a.k.a. Brands (AKA) - 2022 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements This section presents a.k.a. Brands Holding Corp.'s unaudited condensed consolidated financial statements as of September 30, 2022, including balance sheets, income statements, and cash flows, with detailed notes Condensed Consolidated Balance Sheets Total assets decreased slightly to $670.3 million as of September 30, 2022, primarily due to reduced goodwill, while total liabilities increased to $270.6 million due to higher long-term debt Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $31,114 | $38,832 | | Inventory, net | $136,931 | $115,783 | | Goodwill | $326,855 | $363,305 | | Total Assets | $670,258 | $687,846 | | Liabilities & Equity | | | | Total current liabilities | $108,814 | $108,015 | | Long-term debt | $124,334 | $103,182 | | Total Liabilities | $270,559 | $236,820 | | Total Stockholders' Equity | $399,699 | $451,026 | Condensed Consolidated Statements of Income Q3 2022 net sales decreased 3.7% to $155.8 million, while gross profit remained stable and net loss significantly improved to $0.1 million from $10.1 million in Q3 2021 Q3 2022 vs Q3 2021 Income Statement (in thousands) | Metric | Q3 2022 | Q3 2021 | | :--- | :--- | :--- | | Net sales | $155,822 | $161,762 | | Gross profit | $86,857 | $86,110 | | Income from operations | $2,742 | $1,165 | | Net loss | $(114) | $(10,093) | | Diluted net loss per share | $0.00 | $(0.11) | Nine Months Ended Sep 30, 2022 vs 2021 Income Statement (in thousands) | Metric | Nine Months 2022 | Nine Months 2021 | | :--- | :--- | :--- | | Net sales | $462,612 | $379,768 | | Gross profit | $258,500 | $208,132 | | Income from operations | $3,517 | $11,128 | | Net loss | $(2,801) | $(6,114) | | Diluted net loss per share | $(0.02) | $(0.07) | Condensed Consolidated Statements of Cash Flows Net cash used in operating activities was $11.4 million for the nine months ended September 30, 2022, a shift from cash provided in the prior year, primarily due to increased inventory Cash Flow Summary (Nine Months Ended Sep 30, in thousands) | Cash Flow Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(11,417) | $20,631 | | Net cash used in investing activities | $(16,205) | $(251,802) | | Net cash provided by financing activities | $19,453 | $261,528 | | Net (decrease) increase in cash | $(7,958) | $29,527 | Notes to Condensed Consolidated Financial Statements Detailed notes cover the company's IPO, acquisitions, revenue disaggregation by geography, debt facilities, lease obligations, and equity-based compensation plans - The company completed its IPO in September 2021, issuing 10 million shares for net proceeds of $95.7 million[29] Net Sales by Geography (Nine Months Ended Sep 30, in thousands) | Region | 2022 | 2021 | | :--- | :--- | :--- | | U.S. | $242,117 | $190,470 | | Australia | $166,377 | $142,163 | | Rest of world | $54,118 | $47,135 | | Total | $462,612 | $379,768 | - The company acquired a 55% stake in Culture Kings in March 2021 for $369.8 million, including $264.5 million in goodwill, acquiring the remaining interest concurrently with the IPO[45][46] - In October 2021, the company acquired mnml for $46.1 million, including $30.0 million in goodwill[52][54] - As of September 30, 2022, total debt was $129.9 million, comprising a $106.6 million term loan and $25.0 million on its revolving credit facility[74][161] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, noting a 4% Q3 2022 net sales decrease due to lower average order value, while nine-month net sales grew 22%, covering key metrics, non-GAAP measures, macroeconomic pressures, and liquidity Key Operating and Financial Metrics Active customers grew to 3.8 million, but Average Order Value decreased to $85, and Adjusted EBITDA margin compressed significantly to 6% in Q3 2022 due to macroeconomic pressures Key Operating Metrics | Metric (in millions, except AOV) | Q3 2022 | Q3 2021 | | :--- | :--- | :--- | | Active customers | 3.8 | 3.1 | | Average order value | $85 | $89 | | Number of orders | 1.8 | 1.8 | Key Financial Metrics (Non-GAAP) | Metric (in thousands) | Q3 2022 | Q3 2021 | | :--- | :--- | :--- | | Adjusted EBITDA | $9,236 | $18,547 | | Adjusted EBITDA margin | 6% | 11% | Results of Operations Q3 2022 net sales decreased 4% to $155.8 million due to lower AOV, while gross margin improved to 56%; nine-month net sales increased 22% to $462.6 million, driven by higher orders from acquisitions - Q3 2022 net sales decreased by $5.9 million (4%) year-over-year, primarily due to a 4% decrease in average order value; on a constant currency basis, net sales would have been flat[139] - Q3 2022 gross margin increased to 56% from 53%, primarily due to the absence of a $6.0 million inventory step-up charge from the Culture Kings acquisition in the prior year[140][141] - For the nine months ended September 30, 2022, net sales grew by $82.8 million (22%) year-over-year, driven by a 25% increase in orders, largely due to the acquisitions of Culture Kings and mnml[149] - Marketing expenses for the nine-month period increased 40% year-over-year, outpacing sales growth, due to reduced marketing channel effectiveness and mnml's higher advertising spend rate[154] Liquidity and Capital Resources As of September 30, 2022, the company had $31.1 million in cash, with liquidity primarily from operations and a senior secured credit facility, deemed sufficient for the next 12 months, despite $11.4 million net cash used in operations due to inventory build-up - Principal sources of liquidity as of September 30, 2022, were $31.1 million in cash and cash equivalents, a revolving line of credit, and a term loan[160] - The company's senior secured credit facility includes a $100.0 million term loan and a $50.0 million revolving line of credit, with $106.6 million outstanding on the term loan and $25.0 million on the revolver as of September 30, 2022[161] - Net cash used in operating activities for the nine months ended September 30, 2022, was $11.4 million, a shift from $20.6 million provided in the prior year, primarily due to an inventory build-up for Culture Kings' U.S. expansion[165] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from interest rate and foreign currency fluctuations, with a 100 basis point interest rate change impacting annual interest expense by $1.3 million, and a 10% Australian dollar change affecting accumulated other comprehensive loss by $43.4 million - A hypothetical 100 basis point change in interest rates would impact annual interest expense by approximately $1.3 million based on September 30, 2022, debt levels[171] - The company is exposed to foreign currency risk from Australian operations; a hypothetical 10% change in the Australian dollar could lead to a $43.4 million fluctuation in the currency translation adjustment[172] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were ineffective as of September 30, 2022, due to material weaknesses in internal control design, documentation, and segregation of duties, with remediation efforts ongoing - Management concluded that the company's disclosure controls and procedures were not effective as of September 30, 2022[174] - Ineffectiveness stems from two material weaknesses: insufficient design and documentation of internal controls, and lack of appropriate segregation of duties in manual and IT processes[175] - Remediation efforts are underway, including hiring experienced personnel and a third-party consulting firm, but material weaknesses are not yet remediated[176][177] PART II - OTHER INFORMATION Item 1. Legal Proceedings The company is subject to ordinary course legal proceedings, not expecting a material adverse impact on its financial position or results of operations - Ongoing legal proceedings are not expected to have a material adverse impact on the company's financial position, results of operations, or cash flows[181] Item 1A. Risk Factors No material changes to risk factors previously disclosed in the company's 2021 Annual Report on Form 10-K are reported - The company reports no material changes to the risk factors disclosed in its 2021 Form 10-K[182] Item 6. Exhibits This section lists exhibits filed with the quarterly report, including CEO and CFO certifications and Inline XBRL documents - The report includes required exhibits such as CEO and CFO certifications under Sarbanes-Oxley Sections 302 and 906, and XBRL data files[185]