a.k.a. Brands (AKA) - 2022 Q4 - Annual Report

Forward-Looking Statements This section outlines forward-looking statements, noting inherent risks and uncertainties that could alter actual results - This report contains forward-looking statements subject to known and unknown risks, uncertainties, and assumptions that may cause actual results to differ materially[13][14] - The company operates in a competitive and rapidly changing environment, making it difficult to predict all risks or assess the full impact of factors on the business[14] PART I ITEM 1. BUSINESS a.k.a. Brands accelerates digitally-native fashion brands for Millennial and Gen Z consumers, leveraging a data-driven model for growth and profitability Our Vision The company's vision is to be the global leader in fashion for the next generation of consumers - The company's vision is to be the global leader in fashion for the next generation of consumers through a portfolio of the most innovative brands[19] Who We Are The company accelerates high-potential fashion brands for Millennial and Gen Z consumers, driving growth and profitability - a.k.a. Brands accelerates high-potential fashion brands by integrating them into its operating model to achieve faster growth, broader reach, greater scale, and enhanced profitability[20] - The brands primarily target Millennial and Gen Z consumers who seek fashion inspiration on social media and primarily shop online[21] Key Performance Indicators | Metric | Value | | :-------------------- | :-------------------- | | Active Customer Base Growth (2022 vs 2021) | 2.7% | | Orders Placed Growth (2022 vs 2021) | 13.8% | | Sales Return Ratio (2022) | ~16.6% of net sales | | Net Sales (2022) | $611.7 million | | Adjusted EBITDA (2022) | $31.9 million | Our Brands The company's portfolio includes Princess Polly, Petal & Pup, Culture Kings, and mnml, targeting diverse youth demographics - a.k.a. Brands' portfolio includes Princess Polly (women's, 15-25), Petal & Pup (women's, 20s-30s), Culture Kings (men's streetwear, 18-35), and mnml (men's streetwear)[24][25][26][27][29] - Rebdolls, a brand purchased in December 2019, was sold back to its founder in February 2023[24] - Culture Kings operates eight experiential concept stores in Australia and New Zealand, and opened its first U.S. store in Las Vegas in November 2022, serving as a powerful customer acquisition tool[28] Our Operating Model The company employs a data-driven, agile operating model for merchandising, efficient customer acquisition, and operational flexibility - The company uses a data-driven 'test-and-repeat' merchandising model for women's brands, enabling quick reaction to customer demand with minimal inventory risk[30] - Customer acquisition is efficient through authentic digital content, social media influencers (approximately 25,000 globally), and innovative marketing strategies[33] - The operating model balances scale-enabled cost savings with operational flexibility, leveraging a flexible technology stack (Shopify backend with custom presentation layer) and third-party providers[34][35][52] - The company is committed to responsible fashion and sustainability, focusing on ethical sourcing, lower environmental impact materials, and reduced waste[38][60][62][63] Our Growth Strategies The company plans to expand brand awareness, product categories, customer relationships, and international presence, while pursuing strategic acquisitions and operational efficiencies - Plans to grow brand awareness and acquire new customers through continued investment in content creation, social media influencers, and testing omnichannel experiences like wholesale engagements and new retail stores (e.g., Princess Polly store in 2023)[40][41] - Aims to expand product categories and offerings, increase average order value, and broaden customer reach by identifying trends, leveraging data, and increasing exclusive offerings[42] - Intends to deepen customer relationships, improve retention, and increase wallet share through enhanced user experience, personalization, and loyalty programs[43] - Plans international expansion beyond core U.S. and Australian markets, targeting regions with strong social/digital media usage such as Canada, Europe, U.K., Korea, and Japan[44][45] International Sales Performance | Metric | Value | | :-------------------- | :-------------------- | | Net Sales outside U.S. & Australia (2022) | $71.8 million | | % of Total Sales (2022) | 12% | | Countries/Territories (2022) | 184 | - Seeks to grow through acquisitions of high-potential, asset-light brands with strong customer followings and proven profitability, benefiting from a.k.a.'s expertise and resources[46][47] - Aims to improve operational performance and enhance profitability by driving efficiencies, reducing input costs through collective scale, and investing in automation[48] Our Industry The company operates in the large and growing global apparel, footwear, and accessories industry, targeting digitally-native Millennial and Gen Z consumers - The company operates in the large and growing global apparel, footwear, and accessories industry, expected to grow at a CAGR of 12.8% between 2023 and 2028[49] - The U.S. online apparel, footwear, and accessories market was valued at approximately $180 billion in 2021 and is expected to reach $205 billion in 2022[50] - Millennial and Gen Z consumers, the primary target demographic, account for 23% and 32% of the global population, respectively, and are highly digitally native[51] Technology Infrastructure The company utilizes a modern, flexible, and scalable technology infrastructure, combining in-house and cloud-based SaaS solutions - The company utilizes a modern, flexible, and scalable technology infrastructure, combining in-house technology with cloud-based SaaS solutions like Shopify[52] - This approach allows for rapid and efficient scaling, limited upfront investment, and continuous iteration and improvement across marketing, merchandising, customer experience, and supply chain[52][53] Sourcing The company sources products from a diverse network of international suppliers, primarily in China, with an agile supply chain - The company sources products from a network of 311 international suppliers across 10 different countries as of December 31, 2022, primarily based in China[54][80] - An agile supply chain allows new designs to move from production to inventory in as few as 30 to 45 days, significantly faster than traditional apparel brands[55] People & Culture The company fosters an inclusive, diverse, and high-performing culture with a flexible 'work from anywhere' approach - The company promotes an inclusive, diverse, and high-performing culture with a 'work from anywhere' approach[57][58] Workforce Overview | Metric | Value | | :-------------------- | :-------------------- | | Total Employees (as of Dec 31, 2022) | >1,000 (full- and part-time) | | Primary Workforce Locations | Australia, United States | Sustainability and Responsible Fashion a.k.a. Brands is committed to sustainable and responsible fashion through ethical sourcing, environmental impact reduction, and community engagement - a.k.a. Brands promotes sustainable, responsible, and inclusive fashion by focusing on ethical sourcing, sustainability, environment, and equality & community[59] - In 2022, Princess Polly maintained valid ethical manufacturing audits for 100% of final stage production and packaging sites[60] - Presently, 20% of Princess Polly's product range is made from verified lower-impact materials, with a goal to reach over 40% by the end of 2023[62] - The business model limits overproduction through a real-time, demand-driven ordering system, and Princess Polly aims to be carbon neutral by 2030[63] Competition The company faces significant competition across various retail channels, based on product, brand, customer relationships, and experience - The company faces significant competition from eCommerce websites, traditional retailers, direct-from-manufacturer retailers, and in-person stores and boutiques[65] - Competition is based on product selection, differentiation, exclusivity, brand quality, customer relationships, relevance, convenience, ease of use, and consumer experience[66] Seasonality Historically, the fourth fiscal quarter generated the largest revenues, but U.S. expansion has diversified quarterly revenue concentration - Historically, the fourth fiscal quarter generated the largest quarterly revenues, but expansion into the U.S. market has made quarterly revenues less concentrated[67] Quarterly Revenue Distribution | Fiscal Year | Q1 | Q2 | Q3 | Q4 | | :---------- | :- | :- | :- | :- | | 2022 | 24% | 26% | 25% | 24% | | 2021 | 12% | 27% | 29% | 32% | Intellectual Property The company protects its intellectual property primarily through trademark, copyright, and trade secret laws in Australia and the United States - The company primarily protects its intellectual property through trademark, copyright, and trade secret laws in Australia and the United States[68] Intellectual Property Assets | Type | Count (as of Dec 31, 2022) | | :-------------------- | :-------------------- | | Trademark Registrations | ~496 | | Internet Domain Names | ~83 | Government Regulation The business is subject to various domestic and foreign laws and regulations, including consumer protection, data privacy, and product safety - The business is subject to various domestic and foreign laws and regulations, including consumer protection, data privacy (e.g., GDPR, CCPA), information security, and advertising[70][71] - Apparel, shoes, and accessories sold are subject to regulation by governmental agencies in Australia, New Zealand, and the United States regarding materials, labeling, and safety[72] ITEM 1A. RISK FACTORS This section outlines key risks, including economic, operational, and regulatory factors, that could materially impact the company's performance Summary of Risk Factors Key risks include economic downturns, changing consumer preferences, operational challenges, and regulatory compliance issues - Key risks include economic downturns, changes in Chinese policies, rapidly changing consumer preferences, and challenges in customer acquisition and retention[77] - Operational risks involve managing inventory effectively, increases in labor/raw material costs, and potential harm to brand reputation[77] - Regulatory and financial risks include changes in data privacy laws, accounting standards, and debt covenant compliance[77] Risks Relating to Our Business and Strategy The company faces risks from economic downturns, reliance on China-based suppliers, changing consumer preferences, and challenges in growth and operations - Economic downturns, inflation, and reduced consumer discretionary spending can adversely affect business, increasing costs and reducing demand[78] - Reliance on China-based suppliers creates exposure to economic, political, legal, and social risks in China, including increasing labor costs[80][81] - Failure to anticipate and respond to rapid changes in consumer preferences and fashion trends can lead to lost sales and diminished brand loyalty[83][84] - Inability to cost-effectively acquire new customers or retain existing ones, especially with evolving social media marketing, can harm net sales and profitability[85][87] - Growth strategy faces risks from unsuccessful acquisitions, integration difficulties, and challenges in expanding into new international markets with different consumer dynamics[95][102][107] - Shipping interruptions or increased costs, reliance on direct-to-consumer model, and negative social media commentary or influencer actions can adversely affect operations and reputation[110][111][112][115] - Operating results fluctuate seasonally, with a historical concentration in Q4, and are subject to inherent challenges in measuring key operating metrics[117][118] - Damage to corporate integrity or brand reputation due to perceptions of lower quality, increased waste, or unethical sourcing could harm brand loyalty[121][122][123] - Exposure to foreign currency exchange rate fluctuations, especially the Australian dollar, can negatively impact financial condition and results[125][126] - Weather conditions, natural disasters, and global health crises (like COVID-19) can disrupt operations, supply chains, and increase costs[127][128] - Failure to retain key personnel, including executive officers and brand founders, or attract qualified talent, can adversely affect business and strategy execution[129][130] - Decentralized brand management structure may lead to slower problem identification, coordination issues, and excessive risk-taking without central guidance[133] - Increases in labor costs, fluctuations in raw material prices, and supply chain disruptions can increase costs and affect profitability[134][135] - Problems with distribution and warehouse management systems, or failure to expand fulfillment capacity, could impair customer expectations and operating efficiencies[136][137] - Inability to promote responsible fashion from an ethically and sustainably sourced supply chain could damage brand and reputation[138] - Significant intangible assets and goodwill on the balance sheet are subject to impairment charges, as seen with Culture Kings and Rebdolls in 2022 due to worsening economic trends[140][141][142] Risks Relating to Laws and Regulation The company faces significant risks from evolving data privacy laws, supply chain compliance, accounting standard changes, and international trade policies - Evolving data privacy and security laws (e.g., GDPR, CCPA, CPRA) pose significant risks, potentially leading to government enforcement, litigation, and increased compliance costs[143][145][146][147][148] - Dependence on third-party suppliers makes the company vulnerable to supply disruptions, price fluctuations, and non-compliance with regulatory requirements[149][150] - Changes in accounting standards and subjective management estimates can significantly affect financial results[152] - Compliance costs or violations of consumer protection, promotion, and safety laws, or unethical practices by suppliers, can adversely affect operations and reputation[153] - Climate change and increased focus on sustainability issues may lead to new regulations, increased costs, and reputational damage[154][155] - Changes to U.S., Australian, or international trade policy, tariffs, or import/export regulations, or failure to comply, can materially impact business and financial results[156] - Reliance on overseas manufacturing in jurisdictions with increased bribery/corruption risk exposes the company to federal and international anti-corruption law violations and reputational harm[157] Risks Relating to Our Intellectual Property Rights and Our Technology The company's reliance on IT systems and intellectual property protection exposes it to cyber-attacks, infringement claims, and technology changes - Significant reliance on information technology systems makes the company vulnerable to damage, failure, or interruption from cyber-attacks, security breaches, and technical malfunctions[159][160] - Security breaches could lead to loss/theft of sensitive information, litigation, regulatory proceedings, and reputational harm, with insurance potentially insufficient to cover all losses[160][164][165] - Customer growth on mobile devices depends on effective use of mobile operating systems and applications, which the company does not control, posing risks if functionality degrades or costs increase[168] - Restrictions on 'cookie' tracking technologies or changes in technology could decrease the amount/accuracy of internet user information, harming marketing effectiveness[169][170] - Risk of third-party claims of intellectual property infringement, which are expensive to defend and could lead to injunctions, damages, or costly licensing agreements[171][172] - Failure to adequately establish, maintain, protect, and enforce its own intellectual property rights, including against counterfeiting and product imitation, could reduce sales and adversely affect brand value[174][176][177] Risks Relating to our Indebtedness The company's current and future indebtedness could impair liquidity, limit business opportunities, and impose restrictive covenants - Current and future indebtedness could divert funds, impair liquidity, and limit the ability to incur additional debt or capitalize on business opportunities[186][187] - Restrictive covenants in credit facilities impose operating and financial limitations, including restrictions on incurring debt, making investments, and paying dividends[193][194] - Failure to generate sufficient cash flow to service debt could force asset sales, refinancing at unfavorable terms, or acceleration of debt[191][192] - Inability to raise additional capital on acceptable terms could limit investment in business expansion, marketing, hiring, and acquisition opportunities[198] Risks Relating to Ownership of Our Common Stock Summit Partners' control, stock price volatility, internal control weaknesses, and anti-takeover provisions pose risks to common stock ownership - Summit Partners controls approximately 56.3% of common stock, enabling control over board and stockholder decisions, and potentially leading to conflicts of interest[202][204] - An active trading market for common stock may not be sustained, and the stock price has been volatile, potentially dropping below the purchase price[205][206] - Failure to remediate material weaknesses in internal control over financial reporting could lead to inaccurate financial reports, loss of investor confidence, and stock price decline[208][209][216] - As an 'emerging growth company,' the company is exempt from certain reporting requirements, which might make its common stock less attractive to investors[220] - Anti-takeover provisions in corporate documents and Delaware law might discourage or delay acquisition attempts[224][225] - No cash dividends are anticipated in the foreseeable future, meaning investment return depends solely on stock price appreciation[232] ITEM 1B. UNRESOLVED STAFF COMMENTS There are no unresolved staff comments - There are no unresolved staff comments[235] ITEM 2. PROPERTIES The company leases offices and distribution centers in Australia and the U.S., plus nine Culture Kings retail stores - The company leases offices in Los Angeles, California; Newark, New Jersey; Queensland, Australia; and its corporate headquarters in San Francisco, California[236] - It leases and operates three distribution centers in Australia but uses third parties for distribution in the United States[236] Culture Kings Retail Stores | Brand | Location | Number of Stores | | :------------ | :--------------- | :--------------- | | Culture Kings | Australia | 7 | | Culture Kings | New Zealand | 1 | | Culture Kings | United States (Las Vegas) | 1 | ITEM 3. LEGAL PROCEEDINGS The company faces ordinary legal proceedings, with management expecting no material adverse impact on its financial position - The company is subject to legal proceedings that arise in the ordinary course of business[237] - Management does not expect the ultimate liability from these legal proceedings to have a material adverse impact on the company's financial position, results of operations, or cash flows[237] ITEM 4. MINE SAFETY DISCLOSURES This item is not applicable to the company - This item is not applicable[238] PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES The company's common stock (AKA) trades on the NYSE, with no cash dividends expected as earnings are retained for growth Market Information for Common Stock The company's common stock has traded on the NYSE under the symbol 'AKA' since its initial public offering in September 2021 - The company's common stock has traded on the NYSE under the symbol 'AKA' since its initial public offering on September 22, 2021[241] Stockholders of Record As of March 6, 2023, the company had 10 stockholders of record Stockholders of Record | Metric | Value | | :-------------------- | :-------------------- | | Stockholders of Record (as of March 6, 2023) | 10 | Dividend Policy The company has never paid cash dividends and does not expect to in the foreseeable future, retaining earnings for business development - The company has never declared or paid cash dividends on its capital stock and does not expect to in the foreseeable future, intending to retain future earnings for business development[243] Stock Performance Graph This section presents a comparison of the cumulative total return for the company's common stock against the S&P 500 and S&P Retail Select Industry Indices Stock Performance Comparison | Company/Index | 9/22/2021 | 12/31/2021 | 3/31/2022 | 6/30/2022 | 9/30/2022 | 12/31/2022 | | :-------------------------- | :-------- | :--------- | :-------- | :-------- | :-------- | :--------- | | a.k.a. Brands Holding Corp. | $100.00 | $92.59 | $44.24 | $27.63 | $14.51 | $12.71 | | S&P 500 Index | $100.00 | $105.86 | $101.00 | $84.73 | $80.60 | $86.69 | | S&P Retail Select Industry Index | $100.00 | $97.02 | $81.23 | $62.88 | $61.32 | $66.25 | ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA This item is not required for the company - This item is not required[249] ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section analyzes the company's financial condition, operations, and performance for 2020-2022, covering key metrics and estimates Overview a.k.a. Brands is a fashion brand accelerator for Gen Z and Millennial audiences, reporting increased active customers and orders in 2022, alongside a significant goodwill impairment - a.k.a. Brands is a brand accelerator of fashion brands for Gen Z and Millennial audiences, with a portfolio including Princess Polly, Petal & Pup, Culture Kings, and mnml[252][253] Key Operating Metrics (2022) | Metric | 2022 | | :-------------------- | :-------------------- | | Active customers | 3.8 million (3% increase from 2021) | | Number of orders | 7.4 million (14% increase from 2021) | | Average order value | $82 | - A non-cash goodwill impairment charge of $173.8 million was recorded in 2022 for the Culture Kings and Rebdolls reporting units due to worsening economic trends and changing customer preferences[257] Key Operating and Financial Metrics This section presents key operating metrics and financial performance indicators for the fiscal years 2020-2022 Operating Metrics | Metric | 2022 | 2021 | 2020 | | :------------------------------------------ | :--------- | :--------- | :--------- | | Active customers | 3.8 million | 3.7 million | 1.4 million | | Average order value | $82 | $86 | $75 | | Number of orders | 7.4 million | 6.5 million | 2.9 million | Financial Metrics (in thousands) | Metric | 2022 | 2021 | 2020 | | :------------------------------------------ | :--------- | :--------- | :--------- | | Gross margin | 55% | 55% | 59% | | Net income (loss) (in thousands) | $(176,697) | $(6,091) | $14,805 | | Adjusted EBITDA (in thousands) | $31,872 | $62,431 | $30,282 | | Free cash flow (in thousands) | $(20,065) | $16,234 | $20,384 | Non-GAAP Financial Measures Adjusted EBITDA and Free Cash Flow are non-GAAP measures used to evaluate operating performance and liquidity, providing supplemental information to investors - Adjusted EBITDA and Free Cash Flow are non-GAAP measures used to evaluate operating performance and liquidity, providing supplemental information to investors[263] Adjusted EBITDA Reconciliation (in thousands) | Metric | 2022 | 2021 | 2020 | | :------------------------------------ | :--------- | :--------- | :--------- | | Net income (loss) | $(176,697) | $(6,091) | $14,805 | | Adjusted EBITDA | $31,872 | $62,431 | $30,282 | | Adjusted EBITDA margin | 5% | 11% | 14% | Free Cash Flow Reconciliation (in thousands) | Metric | 2022 | 2021 | 2020 | | :------------------------------------------------ | :--------- | :--------- | :--------- | | Net cash (used in) provided by operating activities | $(319) | $23,968 | $21,712 | | Less: purchases of property and equipment | (19,746) | (7,734) | (1,328) | | Free cash flow | $(20,065) | $16,234 | $20,384 | - Free Cash Flow decreased by $36.3 million in 2022 compared to 2021, primarily due to increased capital expenditures (Culture Kings Las Vegas store build-out) and decreased net income after adjusting for non-cash items[269] Factors Affecting Our Performance Macroeconomic conditions, brand awareness, customer acquisition, supply chain disruptions, and foreign currency fluctuations significantly impact the company's performance - The macroeconomic environment (inflation, potential recession, increasing labor rates) and slower COVID-19 recovery in Australia pressured net sales, operating income, and Adjusted EBITDA in 2022[270] - Brand awareness, efficient customer acquisition, and strong customer retention are critical for profitable business growth[272][273][274] - The COVID-19 pandemic continued to impact the supply chain in H1 2022, causing delays and increased air freight costs, with some reductions expected in 2023[275] - Foreign currency rate fluctuations, particularly the U.S. dollar against the Australian dollar, significantly affect net sales and operating income from international operations[276] Results of Operations Comparison of the Years Ended December 31, 2022 and 2021 Net sales increased by 9% in 2022, but a significant goodwill impairment led to a substantial net loss Consolidated Results (in thousands) | Metric | 2022 (in thousands) | 2021 (in thousands) | YoY Change | | :-------------------- | :------------------ | :------------------ | :--------- | | Net sales | $611,738 | $562,191 | +9% | | Gross profit | $337,247 | $307,664 | +10% | | Gross margin | 55% | 55% | 0% | | Selling expenses | $166,070 | $144,345 | +15% | | Marketing expenses | $66,730 | $58,120 | +15% | | General and administrative expenses | $102,700 | $88,816 | +16% | | Goodwill impairment | $173,786 | — | N/A | | Net income (loss) | $(176,697) | $(6,091) | N/A | - Net sales increased by 9% in 2022, driven by a 14% increase in orders, partially offset by a 5% decrease in average order value due to foreign currency impact, higher return rates, and incremental promotional activity[281] - A $173.8 million goodwill impairment charge was recognized in 2022 for the Culture Kings and Rebdolls reporting units due to worsening economic trends and changing customer preferences[288] Comparison of the Years Ended December 31, 2021 and 2020 Net sales surged by 160% in 2021 due to acquisitions and growth, despite a decrease in gross margin Consolidated Results (in thousands) | Metric | 2021 (in thousands) | 2020 (in thousands) | YoY Change | | :-------------------- | :------------------ | :------------------ | :--------- | | Net sales | $562,191 | $215,916 | +160% | | Gross profit | $307,664 | $126,401 | +143% | | Gross margin | 55% | 59% | -4% | | Selling expenses | $144,345 | $58,313 | +148% | | Marketing expenses | $58,120 | $17,871 | +225% | | General and administrative expenses | $88,816 | $28,077 | +216% | | Net income (loss) | $(6,091) | $14,805 | N/A | - Net sales increased by 160% in 2021, driven by a 126% increase in orders and a 15% increase in average order value, largely due to the acquisitions of Culture Kings and mnml and growth of Princess Polly in the U.S.[291] - Gross margin decreased to 55% in 2021, primarily due to a $15.9 million impact from the fair value increase in inventory acquired in the Culture Kings and mnml acquisitions, and higher air freight expense[293][294] - Total other expense, net, increased by $21.1 million in 2021, primarily due to a $10.9 million loss on extinguishment of debt and increased interest expense[298] Quarterly Results of Operations Quarterly net sales in 2022 were impacted by macroeconomic factors, while a significant goodwill impairment in Q4 2022 led to a substantial net loss Quarterly Financial Performance (in thousands) | Quarter | Mar 31, 2021 | Jun 30, 2021 | Sep 30, 2021 | Dec 31, 2021 | Mar 31, 2022 | Jun 30, 2022 | Sep 30, 2022 | Dec 31, 2022 | | :------ | :----------- | :----------- | :----------- | :----------- | :----------- | :----------- | :----------- | :----------- | | Net sales (in thousands) | $68,779 | $149,227 | $161,762 | $182,423 | $148,319 | $158,471 | $155,822 | $149,126 | | Net income (loss) (in thousands) | $1,790 | $2,189 | $(10,093) | $23 | $1,525 | $(4,212) | $(114) | $(173,896) | - Net sales in 2022 were impacted by foreign currency exchange rates, inflationary pressures, and economic slowdown, contrasting with sequential increases in 2021 driven by acquisitions[304] - A goodwill impairment of $173.8 million was recorded in Q4 2022, significantly impacting net income for that quarter[302] - Seasonality became less concentrated in Q4 in fiscal year 2022 (24% of total net sales) compared to fiscal year 2021 (32% of total net sales) due to expansion into the U.S. market[309] Quarterly Adjusted EBITDA and Adjusted EBITDA Margin Adjusted EBITDA margin declined from 12-13% in early 2021 to 4% in Q4 2022, reflecting operational pressures and the goodwill impairment Quarterly Adjusted EBITDA and Margin (in thousands) | Quarter | Mar 31, 2021 | Jun 30, 2021 | Sep 30, 2021 | Dec 31, 2021 | Mar 31, 2022 | Jun 30, 2022 | Sep 30, 2022 | Dec 31, 2022 | | :------ | :----------- | :----------- | :----------- | :----------- | :----------- | :----------- | :----------- | :----------- | | Net income (loss) (in thousands) | $1,790 | $2,189 | $(10,093) | $23 | $1,525 | $(4,212) | $(114) | $(173,896) | | Adjusted EBITDA (in thousands) | $8,326 | $19,429 | $18,547 | $16,129 | $10,652 | $5,891 | $9,236 | $6,093 | | Adjusted EBITDA margin | 12% | 13% | 11% | 9% | 7% | 4% | 6% | 4% | - Adjusted EBITDA margin declined from 12-13% in early 2021 to 4% in Q4 2022, reflecting operational pressures and the goodwill impairment[310] Liquidity and Capital Resources The company's liquidity is supported by cash, operating cash flows, and a senior secured credit facility, with compliance to all debt covenants Cash and Cash Equivalents (in thousands) | Metric | Dec 31, 2022 (in thousands) | Dec 31, 2021 (in thousands) | | :-------------------- | :-------------------------- | :-------------------------- | | Cash and cash equivalents | $46,319 | $38,832 | - Principal liquidity sources include cash, operating cash flows, and a senior secured credit facility ($100.0 million term loan, $50.0 million revolving line of credit, and $50.0 million accordion provision)[311][313] Debt Outstanding (in thousands) | Debt Type | Amount Outstanding (as of Dec 31, 2022, in thousands) | | :-------------------- | :------------------------------------------ | | Term loan and accordion borrowings | $105,150 | | Revolving line of credit | $40,000 | - The company was in compliance with all debt covenants as of December 31, 2022[314] Material Cash Requirements (in millions) | Material Cash Requirement | Total (in millions) | Within 12 Months (in millions) | | :-------------------------- | :------------------ | :----------------------------- | | Operating Lease Obligations | $48.9 | $8.3 | | Inventory Purchase Commitments | $10.2 | $10.2 | | Planned Capital Expenditures (2023) | $8.0 - $10.0 | $8.0 - $10.0 | Cash Flow Activities (in thousands) | Cash Flow Activity | 2022 (in thousands) | 2021 (in thousands) | 2020 (in thousands) | | :------------------------------------------ | :------------------ | :------------------ | :------------------ | | Net cash (used in) provided by operating activities | $(319) | $23,968 | $21,712 | | Net cash used in investing activities | $(25,314) | $(278,075) | $(2,379) | | Net cash provided by financing activities | $33,260 | $269,850 | $1,240 | - Net cash provided by operating activities decreased by $24.3 million in 2022, primarily due to timing of payments and a decrease in net income after adjusting for non-cash items, partially offset by a smaller build of inventory[321] - Net cash used in investing activities decreased by $252.8 million in 2022, mainly due to the absence of large acquisitions (Culture Kings, mnml, Petal & Pup noncontrolling interest) that occurred in 2021[324] - Net cash provided by financing activities decreased by $236.6 million in 2022, primarily attributable to the absence of IPO proceeds and large debt issuances from 2021[327] Critical Accounting Estimates Critical accounting estimates involve significant judgment in revenue recognition, inventory valuation, goodwill impairment, and income taxes - Revenue recognition involves significant judgment in estimating product returns based on historical trends and current economic conditions[330] - Inventory is valued at the lower of cost or net realizable value, requiring assumptions regarding future demand, sales volume, and sales price[331] - Goodwill and intangible assets are tested for impairment at least annually (Q4) or when circumstances indicate, using qualitative and quantitative assessments (discounted cash flow and market-based methods)[333][334] - A $173.8 million goodwill impairment was recorded in 2022 for Culture Kings and Rebdolls due to worsening economic trends and changing customer preferences[337] - Income taxes involve recognizing deferred tax assets and liabilities and evaluating uncertain tax positions, requiring judgment on realizability and sustainability[338] ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The company faces market risks from interest rate and foreign currency fluctuations, notably a $34.1 million currency translation loss in 2022 Interest Rate Sensitivity The company is exposed to interest rate changes, with a hypothetical 100 basis point increase in rates leading to a $1.5 million increase in interest expense - The company is exposed to interest rate changes, with approximately $145.2 million in debt outstanding under its senior secured credit facility as of December 31, 2022[340] - A hypothetical 100 basis point increase in underlying interest rates would increase interest expense by approximately $1.5 million[340] Foreign Currency Risk The company is exposed to foreign currency fluctuations, primarily from its Australian operations, resulting in a significant currency translation loss in 2022 - The company is exposed to fluctuations in currency exchange rates, principally related to its significant operations in Australia[342] - Movements in currency exchange rates resulted in a $34.1 million net loss in the currency translation category of accumulated other comprehensive income (loss) in 2022[342] - Foreign currency remeasurement resulted in a $1.6 million net loss in other expense for the year ended December 31, 2022[343] ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA This section presents the audited consolidated financial statements for 2020-2022, including core statements and detailed accounting notes REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM PricewaterhouseCoopers issued an unqualified opinion on the consolidated financial statements for the three years ended December 31, 2022 - PricewaterhouseCoopers audited the consolidated financial statements for the three years ended December 31, 2022, and issued an unqualified opinion[350] - The audit confirmed that the financial statements present fairly, in all material respects, the financial position, results of operations, and cash flows in conformity with GAAP[350] - The audit did not include an opinion on the effectiveness of the company's internal control over financial reporting[352] CONSOLIDATED BALANCE SHEETS Total assets and stockholders' equity decreased significantly in 2022, primarily due to a substantial reduction in goodwill and net loss Consolidated Balance Sheets (in thousands) | Metric | Dec 31, 2022 (in thousands) | Dec 31, 2021 (in thousands) | | :-------------------- | :-------------------------- | :-------------------------- | | Total Assets | $509,638 | $687,846 | | Goodwill | $167,731 | $363,305 | | Total Liabilities | $262,561 | $236,820 | | Total Stockholders' Equity | $247,077 | $451,026 | - Total assets decreased by $178.2 million in 2022, primarily due to a significant reduction in goodwill[357] - Total stockholders' equity decreased by $203.9 million in 2022, reflecting the net loss and other comprehensive losses[357] CONSOLIDATED STATEMENTS OF INCOME The company reported a significant net loss of $176.7 million in 2022, primarily driven by a substantial goodwill impairment charge Consolidated Statements of Income (in thousands) | Metric | 2022 (in thousands) | 2021 (in thousands) | 2020 (in thousands) | | :------------------------------------------ | :------------------ | :------------------ | :------------------ | | Net sales | $611,738 | $562,191 | $215,916 | | Gross profit | $337,247 | $307,664 | $126,401 | | Total operating expenses | $509,286 | $291,281 | $104,261 | | Goodwill impairment | $173,786 | — | — | | Net income (loss) | $(176,697) | $(6,091) | $14,805 | | Net income (loss) per share (Basic & Diluted) | $(1.37) | $(0.06) | $0.21 | - The company reported a net loss of $176.7 million in 2022, a significant increase from a $6.1 million net loss in 2021, primarily due to a $173.8 million goodwill impairment charge[359] CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Total comprehensive loss significantly increased to $210.8 million in 2022, driven by the net loss and a $34.1 million currency translation loss Consolidated Statements of Comprehensive Income (in thousands) | Metric | 2022 (in thousands) | 2021 (in thousands) | 2020 (in thousands) | | :------------------------------------------ | :------------------ | :------------------ | :------------------ | | Net income (loss) | $(176,697) | $(6,091) | $14,805 | | Currency translation | $(34,105) | $(27,619) | $11,355 | | Total comprehensive income (loss) | $(210,802) | $(33,710) | $26,160 | - Total comprehensive loss significantly increased to $210.8 million in 2022, primarily driven by the net loss and a $34.1 million loss from currency translation adjustments[361] CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, PARTNERS' CAPITAL AND REDEEMABLE NONCONTROLLING INTEREST Total stockholders' equity decreased significantly in 2022 due to the net loss and negative cumulative translation adjustments Consolidated Statements of Stockholders' Equity (in thousands) | Metric | Dec 31, 2022 (in thousands) | Dec 31, 2021 (in thousands) | | :------------------------------------------ | :-------------------------- | :-------------------------- | | Common Stock (shares) | 129,007,033 | 128,647,836 | | Additional Paid-In Capital | $460,660 | $453,807 | | Accumulated Other Comprehensive Loss | $(45,185) | $(11,080) | | Retained Earnings (Accumulated Deficit) | $(168,527) | $8,170 | | Total Stockholders' Equity | $247,077 | $451,026 | - Total stockholders' equity decreased from $451.0 million in 2021 to $247.1 million in 2022, primarily due to the net loss and a $34.1 million negative cumulative translation adjustment[365] CONSOLIDATED STATEMENTS OF CASH FLOWS Net cash used in operating activities increased in 2022, while cash used in investing and provided by financing activities decreased significantly due to fewer acquisitions and IPO proceeds Consolidated Statements of Cash Flows (in thousands) | Cash Flow Activity | 2022 (in thousands) | 2021 (in thousands) | 2020 (in thousands) | | :------------------------------------------ | :------------------ | :------------------ | :------------------ | | Net cash (used in) provided by operating activities | $(319) | $23,968 | $21,712 | | Net cash used in investing activities | $(25,314) | $(278,075) | $(2,379) | | Net cash provided by financing activities | $33,260 | $269,850 | $1,240 | - Net cash used in operating activities was $0.3 million in 2022, a decrease from $24.0 million provided in 2021[368] - Net cash used in investing activities decreased significantly from $278.1 million in 2021 to $25.3 million in 2022, primarily due to fewer acquisitions[368] - Net cash provided by financing activities decreased from $269.9 million in 2021 to $33.3 million in 2022, reflecting the absence of IPO proceeds and large debt issuances[368] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Organization and Description of Business a.k.a. Brands is an online fashion retailer focused on acquiring and accelerating digitally native brands, completing an IPO and refinancing in 2021 - a.k.a. Brands Holding Corp. is an online fashion retailer focused on acquiring and accelerating the growth of next-generation, digitally native fashion brands targeting Gen Z and Millennial customers[371] - The company completed an initial public offering (IPO) in September 2021, issuing 10,000,000 shares of common stock for net proceeds of $95.7 million[373] - In connection with the IPO, a reorganization was undertaken, causing Excelerate, L.P. to become a wholly-owned subsidiary of a.k.a. Brands Holding Corp.[375] - Refinancing transactions in September 2021 repaid previous Fortress Credit Facilities and Summit Notes in full, utilizing IPO proceeds and borrowings from a new senior secured credit facility[379] Note 2. Significant Accounting Policies This note details the company's significant accounting policies, including revenue recognition, inventory valuation, business combinations, and goodwill impairment - Consolidated financial statements are prepared in accordance with GAAP, requiring management to make significant estimates and assumptions[382][383] - Inventory is valued at the lower of cost or net realizable value, with provisions for excess and obsolete inventory based on assumptions regarding future demand and sales prices[389][390] - Business combinations are accounted for using the acquisition method, recording identifiable assets acquired and liabilities assumed at their acquisition date fair values, with goodwill representing the excess purchase price[397] - Goodwill is tested for impairment at least annually in the fourth quarter, or whenever circumstances indicate, using discounted cash flow and market-based valuation methods[405] - Revenue is recognized upon shipment or at the point of sale, net of sales returns and discounts, with a returns reserve estimated based on historical trends[430][431][432] Sales Returns Reserve (in thousands) | Metric | Dec 31, 2022 (in thousands) | Dec 31, 2021 (in thousands) | | :-------------------- | :-------------------------- | :-------------------------- | | Beginning balance | $6,887 | $3,517 | | Returns | $(101,716) | $(80,915) | | Allowance | $98,797 | $84,285 | | Ending balance | $3,968 | $6,887 | Net Sales by Geography (in thousands) | Geography | 2022 (in thousands) | 2021 (in thousands) | 2020 (in thousands) | | :-------------------- | :------------------ | :------------------ | :------------------ | | United States | $312,977 | $270,028 | $125,179 | | Australia | $226,929 | $218,563 | $67,850 | | Rest of world | $71,832 | $73,600 | $22,887 | | Total | $611,738 | $562,191 | $215,916 | - Recently adopted accounting pronouncements, ASU 2019-12 (Income Taxes) and ASU 2020-04 (Reference Rate Reform), did not have a material impact on the consolidated financial statements[443][444] Note 3. Acquisitions This note details the company's significant acquisitions in 2021, including Culture Kings and mnml, and the purchase of remaining noncontrolling interests - On March 31, 2021, the company acquired a 55% ownership stake in Culture Kings for AUD $307.4 million ($235.9 million) in cash and noncontrolling interest with a fair value of AUD $186.0 million ($142.7 million), recognizing $264.5 million in goodwill[446][447][452] Culture Kings Acquisition - Identifiable Net Assets Acquired (in thousands) | Item | Value (in thousands) | | :------------------------------------------ | :-------------------- | | Inventory | $62,937 | | Brand names | $68,354 | | Customer relationships | $4,855 | | Goodwill | $264,549 | - On October 14, 2021, the company acquired all equity interests of mnml for total consideration of $46.1 million, including $28.2 million cash and $17.3 million in common stock, recognizing $30.0 million in goodwill[456][458] mnml Acquisition - Identifiable Net Assets Acquired (in thousands) | Item | Value (in thousands) | | :------------------------------------------ | :-------------------- | | Inventory | $7,321 | | Brand | $11,800 | | Customer relationships | $2,500 | | Goodwill | $29,990 | - In 2021, the company purchased the remaining noncontrolling interests in Culture Kings (for common stock) and Petal & Pup (for cash), making them wholly-owned subsidiaries[460][461] Note 4. Prepaid Expenses and Other Current Assets Prepaid expenses and other current assets decreased in 2022, primarily due to a significant reduction in inventory prepayments Prepaid Expenses and Other Current Assets (in thousands) | Item | Dec 31, 2022 (in thousands) | Dec 31, 2021 (in thousands) | | :-------------------- | :-------------------------- | :-------------------------- | | Security deposits | $2,945 | $741 | | Inventory prepayments | $3,067 | $14,251 | | Other | $7,366 | $5,817 | | Total | $13,378 | $20,809 | - Prepaid expenses and other current assets decreased from $20.8 million in 2021 to $13.4 million in 2022, primarily due to a significant decrease in inventory prepayments[462] Note 5. Property and Equipment, Net Property and equipment, net, increased in 2022, driven by additions in leasehold improvements, machinery, and computer equipment Property and Equipment, Net (in thousands) | Item | Dec 31, 2022 (in thousands) | Dec 31, 2021 (in thousands) | | :------------------------------------------ | :-------------------------- | :-------------------------- | | Furniture and fixtures | $2,367 | $1,305 | | Machinery and equipment | $5,188 | $1,595 | | Computer equipment and capitalized software | $6,015 | $2,638 | | Leasehold improvements | $24,816 | $12,457 | | Total property and equipment, net | $28,958 | $14,657 | - Property and equipment, net, increased from $14.7 million in 2021 to $29.0 million in 2022, driven by additions in leasehold improvements, machinery, and computer equipment[463] - Total depreciation expense was $6.2 million in 2022, up from $2.7 million in 2021[463] Note 6. Goodwill Goodwill decreased significantly in 2022 due to a $173.8 million non-cash impairment charge for Culture Kings and Rebdolls Goodwill Carrying Value (in thousands) | Year | Goodwill Carrying Value (in thousands) | | :--- | :----------------------------------- | | Dec 31, 2022 | $167,731 | | Dec 31, 2021 | $363,305 | - Goodwill decreased significantly from $363.3 million in 2021 to $167.7 million in 2022, primarily due to a $173.8 million non-cash goodwill impairment charge recorded in Q4 2022[464] - The impairment charge was for the Culture Kings and Rebdolls reporting units, with $60.0 million of goodwill remaining for Culture Kings and Rebdolls' goodwill fully impaired as of December 31, 2022[464] Note 7. Intangible Assets Net identifiable intangible assets decreased in 2022, with amortization expense of $14.2 million, and an intra-entity transfer of Culture Kings' intellectual property occurred Intangible Assets, Net (in thousands) | Item | Dec 31, 2022 (in thousands) | Dec 31, 2021 (in thousands) | | :-------------------- | :-------------------------- | :-------------------------- | | Customer relationships | $21,703 | $24,516 | | Brands | $84,278 | $100,315 | | Total intangible assets, net | $76,105 | $98,287 | - Net identifiable intangible assets decreased from $98.3 million in 2021 to $76.1 million in 2022, with amortization expense of $14.2 million in 2022[466] - An intra-entity transfer of certain intellectual property rights related to Culture Kings' brands to a U.S. subsidiary occurred in September 2022, resetting its gross value to the net book value of $48.7 million[466] Estimated Amortization Expense (in thousands) | Year Ending December 31 | Estimated Amortization Expense (in thousands) | | :------------------------ | :------------------------------------------ | | 2023 | $10,812 | | 2024 | $10,288 | | 2025 | $9,578 | | 2026 | $8,923 | | 2027 | $8,423 | | Thereafter | $28,081 | | Total | $76,105 | Note 8. Debt The company refinanced its debt in 2021 with a new senior secured credit facility and was in compliance with all debt covenants as of December 31, 2022 - Previous credit facilities (Princess Polly, Rebdolls, Fortress Credit Facilities, Summit Notes) were repaid and terminated in 2021[469][470][473][477] - In September 2021, the company entered into a new senior secured credit facility, including a $100.0 million term loan, a $50.0 million revolving line of credit, and a $50.0 million accordion feature[475] Total Debt (in thousands) | Item | Dec 31, 2022 (in thousands) | Dec 31, 2021 (in thousands) | | :-------------------------- | :-------------------------- | :-------------------------- | | Term loan | $105,150 | $110,750 | | Revolving credit facility | $40,000 | — | | Capitalized debt issuance costs | $(1,501) | $(1,968) | | Total debt | $143,649 | $108,782 | - As of December 31, 2022, the company was in compliance with all debt covenants[475] - Interest expense was $7.0 million in 2022, down from $9.5 million in 2021, due to more favorable rates under the new senior secured credit facility[481] Note 9. Leases The company leases various facilities under non-cancellable operating lease agreements, with total lease costs increasing in 2022 - The company leases office, warehouse, and retail facilities under non-cancellable operating lease agreements with remaining terms of approximately 1 to 10 years[482] Total Lease Costs (in thousands) | Lease Cost Type | 2022 (in thousands) | 2021 (in thousands) | 2020 (in thousands) | | :-------------------- | :------------------ | :------------------ | :------------------ | | Operating lease costs | $8,890 | $5,823 | $1,192 | | Variable lease costs | $609 | $343 | $130 | | Short-term lease costs | $430 | $136 | — | | Total lease costs | $9,929 | $6,302 | $1,322 | Operating Lease Liabilities (in thousands) | Year Ending December 31 | Operating Lease Liabilities (in thousands) | | :------------------------ | :--------------------------------------- | | 2023 | $8,322 | | 2024 | $6,688 | | 2025 | $5,971 | | 2026 | $5,153 | | 2027 | $4,944 | | Thereafter | $17,830 | | Total remaining lease payments | $48,908 | | Total operating lease liabilities | $41,047 | - A new Culture Kings store in Las Vegas commenced its lease in March 2022 and opened in November 2022, with base rent payments of approximately $1.7 million for the first twelve months[485] Note 10. Income Taxes The company reported an income tax benefit in 2022, primarily due to goodwill impairment and an intra-entity intellectual property transfer Income Tax Expense (Benefit) (in thousands) | Metric | 2022 (in thousands) | 2021 (in thousands) | 2020 (in thousands) | | :------------------------------------------ | :------------------ | :------------------ | :------------------ | | Income (loss) from continuing operations before income taxes | $(180,614) | $(5,239) | $21,655 | | Income tax expense (benefit) | $(3,917) | $852 | $6,850 | - The company reported a benefit from income tax of $3.9 million in 2022, compared to a provision of $0.9 million in 2021, primarily due to the goodwill impairment and an intra-entity transfer of intellectual property rights[290][487] Deferred Tax Assets and Liabilities (in thousands) | Item | Dec 31, 2022 (in thousands) | Dec 31, 2021 (in thousands) | | :-------------------- | :-------------------------- | :-------------------------- | | Total deferred tax assets | $19,741 | $15,715 | | Total deferred tax liabilities | $(18,955) | $(18,635) | | Net deferred assets (liabilities) | $786 | $(2,920) | - As of December 31, 2022, the company had a $7.1 million Australian net operating loss carryforward and a $15.8 million Australian capital loss carryforward, with a full valuation allowance recorded on the capital loss carryforward[489] Note 11. Accrued Liabilities Accrued liabilities decreased in 2022, primarily due to reductions in sales tax payable and accrued freight costs Accrued Liabilities (in thousands) | Item | Dec 31, 2022 (in thousands) | Dec 31, 2021 (in thousands) | | :-------------------------- | :-------------------------- | :-------------------------- | | Accrued salaries and other benefits | $10,569 | $11,746 | | Accrued freight costs | $5,064 | $9,199 | | Sales tax payable | $15,999 | $20,008 | | Accrued marketing costs | $2,566 | $2,543 | | Accrued professional services | $2,509 | $1,698 | | Other accrued liabilities | $3,099 | $8,181 | | Total accrued liabilities | $39,806 | $53,375 | - Accrued liabilities decreased from $53.4 million in 2021 to $39.8 million in 2022, primarily due to decreases in sales tax payable ($4.0 million) and accrued freight costs ($4.1 million)[494] Note 12. Equity-based Compensation The company adopted new equity incentive plans in 2021, with significant unrecognized compensation costs for unvested stock options and RSUs as of December 31, 2022 - The company adopted the 2021 Omnibus Incentive Plan and the 2021 Employee Stock Purchase Plan (ESPP) in connection with its IPO[495][496] - The 2018 Stock and Incentive Compensation Plan was terminated in September 2021 but continues to govern outstanding incentive units granted prior to the IPO[500] Equity-based Compensation Expense (in thousands) | Award Type | 2022 (in thousands) | 2021 (in thousands) | 2020 (in thousands) | | :-------------------------- | :------------------ | :------------------ | :------------------ | | Stock options | $495 | $95 | — | | RSUs | $2,943 | $655 | — | | ESPP purchase rights | $188 | — | — | | Time-based incentive units | $3,104 | $2,390 | $1,380 | | Performance-based incentive units | — | $4,903 | — | | Total | $6,730 | $8,043 | $1,380 | - As of December 31, 2022, there was $1.3 million of total unrecognized compensation cost re