to purchase hereunder on such date, the non-defaulting Underwriters may in their discretion arrange for the purchase of such Shares by other persons satisfactory to the Company and the Selling Stockholders on the terms contained in this Agreement. If, within 36 hours after any such default by any Underwriter, the non-defaulting Underwriters do not arrange for the purchase of such Shares, then the Company and the Selling Stockholders shall be entitled to a further period of 36 hours within which to procure other persons satisfactory to the non-defaulting Underwriters to purchase such Shares on such terms. If other persons become obligated or agree to purchase the Shares of a defaulting Underwriter, either the non-defaulting Underwriters or the Company and the Selling Stockholders may postpone the Closing Date or the Additional Closing Date, as the case may be, for up to five full business days in order to effect any changes that in the opinion of counsel for the Company, counsel for the Selling Stockholders or counsel for the Underwriters may be necessary in the Registration Statement and the Prospectus or in any other document or arrangement, and the Company agrees to promptly prepare any amendment or supplement to the Registration Statement and the Prospectus that effects any such changes. As used in this Agreement, the term “Underwriter” includes, for all purposes of this Agreement unless the context otherwise requires, any person not listed in Schedule 1 hereto that, pursuant to this Section 12, purchases Shares that a defaulting Underwriter agreed but failed to purchase.

(b) If, after giving effect to any arrangements for the purchase of the Shares of a defaulting Underwriter or Underwriters by the non-defaulting Underwriters, the Company and the Selling Stockholders as provided in paragraph (a) above, the aggregate number of Shares that remain unpurchased on the Closing Date or the Additional Closing Date, as the case may be, does not exceed one-eleventh of the aggregate number of Shares to be purchased on such date, then the Company and the Selling Stockholders shall have the right to require each non-defaulting Underwriter to purchase the number of Shares that such Underwriter agreed to purchase hereunder on such date plus such Underwriter’s pro rata share (based on the number of Shares that such Underwriter agreed to purchase on such date) of the Shares of such defaulting Underwriter or Underwriters for which such arrangements have not been made.

 

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(c) If, after giving effect to any arrangements for the purchase of the Shares of a defaulting Underwriter or Underwriters by the non-defaulting Underwriters, the Company and the Selling Stockholders as provided in paragraph (a) above, the aggregate number of Shares that remain unpurchased on the Closing Date or the Additional Closing Date, as the case may be, exceeds one-eleventh of the aggregate amount of Shares to be purchased on such date, or if the Company and the Selling Stockholders shall not exercise the right described in paragraph (b) above, then this Agreement or, with respect to any Additional Closing Date, the obligation of the Underwriters to purchase Shares on the Additional Closing Date shall terminate without liability on the part of the non-defaulting Underwriters. Any termination of this Agreement pursuant to this Section 12 shall be without liability on the part of the Company, except that the Company and the Selling Stockholders will continue to be liable for the payment of expenses as set forth in Section 13 hereof and except that the provisions of Section 9 hereof shall not terminate and shall remain in effect.

(d) Nothing contained herein shall relieve a defaulting Underwriter of any liability it may have to the Company, the Selling Stockholders or any non-defaulting Underwriter for damages caused by its default.

13. Payment of Expenses .

(a) Whether or not the transactions contemplated by this Agreement are consummated or this Agreement is terminated, the Company will pay or cause to be paid all costs and expenses incident to the performance of its obligations hereunder, including without limitation, (i) the costs incident to the authorization, issuance, sale, preparation and delivery of the Shares and any taxes payable in that connection; (ii) the costs incident to the preparation, printing and filing under the Securities Act of the Registration Statement, the Preliminary Prospectus, any Issuer Free Writing Prospectus, any Pricing Disclosure Package and the Prospectus (including all exhibits, amendments and supplements thereto) and the distribution thereof; (iii) the fees and expenses of the Company’s counsel and independent accountants; (iv) the fees and expenses incurred in connection with the registration or qualification and determination of eligibility for investment of the Shares under the state or foreign securities or blue sky laws of such jurisdictions as the Representatives may designate and the preparation, printing and distribution of a Blue Sky Memorandum (including the reasonably incurred fees and expenses of counsel for the Underwriters related thereto) in an amount not to exceed $7,500 (excluding filing fees); (v) the cost of preparing stock certificates; (vi) the costs and charges of any transfer agent and any registrar; (vii) all expenses and application fees incurred in connection with any filing with, and clearance of the offering by, FINRA in an amount not to exceed $30,000 (excluding filing fees); (viii) all expenses incurred by the Company in connection with any “road show” presentation to potential investor, except that it is understood that 50% of the cost of any chartered aircraft and other transportation chartered in connection with any such presentation and all lodging, commercial airfare, other travel and individual expenses of the Underwriters shall be the responsibility of the Underwriters; (ix) all expenses and application fees related to the listing of the Shares on the Exchange; and (x) all of the fees and disbursements of counsel incurred by the Underwriters in connection with the Directed Shares Program and stamp duties, similar taxes or duties or other taxes, if any, incurred by

 

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the Underwriters in connection with the Directed Share Program. The provisions of this Section shall not supersede or otherwise affect any agreement that the Company and the Selling Stockholders may otherwise have for the allocation of such expenses among themselves.

(b) If (i) this Agreement is terminated pursuant to clause (ii) of Section 11, (ii) the Company for any reason fails to tender the Shares required to be tendered by it or on its behalf pursuant to this Agreement for delivery to the Underwriters other than as a result of a termination pursuant to clause (i), (iii) or (iv) of Section 11 or (iii) the Underwriters decline to purchase the Shares for any reason permitted under this Agreement (other than as a result of a termination pursuant to clause (i), (iii) or (iv) of Section 11 or as set forth in Section 12), the Company agrees to reimburse the Underwriters for all out-of-pocket costs and expenses (including the reasonable and documented fees and expenses of their counsel) reasonably incurred and documented by the Underwriters in connection with this Agreement and the offering contemplated hereby. If any Selling Stockholder for any reason defaults on its obligation to tender the Shares required to be tendered by it or on its behalf pursuant to this Agreement for delivery to the Underwriters, such Selling Stockholder agrees to reimburse the Underwriters for all out-of-pocket costs and expenses (including the reasonable and documented fees and expenses of their counsel) reasonably incurred and documented by the Underwriters in making preparations for the purchase, sale and delivery of the Shares not so delivered by such Selling Stockholder. For the avoidance of doubt, it is understood that neither the Company nor the Selling Stockholders shall pay or reimburse any costs, fees or expenses incurred by any Underwriter that defaults on its obligations to purchase the Shares.

14. Persons Entitled to Benefit of Agreement . This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and the officers and directors and any controlling persons referred to in Section 9 hereof. Nothing in this Agreement is intended or shall be construed to give any other person any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision contained herein. No purchaser of Shares from any Underwriter shall be deemed to be a successor merely by reason of such purchase.

15. Survival . The respective indemnities, rights of contribution, representations, warranties and agreements of the Company, the Selling Stockholders and the Underwriters contained in this Agreement or made by or on behalf of the Company, the Selling Stockholders or the Underwriters pursuant to this Agreement or any certificate delivered pursuant hereto shall survive the delivery of and payment for the Shares and shall remain in full force and effect, regardless of any termination of this Agreement or any investigation made by or on behalf of the Company, the Selling Stockholders or the Underwriters.

16. Certain Defined Terms . For purposes of this Agreement, (a) except where otherwise expressly provided, the term “affiliate” has the meaning set forth in Rule 405 under the Securities Act; (b) the term “business day” means any day other than a day on which banks are permitted or required to be closed in New York City; (c) the term “subsidiary” has the meaning set forth in Rule 405 under the Securities Act; and (d) the term “significant subsidiary” has the meaning set forth in Rule 1-02 of Regulation S-X under the Exchange Act.

 

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17. Miscellaneous .

(a) Notices.  All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if mailed or transmitted and confirmed by any standard form of telecommunication. Notices to the Underwriters shall be given to the Representatives c/o J.P. Morgan Securities LLC, 383 Madison Avenue, New York, New York 10179 (fax: (212) 622-8358); Attention: Equity Syndicate Desk and c/o Morgan Stanley & Co. LLC, 1585 Broadway, New York, New York 10036, Attention: Equity Syndicate Desk with a copy to the Legal Department. Notices to the Company shall be given to it at 570 10th Street, Oakland, CA 94607; Attention: Scott K. Milsten, with a copy to (which copy shall not constitute notice): Latham & Watkins LLP, 140 Scott Drive, Menlo Park, California 94025 (fax: (650) 463-2600); Attention: Tad J. Freese and Kathleen M. Wells. Notices to TPG shall be given to it at [●], (Fax: [●]); Attention: [●]. Notices to J.A. Cosmetics Corp. shall be given to it at [●], (Fax: [●]); Attention: [●].

(b) Governing Law.  This Agreement and any claim, controversy or dispute arising under or related to this Agreement shall be governed by and construed in accordance with the laws of the State of New York applicable to agreements made and to be performed in such state.

(c) Counterparts.  This Agreement may be signed in counterparts (which may include counterparts delivered by any standard form of telecommunication), each of which shall be an original and all of which together shall constitute one and the same instrument.

(d) Amendments or Waivers.  No amendment or waiver of any provision of this Agreement, nor any consent or approval to any departure therefrom, shall in any event be effective unless the same shall be in writing and signed by the parties hereto.

(e) Headings.  The headings herein are included for convenience of reference only and are not intended to be part of, or to affect the meaning or interpretation of, this Agreement.

 

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If the foregoing is in accordance with your understanding, please indicate your acceptance of this Agreement by signing in the space provided below.

 

Very truly yours,
e.l.f. Beauty, Inc.
By:  

 

  Title:
TPG elf Holdings, L.P.
By:  

 

  Title:
J.A. Cosmetics Corp.
By:  

 

  Name:
  Title:

 

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Accepted: As of the date first written above
J.P. MORGAN SECURITIES LLC
By:  

 

  Authorized Signatory
MORGAN STANLEY & CO. LLC
By:  

 

Authorized Signatory
For itself and on behalf of the several Underwriters listed in Schedule 1 hereto.

 

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Schedule 1

 

Underwriter

   Number of Shares  

J.P. Morgan Securities LLC

  

Morgan Stanley & Co. LLC

  

Piper Jaffray & Co

  

Wells Fargo Securities, LLC

  

William Blair & Company

  

Cowen and Company

  

BMO Capital Markets

  

Stifel, Nicolaus & Company

  

SunTrust Robinson Humphrey

  
  

 

 

 

Total

     8,333,333   

 

Sch. 1-1


Schedule 2

 

Selling Stockholders:

   Number of
Underwritten Shares:
     Number of
Option Shares:
 

TPG elf Holdings, L.P.

     3,201,828         923,604   

J.A. Cosmetics Corp.

     1,131,505         326,396   

 

Sch. 2-1


Schedule 3

Significant Subsidiaries

e.l.f. Cosmetics, Inc.

J.A. China Holdings, LLC (a wholly owned subsidiary of e.l.f. Cosmetics, Inc.)

J.A. Cosmetics Trading (Shanghai) Co., Ltd. (a wholly owned subsidiary of J.A. China Holdings, LLC)

 

Sch. 3-1


Annex A

 

a. Pricing Disclosure Package

 

Annex A-2-1


Annex B

Written Testing-the-Waters Communications

 

Annex B-1


Annex C

e.l.f. Beauty, Inc.

Pricing Term Sheet


Exhibit A

EGC – Testing the waters authorization (to be delivered by the issuer to the Underwriters in email or letter form)

In reliance on Section 5(d) of the Securities Act of 1933, as amended (the “Act”), e.l.f. Beauty, Inc. (the “Issuer”) hereby authorizes J.P. Morgan Securities LLC (“J.P. Morgan”) and its affiliates and their respective employees and Morgan Stanley & Co. LLC (“Morgan Stanley”) and its affiliates and their respective employees (the “Authorized Underwriters”), to engage on behalf of the Issuer in oral and written communications with potential investors that are “qualified institutional buyers”, as defined in Rule 144A under the Act, or institutions that are “accredited investors”, as defined in Regulation D under the Act, to determine whether such investors might have an interest in the Issuer’s contemplated initial public offering (“Testing-the-Waters Communications”) in the United States. A “Written Testing-the-Waters Communication” means any Testing-the-Waters Communication that is a written communication within the meaning of Rule 405 under the Act. Any Written Testing-the-Waters Communication shall be subject to prior approval by the Issuer’s Chief Financial Officer prior to its dissemination to a potential investor, provided, however, that no such approval shall be required for any written communication relating to ministerial or organizational logistics such as date, time and location of meetings with potential investors. The Issuer has advised the Authorized Underwriters that it does not intend to provide or authorize any written communications to potential investors other than communications that are solely administrative in nature.

The Issuer represents that (i) except as disclosed to the Authorized Underwriters, it has not alone engaged in any Testing-the-Waters Communication and (ii) it has not authorized anyone other than the Authorized Underwriters to engage in Testing-the-Waters Communications. The Issuer agrees that it shall not authorize any other third party to engage on its behalf in oral or written communications with potential investors without the written consent of the Authorized Underwriters. The Issuer also represents that, as of the date hereof, it is an “emerging growth company” as defined in Section 2(a)(19) of the Act (“Emerging Growth Company”) and agrees to promptly notify the Authorized Underwriters in writing if the Issuer hereafter ceases to be an Emerging Growth Company while this authorization is in effect. If at any time following the distribution of any Written Testing-the-Waters Communication there occurred or occurs an event or development as a result of which such Written Testing-the-Waters Communication, when taken together with the prospectus contained in the registration statement of the Issuer that was, at such time, the most recent registration statement of the Issuer that was confidentially submitted or filed with the Commission, included or would include an untrue statement of a material fact or omitted or would omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances existing at that subsequent time, not misleading, the Issuer will promptly notify the Authorized Underwriters and will promptly amend or supplement, at its own expense, such Written Testing-the-Waters Communication to eliminate or correct such untrue statement or omission.

Nothing in this authorization is intended to limit or otherwise affect the ability of the Authorized Underwriters, to engage in communications in which they could otherwise lawfully engage in the

 

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absence of this authorization, including, without limitation, any written communication containing only one or more of the statements specified under Rule 134(a) under the Act. This authorization shall remain in effect until the Issuer has provided to the Authorized Underwriters a written notice revoking this authorization. All notices as described herein shall be sent by email to the attention of Jason Fournier at jason.fournier@jpmorgan.com and Tilli Dias at tilli.dias@morganstanley.com.

 

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Exhibit B

Form of Waiver of Lock-up

J.P. MORGAN SECURITIES LLC

MORGAN STANLEY & CO. LLC

e.l.f. Beauty, Inc.

Public Offering of Common Stock

            , 20    

[Name and Address of

Officer or Director

Requesting Waiver]

Dear Mr./Ms. [Name]:

This letter is being delivered to you in connection with the offering by e.l.f. Beauty, Inc. (the “Company”) of                 shares of Class A common stock, $0.01 par value (the “Common Stock”), of the Company and the lock-up letter dated             , 2016 (the “Lock-up Letter”), executed by you in connection with such offering, and your request for a [waiver] [release] dated             , 20    , with respect to                  shares of Common Stock (the “Shares”).

Each of J.P. Morgan Securities LLC and Morgan Stanley & Co. LLC hereby agrees to [waive] [release] the transfer restrictions set forth in the Lock-up Letter, but only with respect to the Shares, effective             , 20    ; provided , however , that such [waiver] [release] is conditioned on the Company announcing the impending [waiver] [release] by press release through a major news service at least two business days before effectiveness of such [waiver] [release]. This letter will serve as notice to the Company of the impending [waiver] [release].

Except as expressly [waived] [released] hereby, the Lock-up Letter shall remain in full force and effect.

 

Yours very truly,

 

[Signature of J.P. Morgan Securities LLC Representative]

 

[Name of J.P. Morgan Securities LLC Representative]

 

[Signature of Morgan Stanley & Co. LLC Representative]

 

[Name of Morgan Stanley & Co. LLC Representative]


Exhibit C

Form of Press Release

e.l.f. Beauty, Inc.

[Date]

e.l.f. Beauty, Inc. (the “Company”) announced today that J.P. Morgan Securities LLC and Morgan Stanley & Co. LLC, the joint book-running managers in the Company’s recent public sale of                  shares of common stock, is [waiving] [releasing] a lock-up restriction with respect to                  shares of the Company’s common stock held by [certain officers or directors] [an officer or director] of the Company. The [waiver] [release] will take effect on             , 20    , and the shares may be sold on or after such date.

This press release is not an offer for sale of the securities in the United States or in any other jurisdiction where such offer is prohibited, and such securities may not be offered or sold in the United States absent registration or an exemption from registration under the United States Securities Act of 1933, as amended.


Exhibit D

Form of Lock-Up Agreement

LOCK-UP AGREEMENT

[●], 2016

J.P. Morgan Securities LLC

Morgan Stanley & Co. LLC

As Representatives of

the several Underwriters listed in

Schedule 1 to the Underwriting

Agreement referred to below

c/o J.P. Morgan Securities LLC

383 Madison Avenue

New York, NY 10179

c/o Morgan Stanley & Co. LLC

1585 Broadway

New York, NY 10036

 

  Re: e.l.f. Beauty, Inc. — Public Offering

Ladies and Gentlemen:

The undersigned understands that you, as Representatives of the several Underwriters, propose to enter into an underwriting agreement (the “Underwriting Agreement”) with e.l.f. Beauty, Inc., a Delaware corporation (the “Company”) and the Selling Stockholders listed on Schedule 2 to the Underwriting Agreement, providing for the public offering (the “Public Offering”) by the several Underwriters named in Schedule 1 to the Underwriting Agreement (the “Underwriters”), of common stock of the Company (the “Securities”). Capitalized terms used herein and not otherwise defined shall have the meanings set forth in the Underwriting Agreement.

In consideration of the Underwriters’ agreement to purchase and make the Public Offering of the Securities, and for other good and valuable consideration receipt of which is hereby acknowledged, the undersigned hereby agrees that, without the prior written consent of J.P. Morgan Securities LLC and Morgan Stanley & Co. LLC (together, the “Representatives”) on behalf of the Underwriters, the undersigned will not, during the period from the date hereof and ending 180 days after the date of the final prospectus relating to the Public Offering (the “Prospectus”


and such period, the “Lockup Period”), (1) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock, $0.01 per share par value, of the Company (the “Common Stock”) or any securities convertible into or exercisable or exchangeable for Common Stock (including without limitation, Common Stock or such other securities which may be deemed to be beneficially owned by the undersigned in accordance with the rules and regulations of the Securities and Exchange Commission and securities which may be issued upon exercise of a stock option or warrant), or publicly disclose the intention to make any offer, sale, pledge or disposition, (2) enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of the Common Stock or such other securities, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise or (3) make any demand for or exercise any right with respect to the registration of any shares of Common Stock or any security convertible into or exercisable or exchangeable for Common Stock, in each case other than with respect to:

(A) the Securities to be sold by the undersigned pursuant to the Underwriting Agreement;

(B) transfers of shares of Common Stock (i) as a bona fide gift or gifts, (ii) by will, other testamentary document or intestate succession, (iii) to any trust for the direct or indirect benefit of the undersigned or an immediate family member of the undersigned, or to any other entity that is wholly-owned by such persons (for purposes hereof, “immediate family” shall mean any relationship by blood, marriage or adoption, not more remote than first cousin), (iv) if the undersigned is a trust, transfers to the trustor or beneficiary of such trust, (v) transfers to any immediate family member or any investment fund or other entity controlled or managed by the undersigned not for value (provided that any transferee thereof agrees to be bound by the terms hereof), and (vi) transfers to a nominee or custodian of a person or entity to whom a disposition or transfer would be permissible under clauses (i) through (v);

(C) if the undersigned is a corporation, partnership or other business entity, transfers or distributions of shares of Common Stock or any security convertible into or exercisable or exchangeable for shares of Common Stock to members, partners, stockholders or affiliates of the undersigned (other than the Company and its controlled affiliates), including investment funds or other entities under common control or management with the undersigned; or

(D) (i) the repurchase of the Common Stock or such other securities by the Company pursuant to stock option agreements or other equity award agreements providing for the right of said repurchase in connection with the termination of the undersigned’s employment or consulting service with the Company, (ii) transfers of shares of Common Stock acquired in open market transactions after the completion of the Public Offering, (iii) tenders, sales or other transfers in response to a bona fide third-party takeover bid made to all holders of Common Stock or any other acquisition transaction whereby all or substantially all of the Common Stock are acquired by a third party (provided that if such transaction is not consummated, the subject Common Stock shall remain subject to the restrictions set forth herein) that, in each case, has been approved by the board of directors of the Company and will occur after the Public Offering, and

 

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(iv) transfers to the Company in connection with, and to the extent necessary to fund, the payment of taxes due with respect to the vesting of restricted stock or vesting or exercise of similar rights to purchase Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock pursuant to the Company’s equity incentive plans;

provided that in the case of any transfer or distribution pursuant to clause (B) or (C), each donee or distributee shall execute and deliver to the Representatives a lock-up letter in the form of this paragraph; and provided , further , that in the case of any transfer or distribution pursuant to clause (B) or (C), no filing by any party (donor, donee, transferor or transferee) under the Securities Exchange Act of 1934, as amended, or other public announcement shall be required or shall be made voluntarily in connection with such transfer or distribution (other than a filing on a Form 5 made after the expiration of the Lockup Period); provided , further , in the case of clause (D)(ii), that no filing by any party under Section 16(a) of the Exchange Act shall be required or shall be made voluntarily in connection with such transfer during the Lockup Period, and in the case of clause (D)(iv), any filing under Section 16(a) of the Exchange Act in connection with such transfer shall disclose that such transfer was to cover the payment of taxes due with respect to the vesting of restricted stock or similar rights to purchase Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock pursuant to the Company’s equity incentive plans.

If the undersigned is an officer or director of the Company, the undersigned further agrees that the foregoing provisions shall be equally applicable to any Company-directed Securities the undersigned may purchase in the Public Offering.

Furthermore, the undersigned may, if permitted by the Company, establish a written trading plan meeting the requirements of Rule 10b5-1 under the Exchange Act; provided that no sales or other transfers occur under such plan and no public disclosure of such plan shall be required or shall be made by any person during the Lockup Period.

In addition, the foregoing restrictions shall not apply to transfers of shares to the Company pursuant to the exercise of stock options granted pursuant to the Company’s equity incentive plans described in the Prospectus, including the “net” exercise of such options in accordance with their terms and the surrender of the undersigned’s securities to the Company in lieu of payment in cash of the exercise price; provided that the provisions of this lock-up agreement shall apply to any securities issued upon such exercise.

If the undersigned is an officer or director of the Company, (i) the Representatives on behalf of the Underwriters agree that, at least three business days before the effective date of any release or waiver of the foregoing restrictions in connection with a transfer of shares of Common Stock, the Representatives on behalf of the Underwriters will notify the Company of the impending release or waiver, and (ii) the Company will agree in the Underwriting Agreement to announce the impending release or waiver by press release through a major news service at least two business days before the effective date of the release or waiver. Any release or waiver granted by the Representatives on behalf of the Underwriters hereunder to any such officer or director shall only be effective two business days after the publication date of such press release.

 

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The provisions of this paragraph will not apply if (a) the release or waiver is effected solely to permit a transfer not for consideration and (b) the transferee has agreed in writing to be bound by the same terms described in this letter to the extent and for the duration that such terms remain in effect at the time of the transfer.

In furtherance of the foregoing, the Company, and any duly appointed transfer agent for the registration or transfer of the securities described herein, are hereby authorized to decline to make any transfer of securities if such transfer would constitute a violation or breach of this Letter Agreement.

The undersigned hereby represents and warrants that the undersigned has full power and authority to enter into this Letter Agreement. All authority herein conferred or agreed to be conferred and any obligations of the undersigned shall be binding upon the successors, assigns, heirs or personal representatives of the undersigned.

The undersigned understands that, if (i) prior to signing the Underwriting Agreement, the Company notifies the Underwriters that it does not intend to proceed with the Public Offering, (ii) the Underwriting Agreement (other than the provisions thereof which survive termination) shall terminate or be terminated prior to payment for and delivery of the Common Stock to be sold thereunder, (iii) the Registration Statement is withdrawn by the Company prior to the completion of the Public Offering or (iv) the Public Offering is not completed by November 30, 2016, the undersigned shall be released from all obligations under this Letter Agreement. The undersigned understands that the Underwriters are entering into the Underwriting Agreement and proceeding with the Public Offering in reliance upon this Letter Agreement.

 

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This Letter Agreement and any claim, controversy or dispute arising under or related to this Letter Agreement shall be governed by and construed in accordance with the laws of the State of New York, without regard to the conflict of laws principles thereof.

 

Very truly yours,
[NAME OF STOCKHOLDER]
By:  

 

  Name:  
  Title:  

 

-5-

Exhibit 3.2

e.l.f. Beauty, Inc.

Second Certificate of Amendment to

Amended and Restated Certificate of Incorporation

e.l.f. Beauty, Inc., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, hereby certifies as follows:

1. The name of the corporation is e.l.f. Beauty, Inc., which was originally incorporated under the name J.A. Cosmetics, Holdings, Inc. The corporation’s original Certificate of Incorporation was filed with the Secretary of State of the State of Delaware on December 20, 2013.

2. This Second Certificate of Amendment has been duly adopted and approved by the Board of Directors of the corporation, acting in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware, and the corporation’s stockholders have given their written consent in accordance with Section 228 of the General Corporation Law of the State of Delaware.

3. The corporation’s Amended and Restated Certificate of Incorporation, filed with the Secretary of State of the State of Delaware on January 31, 2014, as amended on April 26, 2016 (together as previously amended, the “ Restated Certificate ”), is hereby amended as follows:

A. Article Four is hereby amended in its entirety as follows:

ARTICLE FOUR

AUTHORIZED SHARES AND STOCK SPLIT

The total number of shares of capital stock which the Corporation shall have authority to issue is 250,200,000 shares, consisting of 250,000,000 shares of common stock, $0.01 par value per share (the “ Common Stock ”), and 200,000 shares of preferred stock, $0.01 value per share (the “ Preferred Stock ”).

Upon the filing and effectiveness of this Second Certificate of Amendment pursuant to the General Corporation Law of the State of Delaware (the “ Effective Time ”), each one (1) share of Common Stock issued and outstanding or held by the Corporation in treasury stock immediately prior to the Effective Time shall, automatically and without any further action by the holders thereof, be split into two and seventy-six one hundredths (2.76) shares of Common Stock (the “ Stock Split ”). No fractional shares shall be issued in connection with the Stock Split. Stockholders who otherwise would be entitled to receive fractional shares of Common Stock shall be entitled to receive cash (without interest or deduction) in an amount equal to the product obtained by multiplying (a) the fair value (as determined by the Corporation’s board of directors) of one whole share of Common Stock (after the effect of Stock Split) by (b) the fraction of one share owned by the stockholder. Each certificate that immediately prior to the Effective Time represented shares of Common Stock (the “ Old Certificates ”) shall thereafter represent that number of shares of Common Stock into which the shares represented by the Old Certificate shall have been split, subject to the elimination of fractional shares as described above.”


B. Section V.A is hereby amended to read in its entirety as follows:

“A. Dividends .

(i) General Obligation . When and as declared by the Corporation’s board of directors (the “ Board ”) and to the extent not prohibited under the General Corporation Law of the State of Delaware, the Corporation shall pay preferential dividends in cash to the holders of the Preferred Stock as provided in this Section V.A (the “ Accruing Dividends ”). The Accruing Dividends shall accrue on each share of the Preferred Stock (a “ Share ”) on a daily basis at the rate of 8% per annum of the sum of the Liquidation Value thereof plus all accumulated and unpaid Accruing Dividends thereon from and including the date of issuance of such Share to and including the first to occur of (i) the date on which the Liquidation Value of such Share (plus all declared and unpaid Accruing Dividends thereon) is paid to the holder thereof in connection with the liquidation of the Corporation or the redemption of such Share by the Corporation, (ii) the date on which such Share is converted into shares of Conversion Stock hereunder or (iii) the date on which such share is otherwise acquired by the Corporation; provided, however, that the Accruing Dividends shall be payable only when, as and if declared by the Board and the Corporation shall be under no obligation to pay such Accruing Dividends. The Accruing Dividends shall accrue regardless of whether or not (a) such dividends have been declared, (b) there are profits or surplus (as defined in the General Corporation Law of the State of Delaware) available for payment or (c) the Corporation is prohibited from paying dividends under applicable law. The date on which the Corporation initially issues any Share shall be deemed to be its “date of issuance” regardless of the number of times transfer of such Share is made on the stock records maintained by or for the Corporation and regardless of the number of certificates which may be issued to evidence such Share.

(ii) Dividend Reference Dates . To the extent not paid on March 31, June 30, September 30 and December 31 of each year, beginning March 31, 2014 (the “ Dividend Reference Dates ”), all Accruing Dividends which have accrued on each Share outstanding during the three (3)-month period (or other period in the case of the initial Dividend Reference Date) ending upon each such Dividend Reference Date shall be accumulated and shall remain Accruing Dividends with respect to such Share until paid to the holder thereof; provided, however, that the Accruing Dividends shall be payable only when, as and if declared by the Board and the Corporation shall be under no obligation to pay such Accruing Dividends.

(iii) Distribution of Partial Dividend Payments . Except as otherwise provided herein, if at any time following the declaration of Accruing Dividends by the Board the Corporation pays less than the total amount of Accruing Dividends then accrued with respect to the Preferred Stock, such payment shall be distributed pro rata among the holders thereof based upon the number of Shares held by each such holder.”

C. Section V.B is hereby amended to read in its entirety as follows:

“B. Liquidation . Upon any liquidation, dissolution or winding up of the Corporation (whether voluntary or involuntary), each holder of Preferred Stock shall be entitled to be paid, before any distribution or payment is made upon any Junior Securities, an amount in cash equal to the greater of (i) the aggregate Liquidation Value of all Shares held by such holder (plus any declared and unpaid Accruing Dividends thereon) or (ii) the amount to which such holder would be entitled to receive upon such liquidation, dissolution or winding up if all of such holder’s Preferred Stock was converted into Conversion Stock immediately prior to such event, and except as otherwise provided in Section V.D , the holders of Preferred Stock shall not be entitled to any further payment with respect to their Shares. If upon any such liquidation, dissolution or winding up of the Corporation the assets of the Corporation to be distributed among the holders of the Preferred Stock are insufficient to permit payment to such holders of the aggregate amount which they are entitled to be paid under this Section V.B , then the entire assets available to be

 

2


distributed to the Corporation’s stockholders shall be distributed pro rata among such holders based upon the aggregate Liquidation Value (plus any declared and unpaid Accruing Dividends) of the Preferred Stock held by each such holder. Not less than thirty (30) days prior to the payment date stated therein, the Corporation shall deliver written notice of any such liquidation, dissolution or winding up to each record holder of Preferred Stock, setting forth in reasonable detail the amount of proceeds to be paid with respect to each Share and each share of Junior Securities in connection with such liquidation, dissolution or winding up.”

D. Section V.D(ii) is hereby amended to read in its entirety as follows:

“(ii) Intentionally deleted.”

E. Section V.D(iii) is hereby amended to read in its entirety as follows:

“(iii) Redemption Payments . For each Share which is to be redeemed pursuant to Section V.D(i) hereunder, the Corporation shall be obligated on the Redemption Date to pay to the holder thereof (upon surrender by such holder at the Corporation’s principal office of the certificate representing such Share) an amount in cash immediately available funds equal to the Liquidation Value of such Share (plus any declared and unpaid Accruing Dividends thereon). If on any Redemption Date the Corporation is prohibited, under applicable law or the debt financing agreements to which the Corporation is subject, from redeeming the total number of Shares to be redeemed on such date, the Corporation shall redeem the maximum number of Shares that it is not prohibited under applicable law or such debt financing agreements from so redeeming pro rata among the holders of the Shares to be redeemed. At any time thereafter when the Corporation is not prohibited under applicable law or such debt financing agreements from redeeming additional Shares which the Corporation has become obligated to redeem on any Redemption Date but which it has not redeemed, the Corporation shall immediately redeem the maximum number of such Shares that it is not prohibited by applicable law or such debt financing agreements from redeeming pro rata among the holders of the Shares upon the same basis until all of such Shares have been redeemed.”

F. Section V.D(vi) is hereby amended to read in its entirety as follows:

“(vi) Dividends after Redemption Date . No Share shall be entitled to any Accruing Dividends accruing after the date on which the Liquidation Value of such Share (plus any declared and unpaid Accruing Dividends thereon) is paid to the holder of such Share. On such date, all rights of the holder of such Share shall cease, and such Share shall no longer be deemed to be issued and outstanding.”

G. Section V.F(iii) is hereby amended to read in its entirety as follows:

“(iii) The conversion rights of any Share subject to redemption hereunder shall terminate on the Redemption Date for such Share unless the Corporation has failed to pay to the holder thereof the Liquidation Value of such Share (plus any declared and unpaid Accruing Dividends thereon and any premium payable with respect thereto).”

H. Section V.F(vi) is hereby amended to read in its entirety as follows:

“(vi) If the Corporation is prohibited under applicable law from paying any portion of any declared and unpaid Accruing Dividends on Preferred Stock being converted, the Corporation shall pay such Accruing Dividends to the converting holder as soon thereafter as

 

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(and to the maximum extent as) the Corporation is not prohibited from doing so under applicable law. At the request of any such converting holder, the Corporation shall provide such holder with written evidence of its obligation to such holder.”

I. A new Section V.F(xi) is hereby added to the Restated Certificate and shall read in its entirety as follows:

“(xi) Upon the date and time, or the occurrence of an event (including without limitation a Public Offering), specified by vote or written consent of the holders of a majority of the then outstanding Shares of Preferred Stock, then all outstanding Shares of Preferred Stock shall automatically be converted into a number of shares of Conversion Stock computed by multiplying the number of Shares to be converted by $1,000 and dividing the result by the Conversion Price then in effect.”

J. Section V.K is hereby amended to read in its entirety as follows:

“K. Certain Events . If any event occurs of the type contemplated by the provisions of this Article Five but not expressly provided for by such provisions (including, without limitation, the granting of stock appreciation rights, phantom stock rights or other rights with equity features other than pursuant to stock option plans, stock ownership plans and phantom equity plans approved by the Board including without limitation the Corporation’s 2014 Phantom Equity Plan, as the same may be amended from time to time), then the Board shall make an appropriate adjustment in the Conversion Price so as to protect the rights of the holders of Preferred Stock; provided that no such adjustment shall increase the Conversion Price as otherwise determined pursuant to this Article Five or decrease the number of shares of Conversion Stock issuable upon conversion of each Share.”

K. Section V.L(i) is hereby amended to read in its entirety as follows:

“L. Notices.

(i) Immediately upon any adjustment of the Conversion Price other than as a result of the Stock Split, the Corporation shall give written notice thereof to all holders of Preferred Stock, setting forth in reasonable detail and certifying the calculation of such adjustment.”

L. The definition of “Redemption Date” in Section V.N is hereby amended to read in its entirety as follows:

““ Redemption Date ” as to any Share means the date specified in the notice of any redemption at the Corporation’s option or the applicable date specified herein in the case of any other redemption; provided that no such date shall be a Redemption Date unless the Liquidation Value of such Share (plus any declared and unpaid Accruing Dividends thereon and any required premium with respect thereto) is actually paid in full on such date, and if not so paid in full, the Redemption Date shall be the date on which such amount is fully paid.”

4. All other provisions of the Restated Certificate shall remain in full force and effect.

(Signature page follows)

 

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IN WITNESS WHEREOF , the corporation has caused this Second Certificate of Amendment to the Amended and Restated Certificate of Incorporation to be executed by its duly authorized officer on             , 2016.

 

e.l.f. Beauty, Inc.

 

Tarang P. Amin
Chief Executive Officer

Exhibit 4.3

E.L.F. BEAUTY, INC.

AMENDED AND RESTATED STOCKHOLDERS AGREEMENT

Dated as of [            ], 2016


TABLE OF CONTENTS

 

         Page  

SECTION 1.

  COVENANTS, REPRESENTATIONS AND WARRANTIES      1   

SECTION 2.

  RESTRICTIONS ON TRANSFER OF COMPANY STOCK      2   

2A.

  Restrictions on Transfer      2   

2B.

  Void Transfers      2   

2C.

  Effect of Assignment      2   

SECTION 3.

  BOARD OF DIRECTORS; OBSERVERS; VOTING      2   

3A.

  Composition of the Board      2   

3B.

  TPG/Rollover Stockholder Representation      3   

3C.

  TPG Committee Representation      4   

3D.

  Vacancies and Removal      4   

3E.

  Subsidiary Boards      4   

3F.

  Additional Unaffiliated Directors      4   

3G.

  Board Meeting Expenses      5   

3H.

  Indemnification      5   

3I.

  Irrevocable Proxy      5   

3J.

  Termination of Voting Agreement      6   

SECTION 4.

  RESTRICTIONS      6   

4A.

  Consent Rights of TPG      6   

SECTION 5.

  FINANCIAL INFORMATION      7   

5A.

  Quarterly Financial Statements      7   

5B.

  Annual Financial Statements      7   

5C.

  Access      7   

SECTION 6.

  CONFIDENTIALITY      7   

6A.

  Confidentiality      7   

6B.

  Sharing Information      9   

SECTION 7.

  DEFINITIONS      9   

SECTION 8.

  MISCELLANEOUS      13   

8A.

  Amendment and Waiver      13   

8B.

  Freedom to Pursue Opportunities      13   

8C.

  Severability      13   

8D.

  Entire Agreement      13   

8E.

  Successors and Assigns      14   

8F.

  Counterparts      14   

8G.

  Remedies      14   

8H.

  Notices      14   

8I.

  Governing Law      15   

8J.

  Descriptive Headings      15   

8K.

  Understanding among the Stockholders      15   


AMENDED AND RESTATED STOCKHOLDERS AGREEMENT

This Amended and Restated Stockholders Agreement (this “ Agreement ”) is entered into as of [            ], 2016, by and among (i) e.l.f. Beauty, Inc., a Delaware corporation (f/k/a J.A. Cosmetics Holdings, Inc.) (the “ Company ”), (ii) TPG elf Holdings, L.P., a Delaware limited partnership (together with its Permitted Transferees designated as such in such Permitted Transferees’ Joinder Agreements, “ TPG ”), (iii) each of the Persons listed on the Schedule of Rollover Stockholders attached hereto as such schedule may be modified or amended from time to time to reflect any Transfer to Permitted Transfers (the “ Rollover Stockholders ”), and (iv) each other Person listed on the Schedule of Additional Stockholders attached hereto as such schedule may be modified or amended from time to time to reflect each Person after the date hereof who at any time acquires Equity Securities of the Company and agrees to become party to and bound by this Agreement by signing a Joinder Agreement (“ Joinder Agreement ”), in the form attached hereto as Exhibit A (each an “ Additional Stockholder ” and collectively with TPG and the Rollover Stockholders, the “ Stockholders ”). Each capitalized term used and not otherwise defined herein shall have the meaning set forth in Section 7 .

WHEREAS , the Company, TPG, the Rollover Stockholders and certain other Persons entered into a Stockholders Agreement, dated as of January 31, 2014 (the “ Existing Stockholders Agreement ”);

WHEREAS , in connection with the intended Public Offering of the Company, the Stockholders desire to amend and restate in their entirety the terms of the Existing Stockholders Agreement to provide for certain governance rights and other matters and to set forth the rights and obligations of the Stockholders following the Public Offering;

NOW, THEREFORE , in consideration of the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties to this Agreement hereby agree as follows:

 

  SECTION 1. COVENANTS, REPRESENTATIONS AND WARRANTIES

Each Stockholder hereby represents and warrants to the Company and acknowledges that: (i) to the extent applicable, the execution, delivery and performance of this Agreement have been duly authorized by such Stockholder and do not require such Stockholder to obtain any consent or approval that has not been obtained and do not contravene or result in a default under any provision of any law or regulation applicable to such Stockholder or other governing documents or any agreement or instrument to which such Stockholder is a party or by which such Stockholder is bound; (ii) such Stockholder has the power and authority to enter into this Agreement and to carry out its obligations hereunder; and (iii) this Agreement is valid, binding and enforceable against such Stockholder in accordance with its terms.

 

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  SECTION 2. RESTRICTIONS ON TRANSFER OF COMPANY STOCK

2A. Restrictions on Transfer .

(i) No Stockholder shall Transfer any interest in any Shares other than (w) pursuant to and in compliance with this Section 2 , (x) pursuant to and in accordance with the Registration Rights Agreement, (y) pursuant to a Public Sale or (z) to any of its Permitted Transferees.

(ii) Prior to consummating, or committing to consummate, any Transfer of any Shares (other than pursuant to a Public Sale) to any Person (including, for the avoidance of doubt, any Permitted Transferees), and as a condition precedent to any such Transfer, the Transferring Stockholder shall cause each prospective Transferee thereof to execute and deliver to the Company a Joinder Agreement substantially in the form attached hereto as Exhibit A . Any Transfer or attempted Transfer of any Shares in violation of the foregoing or any other provision of this Agreement shall be void ab initio , and the Company shall not record such Transfer on its books or treat any purported Transferee of such Shares as the owner of such Shares for any purpose.

(iii) No Stockholder shall avoid the provisions of this Agreement by making one or more Transfers to one or more Persons and then disposing of all or any portion of such Stockholder’s interest in any such Person, or by issuing any equity securities of such Person other than to the current direct and indirect holders of such equity interests. Each Stockholder that is not a natural Person shall cause the holders of legal and beneficial interests in such Stockholder to not avoid the provisions of this Agreement by disposing all or any portion of such Person’s interest in such Stockholder. Any Transfer or attempted Transfer in violation of this Section 2A(iii) shall be void and otherwise subject to Section 2A(ii) .

2B. Void Transfers . Any Transfer by any Stockholder of any Shares or other interest in the Company in contravention of this Agreement in any respect (including the failure of the Transferee to execute a Joinder Agreement in accordance with Section 2A(ii) ) shall be void and ineffectual and shall not bind or be recognized by the Company or any other Person.

2C. Effect of Assignment . Any Stockholder who shall assign any Shares or other interest in the Company shall cease to be a Stockholder of the Company with respect to such Shares or other interest and shall no longer have any rights or privileges of a Stockholder with respect to such Shares or other interest.

 

  SECTION 3. BOARD OF DIRECTORS; OBSERVERS; VOTING

3A. Composition of the Board . The authorized number of directors on the Company’s Board shall initially be eight (8); three (3) of whom shall initially be representatives designated by TPG (the “ TPG Directors ”), one (1) of whom shall initially be a representative designated by the Rollover Stockholders (the “ Rollover Stockholders Director ”), one (1) of whom shall initially be the then-current Chief Executive Officer of the Company (the “ CEO Director ”), and three (3) of whom shall initially meet the independence criteria set forth in Rule 10A-3 under the 1934 Securities Act (the “ Independent Directors ”). The foregoing directors shall be divided into three classes of directors, each of which directors shall serve for staggered three (3) year-terms and who shall initially be allocated as follows:

(i) the class I directors shall include: one (1) TPG Director and two (2) Independent Directors;

 

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(ii) the class II directors shall include: one (1) TPG Director and the Rollover Stockholders Director; and

(iii) the class III directors shall include: one (1) TPG Director, the CEO Director and one (1) Independent Director.

The initial term of the class I directors shall expire at the Company’s 2017 annual meeting of stockholders at which directors are elected. The initial term of the class II directors shall expire at the Company’s 2018 annual meeting of stockholders at which directors are elected. The initial term of the class III directors shall expire at the Company’s 2019 annual meeting at which directors are elected. Any additional authorized directors shall be assigned to classes in as nearly as equal number as possible.

3B. TPG/Rollover Stockholder Representation . Each Stockholder shall vote all of his, her or its Shares and any other voting securities of the Company over which such Stockholder has voting control (whether at a stockholders’ meeting which has been duly called or by written consent, if applicable) and shall take all other Necessary Action within his, her or its control (including attendance at meetings in person or by proxy for purposes of obtaining a quorum and execution of written consents in lieu of meetings, if applicable), and the Company shall take all Necessary Action within its control (including calling special board and stockholder meetings), so that the Board shall at all times be composed of the following persons:

(i) for so long as TPG holds a number of shares of Common Stock representing at least the percentage of the outstanding Common Stock shown below, the Company shall, and the Stockholders shall take all Necessary Action to, include in the slate of nominees recommended by the Board for election as directors at each applicable annual or special meeting of stockholders at which directors are to be elected that number of individuals designated by TPG that, if elected, will result in TPG having the number of directors serving on the Board that is shown below.

 

Percentage of Outstanding Common Stock

   Number of TPG Directors
30% or greater    3
Less than 30% but greater than or equal to 20%    2
Less than 20% but greater than or equal to 5%    1
Less than 5%    0

 

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(ii) for so long as the Rollover Stockholders hold a number of shares of Common Stock representing at least ten percent (10%) of the outstanding Common Stock, the Company shall, and the Stockholders shall take all Necessary Action to, include in the slate of nominees recommended by the Board for election as directors at each applicable annual or special meeting of stockholders at which directors are to be elected one (1) individual designated by the Rollover Stockholders.

(iii) for so long as the Stockholders hold a number of shares of Common Stock representing at least fifty percent (50%) of the outstanding Common Stock, the Company shall, and the Stockholders shall take all Necessary Action to, include in the slate of nominees recommended by the Board for election as directors at each applicable annual or special meeting of stockholders at which directors are to be elected the CEO Director.

3C. TPG Committee Representation . Subject to applicable laws and stock exchange regulations, TPG shall have the right to have a representative appointed to serve on each committee of the Board other than the audit committee for so long as TPG has the right to designate at least one (1) director for election to the Board.

3D. Vacancies and Removal . Except as provided for in Section 3A and Section 3B , and to the extent not inconsistent with Section 141(k) of the General Corporation Law of the State of Delaware and the Company’s Governing Documents, (i) TPG and the Rollover Stockholders shall have the exclusive right to remove their respective directors from the Board, and the Board and the Stockholders shall take all Necessary Action to cause the removal of any of the TPG Directors or the Rollover Stockholders Director at the request of TPG or the Rollover Stockholders, as applicable, and (ii) TPG and the Rollover Stockholders shall have the exclusive right to designate for election to the Board directors to fill vacancies created by reason of death, removal or resignation of their respective directors, and the Board and the Stockholders shall take all Necessary Action to cause any such vacancies to be filled by replacement directors designated by TPG or the Rollover Stockholders, as applicable, as promptly as reasonably practicable; provided, that, for the avoidance of doubt and notwithstanding anything to the contrary in this paragraph, TPG and the Rollover Stockholders shall not have the right to designate a replacement director, and the Board and the Stockholders shall not be required to take any action to cause any vacancy to be filled with any such TPG Director or Rollover Stockholder Director, as applicable, to the extent that election or appointment of such TPG Director or Rollover Stockholder Director to the Board would result in a number of directors designated by TPG or the Rollover Stockholders in excess of the number of directors that TPG or the Rollover Stockholders are then entitled to designate for membership on the Board pursuant to Section 3B .

3E. Subsidiary Boards . The Company shall at all times, unless otherwise determined by the Board in its sole discretion, cause the board of directors of e.l.f. Cosmetics, Inc. to be composed of the same persons who are then members of the Board pursuant to Section 3A and Section 3B .

3F. Additional Unaffiliated Directors . For so long as TPG has the right to designate at least one (1) director for nomination under this Agreement, the Company will take

 

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all Necessary Action to ensure that the number of directors serving on the Board shall not exceed nine (9); provided, that the number of directors may be increased if necessary to satisfy the requirements of applicable laws and stock exchange regulations.

3G. Board Meeting Expenses . The Company shall pay all reasonable reimbursable out-of-pocket costs and expenses (including, but not limited to, travel and lodging) incurred by each member of the Board incurred in the course of his or her service hereunder, including in connection with attending regular and special meetings of the Board, any board of directors or board of managers of each of the Company’s Subsidiaries and/or any of their respective committees.

3H. Indemnification . The Company shall obtain customary director and officer indemnity insurance on reasonable terms. The Company hereby acknowledges that any director, officer or other indemnified person covered by any such indemnity insurance policy (any such Person, an “ Indemnitee ”) may have certain rights to indemnification, advancement of expenses and/or insurance provided by TPG or one or more of its Affiliates (collectively, the “ Fund Indemnitors ”). The Company hereby (i) agrees that the Company and any of its Subsidiaries that provides indemnity shall be the indemnitor of first resort (i.e., its or their obligations to an Indemnitee shall be primary and any obligation of any Fund Indemnitor to advance expenses or to provide indemnification for the same expenses or liabilities incurred by an Indemnitee shall be secondary), (ii) agrees that it shall be required to advance the full amount of expenses incurred by an Indemnitee and shall be liable for the full amount of all expenses, judgments, penalties, fines and amounts paid in settlement to the extent legally permitted and as required by the terms of this Agreement or any other agreement between the Company and an Indemnitee, without regard to any rights an Indemnitee may have against any Fund Indemnitor or its insurers, and (iii) irrevocably waives, relinquishes and releases the Fund Indemnitors from any and all claims against the Fund Indemnitors for contribution, subrogation or any other recovery of any kind in respect thereof. The Company further agrees that no advancement or payment by the Fund Indemnitors on behalf of an Indemnitee with respect to any claim for which such Indemnitee has sought indemnification from the Company shall affect the foregoing and the Fund Indemnitors shall have a right of contribution and/or be subrogated to the extent of such advancement or payment to all of the rights of recovery of such Indemnitee against the Company.

3I. Irrevocable Proxy . In order to secure the obligation of each holder of Shares to vote his, her or its Shares and other voting securities of the Company in accordance with Section 3A and Section 3B , for so long as TPG has the right to designate at least one (1) director for nomination under this Agreement, each holder of Shares appoints TPG as his, her or its true and lawful proxy and attorney-in-fact, with full power of substitution, to vote all of his, her or its Shares and other voting securities of the Company (whether now owned or hereafter acquired) for all matters in connection therewith; provided, however, that the irrevocable proxy granted to TPG by an Additional Stockholder hereunder shall automatically terminate at such time as such Additional Stockholder becomes a Terminated Stockholder (as defined in Section 3J below ). TPG may exercise the irrevocable proxy granted to it hereunder at any time that the vote, consent or approval of any holder of Shares may be required pursuant Section 3A and Section 3B . The proxies and powers granted by each such Stockholder pursuant to this Section 3I are coupled with an interest and are given to secure the performance of each such Stockholder’s obligations

 

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under this Agreement. Such proxies and powers shall be irrevocable and shall survive the death, incompetency, disability, bankruptcy or dissolution of such Stockholder and the subsequent holders of such Stockholder’s Shares or other voting securities.

3J. Termination of Voting Agreement . In the event any Additional Stockholder who is or was classified as an “officer” of the Company as defined in Rule 16a-1 under the 1934 Securities Act is no longer an “officer,” director or “ten percent beneficial owner” (as defined in Rule 16a-2 under the 1934 Securities Act) (each, a “ Section 16 Reporting Person ”), such Additional Stockholder and any other Additional Stockholder which (A) is not an Affiliate of any other Additional Stockholder that remains a Section 16 Reporting Person and (B) of which the “officer” or a family member thereof is the trustee, trustor, grantor, donor, settlor or beneficiary, or that was otherwise established by the Terminated Stockholder or such Terminated Stockholder’s family member (collectively, the “ Terminated Stockholder ”) shall no longer be subject to any further obligations under Sections 2 , 3B and 3D and such obligations shall terminate effective immediately upon the termination of such Terminated Stockholder’s status as a Section 16 Reporting Person.

 

  SECTION 4. RESTRICTIONS

4A. Consent Rights of TPG . For so long as TPG owns or holds of record, directly or indirectly, shares of Common Stock representing at least 30% of the outstanding Common Stock, the Company shall not, and shall cause each of its Subsidiaries to not, take any of the following actions without the prior written consent of TPG:

(i) except as expressly contemplated by this Agreement, authorize, issue or enter into any agreement providing for the issuance (contingent or otherwise) of (x) any notes or debt securities with options, warrants or other rights to acquire Equity Securities (including any notes or debt securities convertible into or exchangeable for Equity Securities or options, warrants or other rights to acquire Equity Securities issued in connection therewith) of the Company or any Subsidiary or otherwise containing profit participation features or (y) any Equity Securities of the Company or any Subsidiary other than Equity Securities issued to employees or directors of, or consultants or advisors to, the Company or any Subsidiary pursuant to a plan, agreement or arrangement approved by the Board;

(ii) liquidate, dissolve or effect a recapitalization or reorganization in any form of transaction or series of transactions;

(iii) other than with respect to transactions between or among the Company and/or its Subsidiaries, create, incur, assume or suffer to exist any indebtedness in excess of $50,000,000 for borrowed money, guaranties of borrowed money or capitalized leases other than indebtedness under the terms and provisions of the Credit Facility; and

(iv) increase or decrease the size of the Company’s Board other than in accordance with Section 3 .

 

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  SECTION 5. FINANCIAL INFORMATION

5A. Quarterly Financial Statements . Concurrently with the distribution of the Company’s quarterly financial statements to the audit committee of the Board for review, for so long as TPG has the right to designate at least one (1) director for nomination under this Agreement, the Company shall deliver to TPG an unaudited balance sheet of the Company as of the last day of each of the first three (3) fiscal quarters of each fiscal year and the related unaudited consolidated statements of income, shareholders equity and cash flows for such fiscal quarter and for the fiscal year-to-date period then ended.

5B. Annual Financial Statements . Concurrently with the distribution of the Company’s annual financial statements to the audit committee of the Board for review, for so long as TPG has the right to designate at least one (1) director for nomination under this Agreement, the Company shall deliver to TPG an audited balance sheet of the Company as of the end of such fiscal year and the related audited consolidated statements of income, shareholders equity and cash flows for such fiscal year (it being understood that the Company shall not in any event be obligated to deliver any such audited financial statements prior to one hundred fifty (150) days after completion of the applicable fiscal year unless such audited financial statements have been released earlier).

5C. Access . For so long as TPG holds at least five percent (5%) of the outstanding Common Stock, the Company shall, and shall cause its Subsidiaries to, permit TPG and its respective designated representatives, at reasonable times and upon reasonable prior notice to the Company, to review the books and records of the Company or any of such Subsidiaries and to discuss the affairs, finances and condition of the Company or any of such Subsidiaries with the officers of the Company or any such Subsidiary.

 

  SECTION 6. CONFIDENTIALITY

6A. Confidentiality .

(i) Each Stockholder recognizes and acknowledges that it has and may in the future receive certain confidential and proprietary information and trade secrets of the Company and its Subsidiaries, including regarding identifiable, specific and discrete business opportunities being pursued by the Company or its Subsidiaries (the “ Confidential Information ”). Except as otherwise agreed to by the Company and TPG, each Stockholder agrees that it will not, and shall cause each of its directors, officers, equityholders, partners, employees, agents and members not to, during or after the term of this Agreement, whether directly or indirectly through an Affiliate or otherwise, disclose Confidential Information to any Person for any reason or purpose whatsoever, except (a) to authorized directors, officers, representatives, agents and employees of the Company or its Subsidiaries and as otherwise may be proper in the course of performing such Stockholder’s obligations, or enforcing such Stockholder’s rights, under this Agreement and the agreements expressly contemplated hereby; (b) as part of such Stockholder’s normal reporting, rating or review procedure (including normal credit rating or pricing process), or in connection with such Stockholder’s or such Stockholder’s Affiliates’ normal fund raising, marketing, informational or reporting activities, or to such Stockholder’s (or any of its

 

7


Affiliates’) Affiliates, auditors, attorneys or other agents who need to know such Confidential Information and are subject to confidentiality obligations; (c) to any bona fide prospective purchaser of the equity or assets of such Stockholder or its Affiliates or the shares of Company Stock held by such Stockholder, or prospective merger partner of such Stockholder or its Affiliates, provided that such prospective purchaser or merger partner agrees to be bound by a confidentiality agreement consistent with the provisions of this Section 6 ; or (d) as is required to be disclosed by order of a court of competent jurisdiction, administrative body or governmental body, or by subpoena, summons or legal process, or by law, rule or regulation, provided that (1) in the event that a Stockholder is requested or required, pursuant to the type of process described in this clause (d), to disclose any Confidential Information such Stockholder will provide the Company with prompt notice of any such request or requirement and shall cooperate with the Company so that the Company may, in its discretion, seek a protective order or other appropriate remedy, if available, (2) such Stockholder will give the Company written notice of the information to be disclosed as far in advance as practicable, and (3) such Stockholder will cooperate with the Company’s efforts to obtain, at the Company’s sole expense, a protective order or other reliable assurance that confidential treatment will be accorded the Confidential Information so disclosed, and in the event that such protective order is not obtained (or sought by the Company after notice), the Stockholder (A) shall furnish only that portion of the Confidential Information which, upon advice of counsel, is legally required to be furnished and (B) will exercise its reasonable efforts to obtain adequate assurances that confidential treatment will be accorded the Confidential Information by its recipients. For purposes of this Section 6 , “Confidential Information” shall not include any information which (x) such Person learns from a source other than the Company or any of its Subsidiaries who is at the time of the disclosure not known by such Person to be bound by any confidentiality obligations, (y) is disclosed in a Company prospectus or other similar Company document disseminated to the public, or (z) otherwise becomes publicly known and made generally available through no wrongful act of any Stockholder. Nothing in this Section 6 shall in any way limit or otherwise modify the provisions of any other agreement entered into by any Stockholder with the Company or any of its Subsidiaries.

(ii) The Company hereby agrees that it and its Subsidiaries, and its and its Subsidiaries’ respective directors, officers, equityholders, partners, employees, agents and members, with the exception of the TPG Affiliated Persons, shall keep confidential, and shall not disclose to any third Person or use for its own benefit, without prior approval of TPG any non-public information with respect to TPG, or any of its subsidiaries or Affiliates (including any Person in which TPG holds, or contemplates acquiring, an investment, but excluding the Company and its Subsidiaries) (collectively “ TPG Confidential Information ”) that is in the Company’s possession on the date hereof or disclosed after the date of this Agreement to the Company by or on behalf of TPG, or its subsidiaries or Affiliates, provided, that the Company may disclose any such TPG Confidential Information (a) as has become generally available to the public, or was in or has come into the Company’s possession on a non-confidential basis, without, to the Company’s knowledge, a breach of any confidentiality obligations by the Person disclosing such TPG Confidential Information, or has been independently developed by the Company without use of TPG Confidential Information, (b) to the Company’s Affiliates, and its and their respective directors, officers, equityholders, partners, employees, agents, members and professional advisors who need to know such TPG Confidential Information and are subject to

 

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confidentiality obligations, (c) to the extent necessary in order to comply with any law, order, regulation or ruling applicable to the Company or its Affiliates, or to a regulatory agency with applicable jurisdiction, and (d) as may be required in response to any summons or subpoena or in connection with any litigation or arbitration, it being agreed that, unless such TPG Confidential Information has been generally available to the public, if such TPG Confidential Information is being requested pursuant to a summons or subpoena or a discovery request in connection with a litigation, then (A) the Company shall give TPG notice of such request and shall cooperate with TPG so that TPG may, in its discretion, seek a protective order or other appropriate remedy, if available, and (B) in the event that such protective order is not obtained (or sought by TPG after notice), the Company (1) shall furnish only that portion of the TPG Confidential Information which, in the written opinion of counsel, is legally required to be furnished and (2) will exercise its reasonable efforts to obtain adequate assurances that confidential treatment will be accorded TPG Confidential Information by its recipients.

6B. Sharing Information . To the extent permitted by antitrust or competition laws, each Stockholder agrees and acknowledges that the directors designated by TPG may share Confidential Information about the Company and its Subsidiaries with TPG.

 

  SECTION 7. DEFINITIONS

1933 Securities Act ” means the Securities Act of 1933, as amended, and applicable rules and regulations thereunder, and any successor to such statute, rules or regulations. Any reference herein to a specific section, rule or regulation of the 1933 Securities Act shall be deemed to include any corresponding provisions of future law.

1934 Securities Act ” means the Securities Exchange Act of 1934, as amended, and applicable rules and regulations thereunder, and any successor to such statute, rules or regulations. Any reference herein to a specific section, rule or regulation of the 1934 Securities Act shall be deemed to include any corresponding provisions of future law.

Additional Stockholder ” has the meaning set forth in the preface above.

Affiliate ” of any particular Person means any other Person controlling, controlled by or under common control with such particular Person, where “control” means the possession, directly or indirectly, of the power to direct the management and policies of a Person whether through the ownership of voting securities, by contract or otherwise.

Agreement ” means this Agreement, as amended, modified and waived from time to time in accordance with the terms hereof.

Board ” means the board of directors of the Company.

Commission ” means the Securities and Exchange Commission.

Common Stock ” means the shares of common stock, par value $0.01, of the Company.

 

9


Company ” has the meaning set forth in the preface above.

Company Stock ” means the Shares and any other shares of capital stock of the Company from time to time outstanding.

Confidential Information ” has the meaning set forth in Section 6 .

Credit Facility ” means the Credit Agreement, dated as of January 31, 2014 (as amended, restated, supplemented or otherwise modified from time to time), by and among the Company and the other Borrowers party thereto, each of the other Loan Parties from time to time party thereto, each Lender from time to time party thereto and Bank of Montreal, as Administrative Agent, Swing Line Lender, and an L/C Issuer.

Equity Securities ” means, with respect to the Company, (i) shares of Company Stock, (ii) obligations, evidences of indebtedness or other securities or interests, in each case that are convertible or exchangeable into shares of Company Stock, (iii) warrants, options or other rights to purchase or otherwise acquire shares of Company Stock, (iv) any capital stock of the Company issued or issuable upon the exercise, conversion, or exchange of any of the securities referred to in clauses (i) through (iii) above, (v) any securities issued or issuable directly or indirectly with respect to the securities referred to in clauses (i) through (iv) above by way of stock dividend or stock split or in connection with a combination of shares, recapitalization, reclassification, merger, consolidation or other reorganization. As to any particular securities constituting Company Stock, such securities will cease to be Company Stock when they have been (1) effectively registered under the 1933 Securities Act and disposed of in accordance with the registration statement or prospectus covering them, (2) distributed to the public through a broker, dealer or market maker pursuant to Rule 144 under the 1933 Securities Act (or any similar or equivalent provision then in force), or (3) been repurchased or otherwise acquired by the Company.

Fund Indemnitors ” has the meaning set forth in Section 3H .

Governing Documents ” with respect to the Company and any of its Subsidiaries, means, collectively, such Person’s certificate of incorporation, certificate of formation, bylaws, operating agreement or similar governing documents.

Governmental Entity ” means the United States of America or any other nation, any state or other political subdivision thereof, or any entity exercising executive, legislative, judicial, regulatory or administrative functions of government.

Indemnitee ” has the meaning set forth in Section 3H .

Joinder Agreement ” has the meaning set forth in the preface above.

Necessary Action ” means, with respect to a specified result, all actions, to the fullest extent permitted by applicable law, necessary to cause such result, including, without limitation, (i) voting or providing a written consent or proxy with respect to the Company Stock, (ii) causing the adoption of Stockholders’ resolutions and amendments to the Governing

 

10


Documents, (iii) executing agreements and instruments and (iv) making, or causing to be made, with governmental, administrative or regulatory authorities, all filings, registrations or similar actions that are required to achieve such result.

Non-TPG Shares ” means the shares of Company Stock other than the TPG Shares.

Permitted TPG Transfer ” means any Transfer of Company Stock by TPG or its Affiliates (i) to or among TPG and its Affiliates and/or its or their limited partners or (ii) pursuant to an in-kind distribution to their equityholders.

Permitted Transferee ” means (i) with respect to any Stockholder who is a natural person, such Stockholder’s “family members” as defined under Rule 701 promulgated under the 1933 Securities Act, as in effect as of the date hereof (“family members”); (ii) in the case of TPG or an Affiliate of TPG, a Permitted TPG Transferee; and (iii) in the case of J.A. Cosmetics Corp. (the initial Rollover Stockholder), the stockholders thereof and their family members provided in each case that (w) such Transfer is consummated in accordance with Section 2A(ii) , (x) the restrictions contained herein will continue to be applicable to the applicable Company Stock after any such Transfer, (y) the transferee(s) of such Company Stock is an “accredited investor” as defined under Rule 501 of Regulation D of the Securities Act (or any similar or equivalent provision then in force) and (z) neither the transferee(s) of such Company Stock nor any of its Affiliates is, or is reasonably expected to be, engaged in any business or other activities which competes with the business of the Company or any of its Subsidiaries.

Person ” means an individual, a partnership, a corporation, a limited liability company, an association, a joint stock company, a trust, a joint venture, an unincorporated organization, association or other entity or a Governmental Entity.

Public Offering ” means any sale, in an underwritten public offering registered under the 1933 Securities Act, of the Company’s (or any successor’s) Equity Securities.

Public Sale ” means any sale of Company Stock or other securities to the public pursuant to an offering registered under the Securities Act or through a broker, dealer or market maker pursuant to the provisions of Rule 144 promulgated under the 1933 Securities Act.

Registration Rights Agreement ” means the Registration Rights Agreement, dated January 31, 2014, by and among the Company, the Stockholders and the other parties thereto, as amended from time to time.

Rollover Stockholders ” has the meaning set forth in the preface above.

Schedule of Additional Stockholders ” has the meaning set forth in the preface above.

Schedule of Rollover Stockholders ” has the meaning set forth in the preface above.

 

11


Section 16 Reporting Person ” has the meaning set forth in Section 3J .

Shares ” means the shares of common stock, par value $0.01, of the Company, and any other Equity Securities of the Company from time to time outstanding.

Stockholder ” has the meaning set forth in the preface above.

Subsidiary ” means, with respect to any Person, any corporation, limited liability company, partnership, association or business entity of which (i) if a corporation, a majority of the total voting power of units of stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by that Person or one or more of the other Subsidiaries of that Person or a combination thereof, or (ii) if a limited liability company, partnership, association or other business entity (other than a corporation), a majority of the partnership or other similar ownership interest thereof is at the time owned or controlled, directly or indirectly, by any Person or one or more Subsidiaries of that Person or a combination thereof. For purposes hereof, a Person or Persons shall be deemed to have a majority ownership interest in a limited liability company, partnership, association or other business entity (other than a corporation) if such Person or Persons shall be allocated a majority of limited liability company, partnership, association or other business entity gains or losses or shall be or control any managing director or general partner of such limited liability company, partnership, association or other business entity. For purposes hereof, references to a “ Subsidiary ” of any Person shall be given effect only at such times that such Person has one or more Subsidiaries, and, unless otherwise indicated, the term “ Subsidiary ” refers to a Subsidiary of the Company.

Terminated Stockholder ” has the meaning set forth in Section 3J .

TPG ” has the meaning set forth in the preface above.

TPG Affiliated Person ” means, each of TPG and all of its respective partners, principals, directors, officers, members, managers, managing directors, advisors, consultants and employees, TPG’s Affiliates, the TPG Directors, or any officer of the Company that is an Affiliate of TPG.

TPG Confidential Information ” has the meaning set forth in Section 6A(ii) .

TPG Directors ” has the meaning set forth in Section 3A .

TPG Shares ” means the Shares held by TPG as of any date. As to any particular securities constituting TPG Shares, such securities shall cease to be TPG Shares when they have been (i) effectively registered under the 1933 Securities Act and disposed of in accordance with the registration statement covering them, (ii) distributed to the public through a broker, dealer or market maker pursuant to Rule 144 under the 1933 Securities Act (or any similar provision then in force), or (iii) repurchased by the Company or any Subsidiary.

Transfer ” means any sale, transfer, assignment, pledge, mortgage, exchange, hypothecation, grant of a security interest or other direct or indirect disposition or encumbrance

 

12


of an interest whether with or without consideration, whether voluntarily or involuntarily or by operation of law) or the acts thereof. The terms “ Transferee ,” “ Transferred ,” and other forms of the word “ Transfer ” shall have correlative meanings.

 

  SECTION 8. MISCELLANEOUS

8A. Amendment and Waiver . This Agreement may be amended, modified or waived with the written consent of TPG; provided that if any such amendment, modification or waiver would, individually or in the aggregate, adversely affect in any material respect the rights, preferences or privileges of any holder of Non-TPG Shares (without regard to any effect on the individual circumstances of the holder of such Non-TPG Shares) disproportionately to the effect of such amendment, modification or waiver on the rights, preferences or privileges of the TPG Shares, such amendment, modification or waiver shall also require the written consent of the holders of a majority of the Non-TPG Shares. The Board may, without the consent of any other Stockholder, amend the Schedule of Additional Stockholders to reflect the issuance or Transfer to any Stockholder consistent with this Agreement.

8B. Freedom to Pursue Opportunities . The Company and the Stockholders acknowledge and understand that TPG and its respective Affiliates, including the TPG Directors, from time to time review the business plans and related proprietary information of many enterprises, including enterprises that may have products or services that compete directly or indirectly with those of the Company, and may trade in the securities of such enterprises. Nothing in this Agreement shall preclude or in any way restrict TPG, any of its respective Affiliates, including the TPG Directors, from investing or participating in any particular enterprise, or trading in the securities thereof, whether or not such enterprise has products or services that compete with those of the Company, and the Company and its Stockholders hereby waive, in perpetuity, any and all claims that it now has or may have in the future, and agree not to initiate any litigation or any other cause of action (whether or not in a court of competent jurisdiction) in respect of any such waived claims, or otherwise on the basis of, or in connection with, the doctrine of corporate opportunity (or any similar doctrine).

8C. Severability . Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision or the effectiveness or validity of any provision in any other jurisdiction, and this Agreement shall be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein.

8D. Entire Agreement . Except as otherwise expressly set forth herein, this document and the documents referenced herein and therein embody the complete agreement and understanding among the parties hereto with respect to the subject matter hereof and supersede and preempt any prior understandings, agreements or representations by or among the parties, written or oral, which may have related to the subject matter hereof in any way.

 

13


8E. Successors and Assigns . Except as otherwise provided herein, this Agreement shall bind and inure to the benefit of and be enforceable by the Company and its successors and assigns and the Stockholders from time to time party hereto and any subsequent holders of Company Stock and the respective successors and assigns of each of them, so long as they hold Company Stock.

8F. Counterparts . This Agreement may be executed in separate counterparts each of which shall be an original and all of which taken together shall constitute one and the same agreement.

8G. Remedies . The parties hereto agree and acknowledge that money damages may not be an adequate remedy for any breach of the provisions of this Agreement and that the Company and any Stockholder shall have the right to injunctive relief or specific performance, in addition to all of its rights and remedies at law or in equity, to enforce the provisions of this Agreement. Nothing contained in this Agreement shall be construed to confer upon any Person who is not a signatory hereto any rights or benefits, as a third party beneficiary or otherwise.

8H. Notices . Any notice provided for under this Agreement will be deemed to have been given hereunder (i) when delivered personally to the recipient, (ii) one (1) business day after being sent to the recipient by reputable overnight courier service (charges prepaid), (iii) upon machine-generated acknowledgment of receipt after transmittal by facsimile if so acknowledged to have been received before 5:00 p.m. on a business day at the location of receipt and otherwise on the next following business day, provided that such notice, demand or other communication is also deposited within 24 hours thereafter with a reputable overnight courier service (charges prepaid) for delivery to the same Person, (iv) upon transmittal by e-mail if transmitted before 5:00 p.m. (on a business day) in the time zone of the address of the recipient and otherwise on the next following business day, or (iv) five (5) days after being mailed to the recipient by certified or registered mail, return receipt requested and postage prepaid, in each case to the addresses provided below, the addresses as indicated by the Company’s records or at such address or to the attention of such other person as the recipient party has specified by prior written notice to the sending party. The Company’s address is:

 

e.l.f. Beauty, Inc.

570 10th Street

Oakland, California 94607

Attention:

 

General Counsel

Facsimile:

  ###

Email:

  ###

with copies (which shall not constitute notice) to:

Kirkland & Ellis LLP

333 South Hope Street, 29th Floor

Los Angeles, California 90071

Attention:

 

###

Facsimile:

 

###

Email:

 

###

 

14


8I. Governing Law . This Agreement, including all issues concerning the relative rights of the Company and the Stockholders with respect to the matters set forth herein, shall be governed by and construed in accordance with the laws of the State of Delaware, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of Delaware or any other jurisdiction) that would cause the application of the law of any jurisdiction other than the State of Delaware.

8J. Descriptive Headings . The descriptive headings of this Agreement are inserted for convenience only and do not constitute a part of this Agreement.

8K. Understanding among the Stockholders . Except as otherwise provided herein, the determination of each Stockholder to purchase the Company Stock has been made by such Stockholder independent of any other Stockholder, or any of such other Stockholder’s Affiliates, and independent of any statements or opinions as to the advisability of such contribution or as to the properties, business, prospects or condition (financial or otherwise) of the Company which may have been made or given by any other Stockholder or by any agent, Affiliate or employee of any other Stockholder. In addition, it is acknowledged by each Stockholder that no Stockholder has acted as an agent of any other Stockholder in connection with making its investment hereunder and that no Stockholder shall be acting as an agent of any other Stockholder in connection with monitoring its investment hereunder. It is further acknowledged by the other Stockholders that TPG and its Affiliates have retained Kirkland & Ellis LLP to act as their counsel in connection with this Agreement and that Kirkland & Ellis LLP has not acted as counsel for any other party in connection herewith or therewith and that no other party has the status of a client of Kirkland & Ellis LLP for conflict of interest or other purposes as a result thereof.

* * * * *

 

15


IN WITNESS WHEREOF, the parties hereto have executed this Stockholders Agreement on the day and year first above written.

 

COMPANY:
E.L.F. BEAUTY, INC.

By:

 

 

 

Name:

 

Title:

 

[Signature Pages - Stockholders Agreement]


STOCKHOLDERS:
J.A. COSMETICS CORP.
By:  

 

Name:  
Title:  

 

Alan Shamah

 

Joseph Shamah

 

[Signature Pages - Stockholders Agreement]


Amin Family Trusts
By:  

 

Name:   Tarang P. Amin
Title:   Attorney-in-Fact
By:  

 

Name:   Hirni T. Amin
Title:   Attorney-in-Fact

 

[Signature Pages - Stockholders Agreement]


TPG ELF HOLDINGS, L.P.
By: TPG Growth II Advisors, Inc.
its general partner
By:  

 

Name:   Clive Bode
Title:   Vice President

 

[Signature Pages - Stockholders Agreement]


Milsten/Conner Trust dated October 17, 2008

By:

 

 

Name:

 

Scott Milsten

Title:

 

Trustee

 

[Signature Pages - Stockholders Agreement]


 

Scott Milsten

 

Tarang Amin

 

John Bailey

 

Richard F. Baruch, Jr.

 

Erin C. Daley

 

Jonathan T. Fieldman

 

[Signature Pages - Stockholders Agreement]


SCHEDULE OF ROLLOVER STOCKHOLDERS

 

Rollover Stockholder

   
J.A. Cosmetics Corp.  

 

[Signature Pages - Stockholders Agreement]


SCHEDULE OF ADDITIONAL STOCKHOLDERS

 

Additional Stockholder

   
Amin Family Trusts*  
Milsten/Conner Trust dated October 17, 2008  
Tarang Amin  
Scott Milsten  
John Bailey  
Richard F. Baruch, Jr.  
Erin C. Daley  
Jonathan T. Fieldman  
Joseph Shamah  
Alan Shamah  

 

* Includes all trusts that are holders of Shares, of which Tarang Amin or his family member is the trustee, trustor, grantor, donor, settlor or beneficiary, or that was otherwise established by Tarang Amin or his family member


EXHIBIT A

FORM OF JOINDER AGREEMENT

This Joinder Agreement is being delivered to e.l.f. Beauty, Inc., a Delaware corporation (the “ Company ”), pursuant to Section 2 of that certain Amended and Restated Stockholders Agreement, dated as of [                    ], 2016 (as amended from time to time, the “ Stockholders Agreement ”), among the Company and the Stockholders (as defined therein). Capitalized terms used herein shall have the meanings assigned to such terms in the Stockholders Agreement.

The undersigned hereby executes and delivers to the Company this Joinder Agreement, pursuant to which the undersigned hereby becomes a party to the Stockholders Agreement and agrees to be bound by the provisions of the Stockholders Agreement with respect to the                                          Shares held by the undersigned.

Any notice provided for in the Stockholders Agreement should be delivered to the undersigned at the address set forth below:

 

   

 

 
   

 

 
   

 

 
    Telephone:  

 

 
    Facsimile:  

 

 

 

Dated:  

 

 

 

[                      ]

[Stockholders Agreement - Joinder]

Exhibit 4.4

 

LOGO

ZQ|CERT#|COY|CLS|RGSTRY|ACCT#|TRANSTYPE|RUN#|TRANS#
COMMON STOCK
PAR VALUE $0.01
COMMON STOCK
THIS CERTIFICATE IS TRANSFERABLE
IN CANTON, MA, JERSEY CITY, NJ AND
COLLEGE STATION, TX
Certificate
Number
ZQ00000000
e.l.f.
eyes lips face
Shares
* * 000000* * * * * * * * * * * * * * * * * *
* * * 000000* * * * * * * * * * * * * * * * *
* * * * 000000* * * * * * * * * * * * * * * *
* * * * * 000000* * * * * * * * * * * * * * *
* * * * * * 000000* * * * * * * * * * * * * *
E.L.F. BEAUTY, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFIES THAT
** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample
**** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David
Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander
David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr.
Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample ****
Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample
**** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David
Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander
David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr.
Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample ****
Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Alexander David Sample **** Mr. Sample **** Mr. Sample
MR. SAMPLE & MRS. SAMPLE &
MR. SAMPLE & MRS. SAMPLE
CUSIP
26856L 103
SEE REVERSE FOR CERTAIN DEFINITIONS
is the owner of
**000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares
****000000**Shares****000000**Shares***
*000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares
****000000**Shares****000000**Shares****

000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares
****000000**Shares****000000**Shares****0
00000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares
****000000**Shares****000000**Shares****00
0000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares
****000000**Shares****000000**Shares****000
000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****
000000**Shares****000000**Shares****0000
00**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****
000000**Shares****000000**Shares****00000
0**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****
000000**Shares****000000**Shares****000000
**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****
000000**Shares****000000**Shares****000000*
*Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****
000000**Shares****000000**Shares****000000**
Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****000000**Shares****
000000**Shares****000000**Shares****000000**S
***ZERO HUNDRED THOUSAND
ZERO HUNDRED AND ZERO***
FULLY-PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK OF
e.l.f. Beauty, Inc. (hereinafter called the “Company”), transferable on the books of the Company in person or by duly authorized attorney, upon surrender of this Certificate properly endorsed. This Certificate and the shares represented hereby, are issued and shall be held subject to all of the provisions of the Certificate of Incorporation, as amended, and the Bylaws, as amended, of the Company (copies of which are on file with the Company and with the Transfer Agent), to all of which each holder, by acceptance hereof, assents. This Certificate is not valid unless countersigned and registered by the Transfer Agent and Registrar.
Witness the facsimile seal of the Company and the facsimile signatures of its duly authorized officers.
DATED
DD-MMM-YYYY
COUNTERSIGNED AND REGISTERED:
COMPUTERSHARE TRUST COMPANY, N.A.
TRANSFER AGENT AND REGISTRAR,
President
Secretary
E.L.F. BEAUTY, INC.
SEAL
DECEMBER 20, 2013
DELAWARE
By
AUTHORIZED SIGNATURE
1234567
e.l.f.
eyes lips face
PO BOX 43004, Providence, RI 02940-3004
MR A SAMPLE
DESIGNATION (IF ANY)
ADD 1 ADD 2 ADD 3 ADD 4
CUSIP XXXXXX XX X
Holder ID XXXXXXXXXX
Insurance Value 1,000,000.00
Number of Shares 123456
DTC 12345678 123456789012345
Certificate Numbers
1234567890/1234567890
1234567890/1234567890
1234567890/1234567890
1234567890/1234567890
1234567890/1234567890
1234567890/1234567890
Total Transaction
Num/No.
123456
Denom.
123456
Total
1234567


 

 

E.L.F BEAUTY, INC.

THE COMPANY WILL FURNISH WITHOUT CHARGE TO EACH STOCKHOLDER WHO SO REQUESTS, A SUMMARY OF THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OF THE COMPANY AND THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES AND RIGHTS, AND THE VARIATIONS IN RIGHTS, PREFERENCES AND LIMITATIONS DETERMINED FOR EACH SERIES, WHICH ARE FIXED BY THE CERTIFICATE OF INCORPORATION OF THE COMPANY, AS AMENDED, AND THE RESOLUTIONS OF THE BOARD OF DIRECTORS OF THE COMPANY, AND THE AUTHORITY OF THE BOARD OF DIRECTORS TO DETERMINE VARIATIONS FOR FUTURE SERIES. SUCH REQUEST MAY BE MADE TO THE OFFICE OF THE SECRETARY OF THE COMPANY OR TO THE TRANSFER AGENT. THE BOARD OF DIRECTORS MAY REQUIRE THE OWNER OF A LOST OR DESTROYED STOCK CERTIFICATE, OR HIS LEGAL REPRESENTATIVES, TO GIVE THE COMPANY A BOND TO INDEMNIFY IT AND ITS TRANSFER AGENTS AND REGISTRARS AGAINST ANY CLAIM THAT MAY BE MADE AGAINST THEM ON ACCOUNT OF THE ALLEGED LOSS OR DESTRUCTION OF ANY SUCH CERTIFICATE.

 

 

 

The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations:

 

      TEN COM   - as tenants in common     UNIF GIFT MIN ACT   -  

 

  Custodian  

 

 
           

(Cust)

    (Minor)  
      TEN ENT   - as tenants by the entireties        

under Uniform Gifts to Minors Act

 

 

 
               

(State)

 
      JT TEN   - as joint tenants with right of survivorship     UNIF TRF MIN ACT   -  

 

 

Custodian (until age

 

 

  )    
   

  and not as tenants in common

        (Cust)          
           

                 

 

under Uniform Transfers to Minors Act

 

                 

 
            (Minor)           (State)  
 

    Additional abbreviations may also be used though not in the above list.

 

 

  PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE
For value received,                                          hereby sell, assign and transfer unto    

 

(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING POSTAL ZIP CODE, OF ASSIGNEE)

 

 

 

  Shares
of the common stock represented by the within Certificate, and do hereby irrevocably constitute and appoint  

 

  Attorney

to transfer the said stock on the books of the within-named Company with full power of substitution in the premises.

 

 
Dated:  

 

  20  

 

Signature:  

 

Signature:  

 

  Notice:   The signature to this assignment must correspond with the name as written upon the face of the certificate, in every particular, without alteration or enlargement, or any change whatever.
 

Signature(s) Guaranteed: Medallion Guarantee Stamp

THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (Banks, Stockbrokers, Savings and Loan Associations and Credit Unions) WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM, PURSUANT TO S.E.C. RULE 17Ad-15.

 

 

 

 

SECURITY INSTRUCTIONS

 

THIS IS WATERMARKED PAPER. DO NOT ACCEPT WITHOUT NOTING WATERMARK. HOLD TO LIGHT TO VERIFY WATERMARK.

 

 

LOGO

 

  

The IRS requires that the named transfer agent (“we”) report the cost basis of certain shares or units acquired after January 1, 2011. If your shares or units are covered by the legislation, and you requested to sell or transfer the shares or units using a specific cost basis calculation method, then we have processed as you requested. If you did not specify a cost basis calculation method, then we have defaulted to the first in, first out (FIFO) method. Please consult your tax advisor if you need additional information about cost basis.

 

If you do not keep in contact with the issuer or do not have any activity in your account for the time period specified by state law, your property may become subject to state unclaimed property laws and transferred to the appropriate state.

   LOGO

Exhibit 5.1

 

   140 Scott Drive
   Menlo Park, California 94025
   Tel: +1.650.328.4600 Fax: +1.650.463.2600
   www.lw.com   

LOGO

   FIRM / AFFILIATE OFFICES
   Barcelona    Moscow
   Beijing    Munich
   Boston    New Jersey
   Brussels    New York
   Century City    Orange County
   Chicago    Paris
   Dubai    Riyadh

September 12, 2016

   Düsseldorf    Rome
   Frankfurt    San Diego
   Hamburg    San Francisco
   Hong Kong    Shanghai
   Houston    Silicon Valley
   London    Singapore
   Los Angeles    Tokyo
   Madrid    Washington, D.C.
   Milan   

e.l.f. Beauty, Inc.

570 10th Street

Oakland, California 94607

 

  Re: Form S-1 Registration Statement File No. 333-213333
       Initial Public Offering of up to 9,583,333 Shares of Common Stock
       of e.l.f. Beauty, Inc.

Ladies and Gentlemen:

We have acted as special counsel to e.l.f. Beauty, Inc., a Delaware corporation (the “Company”), in connection with a registration statement on Form S-1 under the Securities Act of 1933, as amended (the “Act”), filed with the Securities and Exchange Commission (the “Commission”) on August 26, 2016 (Registration No. 333-213333) (as so filed and as amended, the “Registration Statement”). The Registration Statement relates to the registration of 9,583,333 shares of common stock, $0.01 par value per share, 4,000,000 of which are being offered by the Company (the “Company Shares”), 4,333,3333 of which are being offered by certain selling stockholders (the “Selling Stockholders”) of the Company (the “Initial Selling Stockholder Shares”), and 1,250,000 of which may be purchased by the underwriters pursuant to an option to purchase additional shares granted to the underwriters by the Selling Stockholders (together with the Initial Selling Stockholder Shares, the “Selling Stockholder Shares,” and the Selling Stockholder Shares together with the Company Shares, the “Shares”). The term “Shares” shall include any additional shares of common stock registered by the Company pursuant to Rule 462(b) under the Act in connection with the offering contemplated by the Registration Statement. This opinion is being furnished in connection with the requirements of Item 601(b)(5) of Regulation S-K under the Act, and no opinion is expressed herein as to any matter pertaining to the contents of the Registration Statement or related prospectus (the “Prospectus”), other than as expressly stated herein with respect to the issue of the Shares.

As such counsel, we have examined such matters of fact and questions of law as we have considered appropriate for purposes of this letter. With your consent, we have relied upon certificates and other assurances of officers of the Company and others as to factual matters without having independently verified such factual matters. We are opining herein as to the General Corporation Law of the State of Delaware, and we express no opinion with respect to any other laws.


September 12, 2016

Page 2

 

LOGO

 

Subject to the foregoing and the other matters set forth herein, it is our opinion that, as of the date hereof:

 

  1. When the Company Shares shall have been duly registered on the books of the transfer agent and registrar therefor in the name or on behalf of the purchasers, and have been issued by the Company against payment therefor (for not less than par value) in the circumstances contemplated by the form of underwriting agreement most recently filed as an exhibit to the Registration Statement, the issue and sale of the Company Shares will have been duly authorized by all necessary corporate action of the Company, and the Company Shares will be validly issued, fully paid and nonassessable. In rendering the foregoing opinion, we have assumed that the Company will comply with all applicable notice requirements regarding uncertificated shares provided in the General Corporation Law of the State of Delaware.

 

  2. The Selling Stockholder Shares have been duly authorized by all necessary corporate action of the Company and are validly issued, fully paid and nonassessable.

This opinion is for your benefit in connection with the Registration Statement and may be relied upon by you and by persons entitled to rely upon it pursuant to the applicable provisions of the Act. We consent to your filing this opinion as an exhibit to the Registration Statement and to the reference to our firm in the Prospectus under the heading “Legal Matters.” We further consent to the incorporation by reference of this letter and consent into any post-effective amendment to the Registration Statement filed pursuant to Rule 462(b) with respect to the Shares. In giving such consent, we do not thereby admit that we are in the category of persons whose consent is required under Section 7 of the Act or the rules and regulations of the Commission thereunder.

Very truly yours,

/s/ Latham & Watkins LLP

Exhibit 10.16

E.L.F. BEAUTY, INC.

2016 EQUITY INCENTIVE AWARD PLAN

ARTICLE 1.

PURPOSE

The purpose of the e.l.f. Beauty, Inc. 2016 Equity Incentive Award Plan (as it may be amended from time to time, the “ Plan ”) is to promote the success and enhance the value of e.l.f. Beauty, Inc. (the “ Company ”) by linking the individual interests of Directors, Employees and Consultants to those of the Company’s stockholders and by providing such individuals with an incentive for outstanding performance to generate superior returns to the Company’s stockholders. The Plan is further intended to provide flexibility to the Company in its ability to motivate, attract, and retain the services of Directors, Employees and Consultants upon whose judgment, interest, and special effort the successful conduct of the Company’s operation is largely dependent.

ARTICLE 2.

DEFINITIONS AND CONSTRUCTION

Wherever the following terms are used in the Plan they shall have the meanings specified below, unless the context clearly indicates otherwise. The singular pronoun shall include the plural where the context so indicates.

2.1 “ Administrator ” shall mean the entity that conducts the general administration of the Plan as provided in Article 13 hereof. With reference to the duties of the Administrator under the Plan which have been delegated to one or more persons pursuant to Section 13.6 hereof, or as to which the Board has assumed, the term “Administrator” shall refer to such person(s) unless the Committee or the Board has revoked such delegation or the Board has terminated the assumption of such duties.

2.2 “ Affiliate ” shall mean any Parent or Subsidiary.

2.3 “ Applicable Accounting Standards ” shall mean Generally Accepted Accounting Principles in the United States, International Financial Reporting Standards or such other accounting principles or standards as may apply to the Company’s financial statements under United States federal securities laws from time to time.

2.4 “ Applicable Law ” shall mean any requirements relating to the administration of equity incentive plans under U.S. federal and state securities, tax and other applicable laws, rules and regulations, the applicable rules of any stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws and rules of any foreign country or other jurisdiction where rights under this Plan are granted.

2.5 “ Award ” shall mean an Option, a Restricted Stock award, a Restricted Stock Unit award, a Performance Award, a Dividend Equivalent award, a Deferred Stock award, a Deferred Stock Unit award, a Stock Payment award or a Stock Appreciation Right, in any case, which may be awarded or granted under the Plan.


2.6 “ Award Agreement ” shall mean any written notice, agreement, terms and conditions, contract or other instrument or document evidencing an Award, including through electronic medium, which shall contain such terms and conditions with respect to an Award as the Administrator shall determine consistent with the Plan.

2.7 “ Board ” shall mean the Board of Directors of the Company.

2.8 “ Change in Control ” shall mean the occurrence, in a single transaction or in a series of related transactions, of any one or more of the following events:

(a) A transaction or series of transactions (other than an offering of Common Stock to the general public through a registration statement filed with the Securities and Exchange Commission) whereby any “person” or related “group” of “persons” (as such terms are used in Sections 13(d) and 14(d)(2) of the Exchange Act) (other than the Company, any of its Subsidiaries, an employee benefit plan maintained by the Company or any of its Subsidiaries or a “person” that, prior to such transaction, directly or indirectly controls, is controlled by, or is under common control with, the Company) directly or indirectly acquires beneficial ownership (within the meaning of Rule 13d-3 under the Exchange Act) of securities of the Company possessing more than fifty percent (50%) of the total combined voting power of the Company’s securities outstanding immediately after such acquisition; or

(b) During any period of two (2) consecutive years, individuals who, at the beginning of such period, constitute the Board together with any new Director(s) (other than a Director designated by a person who shall have entered into an agreement with the Company to effect a transaction described in Section 2.9(a) or 2.9(c)) whose election by the Board or nomination for election by the Company’s stockholders was approved by a vote of at least two-thirds of the Directors then still in office who either were Directors at the beginning of the two (2)-year period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof; or

(c) The consummation by the Company (whether directly involving the Company or indirectly involving the Company through one or more intermediaries) of (x) a merger, consolidation, reorganization, or business combination or (y) a sale or other disposition of all or substantially all of the Company’s assets in any single transaction or series of related transactions or (z) the acquisition of assets or stock of another entity, in each case other than a transaction:

(i) which results in the Company’s voting securities outstanding immediately before the transaction continuing to represent (either by remaining outstanding or by being converted into voting securities of the Company or the person that, as a result of the transaction, controls, directly or indirectly, the Company or owns, directly or indirectly, all or substantially all of the Company’s assets or otherwise succeeds to the business of the Company (the Company or such person, the “ Successor Entity ”)) directly or indirectly, at least a majority of the combined voting power of the Successor Entity’s outstanding voting securities immediately after the transaction, and

(ii) after which no person or group beneficially owns voting securities representing fifty percent (50%) or more of the combined voting power of the Successor Entity; provided, however, that no person or group shall be treated for purposes of this Section 2.9(c)(ii) as beneficially owning fifty percent (50%) or more of the combined voting power of the Successor Entity solely as a result of the voting power held in the Company prior to the consummation of the transaction; or

(d) The Company’s stockholders approve a liquidation or dissolution of the Company.

 

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Notwithstanding the foregoing, if a Change in Control constitutes a payment event or a toggle event with respect to any Award (or portion thereof) that provides for the deferral of compensation and is subject to Section 409A of the Code, to the extent required to avoid the imposition of additional taxes under Section 409A of the Code, the transaction or event described in subsection (a), (b), (c) or (d) with respect to such Award (or portion thereof) shall only constitute a Change in Control for purposes of the payment timing of such Award if such transaction also constitutes a “change in control event,” as defined in Treasury Regulation Section 1.409A-3(i)(5) to the extent required by Section 409A of the Code.

The Committee shall have full and final authority, which shall be exercised in its sole discretion, to determine conclusively whether a Change in Control of the Company has occurred pursuant to the above definition, the date of the occurrence of such Change in Control and any incidental matters relating thereto; provided that any exercise of authority in conjunction with a determination of whether a Change in Control is a “change in control event” as defined in Treasury Regulation Section 1.409A-3(i)(5) shall be consistent with such regulation.

2.9 “ Code ” shall mean the Internal Revenue Code of 1986, as amended from time to time, together with the regulations and official guidance promulgated thereunder.

2.10 “ Committee ” shall mean the Compensation Committee of the Board, a subcommittee of the Compensation Committee of the Board or another committee or subcommittee of the Board, appointed as provided in Section 13.1 hereof.

2.11 “ Common Stock ” shall mean the common stock of the Company, par value $0.01 per share.

2.12 “ Company ” shall have the meaning set forth in Article 1 hereof.

2.13 “ Consultant ” shall mean any consultant or advisor engaged to provide services to the Company or any Affiliate who qualifies as a consultant or advisor under the applicable rules of the Securities and Exchange Commission for registration of shares on a Form S-8 Registration Statement or any successor Form thereto or, prior to the Public Trading Date, under Rule 701 of the Securities Act.

 

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2.14 “ Covered Employee ” shall mean any Employee who is, or could be, a “covered employee” within the meaning of Section 162(m) of the Code.

2.15 “ Deferred Stock ” shall mean a right to receive Shares awarded under Section 10.4 hereof.

2.16 “ Deferred Stock Unit ” shall mean a right to receive Shares awarded under Section 10.5 hereof.

2.17 “ Director ” shall mean a member of the Board, as constituted from time to time.

2.18 “ Dividend Equivalent ” shall mean a right to receive the equivalent value (in cash or Shares) of dividends paid on Shares, awarded under Section 10.2 hereof.

2.19 “ DRO ” shall mean a “domestic relations order” as defined by the Code or Title I of the Employee Retirement Income Security Act of 1974, as amended from time to time, or the rules thereunder.

2.20 “ Effective Date ” shall mean immediately prior to the Public Trading Date, provided that the Board has adopted the Plan prior to or on such date.

2.21 “ Eligible Individual ” shall mean any person who is an Employee, a Consultant or a Non-Employee Director, as determined by the Administrator.

2.22 “ Employee ” shall mean any officer or other employee (as determined in accordance with Section 3401(c) of the Code and the Treasury Regulations thereunder) of the Company or any Affiliate.

2.23 “ Equity Restructuring ” shall mean a nonreciprocal transaction between the Company and its stockholders, such as a stock dividend, stock split, spin-off, rights offering or recapitalization through a large, nonrecurring cash dividend, that affects the number or kind of Shares (or other securities of the Company) or the share price of Common Stock (or other securities) and causes a change in the per share value of the Common Stock underlying outstanding stock-based Awards.

2.24 “ Exchange Act ” shall mean the Securities Exchange Act of 1934, as amended from time to time.

2.25 “ Fair Market Value ” shall mean, as of any given date, the value of a Share determined as follows:

(a) If the Common Stock is (i) listed on any established securities exchange (such as the New York Stock Exchange, the NASDAQ Global Market and the NASDAQ Global Select Market), (ii) listed on any national market system or (iii) listed, quoted or traded on any automated quotation system, its Fair Market Value shall be the closing sales price for a Share as quoted on such exchange or system for such date or, if there is no closing sales price for a Share on the date in question, the closing sales price for a Share on the last preceding date for which such quotation exists, as reported in The Wall Street Journal or such other source as the Administrator deems reliable;

 

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(b) If the Common Stock is not listed on an established securities exchange, national market system or automated quotation system, but the Common Stock is regularly quoted by a recognized securities dealer, its Fair Market Value shall be the mean of the high bid and low asked prices for such date or, if there are no high bid and low asked prices for a Share on such date, the high bid and low asked prices for a Share on the last preceding date for which such information exists, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; or

(c) If the Common Stock is neither listed on an established securities exchange, national market system or automated quotation system nor regularly quoted by a recognized securities dealer, its Fair Market Value shall be established by the Administrator in good faith.

Notwithstanding the foregoing, with respect to any Award granted after the effectiveness of the Company’s registration statement relating to its initial public offering and prior to the Public Trading Date, the Fair Market Value shall mean the initial public offering price of a Share as set forth in the Company’s final prospectus relating to its initial public offering filed with the Securities and Exchange Commission.

2.26 “ Greater Than 10% Stockholder ” shall mean an individual then owning (within the meaning of Section 424(d) of the Code) more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any “parent corporation” or “subsidiary corporation” (as defined in Sections 424(e) and 424(f) of the Code, respectively).

2.27 “ Holder ” shall mean a person who has been granted an Award.

2.28 “ Incentive Stock Option ” shall mean an Option that is intended to qualify as an incentive stock option and conforms to the applicable provisions of Section 422 of the Code.

2.29 “ Non-Employee Director ” shall mean a Director of the Company who is not an Employee.

2.30 “ Non-Employee Director Compensation Program ” shall have the meaning set forth in Section 4.6 hereof.

2.31 “ Non-Qualified Stock Option ” shall mean an Option that is not an Incentive Stock Option or which is designated as an Incentive Stock Option but does not meet the applicable requirements of Section 422 of the Code.

2.32 “ Option ” shall mean a right to purchase Shares at a specified exercise price, granted under Article 6 hereof. An Option shall be either a Non-Qualified Stock Option or an Incentive Stock Option; provided , however , that Options granted to Non-Employee Directors and Consultants shall only be Non-Qualified Stock Options.

2.33 “ Option Term ” shall have the meaning set forth in Section 6.4 hereof.

 

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2.34 “ Parent ” shall mean any entity (other than the Company), whether domestic or foreign, in an unbroken chain of entities ending with the Company if each of the entities other than the Company beneficially owns, at the time of the determination, securities or interests representing more than fifty percent (50%) of the total combined voting power of all classes of securities or interests in one of the other entities in such chain.

2.35 “ Performance Award ” shall mean a cash bonus award, stock bonus award, performance award or incentive award that is paid in cash, Shares or a combination of both, awarded under Section 10.1 hereof.

2.36 “ Performance-Based Compensation ” shall mean any compensation that is intended to qualify as “performance-based compensation” as described in Section 162(m)(4)(C) of the Code.

2.37 “ Performance Criteria ” shall mean the criteria (and adjustments) that the Committee selects for an Award for purposes of establishing the Performance Goal or Performance Goals for a Performance Period, determined as follows:

(a) The Performance Criteria that shall be used to establish Performance Goals are include, but are not limited to, the following: (i) net earnings or losses (either before or after one or more of the following: (A) interest, (B) taxes, (C) depreciation, (D) amortization and (E) non-cash equity-based compensation expense); (ii) gross or net sales or revenue or sales or revenue growth; (iii) net income (either before or after taxes); (iv) adjusted net income; (v) operating income, earnings or profit (either before or after taxes); (vi) cash flow (including, but not limited to, cash flow return on investments, operating cash flow and free cash flow); (vii) return on assets; (viii) return on capital (or invested capital) and cost of capital; (ix) return on stockholders’ equity; (x) total stockholder return; (xi) return on sales; (xii) gross or net profit or operating margin; (xiii) costs, reductions in costs and cost control measures,; (xiv) funds from operations; (xv) expenses; (xvi) working capital; (xvii) earnings or loss per Share; (xviii) adjusted earnings or loss per share; (xix) price per Share or dividends per share (or appreciation in and/or maintenance of such price of dividends); (xx) regulatory body approval for commercialization of a product; (xxi) implementation or completion of critical projects; (xxii) market share; (xxiii) economic value; (xxiv) debt levels or reduction; (xxv) customer retention; (xxvi) sales-related goals; (xxvii) comparisons with other stock market indices; (xxviii) operating efficiency; (xxix) customer satisfaction and/or growth; (xxx) employee satisfaction; (xxxi) research and development achievements; (xxxii) financing and other capital raising transactions; (xxxiii) recruiting and maintaining personnel; and (xxxiv) year-end cash, any of which may be measured either in absolute terms for the Company or any department or operating unit of the Company or as compared to any incremental increase or decrease or as compared to results of a peer group or to market performance indicators or indices.

(b) The Administrator may, in its sole discretion, provide that one or more objectively determinable adjustments shall be made to one or more of the Performance Goals. Such adjustments may include, but are not limited to, one or more of the following: (i) items related to a change in accounting principle; (ii) items relating to financing activities; (iii) expenses for restructuring or productivity initiatives; (iv) other non-operating items; (v) items related to acquisitions; (vi) items attributable to the business operations of any entity

 

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acquired by the Company during the Performance Period; (vii) items related to the sale or disposition of a business or segment of a business; (viii) items related to discontinued operations that do not qualify as a segment of a business under Applicable Accounting Standards; (ix) items attributable to any stock dividend, stock split, combination or exchange of stock occurring during the Performance Period; (x) any other items of significant income or expense which are determined to be appropriate adjustments; (xi) items relating to unusual or extraordinary corporate transactions, events or developments; (xii) items related to amortization of acquired intangible assets; (xiii) items that are outside the scope of the Company’s core, on-going business activities; (xiv) items related to acquired in-process research and development; (xv) items relating to changes in tax laws; (xvi) items relating to major licensing or partnership arrangements; (xvii) items relating to asset impairment charges; (xviii) items relating to gains or losses for litigation, arbitration and contractual settlements; or (xix) items relating to any other unusual or nonrecurring events or changes in Applicable Laws, accounting principles or business conditions. For all Awards intended to qualify as Performance-Based Compensation, such determinations shall be made within the time prescribed by, and otherwise in compliance with, Section 162(m) of the Code.

2.38 “ Performance Goals ” shall mean, with respect to a Performance Period, one or more goals established in writing by the Administrator for the Performance Period based upon one or more Performance Criteria. Depending on the Performance Criteria used to establish such Performance Goals, the Performance Goals may be expressed in terms of overall Company performance or the performance of an Affiliate, a division, business unit or one or more individuals. The achievement of each Performance Goal shall be determined, to the extent applicable, with reference to Applicable Accounting Standards.

2.39 “ Performance Period ” shall mean one or more periods of time, which may be of varying and overlapping durations, as the Administrator may select, over which the attainment of one or more Performance Goals will be measured for the purpose of determining a Holder’s right to, and the payment of, a Performance Award.

2.40 “ Performance Stock Unit ” shall mean a Performance Award awarded under Section 10.1 hereof which is denominated in units of value including dollar value of Shares.

2.41 “ Permitted Transferee ” shall mean, with respect to a Holder, (a) prior to the Public Trading Date, any “family member” of the Holder, as defined under Rule 701 of the Securities Act and (b) on or after the Public Trading Date, any “family member” of the Holder, as defined under the General Instructions to Form S-8 Registration Statement under the Securities Act or any successor Form thereto, or any other transferee specifically approved by the Administrator, after taking into account Applicable Law.

2.42 “ Plan ” shall have the meaning set forth in Article 1 hereof.

2.43 “ Prior Plan ” shall mean the e.l.f. Beauty, Inc. 2014 Equity Incentive Plan, as such plan may be amended from time to time.

2.44 “ Program ” shall mean any program adopted by the Administrator pursuant to the Plan containing the terms and conditions intended to govern a specified type of Award granted under the Plan and pursuant to which such type of Award may be granted under the Plan.

 

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2.45 “ Public Trading Date ” shall mean the first date upon which the Common Stock is listed (or approved for listing) upon notice of issuance on any securities exchange or designated (or approved for designation) upon notice of issuance as a national market security on an interdealer quotation system, or, if earlier, the date on which the Company becomes a “publicly held corporation” for purposes of Treasury Regulation Section 1.1632-27(c)(1).

2.46 “ Restricted Stock ” shall mean an award of Shares made under Article 8 hereof that is subject to certain restrictions and may be subject to risk of forfeiture or repurchase.

2.47 “ Restricted Stock Unit ” shall mean a contractual right awarded under Article 9 hereof to receive a Share or the Fair Market Value thereof in cash.

2.48 “ Securities Act ” shall mean the Securities Act of 1933, as amended.

2.49 “ Shares ” shall mean shares of Common Stock.

2.50 “ Share Limit ” shall have the meaning set forth in Section 3.1(a) hereof.

2.51 “ Stock Appreciation Right ” shall mean a stock appreciation right granted under Article 11 hereof.

2.52 “ Stock Appreciation Right Term ” shall have the meaning set forth in Section 11.4 hereof.

2.53 “ Stock Payment ” shall mean (a) a payment in the form of Shares, or (b) an option or other right to purchase Shares, as part of a bonus, deferred compensation or other arrangement, awarded under Section 10.3 hereof.

2.54 “ Subsidiary ” shall mean any entity (other than the Company), whether domestic or foreign, in an unbroken chain of entities beginning with the Company if each of the entities other than the last entity in the unbroken chain beneficially owns, at the time of the determination, securities or interests representing more than fifty percent (50%) of the total combined voting power of all classes of securities or interests in one of the other entities in such chain.

2.55 “ Substitute Award ” shall mean an Award granted under the Plan upon the assumption of, or in substitution for, outstanding equity awards previously granted by a company or other entity in connection with a corporate transaction, such as a merger, combination, consolidation or acquisition of property or stock; provided , however , that in no event shall the term “Substitute Award” be construed to refer to an award made in connection with the cancellation and repricing of an Option or Stock Appreciation Right.

 

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2.56 “ Termination of Service ” shall mean:

(a) As to a Consultant, the time when the engagement of a Holder as a Consultant to the Company or an Affiliate is terminated for any reason, with or without cause, including, without limitation, by resignation, discharge, death or retirement, but excluding terminations where the Consultant simultaneously commences or remains in employment or service with the Company or any Affiliate.

(b) As to a Non-Employee Director, the time when a Holder who is a Non-Employee Director ceases to be a Director for any reason, including, without limitation, a termination by resignation, failure to be elected, death or retirement, but excluding terminations where the Holder simultaneously commences or remains in employment or service with the Company or any Affiliate.

(c) As to an Employee, the time when the employee-employer relationship between a Holder and the Company or any Affiliate is terminated for any reason, including, without limitation, a termination by resignation, discharge, death, disability or retirement; but excluding terminations where the Holder simultaneously commences or remains in employment or service with the Company or any Affiliate.

The Administrator, in its sole discretion, shall determine the effect of all matters and questions relating to any Termination of Service, including, without limitation, the question of whether a Termination of Service resulted from a discharge for cause and all questions of whether particular leaves of absence constitute a Termination of Service; provided , however , that, with respect to Incentive Stock Options, unless the Administrator otherwise provides in the terms of any Program, the Award Agreement or otherwise, a leave of absence, change in status from an employee to an independent contractor or other change in the employee-employer relationship shall constitute a Termination of Service only if, and to the extent that, such leave of absence, change in status or other change interrupts employment for the purposes of Section 422(a)(2) of the Code and the then applicable regulations and revenue rulings under said Section. For purposes of the Plan, a Holder’s employee-employer relationship or consultancy relations shall be deemed to be terminated in the event that the Affiliate employing or contracting with such Holder ceases to remain an Affiliate following any merger, sale of stock or other corporate transaction or event (including, without limitation, a spin-off).

ARTICLE 3.

SHARES SUBJECT TO THE PLAN

3.1 Number of Shares .

(a) Subject to Sections 14.1, 14.2 and 3.1(b) hereof, the aggregate number of Shares which may be issued or transferred pursuant to Awards under the Plan shall be equal to the sum of (i) 5,430,690 Shares, (ii) any of the Shares which as of the Effective Date are subject to awards under the Prior Plan that, on or after the Effective Date, terminate, expire or lapse for any reason without the delivery of Shares to the holder thereof (or with the repurchase of any Shares delivered at the original purchase price thereof), up to a maximum of 4,341,200 Shares, and (iii) an annual increase on the first day of each calendar year beginning in 2017 and ending

 

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in 2026 equal to the lesser of (A) four percent (4%) of the Shares outstanding (on an as converted basis) on the last day of the immediately preceding calendar year and (B) such smaller number of Shares as determined by the Board (such sum, the “ Share Limit ”); provided , however , no more than 22,627,878 Shares may be issued upon the exercise of Incentive Stock Options. Notwithstanding the foregoing, Shares added to the Share Limit pursuant to Section 3.1(a)(ii) or Section 3.1(a)(iii) hereof shall be available for issuance as Incentive Stock Options only to the extent that making such Shares available for issuance as Incentive Stock Options would not cause any Incentive Stock Option to cease to qualify as such. Notwithstanding the foregoing, to the extent permitted under Applicable Law, Awards that provide for the delivery of Shares subsequent to the applicable grant date may be granted in excess of the Share Limit if such Awards provide for the forfeiture or cash settlement of such Awards to the extent that insufficient Shares remain under the Share Limit in this Section 3.1(a) at the time that Shares would otherwise be issued in respect of such Award. As of the Effective Date, no further awards may be granted under the Prior Plan; however, any awards under the Prior Plan that are outstanding as of the Effective Date shall continue to be subject to the terms and conditions of the Prior Plan.

(b) If any Shares subject to an Award are forfeited or expire or such Award is settled for cash (in whole or in part), the Shares subject to such Award shall, to the extent of such forfeiture, expiration or cash settlement, again be available for future grants of Awards under the Plan. In addition, the following Shares shall be available for future grants of Awards under the Plan: (i) Shares tendered by a Holder or withheld by the Company in payment of the exercise price of an Option; (ii) Shares tendered by the Holder or withheld by the Company to satisfy any tax withholding obligation with respect to an Award; and (iii) Shares subject to Stock Appreciation Rights that are not issued in connection with the stock settlement of the Stock Appreciation Rights on exercise thereof. Notwithstanding anything to the contrary contained herein, Shares purchased on the open market with the cash proceeds from the exercise of Options shall not be available for future grants of Awards. Any Shares repurchased by the Company under Section 8.4 hereof at the same price paid by the Holder or a lower price so that such Shares are returned to the Company will again be available for Awards. The payment of Dividend Equivalents in cash in conjunction with any outstanding Awards shall not be counted against the Shares available for issuance under the Plan. Notwithstanding the provisions of this Section 3.1(b), no Shares may again be optioned, granted or awarded if such action would cause an Incentive Stock Option to fail to qualify as an incentive stock option under Section 422 of the Code.

(c) Substitute Awards shall not reduce the Shares authorized for grant under the Plan. Additionally, in the event that a company acquired by the Company or any Affiliate or with which the Company or any Affiliate combines has shares available under a pre-existing plan approved by its stockholders and not adopted in contemplation of such acquisition or combination, the shares available for grant pursuant to the terms of such pre-existing plan (as adjusted, to the extent appropriate, using the exchange ratio or other adjustment or valuation ratio or formula used in such acquisition or combination to determine the consideration payable to the holders of common stock of the entities party to such acquisition or combination) may be used for Awards under the Plan and shall not reduce the Shares authorized for grant under the Plan; provided that Awards using such available shares shall not be made after the date awards or grants could have been made under the terms of the pre-existing plan, absent the acquisition or combination, and shall only be made to individuals who were not employed by or providing services to the Company or its Affiliates immediately prior to such acquisition or combination.

 

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3.2 Stock Distributed . Any Shares distributed pursuant to an Award may consist, in whole or in part, of authorized and unissued Common Stock, treasury Common Stock or Common Stock purchased on the open market.

3.3 Limitation on Number of Shares Subject to Awards to Non-Employee Directors . The aggregate value of Awards (with such value determined as of the date of grant under Applicable Accounting Standards) that may be granted to any Non-Employee Director in the calendar year during which the Non-Employee Director’s service first commences may not exceed $1,000,000 and in any other calendar year may not exceed $500,000.

ARTICLE 4.

GRANTING OF AWARDS

4.1 Participation . The Administrator may, from time to time, select from among all Eligible Individuals, those to whom an Award shall be granted and shall determine the nature and amount of each Award, which shall not be inconsistent with the requirements of the Plan. Except as provided in Section 4.6 hereof regarding the grant of Awards pursuant to the Non-Employee Director Compensation Program, no Eligible Individual shall have any right to be granted an Award pursuant to the Plan.

4.2 Award Agreement . Each Award shall be evidenced by an Award Agreement that sets forth the terms, conditions and limitations for such Award, which may include the term of the Award, the provisions applicable in the event of the Holder’s Termination of Service, and the Company’s authority to unilaterally or bilaterally amend, modify, suspend, cancel or rescind an Award. Award Agreements evidencing Awards intended to qualify as Performance-Based Compensation shall contain such terms and conditions as may be necessary to meet the applicable provisions of Section 162(m) of the Code. Award Agreements evidencing Incentive Stock Options shall contain such terms and conditions as may be necessary to meet the applicable provisions of Section 422 of the Code.

4.3 Limitations Applicable to Section 16 Persons . Notwithstanding any other provision of the Plan, the Plan, and any Award granted or awarded to any individual who is then subject to Section 16 of the Exchange Act, shall be subject to any additional limitations set forth in any applicable exemptive rule under Section 16 of the Exchange Act (including Rule 16b-3 of the Exchange Act and any amendments thereto) that are requirements for the application of such exemptive rule. To the extent permitted by Applicable Law, the Plan and Awards granted or awarded hereunder shall be deemed amended to the extent necessary to conform to such applicable exemptive rule.

4.4 At-Will Employment; Voluntary Participation . Nothing in the Plan or in any Program or Award Agreement hereunder shall confer upon any Holder any right to continue as an Employee, Director or Consultant of the Company or any Affiliate, or shall interfere with or restrict in any way the rights of the Company and any Affiliate, which rights are hereby

 

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expressly reserved, to discharge any Holder at any time for any reason whatsoever, with or without cause, and with or without notice, or to terminate or change all other terms and conditions of employment or engagement, except to the extent expressly provided otherwise in a written agreement between the Holder and the Company or any Affiliate. Participation by each Holder in the Plan shall be voluntary and nothing in the Plan shall be construed as mandating that any Eligible Individual participate in the Plan.

4.5 Foreign Holders . Notwithstanding any provision of the Plan to the contrary, in order to comply with the laws in countries other than the United States in which the Company and its Affiliates operate or have Employees, Non-Employee Directors or Consultants, or in order to comply with the requirements of any foreign securities exchange, the Administrator, in its sole discretion, shall have the power and authority to: (a) determine which Affiliates shall be covered by the Plan; (b) determine which Eligible Individuals outside the United States are eligible to participate in the Plan; (c) modify the terms and conditions of any Award granted to Eligible Individuals outside the United States to comply with applicable foreign laws or listing requirements of any such foreign securities exchange; (d) establish subplans and modify exercise procedures and other terms and procedures, to the extent such actions may be necessary or advisable (any such subplans and/or modifications may be attached to the Plan as appendices); provided , however , that no such subplans and/or modifications shall increase the share limitations contained in Sections 3.1 and 3.3 hereof; and (e) take any action, before or after an Award is made, that it deems advisable to obtain approval or comply with any necessary local governmental regulatory exemptions or approvals or listing requirements of any such foreign securities exchange. Notwithstanding the foregoing, the Administrator may not take any actions hereunder, and no Awards shall be granted, that would violate Applicable Law. For purposes of the Plan, all references to foreign laws, rules, regulations or taxes shall be references to the laws, rules, regulations and taxes of any applicable jurisdiction other than the United States or a political subdivision thereof.

4.6 Non-Employee Director Awards . The Administrator may, in its discretion, provide that Awards granted to Non-Employee Directors shall be granted pursuant to a written non-discretionary formula established by the Administrator (the “ Non-Employee Director Compensation Program ”), subject to the limitations of the Plan. The Non-Employee Director Compensation Program shall set forth the type of Award(s) to be granted to Non-Employee Directors, the number of Shares to be subject to Non-Employee Director Awards, the conditions on which such Awards shall be granted, become exercisable and/or payable and expire, and such other terms and conditions as the Administrator shall determine in its discretion. The Non-Employee Director Compensation Program may be modified or terminated by the Administrator from time to time in its discretion.

4.7 Stand-Alone and Tandem Awards . Awards granted pursuant to the Plan may, in the sole discretion of the Administrator, be granted either alone, in addition to, or in tandem with, any other Award granted pursuant to the Plan. Awards granted in addition to or in tandem with other Awards may be granted either at the same time as or at a different time from the grant of such other Awards.

 

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ARTICLE 5.

PROVISIONS APPLICABLE TO AWARDS INTENDED TO QUALIFY AS

PERFORMANCE-BASED COMPENSATION.

5.1 Purpose . The Committee, in its sole discretion, may determine at the time an Award is granted or at any time thereafter whether any Award is intended to qualify as Performance-Based Compensation. If the Committee, in its sole discretion, decides to grant such an Award to an Eligible Individual that is intended to qualify as Performance-Based Compensation, then the provisions of this Article 5 shall control over any contrary provision contained in the Plan. The Administrator may in its sole discretion grant Awards to other Eligible Individuals that are based on Performance Criteria or Performance Goals but that do not satisfy the requirements of this Article 5 and that are not intended to qualify as Performance-Based Compensation. Unless otherwise specified by the Committee at the time of grant, the Performance Criteria with respect to an Award intended to be Performance-Based Compensation payable to a Covered Employee shall be determined on the basis of Applicable Accounting Standards.

5.2 Applicability . The grant of an Award to an Eligible Individual for a particular Performance Period shall not require the grant of an Award to such Eligible Individual in any subsequent Performance Period and the grant of an Award to any one Eligible Individual shall not require the grant of an Award to any other Eligible Individual in such period or in any other period.

5.3 Types of Awards . Notwithstanding anything in the Plan to the contrary, the Committee may grant any Award to an Eligible Individual intended to qualify as Performance-Based Compensation, including, without limitation, Restricted Stock the restrictions with respect to which lapse upon the attainment of specified Performance Goals, Restricted Stock Units that vest and become payable upon the attainment of specified Performance Goals and any Performance Awards that vest or become exercisable or payable upon the attainment of one or more specified Performance Goals.

5.4 Procedures with Respect to Performance-Based Awards . To the extent necessary to comply with the requirements of Section 162(m)(4)(C) of the Code, with respect to any Award granted to one or more Eligible Individuals which is intended to qualify as Performance-Based Compensation, no later than ninety (90) days following the commencement of any Performance Period or any designated fiscal period or period of service (or such earlier time as may be required under Section 162(m) of the Code), the Committee shall, in writing, (a) designate one or more Eligible Individuals, (b) select the Performance Criteria applicable to the Performance Period, (c) establish the Performance Goals, and amounts of such Awards, as applicable, which may be earned for such Performance Period based on the Performance Criteria, and (d) specify the relationship between the Performance Criteria and the Performance Goals and the amounts of such Awards, as applicable, to be earned by each Covered Employee for such Performance Period. Following the completion of each Performance Period, the Committee shall certify in writing whether and the extent to which the applicable Performance Goals have been achieved for such Performance Period. In determining the amount earned under such Awards, unless otherwise provided in an applicable Program or Award Agreement, the Committee shall have the right to reduce or eliminate (but

 

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not to increase) the amount payable at a given level of performance to take into account additional factors that the Committee may deem relevant, including the assessment of individual or corporate performance for the Performance Period.

5.5 Payment of Performance-Based Awards . Unless otherwise provided in the applicable Program or Award Agreement or pursuant to Section 14.2 hereof and only to the extent otherwise permitted by Section 162(m)(4)(C) of the Code, as to an Award that is intended to qualify as Performance-Based Compensation, the Holder must be employed by the Company or an Affiliate throughout the applicable Performance Period. Unless otherwise provided in the applicable Performance Goals, Program or Award Agreement, a Holder shall be eligible to receive payment pursuant to such Awards for a Performance Period only if and to the extent the Performance Goals for such applicable Performance Period are achieved.

5.6 Additional Limitations . Notwithstanding any other provision of the Plan and except as otherwise determined by the Administrator, any Award which is granted to an Eligible Individual and is intended to qualify as Performance-Based Compensation shall be subject to any additional limitations set forth in Section 162(m) of the Code or any regulations or rulings issued thereunder that are requirements for qualification as Performance-Based Compensation, and the Plan and any applicable Program and Award Agreement shall be deemed amended to the extent necessary to conform to such requirements.

ARTICLE 6.

GRANTING OF OPTIONS

6.1 Granting of Options to Eligible Individuals . The Administrator is authorized to grant Options to Eligible Individuals from time to time, in its sole discretion, on such terms and conditions as it may determine which shall not be inconsistent with the Plan.

6.2 Qualification of Incentive Stock Options . No Incentive Stock Option shall be granted to any person who is not an Employee of the Company or any subsidiary corporation or parent corporation (as defined in Section 424(f) and (e), respectively, of the Code) of the Company. No person who qualifies as a Greater Than 10% Stockholder may be granted an Incentive Stock Option unless such Incentive Stock Option conforms to the applicable provisions of Section 422 of the Code. Any Incentive Stock Option granted under the Plan may be modified by the Administrator, with the consent of the Holder, to disqualify such Option from treatment as an “incentive stock option” under Section 422 of the Code. To the extent that the aggregate fair market value of stock with respect to which “incentive stock options” (within the meaning of Section 422 of the Code, but without regard to Section 422(d) of the Code) are exercisable for the first time by a Holder during any calendar year under the Plan, and all other plans of the Company and any subsidiary or parent corporation thereof (each as defined in Section 424(f) and (e), respectively, of the Code), exceeds $100,000, the Options shall be treated as Non-Qualified Stock Options to the extent required by Section 422 of the Code. The rule set forth in the preceding sentence shall be applied by taking Options and other “incentive stock options” into account in the order in which they were granted and the Fair Market Value of stock shall be determined as of the time the respective options were granted. In addition, to the extent that any Options otherwise fail to qualify as Incentive Stock Options, such Options shall be treated as Nonqualified Stock Options.

 

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6.3 Option Exercise Price . Except as provided in Article 14 hereof, the exercise price per Share subject to each Option shall be set by the Administrator, but shall not be less than one hundred percent (100%) of the Fair Market Value of a Share on the date the Option is granted (or, as to Incentive Stock Options, on the date the Option is modified, extended or renewed for purposes of Section 424(h) of the Code). In addition, in the case of Incentive Stock Options granted to a Greater Than 10% Stockholder, such price shall not be less than one hundred ten percent (110%) of the Fair Market Value of a Share on the date the Option is granted (or the date the Option is modified, extended or renewed for purposes of Section 424(h) of the Code).

6.4 Option Term . The term of each Option (the “ Option Term ”) shall be set by the Administrator in its sole discretion; provided , however , that the Option Term shall not be more than ten (10) years from the date the Option is granted, or five (5) years from the date an Incentive Stock Option is granted to a Greater Than 10% Stockholder. The Administrator shall determine the time period, including the time period following a Termination of Service, during which the Holder has the right to exercise the vested Options, which time period may not extend beyond the last day of the Option Term. Except as limited by the requirements of Section 409A or Section 422 of the Code and regulations and rulings thereunder, the Administrator may extend the Option Term of any outstanding Option, may extend the time period during which vested Options may be exercised following any Termination of Service of the Holder, and may amend, subject to Section 14.1, any other term or condition of such Option relating to such a Termination of Service.

6.5 Option Vesting .

(a) The period during which the right to exercise, in whole or in part, an Option vests in the Holder shall be set by the Administrator and the Administrator may determine that an Option may not be exercised in whole or in part for a specified period after it is granted. Such vesting may be based on service with the Company or any Affiliate, any of the Performance Criteria, or any other criteria selected by the Administrator. At any time after the grant of an Option, the Administrator may, in its sole discretion and subject to whatever terms and conditions it selects, accelerate the vesting of the Option, including following a Termination of Service; provided, that in no event shall an Option become exercisable following its expiration, termination or forfeiture.

(b) No portion of an Option which is unexercisable at a Holder’s Termination of Service shall thereafter become exercisable, except as may be otherwise provided by the Administrator either in a Program, an Award Agreement or by action of the Administrator following the grant of the Option.

6.6 Substitute Awards . Notwithstanding the foregoing provisions of this Article 6 to the contrary, in the case of an Option that is a Substitute Award, the price per share of the shares subject to such Option may be less than the Fair Market Value per share on the date of grant; provided that the excess of: (a) the aggregate Fair Market Value (as of the date such Substitute Award is granted) of the shares subject to the Substitute Award, over (b) the aggregate exercise price thereof does not exceed the excess of: (x) the aggregate fair market value (as of the time immediately preceding the transaction giving rise to the Substitute Award,

 

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such fair market value to be determined by the Administrator) of the shares of the predecessor entity that were subject to the grant assumed or substituted for by the Company, over (y) the aggregate exercise price of such shares.

6.7 Substitution of Stock Appreciation Rights . The Administrator may provide in an applicable Program or Award Agreement evidencing the grant of an Option that the Administrator, in its sole discretion, shall have the right to substitute a Stock Appreciation Right for such Option at any time prior to or upon exercise of such Option; provided that such Stock Appreciation Right shall be exercisable with respect to the same number of Shares for which such substituted Option would have been exercisable, and shall also have the same exercise price, vesting schedule and remaining Option Term as the substituted Option.

ARTICLE 7.

EXERCISE OF OPTIONS

7.1 Partial Exercise . An exercisable Option may be exercised in whole or in part. However, an Option shall not be exercisable with respect to fractional Shares and the Administrator may require that, by the terms of the Option, a partial exercise must be with respect to a minimum number of Shares.

7.2 Manner of Exercise . All or a portion of an exercisable Option shall be deemed exercised upon delivery of all of the following to the Secretary of the Company, or such other person or entity designated by the Administrator, or his, her or its office, as applicable:

(a) A written or electronic notice complying with the applicable rules established by the Administrator stating that the Option, or a portion thereof, is exercised. The notice shall be signed by the Holder or other person then entitled to exercise the Option or such portion of the Option;

(b) Such representations and documents as the Administrator, in its sole discretion, deems necessary or advisable to effect compliance with all Applicable Laws. The Administrator may, in its sole discretion, also take whatever additional actions it deems appropriate to effect such compliance including, without limitation, placing legends on share certificates and issuing stop-transfer notices to agents and registrars;

(c) In the event that the Option shall be exercised pursuant to Section 12.3 hereof by any person or persons other than the Holder, appropriate proof of the right of such person or persons to exercise the Option, as determined in the sole discretion of the Administrator; and

(d) Full payment of the exercise price and applicable withholding taxes to the stock administrator of the Company for the Shares with respect to which the Option, or portion thereof, is exercised, in a manner permitted by Section 12.1 and 12.2 hereof.

7.3 Notification Regarding Disposition . The Holder shall give the Company prompt written or electronic notice of any disposition of Shares acquired by exercise of an Incentive Stock Option which occurs within (a) two (2) years from the date of grant (including the date the Option is modified, extended or renewed for purposes of Section 424(h) of the Code) of such Option to such Holder, or (b) one (1) year after the transfer of such Shares to such Holder.

 

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ARTICLE 8.

AWARD OF RESTRICTED STOCK

8.1 Award of Restricted Stock .

(a) The Administrator is authorized to grant Restricted Stock to Eligible Individuals, and shall determine the terms and conditions, including the restrictions applicable to each award of Restricted Stock, which terms and conditions shall not be inconsistent with the Plan, and may impose such conditions on the issuance of such Restricted Stock as it deems appropriate.

(b) The Administrator shall establish the purchase price, if any, and form of payment for Restricted Stock; provided , however , that if a purchase price is charged, such purchase price shall be no less than the par value, if any, of the Shares to be purchased, unless otherwise permitted by Applicable Law. In all cases, legal consideration shall be required for each issuance of Restricted Stock to the extent required by Applicable Law.

8.2 Rights as Stockholders . Subject to Section 8.4 hereof, upon issuance of Restricted Stock, the Holder shall have, unless otherwise provided by the Administrator, all the rights of a stockholder with respect to said Shares, subject to the restrictions in the applicable Program or in each individual Award Agreement, including the right to receive all dividends and other distributions paid or made with respect to the Shares; provided , however , that, in the sole discretion of the Administrator, any extraordinary distributions with respect to the Shares shall be subject to the restrictions set forth in Section 8.3 hereof. In addition, with respect to a share of Restricted Stock with performance-based vesting, dividends which are paid prior to vesting shall only be paid out to the Holder to the extent that the performance-based vesting conditions are subsequently satisfied and the share of Restricted Stock vests.

8.3 Restrictions . All shares of Restricted Stock (including any shares received by Holders thereof with respect to shares of Restricted Stock as a result of stock dividends, stock splits or any other form of recapitalization) shall, in the terms of the applicable Program or Award Agreement, be subject to such restrictions and vesting requirements as the Administrator shall provide. Such restrictions may include, without limitation, restrictions concerning voting rights and transferability and such restrictions may lapse separately or in combination at such times and pursuant to such circumstances or based on such criteria as selected by the Administrator, including, without limitation, criteria based on the Holder’s duration of employment, directorship or consultancy with the Company, the Performance Criteria, Company or Affiliate performance, individual performance or other criteria selected by the Administrator. By action taken after the Restricted Stock is issued, the Administrator may, on such terms and conditions as it may determine to be appropriate, accelerate the vesting of such Restricted Stock by removing any or all of the restrictions imposed by the terms of any applicable Program and/or the Award Agreement. Restricted Stock may not be sold or encumbered until all restrictions are terminated, lapse or expire.

 

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8.4 Repurchase or Forfeiture of Restricted Stock . Except as otherwise determined by the Administrator at the time of the grant of the Award or thereafter, if no price was paid by the Holder for the Restricted Stock, upon a Termination of Service during the applicable restriction period, the Holder’s rights in unvested Restricted Stock then subject to restrictions shall lapse and such Restricted Stock shall be surrendered to the Company and cancelled without consideration. If a price was paid by the Holder for the Restricted Stock, upon a Termination of Service during the applicable restriction period, the Company shall have the right to repurchase from the Holder the unvested Restricted Stock then subject to restrictions at a cash price per Share equal to the price paid by the Holder for such Restricted Stock or such other amount as may be specified in an applicable Program or the Award Agreement. Notwithstanding the foregoing, the Administrator in its sole discretion may provide that in the event of certain events, including a Change in Control, the Holder’s death, retirement or disability or any other specified Termination of Service or any other event, the Holder’s rights in unvested Restricted Stock shall not lapse, such Restricted Stock shall vest and, if applicable, the Company shall not have a right of repurchase.

8.5 Certificates for Restricted Stock . Restricted Stock may be evidenced in such manner as the Administrator shall determine. Certificates or book entries evidencing shares of Restricted Stock must include an appropriate legend referring to the terms, conditions, and restrictions applicable to such Restricted Stock. The Company may, in its sole discretion, (a) retain physical possession of any stock certificate evidencing shares of Restricted Stock until the restrictions thereon shall have lapsed and/or (b) require that the stock certificates evidencing shares of Restricted Stock be held in custody by a designated escrow agent (which may but need not be the Company) until the restrictions thereon shall have lapsed, and that the Holder deliver a stock power, endorsed in blank, relating to such Restricted Stock.

8.6 Section 83(b) Election . If a Holder makes an election under Section 83(b) of the Code to be taxed with respect to the Restricted Stock as of the date of transfer of the Restricted Stock rather than as of the date or dates upon which the Holder would otherwise be taxable under Section 83(a) of the Code, the Holder shall be required to deliver a copy of such election to the Company promptly after filing such election with the Internal Revenue Service.

ARTICLE 9.

AWARD OF RESTRICTED STOCK UNITS

9.1 Grant of Restricted Stock Units . The Administrator is authorized to grant Awards of Restricted Stock Units to any Eligible Individual selected by the Administrator in such amounts and subject to such terms and conditions as determined by the Administrator.

9.2 Term . Except as otherwise provided herein, the term, if any, of a Restricted Stock Unit award shall be set by the Administrator in its sole discretion.

9.3 Purchase Price . The Administrator shall specify the purchase price, if any, to be paid by the Holder to the Company with respect to any Restricted Stock Unit award; provided , however , that value of the consideration shall not be less than the par value of a Share, unless otherwise permitted by Applicable Law.

 

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9.4 Vesting of Restricted Stock Units . At the time of grant, the Administrator shall specify the date or dates on which the Restricted Stock Units shall become fully vested and nonforfeitable, and may specify such conditions to vesting as it deems appropriate, including, without limitation, vesting based upon the Holder’s duration of service to the Company or any Affiliate, one or more Performance Criteria, Company or Affiliate performance, individual performance or other specific criteria, in each case on a specified date or dates or over any period or periods, as determined by the Administrator.

9.5 Maturity and Payment . At the time of grant, the Administrator shall specify the maturity date applicable to each grant of Restricted Stock Units which shall be no earlier than the vesting date or dates of the Award and may be determined at the election of the Holder (if permitted by the applicable Award Agreement); provided that, except as otherwise determined by the Administrator and set forth in any applicable Award Agreement, and subject to compliance with Section 409A of the Code, in no event shall the maturity date relating to each Restricted Stock Unit occur following the later of (a) the fifteenth (15 th ) day of the third (3 rd ) month following the end of calendar year in which the Restricted Stock Unit vests; or (b) the fifteenth (15 th ) day of the third (3 rd ) month following the end of the Company’s fiscal year in which the Restricted Stock Unit vests. On the maturity date, the Company shall, subject to Section 12.4(e) hereof, transfer to the Holder one unrestricted, fully transferable Share for each Restricted Stock Unit scheduled to be paid out on such date and not previously forfeited, or, in the sole discretion of the Administrator, an amount in cash equal to the Fair Market Value of such Shares on the maturity date or a combination of cash and Shares as determined by the Administrator.

9.6 Payment upon Termination of Service . An Award of Restricted Stock Units shall only be payable while the Holder is an Employee, a Consultant or a member of the Board, as applicable; provided , however , that the Administrator, in its sole and absolute discretion may provide (in an Award Agreement or otherwise) that a Restricted Stock Unit award may be paid subsequent to a Termination of Service in certain events, including a Change in Control, the Holder’s death, retirement or disability or any other specified Termination of Service.

9.7 No Rights as a Stockholder . Unless otherwise determined by the Administrator, a Holder of Restricted Stock Units shall possess no incidents of ownership with respect to the Shares represented by such Restricted Stock Units, unless and until such Shares are transferred to the Holder pursuant to the terms of this Plan and the Award Agreement.

9.8 Dividend Equivalents . Subject to Section 10.2 hereof, the Administrator may, in its sole discretion, provide that Dividend Equivalents shall be earned by a Holder of Restricted Stock Units based on dividends declared on the Common Stock, to be credited as of dividend payment dates with respect to dividends with record dates that occur during the period between the date an Award of Restricted Stock Units is granted to a Holder and the maturity date of such Award.

 

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ARTICLE 10.

AWARD OF PERFORMANCE AWARDS, DIVIDEND EQUIVALENTS, STOCK

PAYMENTS, DEFERRED STOCK, DEFERRED STOCK UNITS

10.1 Performance Awards .

(a) The Administrator is authorized to grant Performance Awards, including Awards of Performance Stock Units, to any Eligible Individual and to determine whether such Performance Awards shall be Performance-Based Compensation. The value of Performance Awards, including Performance Stock Units, may be linked to any one or more of the Performance Criteria or other specific criteria determined by the Administrator, in each case on a specified date or dates or over any period or periods determined by the Administrator. Performance Awards, including Performance Stock Unit awards may be paid in cash, Shares, or a combination of cash and Shares, as determined by the Administrator.

(b) Without limiting Section 10.1(a) hereof, the Administrator may grant Performance Awards to any Eligible Individual in the form of a cash bonus payable upon the attainment of objective Performance Goals, or such other criteria, whether or not objective, which are established by the Administrator, in each case on a specified date or dates or over any period or periods determined by the Administrator. Any such bonuses paid to a Holder which are intended to be Performance-Based Compensation shall be based upon objectively determinable bonus formulas established in accordance with the provisions of Article 5 hereof.

10.2 Dividend Equivalents .

(a) Dividend Equivalents may be granted by the Administrator based on dividends declared on the Common Stock, to be credited as of dividend payment dates with respect to dividends with record dates that occur during the period between the date an Award is granted to a Holder and the date such Award vests, is exercised, is distributed or expires, as determined by the Administrator. Such Dividend Equivalents shall be converted to cash or additional Shares by such formula and at such time and subject to such limitations as may be determined by the Administrator. In addition, Dividend Equivalents with respect to Awards with performance-based vesting that are based on dividends which are paid prior to the vesting of such Award shall only be paid out to the Holder to the extent that the performance-based vesting conditions are subsequently satisfied and the Award vests.

(b) Notwithstanding the foregoing, no Dividend Equivalents shall be payable with respect to Options or Stock Appreciation Rights.

10.3 Stock Payments . The Administrator is authorized to make Stock Payments to any Eligible Individual. The number or value of Shares of any Stock Payment shall be determined by the Administrator and may be based upon one or more Performance Criteria or any other specific criteria, including service to the Company or any Affiliate, determined by the Administrator. Shares underlying a Stock Payment which is subject to a vesting schedule or other conditions or criteria set by the Administrator will not be issued until those conditions have been satisfied. Unless otherwise provided by the Administrator, a Holder of a Stock Payment shall have no rights as a Company stockholder with respect to such Stock Payment

 

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until such time as the Stock Payment has vested (if applicable) and the Shares underlying the Award have been issued to the Holder. Stock Payments may, but are not required to, be made in lieu of base salary, bonus, fees or other cash compensation otherwise payable to such Eligible Individual.

10.4 Deferred Stock . The Administrator is authorized to grant Deferred Stock to any Eligible Individual. The number of shares of Deferred Stock shall be determined by the Administrator and may (but is not required to) be based on one or more Performance Criteria or other specific criteria, including service to the Company or any Affiliate, as the Administrator determines, in each case on a specified date or dates or over any period or periods determined by the Administrator. Shares underlying a Deferred Stock award which is subject to a vesting schedule or other conditions or criteria set by the Administrator will be issued on the vesting date(s) or date(s) that those conditions and criteria have been satisfied, as applicable. Unless otherwise provided by the Administrator, a Holder of Deferred Stock shall have no rights as a Company stockholder with respect to such Deferred Stock until such time as the Award has vested and any other applicable conditions and/or criteria have been satisfied and the Shares underlying the Award have been issued to the Holder.

10.5 Deferred Stock Units . The Administrator is authorized to grant Deferred Stock Units to any Eligible Individual. The number of Deferred Stock Units shall be determined by the Administrator and may (but is not required to) be based on one or more Performance Criteria or other specific criteria, including service to the Company or any Affiliate, as the Administrator determines, in each case on a specified date or dates or over any period or periods determined by the Administrator. Each Deferred Stock Unit shall entitle the Holder thereof to receive one Share on the date the Deferred Stock Unit becomes vested or upon a specified settlement date thereafter (which settlement date may (but is not required to) be the date of the Holder’s Termination of Service). Shares underlying a Deferred Stock Unit award which is subject to a vesting schedule or other conditions or criteria set by the Administrator will not be issued until on or following the date that those conditions and criteria have been satisfied. Unless otherwise provided by the Administrator, a Holder of Deferred Stock Units shall have no rights as a Company stockholder with respect to such Deferred Stock Units until such time as the Award has vested and any other applicable conditions and/or criteria have been satisfied and the Shares underlying the Award have been issued to the Holder.

10.6 Term . The term, if any, of a Performance Award, Dividend Equivalent award, Stock Payment award, Deferred Stock award and/or Deferred Stock Unit award shall be set by the Administrator in its sole discretion.

10.7 Purchase Price . The Administrator may establish the purchase price of a Performance Award, Shares distributed as a Stock Payment award, shares of Deferred Stock or Shares distributed pursuant to a Deferred Stock Unit award; provided , however , that value of the consideration shall not be less than the par value of a Share, unless otherwise permitted by Applicable Law.

10.8 Termination of Service . A Performance Award, Stock Payment award, Dividend Equivalent award, Deferred Stock award and/or Deferred Stock Unit award is distributable only while the Holder is an Employee, Director or Consultant, as applicable. The

 

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Administrator, however, in its sole discretion may provide that the Performance Award, Dividend Equivalent award, Stock Payment award, Deferred Stock award and/or Deferred Stock Unit award may be distributed subsequent to a Termination of Service in certain events, including a Change in Control, the Holder’s death, retirement or disability or any other specified Termination of Service.

ARTICLE 11.

AWARD OF STOCK APPRECIATION RIGHTS

11.1 Grant of Stock Appreciation Rights .

(a) The Administrator is authorized to grant Stock Appreciation Rights to Eligible Individuals from time to time, in its sole discretion, on such terms and conditions as it may determine consistent with the Plan.

(b) A Stock Appreciation Right shall entitle the Holder (or other person entitled to exercise the Stock Appreciation Right pursuant to the Plan) to exercise all or a specified portion of the Stock Appreciation Right (to the extent then exercisable pursuant to its terms) and to receive from the Company an amount determined by multiplying the difference obtained by subtracting the exercise price per Share of the Stock Appreciation Right from the Fair Market Value on the date of exercise of the Stock Appreciation Right by the number of Shares with respect to which the Stock Appreciation Right shall have been exercised, subject to any limitations the Administrator may impose. Except as described in (c) below or in Section 14.2 hereof, the exercise price per Share subject to each Stock Appreciation Right shall be set by the Administrator, but shall not be less than one hundred percent (100%) of the Fair Market Value on the date the Stock Appreciation Right is granted.

(c) Notwithstanding the foregoing provisions of Section 11.1(b) hereof to the contrary, in the case of a Stock Appreciation Right that is a Substitute Award, the price per Share of the Shares subject to such Stock Appreciation Right may be less than one hundred percent (100%) of the Fair Market Value per share on the date of grant; provided that the excess of: (i) the aggregate Fair Market Value (as of the date such Substitute Award is granted) of the shares subject to the Substitute Award, over (ii) the aggregate exercise price thereof does not exceed the excess of: (x) the aggregate fair market value (as of the time immediately preceding the transaction giving rise to the Substitute Award, such fair market value to be determined by the Administrator) of the shares of the predecessor entity that were subject to the grant assumed or substituted for by the Company, over (y) the aggregate exercise price of such shares.

11.2 Stock Appreciation Right Vesting .

(a) The period during which the right to exercise, in whole or in part, a Stock Appreciation Right vests in the Holder shall be set by the Administrator and the Administrator may determine that a Stock Appreciation Right may not be exercised in whole or in part for a specified period after it is granted. Such vesting may be based on service with the Company or any Affiliate, any of the Performance Criteria or any other criteria selected by the Administrator. At any time after grant of a Stock Appreciation Right, the Administrator may, in its sole discretion and subject to whatever terms and conditions it selects, accelerate the period during which a Stock Appreciation Right vests.

(b) No portion of a Stock Appreciation Right which is unexercisable at a Holder’s Termination of Service shall thereafter become exercisable, except as may be otherwise provided by the Administrator either in the applicable Program or Award Agreement or by action of the Administrator following the grant of the Stock Appreciation Right, including following a Termination of Service; provided, that in no event shall a Stock Appreciation Right become exercisable following its expiration, termination or forfeiture.

 

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11.3 Manner of Exercise . All or a portion of an exercisable Stock Appreciation Right shall be deemed exercised upon delivery of all of the following to the stock administrator of the Company, or such other person or entity designated by the Administrator, or his, her or its office, as applicable:

(a) A written or electronic notice complying with the applicable rules established by the Administrator stating that the Stock Appreciation Right, or a portion thereof, is exercised. The notice shall be signed by the Holder or other person then entitled to exercise the Stock Appreciation Right or such portion of the Stock Appreciation Right;

(b) Such representations and documents as the Administrator, in its sole discretion, deems necessary or advisable to effect compliance with all Applicable Laws. The Administrator may, in its sole discretion, also take whatever additional actions it deems appropriate to effect such compliance; and

(c) In the event that the Stock Appreciation Right shall be exercised pursuant to this Section 11.3 hereof by any person or persons other than the Holder, appropriate proof of the right of such person or persons to exercise the Stock Appreciation Right.

11.4 Stock Appreciation Right Term . The term of each Stock Appreciation Right (the “ Stock Appreciation Right Term ”) shall be set by the Administrator in its sole discretion; provided , however , that the term shall not be more than ten (10) years from the date the Stock Appreciation Right is granted. The Administrator shall determine the time period, including the time period following a Termination of Service, during which the Holder has the right to exercise the vested Stock Appreciation Rights, which time period may not extend beyond the expiration date of the Stock Appreciation Right Term. Except as limited by the requirements of Section 409A of the Code and regulations and rulings thereunder or the first sentence of this Section 11.4, the Administrator may extend the Stock Appreciation Right Term of any outstanding Stock Appreciation Right, may extend the time period during which vested Stock Appreciation Rights may be exercised following any Termination of Service of the Holder, and may amend, subject to Section 14.1, any other term or condition of such Stock Appreciation Right relating to such a Termination of Service.

11.5 Payment . Payment of the amounts payable with respect to Stock Appreciation Rights pursuant to this Article 11 shall be in cash, Shares (based on its Fair Market Value as of the date the Stock Appreciation Right is exercised), or a combination of both, as determined by the Administrator.

 

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ARTICLE 12.

ADDITIONAL TERMS OF AWARDS

12.1 Payment . The Administrator shall determine the methods by which payments by any Holder with respect to any Awards granted under the Plan shall be made, including, without limitation: (a) cash or check, (b) Shares (including, in the case of payment of the exercise price of an Award, Shares issuable pursuant to the exercise of the Award) or Shares held for such period of time as may be required by the Administrator in order to avoid adverse accounting consequences, in each case, having a Fair Market Value on the date of delivery equal to the aggregate payments required, (c) delivery of a written or electronic notice that the Holder has placed a market sell order with a broker with respect to Shares then issuable upon exercise or vesting of an Award, and that the broker has been directed to pay a sufficient portion of the net proceeds of the sale to the Company in satisfaction of the aggregate payments required; provided that payment of such proceeds is then made to the Company upon settlement of such sale, or (d) other form of legal consideration acceptable to the Administrator. The Administrator shall also determine the methods by which Shares shall be delivered or deemed to be delivered to Holders. Notwithstanding any other provision of the Plan to the contrary, no Holder who is a Director or an “executive officer” of the Company within the meaning of Section 13(k) of the Exchange Act shall be permitted to make payment with respect to any Awards granted under the Plan, or continue any extension of credit with respect to such payment, with a loan from the Company or a loan arranged by the Company in violation of Section 13(k) of the Exchange Act.

12.2 Tax Withholding . The Company or any Affiliate shall have the authority and the right to deduct or withhold, or require a Holder to remit to the Company, an amount sufficient to satisfy federal, state, local and foreign taxes (including the Holder’s FICA or employment tax or other social security contribution obligation) required by law to be withheld with respect to any taxable event concerning a Holder arising as a result of the Plan. The Administrator may in its sole discretion and in satisfaction of the foregoing requirement determine to satisfy, or allow a Holder to satisfy, such obligations by any payment means described in Section 12.1 hereof, including without limitation, by withholding Shares, or allowing such Holder to elect to have the Company withhold Shares, otherwise issuable under an Award (or providing for the surrender of Shares). The number of Shares which may be so withheld or surrendered shall be limited to the number of Shares which have a fair market value on the date of withholding or repurchase equal to the aggregate amount of such liabilities based on the maximum statutory withholding rates for federal, state, local and foreign income tax and payroll tax purposes that are applicable to such supplemental taxable income. The Administrator shall determine the fair market value of the Shares, consistent with applicable provisions of the Code, for tax withholding obligations due in connection with a broker-assisted cashless Option or Stock Appreciation Right exercise involving the sale of Shares to pay the Option or Stock Appreciation Right exercise price or any tax withholding obligation.

12.3 Transferability of Awards .

(a) Except as otherwise provided in Sections 12.3(b) and 12.3(c) hereof:

(i) No Award under the Plan may be sold, pledged, assigned or transferred in any manner other than by will or the laws of descent and distribution or, subject to the consent of the Administrator, pursuant to a DRO, unless and until such Award has been exercised, or the Shares underlying such Award have been issued, and all restrictions applicable to such Shares have lapsed;

 

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(ii) No Award or interest or right therein shall be liable for the debts, contracts or engagements of the Holder or the Holder’s successors in interest or shall be subject to disposition by transfer, alienation, anticipation, pledge, hypothecation, encumbrance, assignment or any other means whether such disposition be voluntary or involuntary or by operation of law by judgment, levy, attachment, garnishment or any other legal or equitable proceedings (including bankruptcy) unless and until such Award has been exercised, or the Shares underlying such Award have been issued, and all restrictions applicable to such Shares have lapsed, and any attempted disposition of an Award prior to the satisfaction of these conditions shall be null and void and of no effect, except to the extent that such disposition is permitted by clause (i) of this Section 12.3(a); and

(iii) During the lifetime of the Holder, only the Holder may exercise an Award (or any portion thereof) granted to such Holder under the Plan, unless it has been disposed of pursuant to a DRO; after the death of the Holder, any exercisable portion of an Award may, prior to the time when such portion becomes unexercisable under the Plan or the applicable Program or Award Agreement, be exercised by the Holder’s personal representative or by any person empowered to do so under the deceased Holder’s will or under the then applicable laws of descent and distribution.

(b) Notwithstanding Section 12.3(a) hereof, the Administrator, in its sole discretion, may determine to permit a Holder or a Permitted Transferee of such Holder to transfer an Award other than an Incentive Stock Option (unless such Incentive Stock Option is to become a Non-Qualified Stock Option) to any one or more Permitted Transferees, subject to the following terms and conditions: (i) an Award transferred to a Permitted Transferee shall not be assignable or transferable by the Permitted Transferee (other than to another Permitted Transferee of the applicable Holder) other than by will or the laws of descent and distribution or pursuant to a DRO; (ii) an Award transferred to a Permitted Transferee shall continue to be subject to all the terms and conditions of the Award as applicable to the original Holder (other than the ability to further transfer the Award); and (iii) the Holder (or transferring Permitted Transferee) and the Permitted Transferee shall execute any and all documents requested by the Administrator, including, without limitation documents to (A) confirm the status of the transferee as a Permitted Transferee, (B) satisfy any requirements for an exemption for the transfer under Applicable Law and (C) evidence the transfer.

(c) Notwithstanding Section 12.3(a) hereof, a Holder may, in the manner determined by the Administrator, designate a beneficiary to exercise the rights of the Holder and to receive any distribution with respect to any Award upon the Holder’s death. A beneficiary, legal guardian, legal representative, or other person claiming any rights pursuant to the Plan is subject to all terms and conditions of the Plan and any Program and/or Award Agreement applicable to the Holder, except to the extent the Plan, an applicable Program and/or the Award Agreement otherwise provide, and to any additional restrictions deemed necessary or appropriate

 

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by the Administrator. If the Holder is married or a domestic partner in a domestic partnership qualified under Applicable Law and resides in a community property state, a designation of a person other than the Holder’s spouse or domestic partner, as applicable, as the Holder’s beneficiary with respect to more than fifty percent (50%) of the Holder’s interest in the Award shall not be effective without the prior written or electronic consent of the Holder’s spouse or domestic partner, as applicable. If no beneficiary has been designated or survives the Holder, payment shall be made to the person entitled thereto pursuant to the Holder’s will or the laws of descent and distribution. Subject to the foregoing, a beneficiary designation may be changed or revoked by a Holder at any time; provided that the change or revocation is filed with the Administrator prior to the Holder’s death.

12.4 Conditions to Issuance of Shares .

(a) Notwithstanding anything herein to the contrary, the Company shall not be required to issue or deliver any certificates or make any book entries evidencing Shares pursuant to the exercise of any Award, unless and until the Board or the Committee has determined, with advice of counsel, that the issuance of such Shares is in compliance with all Applicable Laws, and the Shares are covered by an effective registration statement or applicable exemption from registration. In addition to the terms and conditions provided herein, the Board or the Committee may require that a Holder make such reasonable covenants, agreements, and representations as the Board or the Committee, in its discretion, deems advisable in order to comply with any such Applicable Law.

(b) All Share certificates delivered pursuant to the Plan and all Shares issued pursuant to book entry procedures are subject to any stop-transfer orders and other restrictions as the Administrator deems necessary or advisable to comply with Applicable Law. The Administrator may place legends on any Share certificate or book entry to reference restrictions applicable to the Shares.

(c) The Administrator shall have the right to require any Holder to comply with any timing or other restrictions with respect to the settlement, distribution or exercise of any Award, including a window-period limitation, as may be imposed in the sole discretion of the Administrator.

(d) No fractional Shares shall be issued and the Administrator shall determine, in its sole discretion, whether cash shall be given in lieu of fractional Shares or whether such fractional Shares shall be eliminated by rounding down.

(e) Notwithstanding any other provision of the Plan, unless otherwise determined by the Administrator or required by any Applicable Law, the Company shall not deliver to any Holder certificates evidencing Shares issued in connection with any Award and instead such Shares shall be recorded in the books of the Company (or, as applicable, its transfer agent or stock plan administrator).

 

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12.5 Forfeiture and Claw-Back Provisions . Pursuant to its general authority to determine the terms and conditions applicable to Awards under the Plan, the Administrator shall have the right to provide, in an Award Agreement or otherwise, or to require a Holder to agree by separate written or electronic instrument, that:

(a) (i) Any proceeds, gains or other economic benefit actually or constructively received by the Holder upon any receipt or exercise of the Award, or upon the receipt or resale of any Shares underlying the Award, must be paid to the Company, and (ii) the Award shall terminate and any unexercised portion of the Award (whether or not vested) shall be forfeited, if (x) a Termination of Service occurs prior to a specified date, or within a specified time period following receipt or exercise of the Award, or (y) the Holder at any time, or during a specified time period, engages in any activity in competition with the Company, or which is inimical, contrary or harmful to the interests of the Company, as further defined by the Administrator or (z) the Holder incurs a Termination of Service for “cause” (as such term is defined in the sole discretion of the Administrator, or as set forth in the Award Agreement relating to such Award between the Company and the Holder); and

(b) All Awards (including any proceeds, gains or other economic benefit actually or constructively received by the Holder upon any receipt or exercise of any Award or upon the receipt or resale of any Shares underlying the Award) shall be subject to the provisions of any claw-back policy implemented by the Company, including, without limitation, any claw-back policy adopted to comply with the requirements of Applicable Law, including, without limitation, the Dodd-Frank Wall Street Reform and Consumer Protection Act and any rules or regulations promulgated thereunder, to the extent set forth in such claw-back policy and/or in the applicable Award Agreement.

12.6 Repricing . Subject to Section 14.2 hereof, the Administrator shall without the approval of the stockholders of the Company, have the authority to (i) amend of any outstanding Option or Stock Appreciation Right to reduce its price per Share, or (ii) cancel any Option or Stock Appreciation Right in exchange for cash or another Award when the Option or Stock Appreciation Right price per Share exceeds the Fair Market Value of the underlying Shares, in its sole discretion.

12.7 Leave of Absence . Unless the Administrator provides otherwise, vesting of Awards granted hereunder shall be suspended during any unpaid leave of absence. A Holder shall not cease to be considered an Employee, Non-Employee Director or Consultant, as applicable, in the case of any (a) leave of absence approved by the Company, (b) transfer between locations of the Company or between the Company and any of its Affiliates or any successor thereof, or (c) change in status (Employee to Director, Employee to Consultant, etc.), provided that such change does not affect the specific terms applying to the Holder’s Award.

ARTICLE 13.

ADMINISTRATION

13.1 Administrator . The Committee (or another committee or a subcommittee of the Board or the Compensation Committee of the Board assuming the functions of the Committee under the Plan) shall administer the Plan (except as otherwise permitted herein) and, unless otherwise determined by the Board, shall consist solely of two (2) or more Non-Employee Directors appointed by and holding office at the pleasure of the Board, each of whom is

 

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intended to qualify as both a “non-employee director” as defined by Rule 16b-3 of the Exchange Act or any successor rule, an “outside director” for purposes of Section 162(m) of the Code and an “independent director” under the rules of any securities exchange or automated quotation system on which the Shares are listed, quoted or traded; provided that any action taken by the Committee shall be valid and effective, whether or not members of the Committee at the time of such action are later determined not to have satisfied the requirements for membership set forth in this Section 13.1 or otherwise provided in any charter of the Committee. Except as may otherwise be provided in any charter of the Committee, appointment of Committee members shall be effective upon acceptance of appointment. Committee members may resign at any time by delivering written or electronic notice to the Board. Vacancies in the Committee may only be filled by the Board. Notwithstanding the foregoing, (a) the full Board, acting by a majority of its members in office, shall conduct the general administration of the Plan with respect to Awards granted to Non-Employee Directors and, with respect to such Awards, the terms “Administrator” and “Committee” as used in the Plan shall be deemed to refer to the Board and (b) the Board or Committee may delegate its authority hereunder to the extent permitted by Section 13.6 hereof.

13.2 Duties and Powers of Administrator . It shall be the duty of the Administrator to conduct the general administration of the Plan in accordance with its provisions. The Administrator shall have the power to interpret the Plan, any Program and any Award Agreement, and to adopt such rules for the administration, interpretation and application of the Plan as are not inconsistent therewith, to interpret, amend or revoke any such rules and to amend any Program or Award Agreement; provided that the rights or obligations of the Holder of any Award that is the subject of any such Program or Award Agreement are not affected materially and adversely by such amendment, unless the consent of the Holder is obtained or such amendment is otherwise permitted under Section 14.10 hereof. Any such grant or award under the Plan need not be administered or interpreted the same with respect to each Holder. Any such interpretations and rules with respect to Incentive Stock Options shall be consistent with the provisions of Section 422 of the Code. In its sole discretion, the Board may at any time and from time to time exercise any and all rights and duties of the Committee under the Plan except with respect to matters which under Rule 16b-3 under the Exchange Act or any successor rule, or Section 162(m) of the Code, or any regulations or rules issued thereunder, or the rules of any securities exchange or automated quotation system on which the Shares are listed, quoted or traded are required to be determined in the sole discretion of the Committee.

13.3 Action by the Committee . Unless otherwise established by the Board or in any charter of the Committee, a majority of the Committee shall constitute a quorum and the acts of a majority of the members present at any meeting at which a quorum is present, and acts approved in writing by all members of the Committee in lieu of a meeting, shall be deemed the acts of the Committee. Each member of the Committee is entitled to, in good faith, rely or act upon any report or other information furnished to that member by any officer or other employee of the Company or any Affiliate, the Company’s independent certified public accountants, or any executive compensation consultant or other professional retained by the Company to assist in the administration of the Plan.

 

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13.4 Authority of Administrator . Subject to the Company’s Bylaws, the Committee’s Charter and any specific designation in the Plan, the Administrator has the exclusive power, authority and sole discretion to:

(a) Designate Eligible Individuals to receive Awards;

(b) Determine the type or types of Awards to be granted to each Eligible Individual;

(c) Determine the number of Awards to be granted and the number of Shares to which an Award will relate;

(d) Determine the terms and conditions of any Award granted pursuant to the Plan, including, but not limited to, the exercise price, grant price, purchase price, any performance criteria, any restrictions or limitations on the Award, any schedule for vesting, lapse of forfeiture restrictions or restrictions on the exercisability of an Award, and accelerations or waivers thereof, and any provisions related to non-competition and recapture of gain on an Award, based in each case on such considerations as the Administrator in its sole discretion determines;

(e) Determine whether, to what extent, and pursuant to what circumstances an Award may be settled in, or the exercise price of an Award may be paid in cash, Shares, other Awards or other property, or an Award may be canceled, forfeited, or surrendered;

(f) Prescribe the form of each Award Agreement, which need not be identical for each Holder;

(g) Decide all other matters that must be determined in connection with an Award;

(h) Establish, adopt, or revise any rules and regulations as it may deem necessary or advisable to administer the Plan;

(i) Interpret the terms of, and any matter arising pursuant to, the Plan, any Program or any Award Agreement;

(j) Make all other decisions and determinations that may be required pursuant to the Plan or as the Administrator deems necessary or advisable to administer the Plan; and

(k) Accelerate wholly or partially the vesting or lapse of restrictions of any Award or portion thereof at any time after the grant of an Award, subject to whatever terms and conditions it selects and Sections 3.4 and 14.2(d) hereof.

13.5 Decisions Binding . The Administrator’s interpretation of the Plan, any Awards granted pursuant to the Plan, any Program, any Award Agreement and all decisions and determinations by the Administrator with respect to the Plan are final, binding, and conclusive on all parties.

 

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13.6 Delegation of Authority . To the extent permitted by Applicable Law, the Board or Committee may from time to time delegate to a committee of one or more members of the Board or one or more officers of the Company the authority to grant or amend Awards or to take other administrative actions pursuant to Article 13; provided , however , that in no event shall an officer of the Company be delegated the authority to grant awards to, or amend awards held by, the following individuals: (a) individuals who are subject to Section 16 of the Exchange Act, (b) Covered Employees, or (c) officers of the Company (or Directors) to whom authority to grant or amend Awards has been delegated hereunder; provided , further , that any delegation of administrative authority shall only be permitted to the extent it is permissible under Section 162(m) of the Code and Applicable Law. Any delegation hereunder shall be subject to the restrictions and limits that the Board or Committee specifies at the time of such delegation, and the Board may at any time rescind the authority so delegated or appoint a new delegatee. At all times, the delegatee appointed under this Section 13.6 shall serve in such capacity at the pleasure of the Board and the Committee.

ARTICLE 14.

MISCELLANEOUS PROVISIONS

14.1 Amendment, Suspension or Termination of the Plan . Except as otherwise provided in this Section 14.1, the Plan may be wholly or partially amended or otherwise modified, suspended or terminated at any time or from time to time by the Board or the Committee. However, without approval of the Company’s stockholders given within twelve (12) months before or after the action by the Administrator, no action of the Administrator may, except as provided in Section 14.2 hereof, increase the limits imposed in Section 3.1 hereof on the maximum number of Shares which may be issued under the Plan or the individual Award limits specified in Section 3.3 hereof or take any action prohibited under Section 12.6 hereof. Except as provided in Section 14.10 hereof, no amendment, suspension or termination of the Plan shall, without the consent of the Holder, materially and adversely affect any rights or obligations under any Award theretofore granted or awarded, unless the Award itself otherwise expressly so provides. No Awards may be granted or awarded during any period of suspension or after termination of the Plan, and in no event may any Incentive Stock Option be granted under the Plan after the tenth (10 th ) anniversary of the Effective Date.

14.2 Changes in Common Stock or Assets of the Company, Acquisition or Liquidation of the Company and Other Corporate Events .

(a) In the event of any stock dividend, stock split, combination or exchange of shares, merger, consolidation or other distribution (other than normal cash dividends) of Company assets to stockholders, or any other change affecting the shares of the Company’s stock or the share price of the Company’s stock other than an Equity Restructuring, the Administrator may make equitable adjustments, if any, to reflect such change with respect to (i) the aggregate number and kind of shares that may be issued under the Plan (including, but not limited to, adjustments of the limitations in Sections 3.1 and 3.3 hereof on the maximum number and kind of shares which may be issued under the Plan); (ii) the number and kind of Shares (or

 

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other securities or property) subject to outstanding Awards; (iii) the number and kind of Shares (or other securities or property) for which grants are subsequently to be made to new and continuing Non-Employee Directors pursuant to Section 4.6 hereof; (iv) the terms and conditions of any outstanding Awards (including, without limitation, any applicable performance targets or criteria with respect thereto); and (v) the grant or exercise price per share for any outstanding Awards under the Plan. Any adjustment affecting an Award intended as Performance-Based Compensation shall be made consistent with the requirements of Section 162(m) of the Code.

(b) In the event of any transaction or event described in Section 14.2(a) hereof or any unusual or nonrecurring transactions or events affecting the Company, any Affiliate of the Company, or the financial statements of the Company or any Affiliate, or of changes in Applicable Law, the Administrator, in its sole discretion, and on such terms and conditions as it deems appropriate, either by the terms of the Award or by action taken prior to the occurrence of such transaction or event and either automatically or upon the Holder’s request, is hereby authorized to take any one or more of the following actions whenever the Administrator determines that such action is appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan or with respect to any Award under the Plan, to facilitate such transactions or events or to give effect to such changes in laws, regulations or principles:

(i) To provide for either (A) termination of any such Award in exchange for an amount of cash and/or other property, if any, equal to the amount that would have been attained upon the exercise of such Award or realization of the Holder’s rights (and, for the avoidance of doubt, if as of the date of the occurrence of the transaction or event described in this Section 14.2 the Administrator determines in good faith that no amount would have been attained upon the exercise of such Award or realization of the Holder’s rights, then such Award may be terminated by the Company without payment) or (B) the replacement of such Award with other rights or property selected by the Administrator in its sole discretion having an aggregate value not exceeding the amount that could have been attained upon the exercise of such Award or realization of the Holder’s rights had such Award been currently exercisable or payable or fully vested;

(ii) To provide that such Award be assumed by the successor or survivor corporation, or a parent or subsidiary thereof, or shall be substituted for by similar options, rights or awards covering the stock of the successor or survivor corporation, or a parent or subsidiary thereof, with appropriate adjustments as to the number and kind of shares and prices;

(iii) To make adjustments in the number and type of shares of the Company’s stock (or other securities or property) subject to outstanding Awards, and in the number and kind of outstanding Restricted Stock or Deferred Stock and/or in the terms and conditions of (including the grant or exercise price), and the criteria included in, outstanding Awards and Awards which may be granted in the future;

(iv) To provide that such Award shall be exercisable or payable or fully vested with respect to all shares covered thereby, notwithstanding anything to the contrary in the Plan or the applicable Program or Award Agreement; and

(v) To provide that the Award cannot vest, be exercised or become payable after such event.

 

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(c) In connection with the occurrence of any Equity Restructuring, and notwithstanding anything to the contrary in Sections 14.2(a) and 14.2(b) hereof:

(i) The number and type of securities subject to each outstanding Award and the exercise price or grant price thereof, if applicable, shall be equitably adjusted; and/or

(ii) The Administrator shall make such equitable adjustments, if any, as the Administrator in its discretion may deem appropriate to reflect such Equity Restructuring with respect to the aggregate number and kind of shares that may be issued under the Plan (including, but not limited to, adjustments of the limitations in Sections 3.1 and 3.3 hereof on the maximum number and kind of shares which may be issued under the Plan.

The adjustments provided under this Section 14.2(c) shall be nondiscretionary and shall be final and binding on the affected Holder and the Company.

(d) Change in Control .

(i) Notwithstanding any other provision of the Plan, in the event of a Change in Control, each outstanding Award shall be assumed or an equivalent Award substituted by the successor corporation or a parent or subsidiary of the successor corporation, in each case, as determined by the Administrator.

(ii) In the event that the successor corporation in a Change in Control and its parents and subsidiaries refuse to assume or substitute for any Award in accordance with Section 14.2(d)(i) hereof or it is otherwise determined that Awards shall not be so assumed or substituted, each such non-assumed/substituted Award, except for any Performance Awards, shall become fully vested and, as applicable, exercisable and shall be deemed exercised, immediately prior to the consummation of such transaction, and all forfeiture restrictions on any or all such Awards shall lapse at such time. For the avoidance of doubt, the vesting of any Performance Awards not assumed in a Change in Control will not be automatically accelerated pursuant to this Section 14.2(d)(ii) and will instead vest pursuant to the terms and conditions of the applicable Award Agreement upon a Change in Control where the successor corporation and its parents and subsidiaries refuse to assume or substitute for any Award in accordance with Section 14.2(d)(i) hereof. If an Award vests and, as applicable, is exercised in lieu of assumption or substitution in connection with a Change in Control, the Administrator shall notify the Holder of such vesting and any applicable exercise period, and the Award shall terminate upon the Change in Control. For the avoidance of doubt, if the value of an Award that is terminated in connection with this Section 14.2(d)(ii) is zero or negative at the time of such Change in Control, such Award shall be terminated upon the Change in Control without payment of consideration therefor.

(e) The Administrator may, in its sole discretion, include such further provisions and limitations in any Award, agreement or certificate, as it may deem equitable and in the best interests of the Company that are not inconsistent with the provisions of the Plan.

 

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(f) With respect to Awards which are granted to Covered Employees and are intended to qualify as Performance-Based Compensation, no adjustment or action described in this Section 14.2 or in any other provision of the Plan shall be authorized to the extent that such adjustment or action would cause such Award to fail to so qualify as Performance-Based Compensation, unless the Administrator determines that the Award should not so qualify. No adjustment or action described in this Section 14.2 or in any other provision of the Plan shall be authorized to the extent that such adjustment or action would cause the Plan to violate Section 422(b)(1) of the Code. Furthermore, no such adjustment or action shall be authorized to the extent such adjustment or action would result in short-swing profits liability under Section 16 of the Exchange Act or violate the exemptive conditions of Rule 16b-3 of the Exchange Act unless the Administrator determines that the Award is not to comply with such exemptive conditions.

(g) No action shall be taken under this Section 14.2 which shall cause an Award to fail to be exempt from or comply with Section 409A of the Code or the Treasury Regulations thereunder.

(h) The existence of the Plan, any Program, the Award Agreement and the Awards granted hereunder shall not affect or restrict in any way the right or power of the Company or the stockholders of the Company to make or authorize any adjustment, recapitalization, reorganization or other change in the Company’s capital structure or its business, any merger or consolidation of the Company, any issue of stock or of options, warrants or rights to purchase stock or of bonds, debentures, preferred or prior preference stocks whose rights are superior to or affect the Common Stock or the rights thereof or which are convertible into or exchangeable for Common Stock, or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise.

(i) In the event of any pending stock dividend, stock split, combination or exchange of shares, merger, consolidation or other distribution (other than normal cash dividends) of Company assets to stockholders, or any other change affecting the Shares or the share price of the Common Stock including any Equity Restructuring, for reasons of administrative convenience, the Company in its sole discretion may refuse to permit the exercise of any Award during a period of up to thirty (30) days prior to the consummation of any such transaction.

14.3 Approval of Plan by Stockholders . The Plan will be submitted for the approval of the Company’s stockholders within twelve (12) months after the date of the Board’s initial adoption of the Plan. Awards may be granted or awarded prior to such stockholder approval; provided that such Awards shall not be exercisable, shall not vest and the restrictions thereon shall not lapse and no Shares shall be issued pursuant thereto prior to the time when the Plan is approved by the stockholders; and provided , further , that if such approval has not been obtained at the end of said twelve (12) month period, all Awards previously granted or awarded under the Plan shall thereupon be canceled and become null and void.

 

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14.4 No Stockholders Rights . Except as otherwise provided herein, a Holder shall have none of the rights of a stockholder with respect to Shares covered by any Award until the Holder becomes the record owner of such Shares.

14.5 Paperless Administration . In the event that the Company establishes, for itself or using the services of a third party, an automated system for the documentation, granting or exercise of Awards, such as a system using an internet website or interactive voice response, then the paperless documentation, granting or exercise of Awards by a Holder may be permitted through the use of such an automated system.

14.6 Effect of Plan upon Other Compensation Plans . The adoption of the Plan shall not affect any other compensation or incentive plans in effect for the Company or any Affiliate. Nothing in the Plan shall be construed to limit the right of the Company or any Affiliate: (a) to establish any other forms of incentives or compensation for Employees, Directors or Consultants of the Company or any Affiliate, or (b) to grant or assume options or other rights or awards otherwise than under the Plan in connection with any proper corporate purpose including without limitation, the grant or assumption of options in connection with the acquisition by purchase, lease, merger, consolidation or otherwise, of the business, stock or assets of any corporation, partnership, limited liability company, firm or association.

14.7 Compliance with Laws . The Plan, the granting and vesting of Awards under the Plan and the issuance and delivery of Shares and the payment of money under the Plan or under Awards granted or awarded hereunder are subject to compliance with all Applicable Law, and to such approvals by any listing, regulatory or governmental authority as may, in the opinion of counsel for the Company, be necessary or advisable in connection therewith. Any securities delivered under the Plan shall be subject to such restrictions, and the person acquiring such securities shall, if requested by the Company, provide such assurances and representations to the Company as the Company may deem necessary or desirable to assure compliance with all Applicable Law. To the extent permitted by Applicable Law, the Plan and Awards granted or awarded hereunder shall be deemed amended to the extent necessary to conform to such Applicable Law.

14.8 Titles and Headings, References to Sections of the Code or Exchange Act . The titles and headings of the Sections in the Plan are for convenience of reference only and, in the event of any conflict, the text of the Plan, rather than such titles or headings, shall control. References to sections of the Code or the Exchange Act shall include any amendment or successor thereto.

14.9 Governing Law . The Plan and any agreements hereunder shall be administered, interpreted and enforced under the internal laws of the State of Delaware without regard to conflicts of laws thereof or of any other jurisdiction.

14.10 Section 409A . To the extent that the Administrator determines that any Award granted under the Plan is subject to Section 409A of the Code, any Program pursuant to which such Award is granted and the Award Agreement evidencing such Award shall incorporate the terms and conditions required by Section 409A of the Code. To the extent applicable, the Plan, any Program and any Award Agreements shall be interpreted in accordance with Section 409A

 

34


of the Code and Department of Treasury regulations and other interpretive guidance issued thereunder, including without limitation any such regulations or other guidance that may be issued after the Effective Date. Notwithstanding any provision of the Plan to the contrary, in the event that following the Effective Date the Administrator determines that any Award may be subject to Section 409A of the Code and related Department of Treasury guidance (including such Department of Treasury guidance as may be issued after the Effective Date), the Administrator may adopt such amendments to the Plan and the applicable Program and Award Agreement or adopt other policies and procedures (including amendments, policies and procedures with retroactive effect), or take any other actions, that the Administrator determines are necessary or appropriate to (a) exempt the Award from Section 409A of the Code and/or preserve the intended tax treatment of the benefits provided with respect to the Award, or (b) comply with the requirements of Section 409A of the Code and related Department of Treasury guidance and thereby avoid the application of any penalty taxes under such Section.

14.11 No Rights to Awards . No Eligible Individual or other person shall have any claim to be granted any Award pursuant to the Plan, and neither the Company nor the Administrator is obligated to treat Eligible Individuals, Holders or any other persons uniformly.

14.12 Unfunded Status of Awards . The Plan is intended to be an “unfunded” plan for incentive compensation. With respect to any payments not yet made to a Holder pursuant to an Award, nothing contained in the Plan or any Program or Award Agreement shall give the Holder any rights that are greater than those of a general creditor of the Company or any Affiliate.

14.13 Indemnification . To the extent allowable pursuant to Applicable Law, each member of the Committee or of the Board and any officer or other employee to whom authority to administer any component of the Plan is delegated shall be indemnified and held harmless by the Company from any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by such member in connection with or resulting from any claim, action, suit, or proceeding to which he or she may be a party or in which he or she may be involved by reason of any action or failure to act pursuant to the Plan and against and from any and all amounts paid by him or her in satisfaction of judgment in such action, suit, or proceeding against him or her; provided he or she gives the Company an opportunity, at its own expense, to handle and defend the same before he or she undertakes to handle and defend it on his or her own behalf. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled pursuant to the Company’s Certificate of Incorporation or Bylaws, as a matter of law, or otherwise, or any power that the Company may have to indemnify them or hold them harmless.

14.14 Relationship to other Benefits . No payment pursuant to the Plan shall be taken into account in determining any benefits under any pension, retirement, savings, profit sharing, group insurance, welfare or other benefit plan of the Company or any Affiliate except to the extent otherwise expressly provided in writing in such other plan or an agreement thereunder.

14.15 Expenses . The expenses of administering the Plan shall be borne by the Company and its Affiliates.

 

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* * * * *

I hereby certify that the foregoing Plan was duly adopted by the Board of Directors of e.l.f. Beauty, Inc. on September 5, 2016.

* * * * *

I hereby certify that the foregoing Plan was approved by the stockholders of e.l.f. Beauty, Inc. on September 7, 2016.

Executed on this 7th day of September, 2016.

 

/s/ Scott K. Milsten

Scott K. Milsten
Corporate Secretary

 

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Exhibit 10.17

E.L.F. BEAUTY, INC.

2016 EQUITY INCENTIVE AWARD PLAN

STOCK OPTION GRANT NOTICE

e.l.f. Beauty, Inc., a Delaware corporation, (the “ Company ”), pursuant to its 2016 Equity Incentive Award Plan, as may be amended from time to time (the “ Plan ”), hereby grants to the holder listed below (“ Participant ”), an option to purchase the number of shares of the Company’s common stock (“ Stock ”), set forth below (the “ Option ”). This Option is subject to all of the terms and conditions set forth herein, as well as in the Plan and the Stock Option Agreement attached hereto as Exhibit A (the “ Stock Option Agreement ”), each of which are incorporated herein by reference. Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Grant Notice and the Stock Option Agreement.

 

Participant:

«Participant»

 

Grant Date:

«Grant_Date»

 

Vesting Commencement Date:

«VCD»

 

Exercise Price per Share:

$«Exercise_Price»

 

Total Exercise Price:

$«Total_Price»

 

Total Number of Shares Subject to the Option:

«Shares» shares

 

Expiration Date:

«Expiration_Date»

 

Vesting Schedule:

«Vesting_Schedule»

 

Type of Option:

¨ Incentive Stock Option         ¨ Non-Qualified Stock Option

By his or her signature and the Company’s signature below, Participant agrees to be bound by the terms and conditions of the Plan, the Stock Option Agreement, and this Grant Notice. Participant has reviewed the Stock Option Agreement, the Plan and this Grant Notice in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Grant Notice and fully understands all provisions of this Grant Notice, the Stock Option Agreement and the Plan. Participant hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions arising under the Plan, this Grant Notice or the Stock Option Agreement.

 

E.L.F. BEAUTY, INC.:     PARTICIPANT:
By:         By:    
Print Name:   John P. Bailey     Print Name:   «Participant»
Title:   Chief Financial Officer      
Address:  

570 10 th Street

Oakland, CA 94607

    Address:   «Address»


EXHIBIT A

TO STOCK OPTION GRANT NOTICE

E.L.F. BEAUTY, INC. STOCK OPTION AGREEMENT

Pursuant to the Stock Option Grant Notice (the “ Grant Notice ”) to which this Stock Option Agreement (this “ Agreement ”) is attached, e.l.f. Beauty, Inc., a Delaware corporation (the “ Company ”), has granted to Participant an Option under the Company’s 2016 Equity Incentive Award Plan, as may be amended from time to time (the “ Plan ”), to purchase the number of shares of Stock indicated in the Grant Notice.

ARTICLE 1.

GENERAL

1.1 Defined Terms . Wherever the following terms are used in this Agreement they shall have the meanings specified below, unless the context clearly indicates otherwise. Capitalized terms not specifically defined herein shall have the meanings specified in the Plan and the Grant Notice.

(a) “ Cause ” shall mean (i) a breach by Participant of Participant’s obligations pursuant to his or her employment or other similar agreement (other than as a result of physical or mental incapacity) which constitutes material nonperformance by Participant of his or her obligations and duties thereunder, which Participant has failed to remedy after the Board of Directors or delegate thereof has given Participant written notice of, and at least fifteen (15) days to remedy, such breach, (ii) commission by Participant of an act of fraud, embezzlement, misappropriation, willful misconduct or breach of fiduciary duty against the Company (other than acts, such as making personal use of Company office supplies, as have only a de minimis effect on the Company), (iii) a material breach by Participant of any non-solicitation and or non-competition covenants contained in his or her employment or other similar agreement with the Company, (iv) Participant’s conviction, plea of no contest or nolo contendere, deferred adjudication or unadjudicated probation for any felony or any crime involving moral turpitude, (v) the failure of Participant to carry out, or comply with, in any material respect, any lawful directive of the Board of Directors or delegate thereof (other than any such failure resulting from Participant’s physical or mental incapacity) which Participant has failed to remedy after the Board of Directors or delegate thereof has given Participant written notice of, and at least fifteen (15) days to remedy, such failure, or (vi) Participant’s unlawful use (including being under the influence) or possession of illegal drugs. For purposes of the previous sentence, no act or failure to act on Participant’s part shall be deemed “willful” unless done, or omitted to be done, by Participant not in good faith and without reasonable belief that Participant’s action or omission was in the best interest of the Company.

(b) “ Good Reason ” shall mean (i) a material diminution of Participant’s responsibilities, duties or authority, or the responsibilities, duties or authority of Participant’s direct supervisor (ii) a material diminution of Participant’s base compensation; or (iii) the relocation of Participant’s principal office to a location that is in excess of fifty (50) miles from Participant’s principal office prior to such change (it being understood and agreed that Participant’s reasonable travel for business purposes shall not be considered such a relocation); provided, however, that Participant’s termination will not be for Good Reason unless (x) Participant has given the Company at least thirty (30) days prior written notice of his or her intent to terminate his or her employment for Good Reason, which notice shall specify the facts and circumstances constituting Good Reason and be given within ninety (90) days of the initial occurrence thereof, (y) the Company has not remedied such facts and circumstances constituting Good Reason within thirty (30) days following the receipt of such notice, and (z) Participant terminates employment within six (6) months following the expiration of such thirty (30)-day cure period.

 

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1.2 Incorporation of Terms of Plan . The Option is subject to the terms and conditions of the Plan which are incorporated herein by reference. In the event of any inconsistency between the Plan and this Agreement, the terms of the Plan shall control.

ARTICLE 2.

GRANT OF OPTION

2.1 Grant of Option . In consideration of Participant’s past and/or continued employment with or service to the Company or any Affiliate and for other good and valuable consideration, effective as of the Grant Date set forth in the Grant Notice (the “ Grant Date ”), the Company irrevocably grants to Participant the Option to purchase any part or all of an aggregate of the number of shares of Stock set forth in the Grant Notice, upon the terms and conditions set forth in the Plan and this Agreement, subject to adjustments as provided in Section 14.2 of the Plan. Unless designated as a Non-Qualified Stock Option in the Grant Notice, the Option shall be an Incentive Stock Option to the maximum extent permitted by law.

2.2 Exercise Price . The exercise price of the shares of Stock subject to the Option shall be as set forth in the Grant Notice, without commission or other charge; provided , however , that the price per share of the shares of Stock subject to the Option shall not be less than 100% of the Fair Market Value of a share of Stock on the Grant Date. Notwithstanding the foregoing, if this Option is designated as an Incentive Stock Option and Participant is a Greater Than 10% Stockholder as of the Date of Grant, the exercise price per share of the shares of Stock subject to the Option shall not be less than 110% of the Fair Market Value of a share of Stock on the Grant Date.

2.3 Consideration to the Company . In consideration of the grant of the Option by the Company, Participant agrees to render faithful and efficient services to the Company or any Affiliate. Nothing in the Plan or this Agreement shall confer upon Participant any right to continue in the employ or service of the Company or any Affiliate or shall interfere with or restrict in any way the rights of the Company and its Affiliates, which rights are hereby expressly reserved, to discharge or terminate the services of Participant at any time for any reason whatsoever, with or without cause, except to the extent expressly provided otherwise in a written agreement between the Company or an Affiliate and Participant.

ARTICLE 3.

PERIOD OF EXERCISABILITY

3.1 Commencement of Exercisability .

(a) Subject to Sections 3.2, 3.3, 5.11 and 5.17 hereof, the Option shall become vested and exercisable in such amounts and at such times as are set forth in the Grant Notice.

(b) No portion of the Option which has not become vested and exercisable at the date of Participant’s Termination of Service shall thereafter become vested and exercisable, except as may be otherwise provided by the Administrator or as set forth in a written agreement between the Company and Participant.

 

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(c) Notwithstanding Sections 3.1(a), 3.1(b) and the Grant Notice, in the event Participant experiences a Termination of Service by the Company (or any successor thereof) for other or Cause, or by Participant for Good Reason within twelve (12) months following the consummation of a Change in Control, the Option shall become immediately vested and exercisable with respect to one hundred percent (100%) of the shares subject thereto.

3.2 Duration of Exercisability . The installments provided for in the vesting schedule set forth in the Grant Notice are cumulative. Each such installment which becomes vested and exercisable pursuant to the vesting schedule set forth in the Grant Notice shall remain vested and exercisable until it becomes unexercisable under Section 3.3 hereof.

3.3 Expiration of Option . The Option may not be exercised to any extent by anyone after the first to occur of the following events:

(a) The Expiration Date set forth in the Grant Notice, which shall in no event be more than ten (10) years from the Grant Date;

(b) If this Option is designated as an Incentive Stock Option and Participant, at the time the Option was granted, was a Greater Than 10% Stockholder, the expiration of five (5) years from the Grant Date;

(c) The expiration of three (3) months from the date of Participant’s Termination of Service, unless such termination occurs by reason of Participant’s death or disability; or

(d) The expiration of one (1) year from the date of Participant’s Termination of Service by reason of Participant’s death or disability.

3.4 Special Tax Consequences . Participant acknowledges that, to the extent that the aggregate Fair Market Value (determined as of the time the Option is granted) of all shares of Stock with respect to which Incentive Stock Options, including the Option (if applicable), are exercisable for the first time by Participant in any calendar year exceeds $100,000, the Option and such other options shall be Non-Qualified Stock Options to the extent necessary to comply with the limitations imposed by Section 422(d) of the Code. Participant further acknowledges that the rule set forth in the preceding sentence shall be applied by taking the Option and other “incentive stock options” into account in the order in which they were granted, as determined under Section 422(d) of the Code and the Treasury Regulations thereunder. Participant also acknowledges that an Incentive Stock Option exercised more than three (3) months after Participant’s Termination of Service, other than by reason of death or disability, will be taxed as a Non-Qualified Stock Option.

3.5 Tax Indemnity .

(a) Participant agrees to indemnify and keep indemnified the Company, any Affiliate and Participant’s employing company, if different, from and against any liability for or obligation to pay any Tax Liability (a “ Tax Liability ” being any liability for income tax, withholding tax and any other employment related taxes or social security contributions in any jurisdiction) that is attributable to (1) the grant or exercise of, or any benefit derived by Participant from, the Option, (2) the acquisition by Participant of the Stock on exercise of the Option or (3) the disposal of any Stock.

(b) The Option cannot be exercised until Participant has made such arrangements as the Company may require for the satisfaction of any Tax Liability that may arise in connection with the exercise of the Option and/or the acquisition of the Stock by Participant. The Company shall not be required to issue, allot or transfer Stock until Participant has satisfied this obligation.

 

A-3


(c) Participant hereby acknowledges that the Company (i) makes no representations or undertakings regarding the treatment of any Tax Liabilities in connection with any aspect of the Option and (ii) does not commit to and is under no obligation to structure the terms of the grant or any aspect of any Award, including the Option, to reduce or eliminate Participant’s liability for Tax Liabilities or achieve any particular tax result. Furthermore, if Participant becomes subject to tax in more than one jurisdiction between the date of grant of an Award, including the Option, and the date of any relevant taxable event, Participant acknowledges that the Company may be required to withhold or account for Tax Liabilities in more than one jurisdiction.

ARTICLE 4.

EXERCISE OF OPTION

4.1 Person Eligible to Exercise . Except as provided in Section 5.3 hereof, during the lifetime of Participant, only Participant may exercise the Option or any portion thereof, unless it has been disposed of pursuant to a DRO. After the death of Participant, any exercisable portion of the Option may, prior to the time when the Option becomes unexercisable under Section 3.3 hereof, be exercised by the deceased Participant’s personal representative or by any person empowered to do so under the deceased Participant’s will or under the then applicable laws of descent and distribution.

4.2 Partial Exercise . Any exercisable portion of the Option or the entire Option, if then wholly exercisable, may be exercised in whole or in part at any time prior to the time when the Option or portion thereof becomes unexercisable under Section 3.3 hereof. However, the Option shall not be exercisable with respect to fractional shares of Stock.

4.3 Manner of Exercise . The Option, or any exercisable portion thereof, may be exercised solely by delivery to the Secretary of the Company (or any third party administrator or other person or entity designated by the Company; for the avoidance of doubt, delivery shall include electronic delivery), during regular business hours, of all of the following prior to the time when the Option or such portion thereof becomes unexercisable under Section 3.3 hereof:

(a) An exercise notice in a form specified by the Administrator, stating that the Option or portion thereof is thereby exercised, such notice complying with all applicable rules established by the Administrator. The notice shall be signed by Participant or other person then entitled to exercise the Option or such portion of the Option;

(b) The receipt by the Company of full payment for the shares of Stock with respect to which the Option or portion thereof is exercised, including payment of any applicable withholding tax, which shall be made by deduction from other compensation payable to Participant or in such other form of consideration permitted under Section 4.4 hereof that is acceptable to the Company;

(c) Any other written representations or documents as may be required in the Administrator’s sole discretion to evidence compliance with the Securities Act, the Exchange Act or any other applicable law, rule or regulation; and

 

A-4


(d) In the event the Option or portion thereof shall be exercised pursuant to Section 4.1 hereof by any person or persons other than Participant, appropriate proof of the right of such person or persons to exercise the Option.

Notwithstanding any of the foregoing, the Company shall have the right to specify all conditions of the manner of exercise, which conditions may vary by country and which may be subject to change from time to time.

4.4 Method of Payment . Payment of the exercise price shall be by any of the following, or a combination thereof, at the election of Participant:

(a) Cash or check;

(b) With the consent of the Administrator, surrender of shares of Stock (including, without limitation, shares of Stock otherwise issuable upon exercise of the Option) held for such period of time as may be required by the Administrator in order to avoid adverse accounting consequences and having a Fair Market Value on the date of delivery equal to the aggregate exercise price of the Option or exercised portion thereof; or

(c) Other legal consideration acceptable to the Administrator (including, without limitation, through the delivery of a notice that Participant has placed a market sell order with a broker with respect to shares of Stock then issuable upon exercise of the Option, and that the broker has been directed to pay a sufficient portion of the net proceeds of the sale to the Company in satisfaction of the Option exercise price; provided that payment of such proceeds is then made to the Company at such time as may be required by the Company, but in any event not later than the settlement of such sale).

4.5 Conditions to Issuance of Stock . The shares of Stock deliverable upon the exercise of the Option, or any portion thereof, may be either previously authorized but unissued shares of Stock or issued shares of Stock which have then been reacquired by the Company. Such shares of Stock shall be fully paid and nonassessable. The Company shall not be required to issue or deliver any shares of Stock purchased upon the exercise of the Option or portion thereof prior to fulfillment of all of the conditions in Section 12.4 of the Plan and following conditions:

(a) The admission of such shares of Stock to listing on all stock exchanges on which such Stock is then listed;

(b) The completion of any registration or other qualification of such shares of Stock under any state or federal law or under rulings or regulations of the Securities and Exchange Commission or of any other governmental regulatory body, which the Administrator shall, in its absolute discretion, deem necessary or advisable;

(c) The obtaining of any approval or other clearance from any state or federal governmental agency which the Administrator shall, in its absolute discretion, determine to be necessary or advisable;

(d) The receipt by the Company of full payment for such shares of Stock, including payment of any applicable withholding tax, which may be in one or more of the forms of consideration permitted under Section 4.4 hereof; and

(e) The lapse of such reasonable period of time following the exercise of the Option as the Administrator may from time to time establish for reasons of administrative convenience.

 

A-5


4.6 Rights as Stockholder . The holder of the Option shall not be, nor have any of the rights or privileges of, a stockholder of the Company, including, without limitation, voting rights and rights to dividends, in respect of any shares of Stock purchasable upon the exercise of any part of the Option unless and until such shares of Stock shall have been issued by the Company and held of record by such holder (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company). No adjustment will be made for a dividend or other right for which the record date is prior to the date the shares of Stock are issued, except as provided in Section 14.2 of the Plan.

ARTICLE 5.

OTHER PROVISIONS

5.1 Administration . The Administrator shall have the power to interpret the Plan and this Agreement and to adopt such rules for the administration, interpretation and application of the Plan as are consistent therewith and to interpret, amend or revoke any such rules. All actions taken and all interpretations and determinations made by the Administrator in good faith shall be final and binding upon Participant, the Company and all other interested persons. No member of the Committee or the Board shall be personally liable for any action, determination or interpretation made in good faith with respect to the Plan, this Agreement or the Option.

5.2 Whole Shares . The Option may only be exercised for whole shares of Stock.

5.3 Option Not Transferable .

(a) Subject to Section 4.1 hereof, the Option may not be sold, pledged, assigned or transferred in any manner other than by will or the laws of descent and distribution or, subject to the consent of the Administrator, pursuant to a DRO, unless and until the Option has been exercised and the shares of Stock underlying the Option have been issued, and all restrictions applicable to such shares of Stock have lapsed. Neither the Option nor any interest or right therein shall be liable for the debts, contracts or engagements of Participant or his or her successors in interest or shall be subject to disposition by transfer, alienation, anticipation, pledge, hypothecation, encumbrance, assignment or any other means whether such disposition be voluntary or involuntary or by operation of law by judgment, levy, attachment, garnishment or any other legal or equitable proceedings (including bankruptcy) unless and until the Option has been exercised, and any attempted disposition thereof prior to exercise shall be null and void and of no effect, except to the extent that such disposition is permitted by the preceding sentence.

(b) During the lifetime of Participant, only Participant may exercise the Option (or any portion thereof), unless it has been disposed of pursuant to a DRO; after the death of Participant, any exercisable portion of the Option may, prior to the time when such portion becomes unexercisable under the Plan or this Agreement, be exercised by Participant’s personal representative or by any person empowered to do so under the deceased Participant’s will or under the then-applicable laws of descent and distribution.

(c) Notwithstanding any other provision in this Agreement, Participant may, in the manner determined by the Administrator, designate a beneficiary to exercise the rights of Participant and to receive any distribution with respect to the Option upon Participant’s death. A beneficiary, legal guardian, legal representative, or other person claiming any rights pursuant to the Plan is subject to all terms and conditions of the Plan and this Agreement, except to the extent the Plan and this Agreement otherwise provide, and to any additional restrictions deemed necessary or appropriate by the

 

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Administrator. If Participant is married or a domestic partner in a domestic partnership qualified under Applicable Law and resides in a community property state, a designation of a person other than Participant’s spouse or domestic partner, as applicable, as his or her beneficiary with respect to more than 50% of Participant’s interest in the Option shall not be effective without the prior written consent of Participant’s spouse or domestic partner. If no beneficiary has been designated or survives Participant, payment shall be made to the person entitled thereto pursuant to Participant’s will or the laws of descent and distribution. Subject to the foregoing, a beneficiary designation may be changed or revoked by Participant at any time provided the change or revocation is filed with the Administrator prior to Participant’s death.

5.4 Tax Consultation . Participant understands that Participant may suffer adverse tax consequences as a result of the grant, vesting and/or exercise of the Option, and/or with the purchase or disposition of the shares of Stock subject to the Option. Participant represents that Participant has consulted with any tax consultants Participant deems advisable in connection with the purchase or disposition of such shares of Stock and that Participant is not relying on the Company for any tax advice.

5.5 Binding Agreement . Subject to the limitation on the transferability of the Option contained herein, this Agreement will be binding upon and inure to the benefit of the heirs, legatees, legal representatives, successors and assigns of the parties hereto.

5.6 Adjustments Upon Specified Events . The Administrator may accelerate the vesting of the Option in such circumstances as it, in its sole discretion, may determine. In addition, upon the occurrence of certain events relating to the Stock contemplated by Section 14.2 of the Plan (including, without limitation, an extraordinary cash dividend on such Stock), the Administrator shall make such adjustments the Administrator deems appropriate in the number of shares of Stock subject to the Option, the exercise price of the Option and the kind of securities that may be issued upon exercise of the Option. Participant acknowledges that the Option is subject to adjustment, modification and termination in certain events as provided in this Agreement and Section 14.2 of the Plan.

5.7 Notices . Any notice to be given under the terms of this Agreement to the Company shall be addressed to the Company in care of the Secretary of the Company at the Company’s principal office, and any notice to be given to Participant shall be addressed to Participant at Participant’s last address reflected on the Company’s records. By a notice given pursuant to this Section 5.7, either party may hereafter designate a different address for notices to be given to that party. Any notice which is required to be given to Participant shall, if Participant is then deceased, be given to the person entitled to exercise his or her Option pursuant to Section 4.1 hereof by written notice under this Section 5.7. Any notice shall be deemed duly given when sent via email or when sent by certified mail (return receipt requested) and deposited (with postage prepaid) in a post office or branch post office regularly maintained by the United States Postal Service.

5.8 Titles . Titles are provided herein for convenience only and are not to serve as a basis for interpretation or construction of this Agreement.

5.9 Governing Law . The laws of the State of Delaware shall govern the interpretation, validity, administration, enforcement and performance of the terms of this Agreement regardless of the law that might be applied under principles of conflicts of laws.

5.10 Conformity to Securities Laws . Participant acknowledges that the Plan and this Agreement are intended to conform to the extent necessary with all provisions of the Securities Act and the Exchange Act and any and all Applicable Law and regulations and rules promulgated by the

 

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Securities and Exchange Commission thereunder, and state securities laws and regulations. Notwithstanding anything herein to the contrary, the Plan shall be administered, and the Option is granted and may be exercised, only in such a manner as to conform to such Applicable Law. To the extent permitted by applicable law, the Plan and this Agreement shall be deemed amended to the extent necessary to conform to such Applicable Law.

5.11 Amendment, Suspension and Termination . To the extent permitted by the Plan, this Agreement may be wholly or partially amended or otherwise modified, suspended or terminated at any time or from time to time by the Administrator or the Board; provided, however, that, except as may otherwise be provided by the Plan, no amendment, modification, suspension or termination of this Agreement shall adversely affect the Option in any material way without the prior written consent of Participant.

5.12 Successors and Assigns . The Company may assign any of its rights under this Agreement to single or multiple assignees, and this Agreement shall inure to the benefit of the successors and assigns of the Company. Subject to the restrictions on transfer herein set forth in Section 5.3 hereof, this Agreement shall be binding upon Participant and his or her heirs, executors, administrators, successors and assigns.

5.13 Notification of Disposition . If this Option is designated as an Incentive Stock Option, Participant shall give prompt notice to the Company of any disposition or other transfer of any shares of Stock acquired under this Agreement if such disposition or transfer is made (a) within two (2) years from the Grant Date with respect to such shares of Stock or (b) within one (1) year after the transfer of such shares of Stock to Participant. Such notice shall specify the date of such disposition or other transfer and the amount realized, in cash, other property, assumption of indebtedness or other consideration, by Participant in such disposition or other transfer.

5.14 Limitations Applicable to Section 16 Persons . Notwithstanding any other provision of the Plan or this Agreement, if Participant is subject to Section 16 of the Exchange Act, the Plan, the Option and this Agreement shall be subject to any additional limitations set forth in any applicable exemptive rule under Section 16 of the Exchange Act (including any amendment to Rule 16b-3 of the Exchange Act) that are requirements for the application of such exemptive rule. To the extent permitted by applicable law, this Agreement shall be deemed amended to the extent necessary to conform to such applicable exemptive rule.

5.15 Not a Contract of Service Relationship . Nothing in this Agreement or in the Plan shall confer upon Participant any right to continue to serve as an employee or other service provider of the Company or any of its Affiliates or interfere with or restrict in any way with the right of the Company or any of its Affiliates, which rights are hereby expressly reserved, to discharge or to terminate for any reason whatsoever, with or without cause, the services of Participant’s at any time.

5.16 Entire Agreement . The Plan, the Grant Notice and this Agreement (including all Exhibits thereto) constitute the entire agreement of the parties and supersede in their entirety all prior undertakings and agreements of the Company and Participant with respect to the subject matter hereof.

5.17 Section 409A . This Option is not intended to constitute “nonqualified deferred compensation” within the meaning of Section 409A of the Code (together with any Department of Treasury regulations and other interpretive guidance issued thereunder, including without limitation any such regulations or other guidance that may be issued after the date hereof, “ Section 409A ”). However, notwithstanding any other provision of the Plan, the Grant Notice or this Agreement (or any Exhibits hereto), if at any time the Administrator determines that the Option (or any portion thereof) may be

 

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subject to Section 409A, the Administrator shall have the right in its sole discretion (without any obligation to do so or to indemnify Participant or any other person for failure to do so) to adopt such amendments to the Plan, the Grant Notice or this Agreement (or any Exhibits hereto), or adopt other policies and procedures (including amendments, policies and procedures with retroactive effect), or take any other actions, as the Administrator determines are necessary or appropriate either for the Option to be exempt from the application of Section 409A or to comply with the requirements of Section 409A.

5.18 Limitation on Participant’s Rights . Participation in the Plan confers no rights or interests other than as herein provided. This Agreement creates only a contractual obligation on the part of the Company as to amounts payable and shall not be construed as creating a trust. Neither the Plan nor any underlying program, in and of itself, has any assets. Participant shall have only the rights of a general unsecured creditor of the Company with respect to amounts credited and benefits payable, if any, with respect to the Option, and rights no greater than the right to receive the Stock as a general unsecured creditor with respect to options, as and when exercised pursuant to the terms hereof.

5.19 Consent to Personal Data Use . Participant acknowledges and agrees that the Company is permitted to collect, hold, store, process, modify, transfer, lock or delete certain personal (and sensitive) data in any medium about Participant (i.e., name, home address, telephone number, e-mail address, date of birth, tax identification number and payroll information) as a part of its personnel and other business records for the exclusive purpose of tracking stock option grants, processing stock option exercises and subsequent share transfers and sales, arranging for appropriate tax reporting and withholding and regulatory tracking and reporting purposes and the Company may disclose such information to third parties in the event that such disclosure is in the Company’s view required for the proper tracking of stock option grants, processing stock option exercises and subsequent share transfers and sales, arranging for appropriate tax reporting and withholding and regulatory tracking. For these purposes, this personal data will be transferred to other locations, including locations outside of the European Union and in so-called insecure third-party countries that do not guarantee the data privacy protection level of the European Union.

5.20 Rules Particular To Specific Countries .

(a) Generally . Participant shall, if required by the Administrator, enter into an election with the Company or an Affiliate (in a form approved by the Company) under which any liability to the Company’s (or an Affiliate’s) Tax Liability, including, but not limited to, National Insurance Contributions (“ NICs ”) and the Fringe Benefit Tax (“ FBT ”), is transferred to and met by Participant. For purposes of this Section 5.20, Tax Liability shall mean any and all liability under applicable non-U.S. laws, rules or regulations from any income tax, the Company’s (or an Affiliate’s) NICs, FBT or similar liability and Participant’s NICs, FBT or similar liability that are attributable to: (A) the grant or exercise of, or any other benefit derived by Participant from the Option; (B) the acquisition by Participant of the shares of Stock on exercise of the Option; or (C) the disposal of any shares of Stock acquired upon exercise of the Option.

(b) Tax Indemnity . Participant shall indemnify and keep indemnified the Company and any of its Affiliates from and against any Tax Liability.

*        *        *         *         *

 

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Exhibit 10.18

E.L.F. BEAUTY, INC.

2016 EMPLOYEE STOCK PURCHASE PLAN

ARTICLE I.

PURPOSE

The purposes of this e.l.f. Beauty, Inc. 2016 Employee Stock Purchase Plan (as it may be amended or restated from time to time, the “ Plan ”) are to assist Eligible Employees of e.l.f. Beauty, Inc. a Delaware corporation (the “ Company ”), and its Designated Subsidiaries in acquiring a stock ownership interest in the Company pursuant to a plan which is intended to qualify as an “employee stock purchase plan” within the meaning of Section 423(b) of the Code, and to help Eligible Employees provide for their future security and to encourage them to remain in the employment of the Company and its Designated Subsidiaries.

ARTICLE II.

DEFINITIONS AND CONSTRUCTION

Wherever the following terms are used in the Plan they shall have the meanings specified below, unless the context clearly indicates otherwise. The singular pronoun shall include the plural where the context so indicates. Masculine, feminine and neuter pronouns are used interchangeably and each comprehends the others.

2.1 “ Administrator ” shall mean the entity that conducts the general administration of the Plan as provided in Article XI. The term “Administrator” shall refer to the Committee unless the Board has assumed the authority for administration of the Plan as provided in Article XI.

2.2 “ Applicable Law ” shall mean the requirements relating to the administration of equity incentive plans under U.S. federal and state securities, tax and other applicable laws, rules and regulations, the applicable rules of any stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws and rules of any foreign country or other jurisdiction where rights under this Plan are granted.

2.3 “ Board ” shall mean the Board of Directors of the Company.

2.4 “ Change in Control ” shall mean and include each of the following:

(a) A transaction or series of transactions (other than an offering of Common Stock to the general public through a registration statement filed with the Securities and Exchange Commission or a transaction or series of transactions that meets the requirements of clauses (i) and (ii) of subsection (c) below) whereby any “person” or related “group” of “persons” (as such terms are used in Sections 13(d) and 14(d)(2) of the Exchange Act) (other than the Company, any of its Subsidiaries, an employee benefit plan maintained by the Company or any of its Subsidiaries or a “person” that, prior to such transaction, directly or indirectly controls, is controlled by, or is under common control with, the Company) directly or indirectly acquires beneficial ownership (within the meaning of Rule 13d-3 under the Exchange Act) of securities of the Company possessing more than 50% of the total combined voting power of the Company’s securities outstanding immediately after such acquisition; or


(b) During any period of two consecutive years, individuals who, at the beginning of such period, constitute the Board together with any new director(s) (other than a director designated by a person who shall have entered into an agreement with the Company to effect a transaction described in subsections (a) or (c)) whose election by the Board or nomination for election by the Company’s stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the two-year period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof; or

(c) The consummation by the Company (whether directly involving the Company or indirectly involving the Company through one or more intermediaries) of (x) a merger, consolidation, reorganization, or business combination or (y) a sale or other disposition of all or substantially all of the Company’s assets in any single transaction or series of related transactions or (z) the acquisition of assets or stock of another entity, in each case other than a transaction:

(i) which results in the Company’s voting securities outstanding immediately before the transaction continuing to represent (either by remaining outstanding or by being converted into voting securities of the Company or the person that, as a result of the transaction, controls, directly or indirectly, the Company or owns, directly or indirectly, all or substantially all of the Company’s assets or otherwise succeeds to the business of the Company (the Company or such person, the “ Successor Entity ”)) directly or indirectly, at least a majority of the combined voting power of the Successor Entity’s outstanding voting securities immediately after the transaction, and

(ii) after which no person or group beneficially owns voting securities representing 50% or more of the combined voting power of the Successor Entity; provided , however , that no person or group shall be treated for purposes of this clause (ii) as beneficially owning 50% or more of the combined voting power of the Successor Entity solely as a result of the voting power held in the Company prior to the consummation of the transaction.

The Administrator shall have full and final authority, which shall be exercised in its discretion, to determine conclusively whether a Change in Control has occurred pursuant to the above definition, the date of the occurrence of such Change in Control and any incidental matters relating thereto.

2.5 “ Code ” shall mean the Internal Revenue Code of 1986, as amended from time to time, together with the and the regulations and official guidance promulgated thereunder.

2.6 “ Common Stock ” shall mean the common stock of the Company and such other securities of the Company that may be substituted therefor pursuant to Article VIII.

2.7 “ Compensation ” of an Eligible Employee shall mean the gross base compensation received by such Eligible Employee as compensation for services to the Company or any Designated Subsidiary, including prior week adjustment and overtime payments but excluding vacation pay, holiday pay, jury duty pay, witness duty pay, bereavement, leave pay,

 

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military leave pay, commissions, incentive compensation, one-time bonuses (e.g., retention or sign on bonuses), education or tuition reimbursements, travel expenses, business and moving reimbursements, income received in connection with any stock options, stock appreciation rights, restricted stock, restricted stock units or other compensatory equity awards, fringe benefits, other special payments and all contributions made by the Company or any Designated Subsidiary for the Employee’s benefit under any employee benefit plan now or hereafter established.

2.8 “ Designated Subsidiary ” shall mean any Subsidiary designated by the Administrator in accordance with Section 11.3(b).

2.9 “ Effectiv e Date ” shall mean immediately prior to the Public Trading Date, provided that the Board has adopted the Plan prior to or on such date.

2.10 “ Eligible Employee ” shall mean an Employee who does not, immediately after any rights under this Plan are granted, own (directly or through attribution) stock possessing 5% or more of the total combined voting power or value of all classes of Common Stock and other stock of the Company, a Parent or a Subsidiary (as determined under Section 423(b)(3) of the Code). For purposes of the foregoing sentence, the rules of Section 424(d) of the Code with regard to the attribution of stock ownership shall apply in determining the stock ownership of an individual, and stock that an Employee may purchase under outstanding options shall be treated as stock owned by the Employee; provided , however , that the Administrator may provide in an Offering Document that an Employee shall not be eligible to participate in an Offering Period if: (i) such Employee is a highly compensated employee within the meaning of Section 423(b)(4)(D) of the Code, (ii) such Employee has not met a service requirement designated by the Administrator pursuant to Section 423(b)(4)(A) of the Code (which service requirement may not exceed two years), (iii) such Employee’s customary employment is for twenty hours or less per week, (iv) such Employee’s customary employment is for less than five months in any calendar year and/or (v) such Employee is a citizen or resident of a foreign jurisdiction and the grant of a right to purchase Common Stock under the Plan to such Employee would be prohibited under the laws of such foreign jurisdiction or the grant of a right to purchase Common Stock under the Plan to such Employee in compliance with the laws of such foreign jurisdiction would cause the Plan to violate the requirements of Section 423 of the Code, as determined by the Administrator in its sole discretion; provided , further , that any exclusion in clauses (i), (ii), (iii), (iv) or (v) shall be applied in an identical manner under each Offering Period to all Employees, in accordance with Treasury Regulation Section 1.423-2(e).

2.11 “ Employee ” shall mean any officer or other employee (as defined in accordance with Section 3401(c) of the Code) of the Company or any Designated Subsidiary. “Employee” shall not include any director of the Company or a Designated Subsidiary who does not render services to the Company or a Designated Subsidiary as an employee within the meaning of Section 3401(c) of the Code. For purposes of the Plan, the employment relationship shall be treated as continuing intact while the individual is on sick leave or other leave of absence approved by the Company or Designated Subsidiary and meeting the requirements of Treasury Regulation Section 1.421-1(h)(2). Where the period of leave exceeds three months and the individual’s right to reemployment is not guaranteed either by statute or by contract, the employment relationship shall be deemed to have terminated on the first day immediately following such three -month period.

 

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2.12 “ Enrollment Date ” shall mean the first Trading Day of each Offering Period.

2.13 “ Exchange Act ” shall mean the Securities Exchange Act of 1934, as amended from time to time.

2.14 “ Fair Market Value ” means, as of any date, the value of Common Stock determined as follows: (A) if the Common Stock is listed (i) on any established securities exchange (such as the New York Stock Exchange, the NASDAQ Global Market and the NASDAQ Global Select Market), (ii) listed on any national market system or (iii) listed, quoted or traded on any automated quotation system, its Fair Market Value will be the closing sales price for such Common Stock as quoted on such exchange or system for such date, or if no sale occurred on such date, the last day preceding such date during which a sale occurred, as reported in The Wall Street Journal or another source the Administrator deems reliable; (B) if the Common Stock is not listed on an established securities exchange, national market system or automated quotation system, but the Common Stock is regularly quoted by a recognized securities dealer, its Fair Market Value shall be the mean of the high bid and low asked prices for such date or, if there are no high bid and low asked prices on such date, the high bid and low asked prices for a share of Common Stock on the last preceding date for which such information exists, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; or (C) if the Common Stock is neither listed on an established securities exchange, national market system or automated quotation system nor regularly quoted by a recognized securities dealer, its Fair Market Value shall be established by the Administrator in good faith.

2.15 “ Offering Document ” shall have the meaning given to such term in Section 4.1.

2.16 “ Offering Period ” shall have the meaning given to such term in Section 4.1.

2.17 “ Parent ” shall mean any corporation, other than the Company, in an unbroken chain of corporations ending with the Company if, at the time of the determination, each of the corporations other than the Company owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.

2.18 “ Participant ” shall mean any Eligible Employee who has executed a subscription agreement and been granted rights to purchase Common Stock pursuant to the Plan.

2.19 “ Plan ” shall mean this e.l.f. Beauty, Inc. 2016 Employee Stock Purchase Plan, as it may be amended from time to time.

2.20 “ Public Trading Date ” shall mean the first date upon which the Common Stock is listed (or approved for listing) upon notice of issuance on any securities exchange or designated (or approved for designation) upon notice of issuance as a national market security on an interdealer quotation system, or, if earlier, the date on which the Company becomes a “publically held corporation” for purposes of Treasury Regulation Section 1.162-27(c)(1).

2.21 “ Purchase Date ” shall mean the last Trading Day of each Purchase Period.

2.22 “ Purchase Period ” shall refer to one or more periods within an Offering Period, as designated in the applicable Offering Document; provided , however , that, in the event no

 

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purchase period is designated by the Administrator in the applicable Offering Document, the purchase period for each Offering Period covered by such Offering Document shall be the same as the applicable Offering Period.

2.23 “ Purchase Price ” shall mean the purchase price designated by the Administrator in the applicable Offering Document (which purchase price shall not be less than 85% of the Fair Market Value of a Share on the Enrollment Date or on the Purchase Date, whichever is lower); provided , however , that, in the event no purchase price is designated by the Administrator in the applicable Offering Document, the purchase price for the Offering Periods covered by such Offering Document shall be 85% of the Fair Market Value of a Share on the Enrollment Date or on the Purchase Date, whichever is lower; provided , further , that the Purchase Price may be adjusted by the Administrator pursuant to Article VIII and shall not be less than the par value of a Share.

2.24 “ Securities Act ” shall mean the Securities Act of 1933, as amended from time to time.

2.25 “ Share ” shall mean a share of Common Stock.

2.26 “ Subsidiary ” shall mean any corporation, other than the Company, in an unbroken chain of corporations beginning with the Company if, at the time of the determination, each of the corporations other than the last corporation in an unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain; provided , however, that a limited liability company or partnership may be treated as a Subsidiary to the extent either (a) such entity is treated as a disregarded entity under Treasury Regulation Section 301.7701-3(a) by reason of the Company or any other Subsidiary that is a corporation being the sole owner of such entity, or (b) such entity elects to be classified as a corporation under Treasury Regulation Section 301.7701-3(a) and such entity would otherwise qualify as a Subsidiary.

2.27 “ Trading Day ” shall mean a day on which national stock exchanges in the United States are open for trading.

ARTICLE III.

SHARES SUBJECT TO THE PLAN

3.1 Number of Shares . Subject to Article VIII, the aggregate number of Shares that may be issued pursuant to rights granted under the Plan shall be 905,115 Shares. In addition to the foregoing, subject to Article VIII, on the first day of each calendar year beginning on January 1, 2017 and ending on and including January 1, 2026, the number of Shares available for issuance under the Plan shall be increased by that number of Shares equal to the least of (a) 1% of the Shares outstanding on the final day of the immediately preceding calendar year and (b) such smaller number of Shares as determined by the Board. If any right granted under the Plan shall for any reason terminate without having been exercised, the Common Stock not purchased under such right shall again become available for issuance under the Plan. Notwithstanding anything in this Section 3.1 to the contrary, the number of Shares that may be issued or transferred pursuant to the rights granted under the Plan shall not exceed an aggregate of 6,788,363 Shares, subject to Article VIII.

3.2 Stock Distributed . Any Common Stock distributed pursuant to the Plan may consist, in whole or in part, of authorized and unissued Common Stock, treasury stock or Common Stock purchased on the open market.

 

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ARTICLE IV.

OFFERING PERIODS; OFFERING DOCUMENTS; PURCHASE DATES

4.1 Offering Periods . The Administrator may from time to time grant or provide for the grant of rights to purchase Common Stock under the Plan to Eligible Employees during one or more periods (each, an “ Offering Period ”) selected by the Administrator. The terms and conditions applicable to each Offering Period shall be set forth in an “ Offering Document ” adopted by the Administrator, which Offering Document shall be in such form and shall contain such terms and conditions as the Administrator shall deem appropriate and shall be incorporated by reference into and made part of the Plan and shall be attached hereto as part of the Plan. The provisions of separate Offering Periods under the Plan need not be identical.

4.2 Offering Documents . Each Offering Document with respect to an Offering Period shall specify (through incorporation of the provisions of this Plan by reference or otherwise):

(a) the length of the Offering Period, which period shall not exceed twenty-seven months;

(b) the maximum number of Shares that may be purchased by any Eligible Employee during such Offering Period, which, in the absence of a contrary designation by the Administrator, shall be 50,000 Shares; and

(c) such other provisions as the Administrator determines are appropriate, subject to the Plan.

ARTICLE V.

ELIGIBILITY AND PARTICIPATION

5.1 Eligibility . Any Eligible Employee who shall be employed by the Company or a Designated Subsidiary on a given Enrollment Date for an Offering Period shall be eligible to participate in the Plan during such Offering Period, subject to the requirements of this Article V and the limitations imposed by Section 423(b) of the Code.

5.2 Enrollment in Plan .

(a) Except as otherwise set forth in an Offering Document or determined by the Administrator, an Eligible Employee may become a Participant in the Plan for an Offering Period by delivering a subscription agreement to the Company by such time prior to the Enrollment Date for such Offering Period (or such other date specified in the Offering Document) designated by the Administrator and in such form as the Company provides.

 

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(b) Each subscription agreement shall designate either (i) a whole percentage of such Eligible Employee’s Compensation or (ii) or a fixed dollar amount, in either case, to be withheld by the Company or the Designated Subsidiary employing such Eligible Employee on each payday during the Offering Period as payroll deductions under the Plan. In either event, the designated percentage or fixed dollar amount may not be less than 1% and may not be more than the maximum percentage specified by the Administrator in the applicable Offering Document (which percentage shall be 15% in the absence of any such designation) as payroll deductions. The payroll deductions made for each Participant shall be credited to an account for such Participant under the Plan and shall be deposited with the general funds of the Company.

(c) A Participant may decrease, but not increase, the percentage of Compensation or the fixed dollar amount designated in his or her subscription agreement, subject to the limits of this Section 5.2, or may suspend his or her payroll deductions, at any time during an Offering Period; provided , however , that the Administrator may limit the number of changes a Participant may make to his or her payroll deduction elections during each Offering Period in the applicable Offering Document (and in the absence of any specific designation by the Administrator, a Participant shall be allowed one change to his or her payroll deduction elections during each Offering Period). Any such change or suspension of payroll deductions shall be effective with the first full payroll period following ten business days after the Company’s receipt of the new subscription agreement (or such shorter or longer period as may be specified by the Administrator in the applicable Offering Document). In the event a Participant suspends his or her payroll deductions, such Participant’s cumulative payroll deductions prior to the suspension shall remain in his or her account and shall be applied to the purchase of Shares on the next occurring Purchase Date and shall not be paid to such Participant unless he or she withdraws from participation in the Plan pursuant to Article VII.

(d) Except as otherwise set forth in an Offering Document or determined by the Administrator, a Participant may participate in the Plan only by means of payroll deduction and may not make contributions by lump sum payment for any Offering Period.

5.3 Payroll Deductions . Except as otherwise provided in the applicable Offering Document, payroll deductions for a Participant shall commence on the first payroll following the Enrollment Date and shall end on the last payroll in the Offering Period to which the Participant’s authorization is applicable, unless sooner terminated by the Participant as provided in Article VII or suspended by the Participant or the Administrator as provided in Section 5.2 and Section 5.6, respectively.

5.4 Effect of Enrollment . A Participant’s completion of a subscription agreement will enroll such Participant in the Plan for each subsequent Offering Period on the terms contained therein until the Participant either submits a new subscription agreement, withdraws from participation under the Plan as provided in Article VII or otherwise becomes ineligible to participate in the Plan.

5.5 Limitation on Purchase of Common Stock . An Eligible Employee may be granted rights under the Plan only if such rights, together with any other rights granted to such Eligible Employee under “employee stock purchase plans” of the Company, any Parent or any Subsidiary, as specified by Section 423(b)(8) of the Code, do not permit such employee’s rights

 

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to purchase stock of the Company or any Parent or Subsidiary to accrue at a rate that exceeds $25,000 of the fair market value of such stock (determined as of the first day of the Offering Period during which such rights are granted) for each calendar year in which such rights are outstanding at any time. This limitation shall be applied in accordance with Section 423(b)(8) of the Code.

5.6 Decrease or Suspension of Payroll Deductions . Notwithstanding the foregoing, to the extent necessary to comply with Section 423(b)(8) of the Code and Section 5.5 or the other limitations set forth in this Plan, a Participant’s payroll deductions may be suspended by the Administrator at any time during an Offering Period. The balance of the amount credited to the account of each Participant that has not been applied to the purchase of Shares by reason of Section 423(b)(8) of the Code, Section 5.5 or the other limitations set forth in this Plan shall be paid to such Participant in one lump sum in cash as soon as reasonably practicable after the Purchase Date.

5.7 Foreign Employees . In order to facilitate participation in the Plan, the Administrator may provide for such special terms applicable to Participants who are citizens or residents of a foreign jurisdiction, or who are employed by a Designated Subsidiary outside of the United States, as the Administrator may consider necessary or appropriate to accommodate differences in local law, tax policy or custom. Such special terms may not be more favorable than the terms of rights granted under the Plan to Eligible Employees who are residents of the United States. Moreover, the Administrator may approve such supplements to, or amendments, restatements or alternative versions of, this Plan as it may consider necessary or appropriate for such purposes without thereby affecting the terms of this Plan as in effect for any other purpose. No such special terms, supplements, amendments or restatements shall include any provisions that are inconsistent with the terms of this Plan as then in effect unless this Plan could have been amended to eliminate such inconsistency without further approval by the stockholders of the Company.

5.8 Leave of Absence . During leaves of absence approved by the Company meeting the requirements of Treasury Regulation Section 1.421-1(h)(2) under the Code, a Participant may continue participation in the Plan by making cash payments to the Company on his or her normal payday equal to his or her authorized payroll deduction.

ARTICLE VI.

GRANT AND EXERCISE OF RIGHTS

6.1 Grant of Rights . On the Enrollment Date of each Offering Period, each Eligible Employee participating in such Offering Period shall be granted a right to purchase the maximum number of Shares specified under Section 4.2, subject to the limits in Section 5.5, and shall have the right to buy, on each Purchase Date during such Offering Period (at the applicable Purchase Price), such number of whole Shares as is determined by dividing (a) such Participant’s payroll deductions accumulated prior to such Purchase Date and retained in the Participant’s account as of the Purchase Date, by (b) the applicable Purchase Price (rounded down to the nearest Share). The right shall expire on the earlier of: (x) the last Purchase Date of the Offering Period, (y) last day of the Offering Period and (z) the date on which the Participant withdraws in accordance with Section 7.1 or Section 7.3.

 

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6.2 Exercise of Rights . On each Purchase Date, each Participant’s accumulated payroll deductions and any other additional payments specifically provided for in the applicable Offering Document will be applied to the purchase of whole Shares, up to the maximum number of Shares permitted pursuant to the terms of the Plan and the applicable Offering Document, at the Purchase Price. No fractional Shares shall be issued upon the exercise of rights granted under the Plan, unless the Offering Document specifically provides otherwise. Any cash in lieu of fractional Shares remaining after the purchase of whole Shares upon exercise of a purchase right will be credited to a Participant’s account and carried forward and applied toward the purchase of whole Shares for the next following Offering Period. Shares issued pursuant to the Plan may be evidenced in such manner as the Administrator may determine and may be issued in certificated form or issued pursuant to book-entry procedures.

6.3 Pro Rata Allocation of Shares . If the Administrator determines that, on a given Purchase Date, the number of Shares with respect to which rights are to be exercised may exceed (a) the number of Shares that were available for issuance under the Plan on the Enrollment Date of the applicable Offering Period, or (b) the number of Shares available for issuance under the Plan on such Purchase Date, the Administrator may in its sole discretion provide that the Company shall make a pro rata allocation of the Shares available for purchase on such Enrollment Date or Purchase Date, as applicable, in as uniform a manner as shall be practicable and as it shall determine in its sole discretion to be equitable among all Participants for whom rights to purchase Common Stock are to be exercised pursuant to this Article VI on such Purchase Date, and shall either (i) continue all Offering Periods then in effect, or (ii) terminate any or all Offering Periods then in effect pursuant to Article IX. The Company may make pro rata allocation of the Shares available on the Enrollment Date of any applicable Offering Period pursuant to the preceding sentence, notwithstanding any authorization of additional Shares for issuance under the Plan by the Company’s stockholders subsequent to such Enrollment Date. The balance of the amount credited to the account of each Participant that has not been applied to the purchase of Shares shall be paid to such Participant in one lump sum in cash as soon as reasonably practicable after the Purchase Date.

6.4 Withholding . At the time a Participant’s rights under the Plan are exercised, in whole or in part, or at the time some or all of the Common Stock issued under the Plan is disposed of, the Participant must make adequate provision for the Company’s federal, state, or other tax withholding obligations, if any, that arise upon the exercise of the right or the disposition of the Common Stock. At any time, the Company may, but shall not be obligated to, withhold from the Participant’s compensation the amount necessary for the Company to meet applicable withholding obligations.

6.5 Conditions to Issuance of Common Stock . The Company shall not be required to issue or deliver any certificate or certificates for, or make any book entries evidencing, Shares purchased upon the exercise of rights under the Plan prior to fulfillment of all of the following conditions:

(a) The admission of such Shares to listing on all stock exchanges, if any, on which the Common Stock is then listed;

 

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(b) The completion of any registration or other qualification of such Shares under any state or federal law or under the rulings or regulations of the Securities and Exchange Commission or any other governmental regulatory body, that the Administrator shall, in its absolute discretion, deem necessary or advisable;

(c) The obtaining of any approval or other clearance from any state or federal governmental agency that the Administrator shall, in its absolute discretion, determine to be necessary or advisable;

(d) The payment to the Company of all amounts that it is required to withhold under federal, state or local law upon exercise of the rights, if any; and

(e) The lapse of such reasonable period of time following the exercise of the rights as the Administrator may from time to time establish for reasons of administrative convenience.

ARTICLE VII.

WITHDRAWAL; CESSATION OF ELIGIBILITY

7.1 Withdrawal . A Participant may withdraw all but not less than all of the payroll deductions credited to his or her account and not yet used to exercise his or her rights under the Plan at any time by giving written notice to the Company in a form acceptable to the Company no later than one week prior to the end of the Offering Period. All of the Participant’s payroll deductions credited to his or her account during an Offering Period shall be paid to such Participant as soon as reasonably practicable after receipt of notice of withdrawal and such Participant’s rights for the Offering Period shall be automatically terminated, and no further payroll deductions for the purchase of Shares shall be made for such Offering Period. If a Participant withdraws from an Offering Period, payroll deductions shall not resume at the beginning of the next Offering Period unless the Participant timely delivers to the Company a new subscription agreement.

7.2 Future Participation . A Participant’s withdrawal from an Offering Period shall not have any effect upon his or her eligibility to participate in any similar plan that may hereafter be adopted by the Company or a Designated Subsidiary or in subsequent Offering Periods that commence after the termination of the Offering Period from which the Participant withdraws.

7.3 Cessation of Eligibility . Upon a Participant’s ceasing to be an Eligible Employee for any reason, he or she shall be deemed to have elected to withdraw from the Plan pursuant to this Article VII and the payroll deductions credited to such Participant’s account during the Offering Period shall be paid to such Participant or, in the case of his or her death, to the person or persons entitled thereto under Section 12.4, as soon as reasonably practicable, and such Participant’s rights for the Offering Period shall be automatically terminated.

ARTICLE VIII.

ADJUSTMENTS UPON CHANGES IN STOCK

8.1 Changes in Capitalization . Subject to Section 8.3, in the event that the Administrator determines that any dividend or other distribution (whether in the form of cash, Common Stock, other securities, or other property), Change in Control, reorganization, merger,

 

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amalgamation, consolidation, combination, repurchase, recapitalization, liquidation, dissolution, or sale, transfer, exchange or other disposition of all or substantially all of the assets of the Company, or sale or exchange of Common Stock or other securities of the Company, issuance of warrants or other rights to purchase Common Stock or other securities of the Company, or other similar corporate transaction or event, as determined by the Administrator, affects the Common Stock such that an adjustment is determined by the Administrator to be appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended by the Company to be made available under the Plan or with respect to any outstanding purchase rights under the Plan, the Administrator shall make equitable adjustments, if any, to reflect such change with respect to (a) the aggregate number and type of Shares (or other securities or property) that may be issued under the Plan (including, but not limited to, adjustments of the limitations in Section 3.1 and the limitations established in each Offering Document pursuant to Section 4.2 on the maximum number of Shares that may be purchased); (b) the class(es) and number of Shares and price per Share subject to outstanding rights; and (c) the Purchase Price with respect to any outstanding rights.

8.2 Other Adjustments . Subject to Section 8.3, in the event of any transaction or event described in Section 8.1 or any unusual or nonrecurring transactions or events affecting the Company, any affiliate of the Company, or the financial statements of the Company or any affiliate (including without limitation any Change in Control), or of changes in Applicable Law or accounting principles, the Administrator, in its discretion, and on such terms and conditions as it deems appropriate, is hereby authorized to take any one or more of the following actions whenever the Administrator determines that such action is appropriate in order to prevent the dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan or with respect to any right under the Plan, to facilitate such transactions or events or to give effect to such changes in laws, regulations or principles:

(a) To provide for either (i) termination of any outstanding right in exchange for an amount of cash, if any, equal to the amount that would have been obtained upon the exercise of such right had such right been currently exercisable or (ii) the replacement of such outstanding right with other rights or property selected by the Administrator in its sole discretion;

(b) To provide that the outstanding rights under the Plan shall be assumed by the successor or survivor corporation, or a parent or subsidiary thereof, or shall be substituted for by similar rights covering the stock of the successor or survivor corporation, or a parent or subsidiary thereof, with appropriate adjustments as to the number and kind of shares and prices;

(c) To make adjustments in the number and type of Shares (or other securities or property) subject to outstanding rights under the Plan and/or in the terms and conditions of outstanding rights and rights that may be granted in the future;

(d) To provide that Participants’ accumulated payroll deductions may be used to purchase Common Stock prior to the next occurring Purchase Date on such date as the Administrator determines in its sole discretion and the Participants’ rights under the ongoing Offering Period(s) shall be terminated; and

(e) To provide that all outstanding rights shall terminate without being exercised.

 

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8.3 No Adjustment Under Certain Circumstances . No adjustment or action described in this Article VIII or in any other provision of the Plan shall be authorized to the extent that such adjustment or action would cause the Plan to fail to satisfy the requirements of Section 423 of the Code.

8.4 No Other Rights . Except as expressly provided in the Plan, no Participant shall have any rights by reason of any subdivision or consolidation of shares of stock of any class, the payment of any dividend, any increase or decrease in the number of shares of stock of any class or any dissolution, liquidation, merger, or consolidation of the Company or any other corporation. Except as expressly provided in the Plan or pursuant to action of the Administrator under the Plan, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number of Shares subject to outstanding rights under the Plan or the Purchase Price with respect to any outstanding rights.

ARTICLE IX.

AMENDMENT, MODIFICATION AND TERMINATION

9.1 Amendment, Suspension and Termination . The Administrator may amend, suspend or terminate the Plan at any time and from time to time; provided , however , that approval of the Company’s stockholders shall be required to amend the Plan to: (a) increase the aggregate number, or change the type, of shares that may be sold pursuant to rights under the Plan under Section 3.1 (other than an adjustment as provided by Article VIII); (b) change the corporations or classes of corporations whose employees may be granted rights under the Plan; or (c) change the Plan in any manner that would cause the Plan to no longer be an “employee stock purchase plan” within the meaning of Section 423(b) of the Code.

9.2 Certain Changes to Plan . Without stockholder consent and without regard to whether any Participant rights may be considered to have been adversely affected, to the extent permitted by Section 423 of the Code, the Administrator shall be entitled to: (a) change the Offering Periods; (b) limit the frequency and/or number of changes in the amount withheld from Compensation during an Offering Period; (c) establish the exchange ratio applicable to amounts withheld in a currency other than U.S. dollars; (d) permit payroll withholding in excess of the amount designated by a Participant in order to adjust for delays or mistakes in the Company’s processing of payroll withholding elections; (e) establish reasonable waiting and adjustment periods and/or accounting and crediting procedures to ensure that amounts applied toward the purchase of Common Stock for each Participant properly correspond with amounts withheld from the Participant’s Compensation; and (f) establish such other limitations or procedures as the Administrator determines in its sole discretion to be advisable that are consistent with the Plan.

9.3 Actions In the Event of Unfavorable Financial Accounting Consequences . In the event the Administrator determines that the ongoing operation of the Plan may result in unfavorable financial accounting consequences, the Administrator may, in its discretion and, to the extent necessary or desirable, modify or amend the Plan to reduce or eliminate such accounting consequence including, but not limited to:

(a) altering the Purchase Price for any Offering Period including an Offering Period underway at the time of the change in Purchase Price;

 

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(b) shortening any Offering Period so that the Offering Period ends on a new Purchase Date, including an Offering Period underway at the time of the Administrator action; and

(c) allocating Shares.

Such modifications or amendments shall not require stockholder approval or the consent of any Participant.

9.4 Payments Upon Termination of Plan . Upon termination of the Plan, the balance in each Participant’s Plan account shall be refunded as soon as practicable after such termination, without any interest thereon.

ARTICLE X.

TERM OF PLAN

The Plan shall be effective on the Effective Date. The effectiveness of the Plan shall be subject to approval of the Plan by the stockholders of the Company within twelve months following the date the Plan is first approved by the Board. No right may be granted under the Plan prior to such stockholder approval. No rights may be granted under the Plan during any period of suspension of the Plan or after termination of the Plan.

ARTICLE XI.

ADMINISTRATION

11.1 Administrator . Unless otherwise determined by the Board, the Administrator of the Plan shall be the Compensation Committee of the Board (or another committee or a subcommittee of the Board to which the Board delegates administration of the Plan) (such committee, the “ Committee ”). The Board may at any time vest in the Board any authority or duties for administration of the Plan.

11.2 Action by the Administrator . Unless otherwise established by the Board or in any charter of the Administrator, a majority of the Administrator shall constitute a quorum. The acts of a majority of the members present at any meeting at which a quorum is present and, subject to Applicable Law and the Bylaws of the Company, acts approved in writing by a majority of the Administrator in lieu of a meeting, shall be deemed the acts of the Administrator. Each member of the Administrator is entitled to, in good faith, rely or act upon any report or other information furnished to that member by any officer or other Employee, the Company’s independent certified public accountants, or any executive compensation consultant or other professional retained by the Company to assist in the administration of the Plan.

11.3 Authority of Administrator . The Administrator shall have the power, subject to, and within the limitations of, the express provisions of the Plan:

(a) To determine when and how rights to purchase Common Stock shall be granted and the provisions of each offering of such rights (which need not be identical).

 

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(b) To designate from time to time which Subsidiaries of the Company shall be Designated Subsidiaries, which designation may be made without the approval of the stockholders of the Company.

(c) To construe and interpret the Plan and rights granted under it, and to establish, amend and revoke rules and regulations for its administration. The Administrator, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan, in a manner and to the extent it shall deem necessary or expedient to make the Plan fully effective.

(d) To amend, suspend or terminate the Plan as provided in Article IX.

(e) Generally, to exercise such powers and to perform such acts as the Administrator deems necessary or expedient to promote the best interests of the Company and its Subsidiaries and to carry out the intent that the Plan be treated as an “employee stock purchase plan” within the meaning of Section 423 of the Code.

11.4 Decisions Binding . The Administrator’s interpretation of the Plan, any rights granted pursuant to the Plan, any subscription agreement and all decisions and determinations by the Administrator with respect to the Plan are final, binding, and conclusive on all parties.

ARTICLE XII.

MISCELLANEOUS

12.1 Restriction upon Assignment . A right granted under the Plan shall not be transferable other than by will or the applicable laws of descent and distribution, and is exercisable during the Participant’s lifetime only by the Participant. Except as provided in Section 12.4 hereof, a right under the Plan may not be exercised to any extent except by the Participant. The Company shall not recognize and shall be under no duty to recognize any assignment or alienation of the Participant’s interest in the Plan, the Participant’s rights under the Plan or any rights thereunder.

12.2 Rights as a Stockholder . With respect to Shares subject to a right granted under the Plan, a Participant shall not be deemed to be a stockholder of the Company, and the Participant shall not have any of the rights or privileges of a stockholder, until such Shares have been issued to the Participant or his or her nominee following exercise of the Participant’s rights under the Plan. No adjustments shall be made for dividends (ordinary or extraordinary, whether in cash securities, or other property) or distribution or other rights for which the record date occurs prior to the date of such issuance, except as otherwise expressly provided herein or as determined by the Administrator.

12.3 Interest . No interest shall accrue on the payroll deductions or contributions of a Participant under the Plan.

 

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12.4 Designation of Beneficiary .

(a) A Participant may, in the manner determined by the Administrator, file a written designation of a beneficiary who is to receive any Shares and/or cash, if any, from the Participant’s account under the Plan in the event of such Participant’s death subsequent to a Purchase Date on which the Participant’s rights are exercised but prior to delivery to such Participant of such Shares and cash. In addition, a Participant may file a written designation of a beneficiary who is to receive any cash from the Participant’s account under the Plan in the event of such Participant’s death prior to exercise of the Participant’s rights under the Plan. If the Participant is married and resides in a community property state, a designation of a person other than the Participant’s spouse as his or her beneficiary shall not be effective without the prior written consent of the Participant’s spouse.

(b) Such designation of beneficiary may be changed by the Participant at any time by written notice to the Company. In the event of the death of a Participant and in the absence of a beneficiary validly designated under the Plan who is living at the time of such Participant’s death, the Company shall deliver such Shares and/or cash to the executor or administrator of the estate of the Participant, or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its discretion, may deliver such Shares and/or cash to the spouse or to any one or more dependents or relatives of the Participant, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate.

12.5 Notices . All notices or other communications by a Participant to the Company under or in connection with the Plan shall be deemed to have been duly given when received in the form specified by the Company at the location, or by the person, designated by the Company for the receipt thereof.

12.6 Equal Rights and Privileges . Subject to Section 5.7, all Eligible Employees will have equal rights and privileges under this Plan so that this Plan qualifies as an “employee stock purchase plan” within the meaning of Section 423 of the Code. Subject to Section 5.7, any provision of this Plan that is inconsistent with Section 423 of the Code will, without further act or amendment by the Company, the Board or the Administrator, be reformed to comply with the equal rights and privileges requirement of Section 423 of the Code.

12.7 Use of Funds . All payroll deductions received or held by the Company under the Plan may be used by the Company for any corporate purpose, and the Company shall not be obligated to segregate such payroll deductions.

12.8 Reports . Statements of account shall be given to Participants at least annually, which statements shall set forth the amounts of payroll deductions, the Purchase Price, the number of Shares purchased and the remaining cash balance, if any.

12.9 No Employment Rights . Nothing in the Plan shall be construed to give any person (including any Eligible Employee or Participant) the right to remain in the employ of the Company or any Parent or Subsidiary or affect the right of the Company or any Parent or Subsidiary to terminate the employment of any person (including any Eligible Employee or Participant) at any time, with or without cause.

 

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12.10 Notice of Disposition of Shares . Each Participant shall give prompt notice to the Company of any disposition or other transfer of any Shares purchased upon exercise of a right under the Plan if such disposition or transfer is made: (a) within two years from the Enrollment Date of the Offering Period in which the Shares were purchased or (b) within one year after the Purchase Date on which such Shares were purchased. Such notice shall specify the date of such disposition or other transfer and the amount realized, in cash, other property, assumption of indebtedness or other consideration, by the Participant in such disposition or other transfer.

12.11 Governing Law . The Plan and any agreements hereunder shall be administered, interpreted and enforced under the internal laws of the State of Delaware without regard to conflicts of laws thereof or of any other jurisdiction.

12.12 Electronic Forms . To the extent permitted by Applicable Law and in the discretion of the Administrator, an Eligible Employee may submit any form or notice as set forth herein by means of an electronic form approved by the Administrator. Before the commencement of an Offering Period, the Administrator shall prescribe the time limits within which any such electronic form shall be submitted to the Administrator with respect to such Offering Period in order to be a valid election.

 

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*  *  *  *  *

I hereby certify that the foregoing Plan was duly adopted by the Board of Directors of e.l.f. Beauty, Inc. on September 5, 2016.

*  *  *  *  *

I hereby certify that the foregoing Plan was approved by the stockholders of e.l.f. Beauty, Inc. on September 7, 2016.

Executed on this 7th day of September, 2016.

 

/s/ Scott K. Milsten

Scott K. Milsten
Corporate Secretary

 

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Exhibit 10.23

AMENDED AND RESTATED EMPLOYMENT AGREEMENT

This Amended and Restated Employment Agreement (this “ Agreement ”), is made and entered into on the 7th day of September, 2016 (the “ Effective Date ”), by and among e.l.f. Cosmetics, Inc. (together with its successor, the “ Company ”), e.l.f. Beauty, Inc., the owner of all of the outstanding capital stock of the Company (together with its successor, “ Holdings ”), and Erin Daley (“ Executive ”). This Agreement amends and restates in its entirety that certain Employment Agreement (the “ Prior Agreement ”) by and among the Company, Holdings and Executive dated as of February 3, 2014 (“ Prior Agreement Effective Date ”).

WHEREAS, the Company desires to assure itself of the continued services of Executive on the terms and conditions contained herein; and

WHEREAS, Executive desires to continue to be employed by and render services to the Company upon and subject to the terms, conditions and other provisions set forth herein.

NOW THEREFORE, in consideration of the promises and mutual covenants and agreements contained herein, the adequacy of all of which consideration is hereby acknowledged, the parties hereby agree as follows:

 

  1. DEFINITIONS

The following words and terms shall have the meanings set forth below for the purposes of this Agreement:

Board of Directors ” means the Board of Directors of Holdings.

Cause ” means (i) a breach by Executive of Executive’s obligations under Section 2.2 (other than as a result of physical or mental incapacity) which constitutes material nonperformance by Executive of her obligations and duties thereunder, which Executive has failed to remedy after the Board of Directors has given Executive written notice of, and at least fifteen (15) days to remedy, such breach, (ii) commission by Executive of an act of fraud, embezzlement, misappropriation, willful misconduct or breach of fiduciary duty against the Company (other than acts, such as making personal use of Company office supplies, as have only a de minimis effect on the Company), (iii) a material breach by Executive of Section 6 of this Agreement, (iv) Executive’s conviction, plea of no contest or nolo contendere, deferred adjudication or unadjudicated probation for any felony or any crime involving moral turpitude, (v) the failure of Executive to carry out, or comply with, in any material respect, any lawful directive of the Board of Directors (other than any such failure resulting from Executive’s physical or mental incapacity) which Executive has failed to remedy after the Board of Directors has given Executive written notice of, and at least fifteen (15) days to remedy, such failure, or (vi) Executive’s unlawful use (including being under the influence) or possession of illegal drugs. For purposes of the previous sentence, no act or failure to act on Executive’s part shall be deemed “willful” unless done, or omitted to be done, by Executive not in good faith and without reasonable belief that Executive’s action or omission was in the best interest of the Company.


Disability ” means Executive’s inability to perform, with or without reasonable accommodation, the essential functions of her position hereunder for a period of one hundred eighty (180) consecutive days due to mental or physical incapacity, as determined by mutual agreement of a physician selected by the Company or its insurers and a physician selected by Executive; provided, however, if the opinion of the Company’s physician and Executive’s physician conflict, the Company’s physician and Executive’s physician shall together agree upon a third physician, whose opinion shall be binding; provided , however , that Executive shall not be considered to have a Disability unless it is also treated as a disability under the Company’s long-term disability policy.

Good Reason ” means: (i) a material default in the performance of the Company’s obligations under this Agreement; (ii) a significant diminution of Executive’s responsibilities, duties or authority as Senior Vice President – Chief Marketing Officer, or a material diminution of Executive’s base compensation, unless such diminution is mutually agreed between Executive and the Company; or (iii) the relocation of Executive’s principal office, without her consent, to a location that is in excess of fifty (50) miles from San Francisco (it being understood and agreed that Executive’s travel for business purposes shall not be considered such a relocation); provided, however, that Executive’s termination will not be for Good Reason unless (x) Executive has given the Company at least thirty (30) days prior written notice of her intent to terminate her employment for Good Reason, which notice shall specify the facts and circumstances constituting Good Reason and be given within ninety (90) days of the initial occurrence thereof, (y) the Company has not remedied such facts and circumstances constituting Good Reason within thirty (30) days following the receipt of such notice, and (z) Executive terminates employment within six (6) months following the expiration of such thirty (30)-day cure period.

Notice of Termination ” means a dated notice that (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive’s employment under the provision so indicated, (iii) specifies a Termination Date, except in the case of the Company’s termination of Executive’s employment for Cause, for which the Termination Date may be the date of the notice; provided , however , that Executive has been provided with any applicable cure period, and (iv) is given in the manner specified in Section 7.2 hereof. With the exception of termination of Executive’s employment due to Executive’s death, any purported termination of Executive’s employment by the Company for any reason, including without limitation for Cause or Disability, or by Executive for any reason, shall be communicated by a written “Notice of Termination” to the other party. The failure by the Company or Executive to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Cause or Good Reason, as applicable, shall not waive any right of the Company or Executive under this Agreement or preclude the Company or Executive from asserting such fact or circumstance in enforcing the Company’s or Executive’s rights under this Agreement.

Termination Date ” means (i) if Executive’s employment is terminated for Cause or Disability, the date specified in the Notice of Termination, (ii) in the case of termination of employment due to death, the date of Executive’s death, (iii) if either party elects not to extend the Term of this Agreement pursuant to Section 2.1, the close of business on the day immediately preceding the next scheduled Extension Date, or (iv) if Executive’s employment is terminated for any other reason, the date on which a Notice of Termination is given or as specified in such Notice.

 

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  2. EMPLOYMENT

2.1 Agreement and Term. The Company hereby agrees to continue to employ Executive as an employee of the Company, and Executive hereby agrees to continue to render services to the Company, on the terms and conditions set forth in this Agreement. Unless terminated earlier as set forth herein, the term of employment under this Agreement shall commence on the Effective Date and shall end on the fifth (5 th ) anniversary of the Prior Agreement Effective Date (the “ Term ”); provided , however , that commencing on the fifth (5 th ) anniversary of the Prior Agreement Effective Date and on each anniversary thereafter (each an “ Extension Date ”), the Term shall be automatically extended for an additional one (1) year period, unless either party gives written notice that the Term shall not be so extended at least sixty (60) days prior to the next Extension Date.

2.2 Position and Duties. Except as otherwise provided in this Agreement, during the Term of this Agreement, Executive shall continue to serve as Senior Vice President – Chief Marketing Officer and report directly to the Chief Executive Officer. Executive shall perform duties, undertake the responsibilities, and exercise the authorities customarily performed, undertaken and exercised by persons situated in a similar capacity at a similar company. Executive shall carry out her duties and responsibilities at all times in compliance with the Company’s Manual of Corporate Authorities, as in effect from time to time, and in compliance with any other policies promulgated from time to time by the Company. Executive shall also perform such other duties, commensurate with her position, as reasonably requested by the Board of Directors. During the Term of this Agreement, Executive shall use her best efforts to serve the Company faithfully, diligently and competently and to the best of her ability, and to devote her full time business hours, energy, ability, attention and skill to the business of the Company; provided , however , that the foregoing is not intended to preclude Executive from noncompetitive activities, conducted outside normal business hours permitted under Section 2.3 hereof.

2.3 Outside Activities. It shall not be a violation of this Agreement for Executive to (i) deliver lectures or fulfill speaking engagements; (ii) manage personal investments; or (iii) subject to the prior consent of the Board of Directors (which consent shall not be unreasonably withheld), serve on industry trade, civic, or charitable boards or committees or on for-profit corporate boards of directors and advisory committees, as long as the activities set forth in (i) – (iii) (taken together or separately) do not materially interfere with the performance of Executive’s duties hereunder and are not in conflict or competitive with, or adverse to, the Company. Executive shall not, however, under any circumstances, provide services or advice in any capacity whatsoever for, or on behalf of, any entity that competes with, or is competitive with, the Company.

2.4 Location. During the Term, Executive shall continue to be based in the San Francisco Bay Area.

 

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  3. COMPENSATION AND BENEFITS

3.1 Salary. The Company shall compensate and pay Executive for her services at a rate equivalent to $325,000 per year, less payroll deductions and all required tax withholdings (“ Base Salary ”), which salary shall be payable in accordance with the Company’s customary payroll practices applicable to its executives, but no less frequently than monthly.

3.2 Bonus. During the Term of this Agreement, Executive shall have the opportunity to earn annual performance bonuses based on performance criteria to be established by the Board of Directors after consultation with Executive. Executive shall be eligible to receive a target cash bonus of 40% of her Base Salary based upon the attainment of performance objectives established by the Board of Directors after consultation with Executive. Unless set forth otherwise herein, Executive must be actively employed with the Company through the end of the applicable fiscal year in order to receive any annual bonus payout pursuant to this subsection. Any bonus payable hereunder in respect of a fiscal year shall be paid at the same time annual bonuses are paid to other senior executives of the Company in respect of such fiscal year; but in any event within the fiscal year following the fiscal year of performance.

3.3 Employee Benefits. During the Term of this Agreement, to the extent eligible under the applicable plans or programs, Executive shall be entitled to participate in the employee benefits plans and programs made available to executive level employees of the Company generally, such as health, medical, dental and other insurance coverage and group retirement plans. The terms and conditions of Executive’s participation in any employee benefit plan or program shall be subject to the terms and conditions of such plan or program, as may be modified by the Company from time to time. Nothing in this Agreement shall preclude the Company from amending or terminating any employee benefit plan or program.

3.4 Paid Leave. Executive shall be entitled to four (4) weeks of paid vacation leave each year, subject an annual accrual cap of thirty (30) days. Executive shall also be entitled to all paid holidays to which executive level employees of the Company are entitled. Accrued unused vacation leave shall be paid in the event of a termination of employment.

 

  4. EXPENSES

4.1 Expenses. The Company shall reimburse Executive or otherwise provide for or pay for reasonable out-of-pocket expenses incurred by Executive in furtherance of or in connection with the business of the Company, including, but not limited to, travel and entertainment expenses commensurate with her duties hereunder (including attendance at industry conferences), subject to the Company’s policies as periodically reviewed by the Board of Directors and in effect from time to time, including without limitation such reasonable documentation and other limitations as may be established or required by the Company.

 

  5. TERMINATION

5.1 Termination Due to Death or Disability. If Executive’s employment is terminated by reason of Executive’s death or Disability, Executive or her estate shall be entitled to receive: (a) Executive’s accrued Base Salary through the Termination Date; (b) an amount for reimbursement, paid within sixty (60) days following submission by Executive (or if applicable,

 

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Executive’s estate) to the Company of appropriate supporting documentation for any unreimbursed business expenses properly incurred prior to the Termination Date by Executive pursuant to Section 4 and in accordance with Company policy; (c) any accrued and unpaid vacation pay, paid within sixty (60) days of the Termination Date; and (d) such employee benefits, if any, to which Executive (or, if applicable, Executive’s estate) or her dependents may be entitled under the employee benefit plans or programs of the Company, paid in accordance with the terms of the applicable plans or programs (the amounts described in clauses (a) through (d) hereof being referred to as the “ Accrued Rights ”). In addition, Executive or her estate shall be entitled to receive (x) in a lump sum in cash within two and one-half (2  1 2 ) months after the Termination Date (or such earlier date as required by applicable law), the amount of any annual bonus earned for any previously completed fiscal year in accordance with Section 3.2 that has not been paid (the “ Accrued Bonus ”); and (y) an amount equal to the product of (i) the fraction of the current fiscal year that has elapsed through the date of Executive’s termination and (ii) the Board-approved annual bonus payout for Executive for such fiscal year based on actual Company performance for such fiscal year measured following the completion thereof, payable at the time the annual bonus would have been paid to Executive had she remained employed through the end of the such fiscal year (the “ Pro-Rata Bonus ”).

5.2 Termination by Executive without Good Reason and other than Disability or Death. In the event Executive terminates her employment for any reason other than Good Reason, Disability or death, Executive shall be entitled to receive the Accrued Rights, but following the Termination Date, Executive shall have no further rights to any other compensation or benefits under this Agreement, including without limitation any severance or continuation of benefits or otherwise.

5.3 Termination by the Company for Cause. In the event the Company terminates her employment for Cause, Executive shall be entitled to receive the Accrued Rights, but following the Termination Date, Executive shall have no further rights to any other compensation or benefits under this Agreement, including without limitation any severance or continuation of benefits or otherwise.

5.4 Termination by the Company Other Than for Death, Disability or Cause or by Executive for Good Reason. If Executive’s employment is terminated by the Company prior to the end of the Term for reasons other than death, Disability or Cause, or by Executive prior to the end of the Term for Good Reason, Executive shall be entitled to receive (a) an amount equal to her Base Salary, payable on a monthly basis, for a period of twelve (12) months following the Termination Date; (b) for a period of eighteen (18) months following the Termination Date that Executive is eligible to elect and does elect to continue coverage for herself and her eligible dependents under the Company’s group health plans, as applicable, under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended, and/or Sections 601 through 608 of the Employee Retirement Income Security Act of 1974, as amended (collectively, “ COBRA ”), medical and dental coverage as required by COBRA and prompt reimbursement for the premium costs charged to Executive for such COBRA continuation coverage; provided, however, that (i) such COBRA coverage shall terminate if and to the extent Executive becomes eligible to receive medical and dental coverage from a subsequent employer (and any such eligibility shall be promptly reported to the Company by Executive) and (ii) the Company’s obligation to reimburse Executive for such premium costs shall cease if, upon the advice of legal

 

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counsel, the Company determines that it would reasonably be expected to be subject to any penalty, excise or other tax for providing discriminatory benefits; provided that, in such event, the Company shall implement reasonable comparable alternative payments or benefits to Executive that would avoid such penalty, excise tax or other tax; (c) the Accrued Bonus; (d) the Pro-Rata Bonus, provided that Executive has been employed for at least six (6) months of the fiscal year in which such termination occurs, and (e) the Accrued Rights; provided that the payments described in clauses (a), (b) and (d) shall be subject to Executive’s continued compliance with the provisions of Section 6 and of the release delivered under Section 5.9.

5.5 Termination by Mutual Consent.  Notwithstanding any of the foregoing provisions of this Section 5, if at any time during the course of this Agreement the parties by mutual consent decide to terminate Executive’s employment, they may do so by separate agreement setting forth the terms and conditions of such termination.

5.6 Termination by Non-Extension of Term.  Notwithstanding anything herein to the contrary, in the event either party elects not to extend the Term of this Agreement pursuant to Section 2.1 hereto, Executive’s employment with the Company hereunder shall automatically terminate upon expiration of the Term of this Agreement on the Termination Date. In the event of such non-extension of the Term, unless Executive’s employment is earlier terminated otherwise pursuant to Section 5 hereof, Executive shall be entitled to receive the Accrued Rights and the Accrued Bonus. Following the Termination Date, Executive shall have no further rights to any other compensation or benefits under this Agreement, including without limitation any severance or continuation of benefits or otherwise.

5.7 Payment of Severance.  Subject to Section 7.13, any severance payments pursuant to Section 5.4(a) hereof shall be paid commencing on the sixtieth (60th) day following the Termination Date (with a lump sum catch-up payment for any installments otherwise payable within sixty (60) days following the Termination Date) and in accordance with the Company’s standard payroll schedule and practices.

5.8 Release of Claims; Offsets.   As a condition to the receipt of any payments of benefits described hereunder subsequent to the termination of the employment of Executive (other than Accrued Rights), Executive shall be required to execute, and not subsequently revoke, within sixty (60) days following the termination of her employment a release in a form reasonably acceptable to the Company of all claims arising out of her employment or the termination thereof. Subject to the limitations of applicable wage laws, the Company’s obligations to pay the severance benefits hereunder shall be subject to set-off, counterclaim or recoupment of amounts owed by Executive to the Company or any of its affiliates, except to the extent that the severance benefits constitute “nonqualified deferred compensation” for purposes of Section 409A (as defined in Section 7.13) and such offset would result in the imposition of tax or other adverse tax consequences under Section 409A. In no event shall Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to Executive under any of the provisions of this Agreement and such amounts shall not be reduced whether or not Executive obtains other employment.

5.9 Cooperation with Company after Termination of Employment.   Following termination of Executive’s employment for any reason, Executive shall reasonably cooperate

 

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with the Company in all matters relating to the winding up of her pending work on behalf of the Company including, but not limited to, any litigation in which the Company is involved and the orderly transfer of any such pending work to other employees of the Company as may be designated by the Company. The Company shall reasonably compensate Executive for services rendered pursuant to this Section 5.9 at a rate to be determined by the parties. In addition, the Company shall reimburse Executive for any reasonable out-of-pocket expenses she incurs in performing any work on behalf of the Company following the termination of her employment.

 

  6. NON-SOLICITATION & NON-COMPETITION

6.1 Non-Compete.   Executive agrees that during the Term and for one year following the Termination Date (the “ Restricted Period ”), Executive shall not, anywhere in the areas where the Company conducts business during the Term (the “ Restricted Territory ”), directly or indirectly, own, manage, operate, join, control or participate in the ownership, management, operation or control of, or be an officer or an employee of any business or organization that, directly or indirectly, develops, processes, packages, markets, promotes or sells color cosmetics or related services in the Restricted Territories (each, a “ Restricted Business ”). The foregoing shall not restrict Executive from (a) owning up to five percent (5%) of any class of securities of any person engaged in a Restricted Business if such securities are listed on any national or regional securities exchange or have been registered under Section 12(g) of the Securities Exchange Act of 1934, as amended, as long as such securities are held solely as a passive investment and not with a view to influencing, controlling or directing the affairs of such person), or (b) following Executive’s termination of employment, being an officer, director, employee, shareholder, consultant, contractor, partner, joint venturer, agent, equity owner or acting in another capacity of or for (i) a business that principally sells retail goods (such as Wal-Mart) for which sales of products manufactured by a Restricted Business generate less than ten percent (10%) of its revenue or (ii) a business entity that has multiple lines of business, some of which are not a Restricted Business, so long as Executive’s services for such entity are restricted so that she will provide no services or other assistance in support of, and will not otherwise be involved with, any Restricted Business conducted by such entity (except that Executive shall be permitted to serve in a management capacity with responsibility for multiple product lines so long as such responsibility does not cover product lines for which more than 10% of the collective revenues are generated by a Restricted Business).

6.2 Non-Solicitation.  Executive agrees that during the Restricted Period, Executive will not, directly or indirectly, for herself or on behalf of or in conjunction with any other person, (i) hire or attempt to hire any person that is an employee of the Company or was within six (6) months prior to the Termination Date; provided , however , this Section 6.2 (including clause (ii) below) shall not be breached by a solicitation to the general public or through general advertising, and Executive may solicit for employment any person who at the Termination Date had not been an employee of the Company at any time within six (6) months preceding such date or whose employment with the Company had terminated more than six months prior to Executive’s solicitation of such person or (ii) solicit, advise or encourage any person, firm, government agency or corporation to withdraw, curtail or cancel its business with the Company.

 

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6.3 Non-Disparagement.  During the Term and thereafter, Executive agrees that she will not, at any time, make, directly or indirectly, any oral or written statements that are disparaging of the Company, its products or services, or any of its present or former officers, directors, stockholders or employees (or any of their respective Affiliates), and the Company shall instruct its Board and executives not to disparage Executive orally or in writing at any time; provided that either party may confer in confidence with its legal representatives and make truthful statements as required by law.

6.4 Reasonable Limitation and Severability.  The parties agree that the above restrictions on competition are (i) reasonable given Executive’s role with the Company, and are necessary to protect the interests of the Company and (ii) completely severable and independent agreements supported by good and valuable consideration and, as such, shall survive the termination of this Agreement for any reason whatsoever. The parties further agree that any invalidity or unenforceability of any one or more of such restrictions on competition shall not render invalid or unenforceable any remaining restrictions on competition. Additionally, should a court of competent jurisdiction determine that the scope of any provision of this Section 6 is too broad to be enforced as written, the parties hereby authorize the court to reform the provision to such narrower scope as it determines to be reasonable and enforceable and the parties intend that the affected provision be enforced as so amended.

6.5 Confidential Information.   Executive acknowledges and agrees that the customers, business connections, customer lists, procedures, operations, techniques and other aspects of and information about the business of the Company (the “ Confidential Information ”) are established at great expense and protected as confidential information and provide the Company with a substantial competitive advantage in conducting its business. Executive further acknowledges and agrees that by virtue of her employment with the Company, she has had access to and will have access to, and has been entrusted with and will be entrusted with Confidential Information, and that the Company would suffer great loss and injury if Executive would disclose this information or use it in a manner not specifically authorized by the Company. Therefore, Executive agrees that during the Term and at all times thereafter, she will not, directly or indirectly, either individually or as an employee, agent, partner, shareholder, owner trustee, beneficiary, co-venturer distributor, consultant or in any other capacity, use or disclose or cause to be used or disclosed any Confidential Information, unless and to the extent (i) that any such information becomes generally known to and available for use by the public other than as a result of Executive’s acts or omissions, (ii) authorized in writing by the Board of Directors or compelled by legal process (provided that Executive provides the Company with advance notice adequate to afford the Company reasonable opportunity to limit or prevent such disclosure), or (iii) use or disclosure is to an employee of the Company or a person to whom disclosure is reasonably necessary or appropriate in connection with the performance by Executive of her duties as an employee or director of the Company. Executive shall deliver to the Company at the termination of the Term, or at any other time the Company may request, all memoranda, notes, plans, records, reports, computer tapes, printouts and software and other documents and data (and copies thereof) relating to the Confidential Information or Work Product (as defined below) which she may then possess or have under her control, provided that Executive shall be entitled to retain her telephone, address and other contact directories subject to compliance with Sections 6.1 through 6.3. Executive acknowledges and agrees that all inventions, innovations, improvements, developments, methods, designs, analyses, drawings,

 

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reports and all similar or related information (whether or not patentable) that relate to the Company’s actual or anticipated business and that are conceived, developed or made by Executive while employed by the Company and during work hours or by the use of the facilities or Confidential Information of the Company (“ Work Product ”) belong to the Company.

 

  7. GENERAL PROVISIONS

7.1 Assignment.   The Company shall assign this Agreement and its rights and obligations hereunder in whole, but not in part, to any company or other entity with or into which the Company may hereafter merge or consolidate or to which the Company may transfer all or substantially all of its assets, and in any such case said company or other entity shall by operation of law or expressly in writing assume all obligations of the Company hereunder as fully as if it had been originally made a party hereto. Such assignment will not release the Company from any payment obligations hereunder. Executive may not assign or transfer this Agreement or any rights or obligations hereunder.

7.2 Notice.  For the purposes of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by certified or registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth below:

 

To the Company:   TPG Growth
  345 California Street, Suite 3300
  San Francisco, California 94104
  Attn: ###
  Email: ###
To Executive:   Erin Daley
  ###
  ###
  Email: ###

7.3 Amendment and Waiver.  No provision of this Agreement may be amended or waived unless such amendment or waiver is in writing and signed by each of the parties hereto.

7.4 Non-Waiver of Breach.  No failure by either party to declare a default due to any breach of any obligation under this Agreement by the other, nor failure by either party to act quickly with regard thereto, shall be considered to be a waiver of any such obligation, or of any future breach.

7.5 Severability.  In the event that any provision or portion of this Agreement shall be determined to be invalid or unenforceable for any reason, the remaining provisions of this Agreement shall be unaffected thereby and shall remain in full force and effect.

 

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7.6 Governing Law.  To the extent not preempted by federal law, the validity and effect of this Agreement and the rights and obligations of the parties hereto shall be construed and determined in accordance with the law of California.

7.7 Arbitration .

(a) Except with respect to disputes and claims under Section 6 (which the parties hereto may pursue in any court of competent jurisdiction as specified herein and with respect to which each party shall bear the cost of its own attorneys’ fees and expenses, except to the extent otherwise required by applicable law), each party hereto agrees that arbitration, pursuant to the procedures set forth in the National Rules for the Resolution of Employment Disputes of the American Arbitration Association (“ AAA ”) as adopted and effective as of June 1, 1997 or such later version as may then be in effect) (the “ AAA Rules ”), shall be the sole and exclusive method for resolving any claim or dispute (“ Claim ”) arising out of or relating to the rights and obligations of the parties under this Agreement and the employment of Executive by the Company (including any Claim regarding employment discrimination, sexual harassment, termination and discharge), whether such Claim arose or the facts on which such Claim is based occurred prior to or after the execution and delivery of this Agreement.

(b) The parties hereto agree that (i) one arbitrator shall be appointed pursuant to the AAA Rules to conduct any such arbitration, (ii) all meetings of the parties and all hearings with respect to any such arbitration shall take place in Oakland, California and (iii) each party to the arbitration shall bear its own costs and expenses (including all attorneys’ fees and expenses, except to the extent otherwise required by applicable law) and all costs and expenses of the arbitration proceeding (such as filing fees, the arbitrator’s fees, hearing expenses, etc.) shall be borne equally by the parties hereto; provided, however, that the arbitrator shall, in the award, allocate all such costs and expenses against the party who did not prevail.

(c) In addition, the parties hereto agree that (i) the arbitrator shall have no authority to make any decision, judgment, ruling, finding, award or other determination that does not conform to the terms and conditions of this Agreement (as executed and delivered by the parties hereto), (ii) the arbitrator shall have no greater authority to award any relief than a court having proper jurisdiction and (iii) the arbitrator shall have no authority to commit an Error of Law (as defined below) in its decision, judgment, ruling, finding, award or other determination, and on appeal from or motion to vacate or confirm such decision, judgment, ruling, finding, award or other determination, a court having proper jurisdiction may vacate any such decision, judgment, ruling, finding, award or other determination to the extent containing an Error of Law. For purposes of this Agreement, an “ Error of Law ” means any decision, judgment, ruling, finding, award or other determination that is inconsistent with the laws governing this Agreement pursuant to Section 7.6. Any decision, judgment, ruling, finding, award or other determination of the arbitrator and any information disclosed in the course of any arbitration hereunder (collectively, the “ Arbitration Information ”) shall be kept confidential by the parties subject to Section 7.7(d), and any appeal from or motion to vacate or confirm such decision, judgment, ruling, finding, award or other determination shall be filed under seal if permitted by the court.

(d) In the event that any party or such party’s affiliates, associates or representatives is requested or required (by oral question or request for information or documents

 

10


in any legal proceeding, interrogatory, subpoena, civil investigative demand, or similar process) to disclose any Arbitration Information (the “ Disclosing Party ”), such Disclosing Party shall notify the other party promptly of the request or requirement so that the other party may seek an appropriate protective order or waive compliance with the provisions of this Section 7.7. If, in the absence of a protective order or the receipt of a waiver hereunder, the Disclosing Party or any of its affiliates, associates or representatives believes in good faith, upon the advice of legal counsel, that it is compelled to disclose any such Arbitration Information, such Disclosing Party may disclose such portion of the Arbitration Information as it believes in good faith, upon the advice of legal counsel, it is required to disclose; provided that the Disclosing Party shall use reasonable efforts to obtain, at the request and expense of the other party, an order or other assurance that confidential treatment shall be accorded to such portion of the Arbitration Information required to be disclosed as the other party shall designate. Notwithstanding anything in this Section 7.7 to the contrary, the parties shall have no obligation to keep confidential any Arbitration Information that becomes generally known to and available for use by the public other than as a result of the disclosing party’s acts or omissions or the acts or omissions of such party’s affiliates, associates or representatives. The parties agree that, subject to the right of any party to appeal or move to vacate or confirm any decision, judgment, ruling, finding, award or other determination of an arbitration as provided in this Section 7.7, the decision, judgment, ruling, finding, award or other determination of any arbitration under the AAA Rules shall be final, conclusive and binding on all of the parties hereto; provided, however, nothing in this Section 7.7 shall prohibit any party hereto from instituting litigation to enforce any final decision, judgment, ruling, finding, award or other determination of the arbitration.

7.8 Entire Agreement. This Agreement contains all of the terms agreed upon by the Company, Holdings and Executive with respect to the subject matter hereof and supersedes all prior agreements, arrangements and communications between the parties dealing with such subject matter, whether oral or written, including without limitation, the Prior Agreement, and all such prior agreements, arrangements and communications are hereby canceled and terminated. To the extent there is any conflict between the terms and conditions of this Agreement and the terms and conditions of any prior employment or consulting agreement, including, without limitation, the Prior Agreement, the terms and conditions of this Agreement shall control.

7.9 Binding Effect. This Agreement shall be binding upon and shall inure to the benefit of the transferees, successors and assigns of the Company, including any company with which the Company may merge or consolidate.

7.10 Headings. Numbers and titles to Sections hereof are for information purposes only and, where inconsistent with the text, are to be disregarded.

7.11 Counterparts. This Agreement may be executed in any number of counterparts, including by facsimile or other electronic transmission, each of which shall be deemed an original, but all of which when taken together, shall be and constitute one and the same instrument.

7.12 Specific Enforcement; Remedies. The provisions of Section 6 of this Agreement are to be specifically enforced if not performed according to their terms. Without limiting the generality of the foregoing, the parties acknowledge that the Company would be

 

11


irreparably damaged and there would be no adequate remedy at law for Executive’s breach of Section 6 of this Agreement and further acknowledge that the Company may seek entry of a temporary restraining order or preliminary injunction, in addition to any other remedies available at law or in equity, to enforce the provisions thereof, without the Company being required to post a bond or other security therefor. In addition, in the event of a material violation by Executive of the provisions of Section 6, any severance being paid to Executive pursuant to this Agreement or otherwise shall immediately cease, and any severance previously paid to Executive shall be immediately repaid to the Company.

7.13 Taxes & IRC Section 409A Matters. The Company may withhold from any payment hereunder such state, federal or local income, employment or other taxes and other legally mandated withholdings as it reasonably deems appropriate. The Company makes no representation about the tax treatment or impact of any payment(s) hereunder. The intent of the parties is that payments and benefits under this Agreement comply with Section 409A of the Code, as amended (“ Section 409A ”), to the extent subject thereto, and, accordingly, to the maximum extent permitted, this Agreement shall be interpreted and administered to be in compliance therewith. Notwithstanding anything herein to the contrary: (i) if at the time of Executive’s termination of employment with the Company, Executive is a “specified employee” as defined in Section 409A and the deferral of the commencement of any payments or benefits otherwise payable hereunder as a result of such termination of employment is necessary in order to prevent any accelerated or additional tax under Section 409A, then the Company will defer the commencement of the payment of any such payments or benefits hereunder (without any reduction in such payments or benefits ultimately paid or provided to Executive) until the date that is six (6) months following Executive’s termination of employment with the Company (or the earliest date as is permitted under Section 409A); (ii) if any other payments of money or other benefits due to Executive hereunder could cause the application of an accelerated or additional tax under Section 409A, such payments or other benefits shall be deferred if deferral will make such payment or other benefits compliant under Section 409A, or otherwise such payment or other benefits shall be restructured, to the extent possible, in a manner determined by the Company that does not cause such an accelerated or additional tax; (iii) to the extent required in order to avoid accelerated taxation and/or tax penalties under Section 409A, Executive shall not be considered to have terminated employment with the Company for purposes of this Agreement and no payment shall be due to Executive under this Agreement until Executive would be considered to have incurred a “separation from service” from the Company within the meaning of Section 409A; and (iv) each amount to be paid or benefit to be provided to Executive pursuant to this Agreement, which constitutes deferred compensation subject to Section 409A, shall be construed as a separate identified payment for purposes of Section 409A. To the extent required to avoid an accelerated or additional tax under Section 409A, amounts reimbursable to Executive under this Agreement shall be paid to Executive on or before the last day of the year following the year in which the expense was incurred and the amount of expenses eligible for reimbursement (and in-kind benefits provided to Executive) during any one year may not affect amounts reimbursable or provided in any subsequent year, or be subject to liquidation or exchange for another benefit. Neither the Company nor any of its employees or representatives shall have any liability to Executive with respect to Section 409A.

 

12


7.14 Survival. Except as otherwise expressly provided in this Agreement, all covenants, representations and warranties, express or implied, in addition to the provisions of Sections 6 and 7 of this Agreement, shall survive the termination of this Agreement.

7.15 Indemnification and Insurance . The Company shall indemnify Executive to the full extent provided for in its corporate Bylaws and to the maximum extent that the Company indemnifies any of its other directors and senior executive officers, and she will be entitled to the protection of any insurance policies the Company may elect to maintain generally for the benefit of its directors and senior executive officers against all costs, charges, liabilities and expenses incurred or sustained by her in connection with any action, suit or proceeding to which she may be made a party by reason of her being or having been a director, officer or employee of the Company or any of its affiliates or her serving or having served any other enterprise, plan or trust as a director, officer, employee or fiduciary at the request of the Company or any of its affiliates (other than any dispute, claim or controversy arising under or relating to this Agreement (except for this Section 7.15)). The Company will enter into an indemnification agreement with Executive in the standard form that it has or will adopt for the benefit of its other directors and senior executive officers. The provisions of this Section 7.15 shall survive any termination of Executive’s employment or any termination of this Agreement.

7.16 Section 280G . In the event that it shall be determined that any payment or distribution to or for the benefit of Executive under this Agreement or under any other Company plan, contract or agreement would, but for the effect of this Section 7.16, be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties with respect to such excise tax (collectively, such excise tax, together with any such interest or penalties, the “ Excise Tax ”), then, at the election of Executive, in the event that the after-tax value of all Payments (as defined below) to Executive (such after-tax value to reflect the deduction of the Excise Tax and all income or other taxes on such Payments) would, in the aggregate, be less than the after-tax value to Executive of the Safe Harbor Amount (as defined below), (1) the cash portions of the Payments payable to Executive under this Agreement shall be reduced, in the order in which they are due to be paid, until the Parachute Value (as defined below) of all Payments paid to Executive, in the aggregate, equals the Safe Harbor Amount, and (2) if the reduction of the cash portions of the Payments, payable under this Agreement, to zero would not be sufficient to reduce the Parachute Value of all Payments to the Safe Harbor Amount, then any cash portions of the Payments payable to Executive under any other plans shall be reduced, in the order in which they are due to be paid, until the Parachute Value of all Payments paid to Executive, in the aggregate, equals the Safe Harbor Amount, and (3) if the reduction of all cash portions of the Payments, payable pursuant to this Agreement and otherwise, to zero would not be sufficient to reduce the Parachute Value of all Payments to the Safe Harbor Amount, then non-cash portions of the Payments shall be reduced, in the order in which they are due to be paid, until the Parachute Value of all Payments paid to Executive, in the aggregate, equals the Safe Harbor Amount. As used herein, (x) “ Payment ” shall mean any payment or distribution in the nature of compensation (within the meaning of Section 280G(b)(2) of the Code) to or for the benefit of Executive, whether paid or payable pursuant to this Agreement or otherwise, (y) “ Safe Harbor Amount ” shall mean 2.99 times Executive’s “base amount,” within the meaning of Section 280G(b)(3) of the Code, and (z) “ Parachute Value ” of a Payment shall mean the present value as of the date of the Change in Control for purposes of Section 280G of the Code of the portion of such Payment that constitutes a “parachute payment” under Section 280G(b)(2) of the Code

 

13


for purposes of determining whether and to what extent the Excise Tax will apply to such Payment. All calculations under this section shall be made reasonably by the Company and the Company’s outside auditor at the Company’s expense and at the times reasonably requested by Executive.

[Signatures on next page]

 

14


IN WITNESS WHEREOF, the parties hereto have caused this Amended and Restated Employment Agreement to be duly executed on the date and year first written above.

 

e.l.f. Cosmetics, Inc.    
By:  

/s/ Scott K. Milsten

   

/s/ Erin Daley

Name:  

Scott K. Milsten

    Erin Daley
Title:  

Senior Vice President, General Counsel

   
e.l.f. Beauty, Inc.    
By:  

/s/ Scott K. Milsten

   
Name:  

Scott K. Milsten

   
Title:  

Senior Vice President, General Counsel

   

 

15

Exhibit 10.26

E.L.F. BEAUTY, INC.

NON-EMPLOYEE DIRECTOR COMPENSATION PROGRAM

Non-employee members of the board of directors (the “ Board ”) of e.l.f. Beauty, Inc. (the “ Company ”) shall be eligible to receive cash and equity compensation as set forth in this Non-Employee Director Compensation Program (this “ Program ”). The cash and equity compensation described in this Program shall be paid or be made, as applicable, automatically and without further action of the Board, to each member of the Board who is not (i) an employee of the Company or any parent or subsidiary of the Company, (ii) a partner, member, director, officer or employee of TPG Growth II Management, LLC (or any other entity which, directly or indirectly, through one or more intermediaries, is controlled by or under common control with such entity, whether by contract, equity ownership or otherwise) or (iii) designated for service on the Board by the Rollover Stockholders (as defined in that certain Amended and Restated Stockholders Agreement, dated on or about the Effective Date (as defined below), by and among the Company, TPG elf Holdings, L.P., the Rollover Stockholders and the other parties thereto, as the same may be amended from time to time) (each, a “ Non-Employee Director ”), unless such Non-Employee Director declines the receipt of such cash or equity compensation by written notice to the Company. This Program shall remain in effect until it is revised or rescinded by further action of the Board. This Program may be amended, modified or terminated by the Board at any time, without advance notice, in its sole discretion. The terms and conditions of this Program shall supersede any prior cash and/or equity compensation arrangements for service as a member of the Board between the Company and any of its Non-Employee Directors. This Program shall become effective on the date of the pricing of the initial public offering of the Company’s common stock (the “ Effective Date ”).

1. Cash Compensation .

(a) Annual Retainers . Each Non-Employee Director shall be eligible to receive an annual retainer of $45,000 for service on the Board.

(b) Additional Annual Retainers . In addition, a Non-Employee Director shall receive the following annual retainers:

(i) Audit Committee . A Non-Employee Director serving as Chairperson of the Audit Committee shall receive an additional annual retainer of $15,000 for such service. A Non-Employee Director serving as a member of the Audit Committee (other than the Chairperson) shall receive an additional annual retainer of $7,500 for such service.

(ii) Compensation Committee . A Non-Employee Director serving as Chairperson of the Compensation Committee shall receive an additional annual retainer of $10,000 for such service. A Non-Employee Director serving as a member of the Compensation Committee (other than the Chairperson) shall receive an additional annual retainer of $5,000 for such service.

(iii) Nominating and Corporate Governance Committee . A Non-Employee Director serving as Chairperson of the Nominating and Corporate Governance Committee shall receive an additional annual retainer of $6,000 for such service. A Non-Employee Director serving as a member of the Nominating and Corporate Governance Committee (other than the Chairperson) shall receive an additional annual retainer of $3,000 for such service.

(c) Payment of Retainers . Subject to Section 2(a) below, the annual retainers described in Sections 1(a) and 1(b) shall be earned on a quarterly basis based on a calendar quarter and shall be paid in cash by the Company in arrears not later than the fifteenth (15 th ) day following the end of


each calendar quarter. In the event a Non-Employee Director does not serve as a Non-Employee Director, or in the applicable positions described in Section 1(b), for an entire calendar quarter, the retainer paid to such Non-Employee Director shall be prorated for the portion of such calendar quarter actually served as a Non-Employee Director, or in such position, as applicable.

2. Equity Compensation . Non-Employee Directors shall be granted the equity awards described below. The awards described below shall be granted under and shall be subject to the terms and provisions of the Company’s 2016 Equity Incentive Award Plan or any other applicable Company equity incentive plan then-maintained by the Company (the “ Equity Plan ”) and shall be evidenced by the execution and delivery of award agreements, including attached exhibits, in substantially the forms previously approved by the Board. All applicable terms of the Equity Plan apply to this Program as if fully set forth herein, and all grants of Restricted Stock Units (as defined in the Equity Plan) hereby are subject in all respects to the terms of the Equity Plan.

(a) Election to Receive Restricted Stock Units in Lieu of Cash Retainers . Each Non-Employee Director may elect to receive all, but not less than all, of his or her annual retainer payable under Section 1 in an award of Restricted Stock Units, in lieu of cash (a “ Retainer Award Election ”), with the first such Retainer Award Election to apply to the first annual meeting of the Company’s stockholders that occurs after the Effective Date. On or before December 31 of each calendar year, each Non-Employee Director who desires to make a Retainer Award Election shall make his or her Retainer Award Election with respect to the cash compensation otherwise payable to such Non-Employee Director under Section 1 in the twelve-month period immediately following the annual meeting of the Company’s stockholders that occurs in the calendar year after such Retainer Award Election is made. Notwithstanding the foregoing, if a Non-Employee Director is first elected or appointed to the Board on or after January 1 of a calendar year and before the date of the annual meeting of the Company’s stockholders for such calendar year, then such Non-Employee Director shall have until the earlier of (i) the date of the annual meeting of the Company’s stockholders for such calendar year or (ii) the thirtieth (30 th ) day after such election or appointment, to make the Non-Employee Director’s Retainer Award Election to apply to the twelve-month period immediately following such annual meeting of the Company’s stockholders. In each case, the Retainer Award Election shall be made pursuant to an election form provided by the Company and in compliance with the rules and policies as may be established by the Board from time to time. Each such Retainer Award Election shall be irrevocable.

(b) Initial Awards . Each Non-Employee Director who is initially elected or appointed to the Board after the Effective Date and on a date other than the date of an annual meeting of the Company’s stockholders shall automatically be granted, on the date of such initial election or appointment, that number of Restricted Stock Units calculated by dividing (i) the product of (A) $140,000 multiplied times (B) a fraction, the numerator of which is the number of days remaining until either (1) the first anniversary of the annual meeting of the Company’s stockholders that immediately preceded such Non-Employee Director’s election or appointment or (2) in the event such election or appointment occurs prior to the first annual meeting of the Company’s stockholders that occurs after the Effective Date, the projected date of such first annual meeting and the denominator of which is 365, by (ii) the Fair Market Value of a share of the Company’s common stock as of the date of appointment or election and rounding down to the nearest whole number. The awards described in this Section 2(b) shall be referred to as “ Initial Awards .” No Non-Employee Director shall be granted more than one Initial Award.

(c) Subsequent Awards . A Non-Employee Director who will continue to serve as a Non-Employee Director immediately following any annual meeting of the Company’s stockholders, shall be automatically granted, on the date of such annual meeting, that number of Restricted Stock Units calculated by dividing (i) the sum of (A) any compensation covered by a timely Retainer Award Election plus (B) $140,000 by (ii) the Fair Market Value of a share of the Company’s common stock as of the date of such annual meeting of the Company’s stockholders and rounding down to the nearest whole number. The awards described in this Section 2(c) shall be referred to as “ Subsequent Awards .”

 

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(d) Terms of Awards Granted to Non-Employee Directors

(i) Vesting . Each Initial Award shall vest in full upon the earlier of (A) the date of the first annual meeting of the Company’s stockholders occurring after such Initial Award is granted or (B) the first anniversary of the annual meeting of the Company’s stockholders immediately preceding the date the Initial Award is granted, subject to the Non-Employee Director continuing to provide services to the Company through the applicable vesting date. Each Subsequent Award shall vest in full on the earlier of (A) the first anniversary of the date of grant or (B) immediately prior to the next annual meeting of the Company’s stockholders after the date of grant, subject to the Non-Employee Director continuing to provide services to the Company through the applicable vesting date.

(ii) Change in Control Acceleration . All of a Non-Employee Director’s Initial Awards and Subsequent Awards, and any stock options or other equity-based awards outstanding and held by the Non-Employee Director, shall vest and, if applicable, become exercisable with respect to one hundred percent (100%) of the shares subject thereto immediately prior to the occurrence of a Change in Control (as defined in the Equity Plan), to the extent outstanding at such time.

3. Reimbursements . The Company shall reimburse each Non-Employee Director for all reasonable, documented, out-of-pocket travel and other business expenses incurred by such Non-Employee Director in the performance of his or her duties to the Company in accordance with the Company’s applicable expense reimbursement policies and procedures as in effect from time to time.

* * * * *

 

3

Exhibit 10.27

E.L.F. BEAUTY, INC.

2016 EQUITY INCENTIVE AWARD PLAN

RESTRICTED STOCK UNIT AWARD GRANT NOTICE

e.l.f. Beauty, Inc., a Delaware corporation, (the “ Company ”), pursuant to its 2016 Equity Incentive Award Plan, as amended from time to time (the “ Plan ”), hereby grants to the holder listed below (the “ Participant ”), an award of restricted stock units (“ Restricted Stock Units ” or “ RSUs ”). Each vested Restricted Stock Unit represents the right to receive, in accordance with the Restricted Stock Unit Award Agreement attached hereto as Exhibit A (the “ Agreement ”), one share of Common Stock (“ Share ”). This award of Restricted Stock Units is subject to all of the terms and conditions set forth herein and in the Agreement and the Plan, each of which are incorporated herein by reference. Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Restricted Stock Unit Award Grant Notice (the “ Grant Notice ”) and the Agreement.

 

Participant:

   «Participant»

Grant Date:

   «Grant_Date»

Total Number of RSUs:

   «Shares»

Vesting Commencement Date:

   «VCD»

Vesting Schedule:

   «Vesting_Schedule»

Termination:

   Except as set forth in Section 2.3 of the Agreement, if the Participant experiences a Termination of Service prior to the applicable vesting date, all RSUs that have not become vested on or prior to the date of such Termination of Service (after taking into consideration any vesting that may occur in connection with such Termination of Service, if any) will thereupon be automatically forfeited by the Participant without payment of any consideration therefor.

By his or her signature and the Company’s signature below, the Participant agrees to be bound by the terms and conditions of the Plan, the Agreement and this Grant Notice. The Participant has reviewed the Agreement, the Plan and this Grant Notice in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Grant Notice and fully understands all provisions of this Grant Notice, the Agreement and the Plan. The Participant hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions arising under the Plan, this Grant Notice or the Agreement. In addition, by signing below, the Participant also agrees that the Company, in its sole discretion, may satisfy any withholding obligations in accordance with Section 2.6(b) of the Agreement by (i) withholding shares of Common Stock otherwise issuable to the Participant upon vesting of the RSUs, (ii) instructing a broker on the Participant’s behalf to sell shares of Common Stock otherwise issuable to the Participant upon vesting of the RSUs and submit the proceeds of such sale to the Company, or (iii) using any other method permitted by Section 2.6(b) of the Agreement or the Plan.

 

E.L.F. BEAUTY, INC.:     PARTICIPANT:
By:         By:    

Print Name:    

  John P. Bailey    

Print Name:    

  «Participant»

Title:

  Chief Financial Officer      

Address:

 

570 10 th Street

Oakland, CA 94607

   

Address:

  «Address»


EXHIBIT A

TO RESTRICTED STOCK UNIT AWARD GRANT NOTICE

RESTRICTED STOCK UNIT AWARD AGREEMENT

Pursuant to the Restricted Stock Unit Award Grant Notice (the “ Grant Notice ”) to which this Restricted Stock Unit Award Agreement (this “ Agreement ”) is attached, e.l.f. Beauty, Inc., a Delaware corporation (the “ Company ”), has granted to the Participant the number of restricted stock units (“ Restricted Stock Units ” or “ RSUs ”) set forth in the Grant Notice under the Company’s 2016 Equity Incentive Award Plan, as amended from time to time (the “ Plan ”). Each vested Restricted Stock Unit represents the right to receive one share of Common Stock (“ Share ”). Capitalized terms not specifically defined herein shall have the meanings specified in the Plan and Grant Notice.

ARTICLE I.

GENERAL

1.1 Defined Terms . Wherever the following terms are used in this Agreement they shall have the meanings specified below, unless the context clearly indicates otherwise. Capitalized terms not specifically defined herein shall have the meanings specified in the Plan and the Grant Notice.

(a) “ Cause ” shall mean (i) a breach by the Participant of the Participant’s obligations pursuant to his or her employment or other similar agreement (other than as a result of physical or mental incapacity) which constitutes material nonperformance by the Participant of his or her obligations and duties thereunder, which the Participant has failed to remedy after the Board of Directors or delegate thereof has given the Participant written notice of, and at least fifteen (15) days to remedy, such breach, (ii) commission by the Participant of an act of fraud, embezzlement, misappropriation, willful misconduct or breach of fiduciary duty against the Company (other than acts, such as making personal use of Company office supplies, as have only a de minimis effect on the Company), (iii) a material breach by the Participant of any non-solicitation and or non-competition covenants contained in his or her employment or other similar agreement with the Company, (iv) the Participant’s conviction, plea of no contest or nolo contendere, deferred adjudication or unadjudicated probation for any felony or any crime involving moral turpitude, (v) the failure of the Participant to carry out, or comply with, in any material respect, any lawful directive of the Board of Directors or delegate thereof (other than any such failure resulting from the Participant’s physical or mental incapacity) which the Participant has failed to remedy after the Board of Directors or delegate thereof has given the Participant written notice of, and at least fifteen (15) days to remedy, such failure, or (vi) the Participant’s unlawful use (including being under the influence) or possession of illegal drugs. For purposes of the previous sentence, no act or failure to act on the Participant’s part shall be deemed “willful” unless done, or omitted to be done, by the Participant not in good faith and without reasonable belief that the Participant’s action or omission was in the best interest of the Company.

(b) “ Good Reason ” shall mean (i) a material diminution of the Participant’s responsibilities, duties or authority, or the responsibilities, duties or authority of the Participant’s direct supervisor, (ii) a material diminution of the Participant’s base compensation; or (iii) the relocation of the Participant’s principal office to a location that is in excess of fifty (50) miles from the Participant’s principal office prior to such change (it being understood and agreed that the Participant’s reasonable travel for business purposes shall not be considered such a relocation); provided, however, that the Participant’s termination will not be for Good Reason unless (x) the Participant has given the Company at least thirty (30) days prior written notice of his or her intent to terminate his or her employment for Good Reason, which notice shall specify the facts and circumstances constituting Good Reason and be

 

A-1


given within ninety (90) days of the initial occurrence thereof, (y) the Company has not remedied such facts and circumstances constituting Good Reason within thirty (30) days following the receipt of such notice, and (z) the Participant terminates employment within six (6) months following the expiration of such thirty (30)-day cure period.

1.2 Incorporation of Terms of Plan . The RSUs are subject to the terms and conditions of the Plan, which are incorporated herein by reference. In the event of any inconsistency between the Plan and this Agreement, the terms of the Plan shall control.

ARTICLE II.

GRANT OF RESTRICTED STOCK UNITS

2.1 Grant of RSUs . Pursuant to the Grant Notice and upon the terms and conditions set forth in the Plan and this Agreement, effective as of the Grant Date set forth in the Grant Notice, the Company hereby grants to the Participant an award of RSUs under the Plan in consideration of the Participant’s past and/or continued employment with or service to the Company or any Affiliates and for other good and valuable consideration.

2.2 Unsecured Obligation to RSUs . Unless and until the RSUs have vested in the manner set forth in Article 2 hereof, the Participant will have no right to receive Common Stock under any such RSUs. Prior to actual payment of any vested RSUs, such RSUs will represent an unsecured obligation of the Company, payable (if at all) only from the general assets of the Company.

2.3 Vesting Schedule; Accelerated Vesting . Subject to Section 2.5 hereof, the RSUs shall vest and become nonforfeitable with respect to the applicable portion thereof according to the vesting schedule set forth in the Grant Notice (rounding down to the nearest whole Share). Notwithstanding the foregoing, in the event the Participant experiences a Termination of Service by the Company (or any successor thereof) for other than Cause or by the Participant for Good Reason within twelve (12) months following the consummation of a Change in Control, one hundred percent (100%) of the RSUs shall immediately vest and become nonforfeitable.

2.4 Consideration to the Company . In consideration of the grant of the award of RSUs pursuant hereto, the Participant agrees to render faithful and efficient services to the Company or any Affiliate.

2.5 Forfeiture, Termination and Cancellation upon Termination of Service . Notwithstanding any contrary provision of this Agreement or the Plan, upon the Participant’s Termination of Service for any or no reason, all Restricted Stock Units which have not vested prior to or in connection with such Termination of Service (after taking into consideration any accelerated vesting which may occur in connection with such Termination of Service (if any)) shall thereupon automatically be forfeited, terminated and cancelled as of the applicable termination date without payment of any consideration by the Company, and the Participant, or the Participant’s beneficiary or personal representative, as the case may be, shall have no further rights hereunder. No portion of the RSUs which has not become vested as of the date on which the Participant incurs a Termination of Service shall thereafter become vested.

2.6 Issuance of Common Stock upon Vesting .

(a) As soon as administratively practicable following the vesting of any Restricted Stock Units pursuant to Section 2.3 hereof, but in no event later than thirty (30) days after such vesting date (for the avoidance of doubt, this deadline is intended to comply with the “short term deferral”

 

A-2


exemption from Section 409A of the Code), the Company shall deliver to the Participant (or any transferee permitted under Section 3.2 hereof) a number of Shares (either by delivering one or more certificates for such Shares or by entering such Shares in book entry form, as determined by the Company in its sole discretion) equal to the number of RSUs subject to this Award that vest on the applicable vesting date, unless such RSUs terminate prior to the given vesting date pursuant to Section 2.5 hereof. Notwithstanding the foregoing, in the event Shares cannot be issued pursuant to Section 12.4 of the Plan, the Shares shall be issued pursuant to the preceding sentence as soon as administratively practicable after the Administrator determines that Shares can again be issued in accordance with such Section.

(b) As set forth in Section 12.2 of the Plan, the Company shall have the authority and the right to deduct or withhold, or to require the Participant to remit to the Company, an amount sufficient to satisfy all applicable federal, state and local taxes required by law to be withheld with respect to any taxable event arising in connection with the Restricted Stock Units. The Company shall not be obligated to deliver any new certificate representing Shares to the Participant or the Participant’s legal representative or enter such Shares in book entry form unless and until the Participant or the Participant’s legal representative shall have paid or otherwise satisfied in full the amount of all federal, state and local taxes applicable to the taxable income of the Participant resulting from the grant or vesting of the Restricted Stock Units or the issuance of Shares.

2.7 Conditions to Delivery of Shares . The Shares deliverable hereunder may be either previously authorized but unissued Shares, treasury Shares or issued Shares which have then been reacquired by the Company. Such Shares shall be fully paid and nonassessable. The Company shall not be required to issue or deliver any certificates or make any book entries evidencing Shares deliverable hereunder prior to fulfillment of the conditions set forth in Section 12.4 of the Plan.

2.8 Rights as Stockholder . The holder of the RSUs shall not be, nor have any of the rights or privileges of, a stockholder of the Company, including, without limitation, voting rights and rights to dividends, in respect of the RSUs and any Shares underlying the RSUs and deliverable hereunder unless and until such Shares shall have been issued by the Company and held of record by such holder (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company). No adjustment shall be made for a dividend or other right for which the record date is prior to the date the Shares are issued, except as provided in Section 14.2 of the Plan.

ARTICLE III.

OTHER PROVISIONS

3.1 Administration . The Administrator shall have the power to interpret the Plan and this Agreement and to adopt such rules for the administration, interpretation and application of the Plan as are consistent therewith and to interpret, amend or revoke any such rules. All actions taken and all interpretations and determinations made by the Administrator in good faith shall be final and binding upon the Participant, the Company and all other interested persons. No member of the Administrator or the Board shall be personally liable for any action, determination or interpretation made in good faith with respect to the Plan, this Agreement or the RSUs.

3.2 RSUs Not Transferable . The RSUs shall be subject to the restrictions on transferability set forth in Section 12.3 of the Plan; provided, however , that this Section 3.2 notwithstanding, with the consent of the Administrator, the RSUs may be transferred to one or more Permitted Transferees, subject to and in accordance with Section 12.3 of the Plan.

 

A-3


3.3 Tax Consultation . The Participant understands that the Participant may suffer adverse tax consequences in connection with the RSUs granted pursuant to this Agreement (and the Shares issuable with respect thereto). The Participant represents that the Participant has consulted with any tax consultants the Participant deems advisable in connection with the RSUs and the issuance of Shares with respect thereto and that the Participant is not relying on the Company for any tax advice.

3.4 Binding Agreement . Subject to the limitation on the transferability of the RSUs contained herein, this Agreement will be binding upon and inure to the benefit of the heirs, legatees, legal representatives, successors and assigns of the parties hereto.

3.5 Adjustments Upon Specified Events . The Administrator may accelerate the vesting of the RSUs in such circumstances as it, in its sole discretion, may determine. The Participant acknowledges that the RSUs are subject to adjustment, modification and termination in certain events as provided in this Agreement and Section 14.2 of the Plan.

3.6 Notices . Any notice to be given under the terms of this Agreement to the Company shall be addressed to the Company in care of the Secretary of the Company at the Company’s principal office, and any notice to be given to the Participant shall be addressed to the Participant at the Participant’s last address reflected on the Company’s records. By a notice given pursuant to this Section 3.6, either party may hereafter designate a different address for notices to be given to that party. Any notice shall be deemed duly given when sent via email or when sent by certified mail (return receipt requested) and deposited (with postage prepaid) in a post office or branch post office regularly maintained by the United States Postal Service.

3.7 Participant’s Representations . If the Shares issuable hereunder have not been registered under the Securities Act or any applicable state laws on an effective registration statement at the time of such issuance, the Participant shall, if required by the Company, concurrently with such issuance, make such written representations as are deemed necessary or appropriate by the Company and/or its counsel.

3.8 Titles . Titles are provided herein for convenience only and are not to serve as a basis for interpretation or construction of this Agreement.

3.9 Governing Law . The laws of the State of Delaware shall govern the interpretation, validity, administration, enforcement and performance of the terms of this Agreement regardless of the law that might be applied under principles of conflicts of laws.

3.10 Conformity to Securities Laws . The Participant acknowledges that the Plan and this Agreement are intended to conform to the extent necessary with all provisions of the Securities Act and the Exchange Act and any other Applicable Law. Notwithstanding anything herein to the contrary, the Plan shall be administered, and the RSUs are granted, only in such a manner as to conform to Applicable Law. To the extent permitted by Applicable Law, the Plan and this Agreement shall be deemed amended to the extent necessary to conform to such Applicable Law.

3.11 Amendment, Suspension and Termination . To the extent permitted by the Plan, this Agreement may be wholly or partially amended or otherwise modified, suspended or terminated at any time or from time to time by the Administrator or the Board; provided, however, that, except as may otherwise be provided by the Plan, no amendment, modification, suspension or termination of this Agreement shall adversely affect the RSUs in any material way without the prior written consent of the Participant.

 

A-4


3.12 Successors and Assigns . The Company may assign any of its rights under this Agreement to single or multiple assignees, and this Agreement shall inure to the benefit of the successors and assigns of the Company. Subject to the restrictions on transfer herein set forth in Section 3.2 hereof, this Agreement shall be binding upon the Participant and his or her heirs, executors, administrators, successors and assigns.

3.13 Limitations Applicable to Section 16 Persons . Notwithstanding any other provision of the Plan or this Agreement, if the Participant is subject to Section 16 of the Exchange Act, then the Plan, the RSUs and this Agreement shall be subject to any additional limitations set forth in any applicable exemptive rule under Section 16 of the Exchange Act (including any amendment to Rule 16b-3 of the Exchange Act) that are requirements for the application of such exemptive rule. To the extent permitted by Applicable Law, this Agreement shall be deemed amended to the extent necessary to conform to such applicable exemptive rule.

3.14 Not a Contract of Service Relationship . Nothing in this Agreement or in the Plan shall confer upon Participant any right to continue to serve as an employee or other service provider of the Company or any of its Affiliates or interfere with or restrict in any way with the right of the Company or any of its Affiliates, which rights are hereby expressly reserved, to discharge or to terminate for any reason whatsoever, with or without cause, the services of the Participant’s at any time.

3.15 Entire Agreement . The Plan, the Grant Notice and this Agreement (including all Exhibits thereto, if any) constitute the entire agreement of the parties and supersede in their entirety all prior undertakings and agreements of the Company and the Participant with respect to the subject matter hereof.

3.16 Section 409A . This Award is not intended to constitute “nonqualified deferred compensation” within the meaning of Section 409A of the Code (together with any Department of Treasury regulations and other interpretive guidance issued thereunder, including without limitation any such regulations or other guidance that may be issued after the date hereof, “ Section 409A ”). However, notwithstanding any other provision of the Plan, the Grant Notice or this Agreement, if at any time the Administrator determines that this Award (or any portion thereof) may be subject to Section 409A, the Administrator shall have the right in its sole discretion (without any obligation to do so or to indemnify Participant or any other person for failure to do so) to adopt such amendments to the Plan, the Grant Notice or this Agreement, or adopt other policies and procedures (including amendments, policies and procedures with retroactive effect), or take any other actions, as the Administrator determines are necessary or appropriate for this Award either to be exempt from the application of Section 409A or to comply with the requirements of Section 409A.

3.17 Limitation on Participant’s Rights . Participation in the Plan confers no rights or interests other than as herein provided. This Agreement creates only a contractual obligation on the part of the Company as to amounts payable and shall not be construed as creating a trust. Neither the Plan nor any underlying program, in and of itself, has any assets. The Participant shall have only the rights of a general unsecured creditor of the Company and its Affiliates with respect to amounts credited and benefits payable, if any, with respect to the RSUs, and rights no greater than the right to receive the Common Stock as a general unsecured creditor with respect to RSUs, as and when payable hereunder.

 

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Exhibit 10.28

AMENDMENT TO THE E.L.F. BEAUTY, INC.

2014 PHANTOM EQUITY PLAN

September 5, 2016

This Amendment (this “ Amendment ”) to the e.l.f. Beauty, Inc. (f/k/a J.A. Cosmetics Holdings, Inc.) 2014 Phantom Equity Plan (the “ Plan ”) is effective as of the date first set forth above, such amendment having been approved by the Board of Directors of e.l.f. Beauty, Inc. (the “ Company ”) pursuant to Section 8(b) of the Plan. The Plan is hereby amended as follows:

 

  1. The following will replace Section 4(c) of the Plan in its entirety as follows:

“(c) Settlement of Phantom Shares . Notwithstanding anything in the Plan or any Phantom Shares Award Agreement to the contrary, on, or as soon as administratively practicable following, the vesting of any Phantom Shares, the Company shall settle the Phantom Shares so vesting by making a payment in the form of either (i) cash denominated in RMB or (ii) shares of Company common stock, as determined by the Company, in its sole discretion. The amount of any such payment shall be calculated in good faith by the Committee. In the event of the payment in cash denominated in RMB, such payment shall be made by J.A. Cosmetics Trading (Shanghai) Co., Ltd., less any applicable taxes and other withholdings, by check or wire transfer of immediately available funds or through normal payroll processing within sixty (60) days of the date any payment is owed. In the event of the payment in shares of Company common stock, such Company common stock shall be issued subject to the satisfaction of any applicable taxes and other withholdings in such form as the Company shall determine is necessary or appropriate and the completion of any regulatory filings or approvals the Company shall determine is necessary or appropriate. All payments under the Plan are final, and no Participant will have the right to challenge or otherwise to object to the Committee’s calculation of any payment hereunder.”

 

  2. Except as provided in this Amendment, the Plan shall remain in full force and effect.

*    *    *    *    *


The undersigned, being the duly elected and acting Secretary of the Company, hereby certifies that the foregoing amendment was duly approved and adopted by the Board of Directors of the Company, effective as of the date first referenced above.

 

By:   /s/ Scott K. Milsten
 

Scott K. Milsten

Corporate Secretary

( Signature Page to Plan Amendment )

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the use in this Amendment No. 1 to Registration Statement No. 333-213333 of our report dated April 28, 2016, (September     , 2016 as to effects of the stock split discussed in the last paragraph of Note 1) relating to the consolidated financial statements of e.l.f. Beauty, Inc. and subsidiaries (formerly J.A. Cosmetics Holdings, Inc. and subsidiaries) appearing in the Prospectus, which is a part of this Registration Statement, and to the reference to us under the heading “Experts” in such prospectus.

San Francisco, California

September     , 2016

The accompanying consolidated financial statements have been adjusted to give effect to the 2.76:1 stock split of the Company’s outstanding common stock which is to be effected prior to the Company’s proposed initial public offering. The above consent is the form which will be furnished by Deloitte & Touche LLP, an independent registered public accounting firm, upon consummation of such stock split, which is described in Note 1 to the consolidated financial statements and assuming that, from September 8, 2016 to the date such stock split occurs, no other events shall have occurred that would affect the accompanying consolidated financial statements or notes thereto.

/s/ Deloitte & Touche LLP

San Francisco, California

September 8, 2016