a.k.a. Brands (AKA) - 2023 Q2 - Quarterly Report

FORM 10-Q Cover Page - The report is a Quarterly Report on Form 10-Q for the period ended June 30, 2023[1] Registrant Information | Indicator | Value | | :--- | :--- | | Registrant Name | a.k.a. Brands Holding Corp. | | Commission File Number | 001-40828 | | Trading Symbol | AKA | | Exchange | New York Stock Exchange | | Filer Status | Non-accelerated filer, Emerging Growth Company | | Common Stock Outstanding (as of Aug 7, 2023) | 128,528,888 shares | Forward-Looking Statements - The report contains forward-looking statements regarding future results, financial position, plans, goals, intentions, objectives, strategies, expectations, beliefs, and assumptions[12] - These statements are subject to known and unknown risks, uncertainties, and assumptions that may cause actual results to differ materially[12] - Key risk factors include economic downturns, ability to comply with NYSE listing standards, rapid changes in consumer preferences, ability to acquire and retain customers, inventory management, international business risks (including China), supply chain disruptions, reliance on social media, fluctuations in operating results, and ability to maintain brand reputation[13][15] Part I - Financial Information Item 1. Financial Statements The financial statements for a.k.a. Brands Holding Corp. for the period ended June 30, 2023, show a decrease in total assets and stockholders' equity compared to December 31, 2022, alongside a net loss for both the three and six months ended June 30, 2023. Operating activities generated positive cash flow for the six months ended June 30, 2023, a significant improvement from the prior year Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheet Highlights (in thousands) | Metric | June 30, 2023 | December 31, 2022 | Change | | :--- | :--- | :--- | :--- | | Total Assets | $464,196 | $509,638 | -$45,442 | | Total Liabilities | $234,083 | $262,561 | -$28,478 | | Total Stockholders' Equity | $230,113 | $247,077 | -$16,964 | | Cash and Cash Equivalents | $25,876 | $46,319 | -$20,443 | | Inventory, net | $106,695 | $126,533 | -$19,838 | Condensed Consolidated Statements of Income Condensed Consolidated Statements of Income Highlights (in thousands, except per share) | Metric | 3 Months Ended Jun 30, 2023 | 3 Months Ended Jun 30, 2022 | 6 Months Ended Jun 30, 2023 | 6 Months Ended Jun 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $136,028 | $158,471 | $256,513 | $306,790 | | Gross Profit | $77,356 | $87,447 | $145,856 | $171,643 | | Income (Loss) from Operations | $(1,121) | $(2,574) | $(7,672) | $775 | | Net Loss | $(5,040) | $(4,212) | $(14,593) | $(2,687) | | Net Loss Per Share (Basic & Diluted) | $(0.04) | $(0.03) | $(0.11) | $(0.02) | Condensed Consolidated Statements of Comprehensive Income Condensed Consolidated Statements of Comprehensive Income (in thousands) | Metric | 3 Months Ended Jun 30, 2023 | 3 Months Ended Jun 30, 2022 | 6 Months Ended Jun 30, 2023 | 6 Months Ended Jun 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Net Loss | $(5,040) | $(4,212) | $(14,593) | $(2,687) | | Currency translation | $(1,930) | $(39,031) | $(5,855) | $(24,626) | | Total comprehensive loss | $(6,970) | $(43,243) | $(20,448) | $(27,313) | Condensed Consolidated Statements of Changes in Stockholders' Equity - Total stockholders' equity decreased from $247,077 thousand as of December 31, 2022, to $230,113 thousand as of June 30, 2023, primarily due to net loss and cumulative translation adjustments[26] - The company repurchased 673,839 shares for $299 thousand during the six months ended June 30, 2023[26] Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows (in thousands) | Metric | 6 Months Ended Jun 30, 2023 | 6 Months Ended Jun 30, 2022 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $7,290 | $(23,587) | | Net cash used in investing activities | $(3,680) | $(7,962) | | Net cash (used in) provided by financing activities | $(24,175) | $20,905 | | Net decrease in cash, cash equivalents and restricted cash | $(20,496) | $(10,243) | Notes to Condensed Consolidated Financial Statements Note 1. Organization and Description of Business - a.k.a. Brands Holding Corp. is an online fashion retailer focused on acquiring and growing digitally native fashion brands targeting Gen Z and Millennial customers[31] - The company is headquartered in San Francisco, California, with key functions primarily in Australia and the United States[32] Note 2. Significant Accounting Policies - The financial statements are prepared in accordance with SEC's Regulation S-X and GAAP, with certain footnotes condensed or omitted[33] - Revenue is primarily from online sales of apparel merchandise, recognized when control of the product passes to the customer (upon transfer to a third-party carrier or at point of sale for stores)[35][36] - A sales return reserve is established at the time of sale based on historical experience, recorded as a reduction of sales; the reserve was $6.1 million as of June 30, 2023, up from $4.0 million as of December 31, 2022[38] Sales Return Reserve (in thousands) | Metric | Amount | | :--- | :--- | | Balance as of Dec 31, 2022 | $3,968 | | Returns (Jan 1 - Jun 30, 2023) | $(48,542) | | Allowance (Jan 1 - Jun 30, 2023) | $50,681 | | Balance as of Jun 30, 2023 | $6,107 | Net Sales by Geography (in thousands) | Geography | 3 Months Ended Jun 30, 2023 | 3 Months Ended Jun 30, 2022 | 6 Months Ended Jun 30, 2023 | 6 Months Ended Jun 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | U.S. | $79,967 | $82,277 | $152,593 | $159,945 | | Australia/New Zealand | $48,037 | $67,076 | $89,483 | $129,600 | | Rest of world | $8,024 | $9,118 | $14,437 | $17,245 | | Total | $136,028 | $158,471 | $256,513 | $306,790 | Note 3. Disposals - In March 2023, the Company sold its Rebdolls reporting unit back to its founder, recording a pre-tax loss of $1.0 million[42] - The Company retained an 18% ownership in Rebdolls, but the investment was deemed to have no value[42] Note 4. Prepaid Expenses and Other Current Assets Prepaid Expenses and Other Current Assets (in thousands) | Metric | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Security deposits | $568 | $2,945 | | Inventory prepayments | $7,405 | $3,067 | | Other | $8,775 | $7,366 | | Total | $16,748 | $13,378 | Note 5. Property and Equipment, Net Property and Equipment, Net (in thousands) | Metric | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total property and equipment, net | $27,862 | $28,958 | - Total depreciation expense was $4.2 million for the six months ended June 30, 2023, up from $2.7 million in the same period of 2022[44] Note 6. Goodwill Goodwill Activity (in thousands) | Metric | Amount | | :--- | :--- | | Balance as of Dec 31, 2022 | $167,731 | | Changes in foreign currency translation | $(3,591) | | Balance as of Jun 30, 2023 | $164,140 | - No goodwill impairment was recorded during the six months ended June 30, 2023 or 2022[45] Note 7. Intangible Assets Intangible Assets, Net (in thousands) | Metric | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total intangible assets, net | $69,641 | $76,105 | - Amortization of acquired intangible assets was $5.9 million for the six months ended June 30, 2023, down from $8.1 million in the same period of 2022[48] Future Estimated Amortization Expense (in thousands) | Year ending December 31: | Amortization Expense | | :--- | :--- | | Remainder of 2023 | $5,259 | | 2024 | $10,192 | | 2025 | $9,482 | | 2026 | $8,761 | | 2027 | $8,334 | | Thereafter | $27,613 | | Total amortization expense | $69,641 | Note 8. Debt - The Company has a senior secured credit facility including a $100.0 million term loan and a $50.0 million revolving line of credit, with an option for an additional $50.0 million term loan[50] - As of June 30, 2023, outstanding debt included $102.35 million for the term loan and $18.9 million for the revolving credit facility[54] - The all-in interest rate for the term loan and revolving line of credit was 8.33% as of June 30, 2023[53] - The Company was in compliance with all debt covenants as of June 30, 2023[52] - Interest expense increased to $5.7 million for the six months ended June 30, 2023, from $2.7 million in the prior year, due to rising interest rates[54] Note 9. Leases - The Company leases office locations, warehouse facilities, and stores under non-cancellable operating lease agreements with terms of approximately 1 to 10 years[55] Operating Lease Costs (in thousands) | Metric | 3 Months Ended Jun 30, 2023 | 3 Months Ended Jun 30, 2022 | 6 Months Ended Jun 30, 2023 | 6 Months Ended Jun 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Operating lease costs | $2,561 | $2,347 | $4,911 | $4,512 | | Variable lease costs | $204 | $170 | $394 | $318 | | Short-term lease costs | $93 | $90 | $187 | $219 | | Total lease costs | $2,858 | $2,607 | $5,492 | $5,049 | - The weighted-average remaining lease term was 6.8 years as of June 30, 2023, with a weighted-average discount rate of 5.0%[58] Note 10. Income Taxes Effective Tax Rate | Metric | 3 Months Ended Jun 30, 2023 | 3 Months Ended Jun 30, 2022 | 6 Months Ended Jun 30, 2023 | 6 Months Ended Jun 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Loss before income taxes | $(4,712) | $(5,167) | $(15,148) | $(2,989) | | Benefit from (provision for) income taxes | $(328) | $955 | $555 | $302 | | Effective tax rate | 7.0% | (18.5)% | (3.7)% | (10.1)% | - The income tax expense for the three months ended June 30, 2023, was primarily due to discrete items related to equity-based compensation[61] Note 11. Accrued Liabilities Accrued Liabilities (in thousands) | Metric | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Accrued salaries and other benefits | $8,282 | $10,569 | | Accrued freight costs | $4,437 | $5,064 | | Sales tax payable | $5,432 | $15,999 | | Accrued marketing costs | $4,795 | $2,566 | | Accrued professional services | $1,286 | $2,509 | | Other accrued liabilities | $5,483 | $3,099 | | Total accrued liabilities | $29,715 | $39,806 | Note 12. Deferred Revenue Deferred Revenue (in thousands) | Metric | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Gift cards | $10,555 | $10,829 | | Other | $653 | $592 | | Total deferred revenue | $11,208 | $11,421 | Note 13. Equity-based Compensation - The 2021 Omnibus Incentive Plan (2021 Plan) and 2021 Employee Stock Purchase Plan (ESPP) govern equity awards; the 2021 Plan was amended to increase shares available by 10,000,000[64][65] - Total unrecognized compensation cost related to unvested stock options was $1.0 million (expected over 2.0 years) and for RSUs was $8.1 million (expected over 2.2 years) as of June 30, 2023[69][70] Equity-Based Compensation Expense (in thousands) | Award Type | 3 Months Ended Jun 30, 2023 | 3 Months Ended Jun 30, 2022 | 6 Months Ended Jun 30, 2023 | 6 Months Ended Jun 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Stock options | $125 | $91 | $249 | $213 | | RSUs | $988 | $540 | $2,016 | $1,183 | | ESPP purchase rights | $63 | — | $126 | — | | Time-based incentive units | $648 | $863 | $1,369 | $1,466 | | Total | $1,824 | $1,494 | $3,760 | $2,862 | Note 14. Stockholders' Equity - The Company has 500,000,000 authorized shares of common stock and 50,000,000 authorized shares of preferred stock, with no preferred stock issued[76][77] - A share repurchase program was approved on May 25, 2023, authorizing up to $2.0 million in common stock repurchases[78] - During the three and six months ended June 30, 2023, the Company repurchased 673,839 shares for $0.3 million at an average price of $0.44 per share[78] Note 15. Net Income (Loss) Per Share Net Income (Loss) Per Share | Metric | 3 Months Ended Jun 30, 2023 | 3 Months Ended Jun 30, 2022 | 6 Months Ended Jun 30, 2023 | 6 Months Ended Jun 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Net loss (in thousands) | $(5,040) | $(4,212) | $(14,593) | $(2,687) | | Weighted-average common shares outstanding, basic and diluted | 129,138,138 | 128,657,271 | 129,089,647 | 128,652,580 | | Net loss per share, basic and diluted | $(0.04) | $(0.03) | $(0.11) | $(0.02) | - Due to net losses, no potentially dilutive securities had an impact on diluted loss per share for any period[80] Note 16. Commitments and Contingencies - The Company is subject to legal proceedings in the ordinary course of business but does not believe current actions would have a material adverse impact on financial position or results[81] - The Company provides indemnifications to vendors, directors, officers, and other parties but has not incurred material costs or accrued liabilities related to these obligations[82] Note 17. Subsequent Events - No subsequent events requiring disclosure occurred through August 9, 2023, the date the financial statements were issued[83] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The Company experienced a decline in net sales and an increased net loss for both the three and six months ended June 30, 2023, primarily due to adverse macroeconomic conditions in Australia, reduced orders, and lower average order value. Despite these challenges, gross margin improved due to full-price sales and lower freight costs, and operating cash flow significantly improved year-over-year. The Company continues to manage liquidity through its credit facility and share repurchase program Overview - a.k.a. Brands is a brand accelerator of fashion brands for Gen Z and Millennial audiences, leveraging a next-generation operating model to accelerate growth, scale in new markets, and enhance profitability[86] - The portfolio includes Princess Polly, Petal & Pup, Culture Kings, and mnml, targeting distinct age groups and fashion preferences[88] - The Rebdolls reporting unit was sold back to its founder in March 2023[87] Key Operating and Financial Metrics Key Operating Metrics | Operating Metric | 3 Months Ended Jun 30, 2023 | 3 Months Ended Jun 30, 2022 | 6 Months Ended Jun 30, 2023 | 6 Months Ended Jun 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Active customers (millions) | 3.6 | 3.9 | 3.6 | 3.9 | | Average order value | $82 | $85 | $81 | $84 | | Number of orders (millions) | 1.7 | 1.9 | 3.1 | 3.7 | Key GAAP and Non-GAAP Financial Metrics (in thousands) | Financial Metric | 3 Months Ended Jun 30, 2023 | 3 Months Ended Jun 30, 2022 | 6 Months Ended Jun 30, 2023 | 6 Months Ended Jun 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Gross margin | 57% | 55% | 57% | 56% | | Net loss | $(5,040) | $(4,212) | $(14,593) | $(2,687) | | Net loss margin | (4)% | (3)% | (6)% | (1)% | | Adjusted EBITDA | $5,568 | $5,891 | $7,754 | $16,543 | | Adjusted EBITDA margin | 4% | 4% | 3% | 5% | | Net cash provided by (used in) operating activities | N/A | N/A | $7,290 | $(23,587) | | Free Cash Flow | N/A | N/A | $3,672 | $(29,390) | Non-GAAP Financial Measures - The Company uses non-GAAP financial measures like Adjusted EBITDA, Adjusted EBITDA margin, and Free Cash Flow to evaluate operating performance and make strategic decisions, noting they are supplemental and not GAAP substitutes[93] Adjusted EBITDA and Adjusted EBITDA Margin - Adjusted EBITDA excludes interest, taxes, depreciation, amortization, equity-based compensation, inventory step-up amortization, distribution center relocation costs, transaction costs, severance, goodwill/intangible impairment, sales tax penalties, insured losses, and one-time items[94] Adjusted EBITDA and Margin Reconciliation (in thousands) | Metric | 3 Months Ended Jun 30, 2023 | 3 Months Ended Jun 30, 2022 | 6 Months Ended Jun 30, 2023 | 6 Months Ended Jun 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Net loss | $(5,040) | $(4,212) | $(14,593) | $(2,687) | | Adjusted EBITDA | $5,568 | $5,891 | $7,754 | $16,543 | | Net loss margin | (4)% | (3)% | (6)% | (1)% | | Adjusted EBITDA margin | 4% | 4% | 3% | 5% | Free Cash Flow - Free Cash Flow is calculated as net cash provided by (used in) operating activities minus purchases of property and equipment[96] Free Cash Flow Reconciliation (in thousands) | Metric | 6 Months Ended Jun 30, 2023 | 6 Months Ended Jun 30, 2022 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $7,290 | $(23,587) | | Less: purchases of property and equipment | $(3,618) | $(5,803) | | Free Cash Flow | $3,672 | $(29,390) | - Free Cash Flow increased by $33.1 million for the six months ended June 30, 2023, primarily due to a decrease in inventory and lower property and equipment purchases[101] Factors Affecting Our Performance - The macroeconomic environment, including inflation, rising interest rates, and shifts in global spending, continues to pressure net sales, marketing ROI, and operating income[102] - These factors have led to reduced orders, increased merchandise returns, higher discounts, lower net sales, lower gross margins, and increased inventories[103] - Brand awareness, customer acquisition, and customer retention are critical for success, with the Company planning to invest in marketing and loyalty programs[104][105][106] - Foreign currency rate fluctuations, particularly against the Australian dollar, significantly impact net sales and operating income due to international operations[108] Results of Operations Results of Operations Summary (in thousands) | Metric | 3 Months Ended Jun 30, 2023 | 3 Months Ended Jun 30, 2022 | 6 Months Ended Jun 30, 2023 | 6 Months Ended Jun 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $136,028 | $158,471 | $256,513 | $306,790 | | Cost of sales | $58,672 | $71,024 | $110,657 | $135,147 | | Gross profit | $77,356 | $87,447 | $145,856 | $171,643 | | Total operating expenses | $78,477 | $90,021 | $153,528 | $170,868 | | Income (loss) from operations | $(1,121) | $(2,574) | $(7,672) | $775 | | Net loss | $(5,040) | $(4,212) | $(14,593) | $(2,687) | Comparison of the Three Months Ended June 30, 2023 and 2022 Net Sales - Net sales decreased by $22.4 million (14%) to $136.0 million, driven by an 11% decrease in orders and a 4% decrease in average order value, primarily due to adverse macroeconomic conditions in Australia[112] - On a constant currency basis, net sales would have decreased 11% and average order value would have been flat[112] Cost of Sales - Cost of sales decreased by $12.4 million (17%) to $58.7 million, primarily due to reduced net sales and lower inbound air freight costs[113] - As a percentage of net sales, cost of sales decreased from 45% to 43%, driven by higher full-price sales volume in the U.S. and lower freight costs[113] Gross Profit - Gross profit decreased by $10.1 million (12%) to $77.4 million, mainly due to the reduction in net sales, partially offset by lower inbound air freight costs[114] - Gross margin increased from 55% to 57%, attributed to higher full-price sales in the U.S. and lower inbound air freight costs[114] Selling Expenses - Selling expenses decreased by $9.3 million (21%) to $35.9 million, due to reduced net sales and operational efficiencies in distribution, fulfillment, and outbound shipping[115] - As a percentage of net sales, selling expenses decreased from 29% to 26%[115] Marketing Expenses - Marketing expenses decreased by $0.7 million (4%) to $18.4 million[116] - As a percentage of net sales, marketing expenses increased from 12% to 13%, primarily due to lower sales volume[116] General and Administrative Expenses - General and administrative expenses decreased by $1.5 million (6%) to $24.2 million, driven by lower intangible amortization and salaries/benefits, partially offset by increased severance and equity-based compensation[117] - As a percentage of net sales, G&A expenses increased from 16% to 18% due to lower net sales[117] Other Expense, Net - Other expense, net increased by $1.0 million to $3.6 million, primarily due to $1.4 million in additional interest expense from rising variable interest rates, partially offset by foreign currency translation impacts in the prior year[118] Benefit From (Provision For) Income Taxes - The income tax position changed by $1.3 million, from a $955 thousand benefit in 2022 to a $328 thousand provision in 2023, due to discrete items related to equity-based compensation[119] Comparison of the Six Months Ended June 30, 2023 and 2022 Net Sales - Net sales decreased by $50.3 million (16%) to $256.5 million, driven by a 16% decrease in orders and a 4% decrease in average order value, primarily due to adverse macroeconomic conditions in Australia[121] - On a constant currency basis, net sales would have decreased 14% and average order value would have increased 1% to $82[121] Cost of Sales - Cost of sales decreased by $24.5 million (18%) to $110.7 million, primarily due to fewer orders and lower inbound air freight costs, partially offset by a higher merchandise return rate[122] - As a percentage of net sales, cost of sales decreased from 44% to 43%, due to lower inbound air freight costs and higher full-price sales in the U.S.[122] Gross Profit - Gross profit decreased by $25.8 million (15%) to $145.9 million, mainly due to the 16% decrease in total orders[123] - Gross margin increased from 56% to 57%, attributed to higher full-price sales in the U.S. and lower inbound air freight costs[123] Selling Expenses - Selling expenses decreased by $15.3 million (18%) to $70.3 million, due to reduced net sales and operational efficiencies in distribution, fulfillment, and outbound shipping[124] - As a percentage of net sales, selling expenses decreased from 28% to 27%[124] Marketing Expenses - Marketing expenses decreased by $1.6 million (5%) to $33.1 million[125] - As a percentage of net sales, marketing expenses increased from 11% to 13% due to lower net sales[125] General and Administrative Expenses - General and administrative expenses decreased by $0.4 million (1%) to $50.1 million, primarily due to lower intangible amortization and salaries, partially offset by increased equity-based compensation, severance, and professional fees[126] - As a percentage of net sales, G&A expenses increased from 16% to 20% due to lower net sales[126] Other Expense, Net - Other expense, net increased by $3.7 million to $7.5 million, primarily due to $3.0 million in additional interest expense from rising variable interest rates and a $1.0 million loss on the sale of the Rebdolls reporting unit[127] Benefit From Income Taxes - Benefit from income taxes increased by $0.3 million (84%) to $0.6 million, due to an increase in loss before income taxes[128] Liquidity and Capital Resources - As of June 30, 2023, principal liquidity sources were $25.9 million in cash and cash equivalents, the revolving line of credit, and the term loan accordion provision[129] - The Company believes existing cash, operating cash flows, and available borrowing capacity will be sufficient for the next 12 months and beyond[130] Senior Secured Credit Facility - The facility includes a $100.0 million term loan and a $50.0 million revolving line of credit, with an option for an additional $50.0 million term loan[131] - As of June 30, 2023, the Company owed $102.4 million on the term loan and accordion borrowings, and $18.9 million on the revolving line of credit[131] - The Company is subject to financial covenant ratios and mandatory prepayment terms based on excess cash flows and net leverage ratio[132] Material Cash Requirements - No significant changes in material cash requirements from those reported in the 2022 Form 10-K[134] Historical Cash Flows Historical Cash Flows (in thousands) | Cash Flow | 6 Months Ended Jun 30, 2023 | 6 Months Ended Jun 30, 2022 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $7,290 | $(23,587) | | Net cash used in investing activities | $(3,680) | $(7,962) | | Net cash (used in) provided by financing activities | $(24,175) | $20,905 | - Net cash provided by operating activities increased by $30.9 million for the six months ended June 30, 2023, primarily due to a decrease in inventory[137] - Net cash used in investing activities decreased by $4.3 million, mainly due to lower cash paid from holdbacks related to the mnml acquisition and reduced property and equipment purchases[139] - Net cash used in financing activities decreased by $45.1 million, primarily due to $25.0 million in proceeds from the revolving line of credit in 2022 and $23.9 million in principal payments on the senior secured credit facility in 2023[141] Share Repurchase Program (Liquidity) - The board approved a share repurchase program on May 25, 2023, authorizing up to $2.0 million of common stock repurchases[142] - During the three and six months ended June 30, 2023, 673,839 shares were repurchased for $0.3 million at an average price of $0.44 per share[142] Critical Accounting Estimates - No significant changes in critical accounting estimates from those reported in the 2022 Form 10-K[143] Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company is exposed to market risks from interest rate changes and foreign currency fluctuations, particularly the Australian dollar. Rising interest rates could increase annual interest expense, and currency movements have resulted in significant translation losses and remeasurement fluctuations Interest Rate Sensitivity - A hypothetical 100 basis point increase or decrease in interest rates would change annual interest expense by approximately $1.2 million, based on $121.3 million in outstanding debt as of June 30, 2023[146] - Variable interest rates on the senior secured credit facility mean continued interest rate increases could adversely impact borrowings[147] Foreign Currency Risk - Operations in Australia expose the Company to fluctuations in the U.S. dollar against the Australian dollar[148] - A hypothetical 10% increase or decrease in the Australian dollar exchange rate could result in a $19.6 million foreign currency translation fluctuation[148] - Net losses from currency exchange rate movements were $0.2 million for the three months and $0.3 million for the six months ended June 30, 2023, impacting other expense[149] Item 4. Controls and Procedures The Company's management concluded that disclosure controls and procedures were not effective as of June 30, 2023, due to two un-remediated material weaknesses related to entity-level controls and segregation of duties. Despite these weaknesses, the financial statements are fairly presented. Remediation efforts are ongoing Evaluation of Disclosure Controls and Procedures - Management concluded that disclosure controls and procedures were not effective at the reasonable assurance level as of June 30, 2023, due to material weaknesses[152] - Despite the material weaknesses, management believes the consolidated financial statements fairly present the Company's financial position, results of operations, and cash flows[152] Material Weaknesses - Two un-remediated material weaknesses were identified: insufficient design, implementation, and documentation of internal controls at the entity level and across key business/financial processes, and lack of appropriate segregation of duties in manual and IT-based processes[153][155] Remediation Status of Material Weaknesses - Remediation efforts include hiring experienced financial reporting personnel, implementing new processes, engaging a third-party consulting firm, enhancing documentation, providing additional training, and increasing oversight[154] - For segregation of duties, the Company is identifying key systems, implementing enhanced standards, reviewing control design, and increasing staff training[155] - While progress has been made, the material weaknesses were not remediated as of June 30, 2023, as enhanced processes and procedures are still being developed, implemented, and tested[156] Changes in Internal Control over Financial Reporting - No changes in internal control over financial reporting materially affected, or are reasonably likely to materially affect, internal control during the period[157] Part II - Other Information Item 1. Legal Proceedings The Company is involved in legal proceedings arising in the ordinary course of business but management believes the ultimate liability will not have a material adverse impact on its financial position or results of operations - Management believes current legal actions will not materially impact the Company's financial position, results of operations, or cash flows[160] Item 1A. Risk Factors The Company faces a new material risk related to its ability to regain compliance with the NYSE's minimum share price listing standard, which could lead to delisting and negatively impact its stock price, ability to raise financing, and reputation - The NYSE notified the Company on April 12, 2023, that its average closing stock price was below $1.00, violating listing standards[162] - The Company has six months to regain compliance, potentially through a reverse stock split, subject to board and stockholder approval[163] - Delisting could reduce stock liquidity and market price, decrease investor interest, impact equity financing, and harm the Company's reputation[164] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The Company initiated a share repurchase program in May 2023, authorizing up to $2.0 million in common stock repurchases, and has already repurchased a portion of these shares - A share repurchase program was approved on May 25, 2023, authorizing up to $2.0 million of common stock repurchases[165] Share Repurchase Activity (June 2023) | Period | Total Number of Shares Purchased | Average Price Paid per Share | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program (millions) | | :--- | :--- | :--- | :--- | | June 1, 2023 - June 30, 2023 | 673,839 | $0.44 | $1.7 | | Total | 673,839 | | | Item 3. Defaults Upon Senior Securities Not applicable Item 4. Mine Safety Disclosures Not applicable Item 5. Other Information No Rule 10b5-1 trading plans were adopted or terminated by directors or executive officers during the three months ended June 30, 2023 - No Rule 10b5-1 trading plans were adopted or terminated by directors or executive officers during the three months ended June 30, 2023[170] Item 6. Exhibits This section lists the exhibits filed with or incorporated by reference into the Quarterly Report on Form 10-Q, including the Amended and Restated Certificate of Incorporation, Bylaws, an amendment to the Omnibus Incentive Plan, and various certifications - Key exhibits include the Amended and Restated Certificate of Incorporation, Amended and Restated Bylaws, Amendment No. 1 to the Omnibus Incentive Plan, and certifications from the Interim CEO and CFO[171] Signatures The report was duly signed on August 9, 2023, by Ciaran Long, Interim Chief Executive Officer and Chief Financial Officer of a.k.a. Brands Holding Corp - The report was signed by Ciaran Long, Interim Chief Executive Officer and Chief Financial Officer, on August 9, 2023[177]