a.k.a. Brands (AKA) - 2022 Q1 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements The company's quarterly financial statements show significant acquisition-driven sales growth, increased assets and liabilities, and a negative shift in operating cash flow Condensed Consolidated Balance Sheets Total assets grew to $727.6 million, driven by inventory and goodwill, while total liabilities rose to $259.3 million due to increased long-term debt Balance Sheet Summary (in thousands) | Metric | March 31, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Total Current Assets | $197,010 | $184,332 | | Inventory, net | $120,598 | $115,783 | | Total Assets | $727,627 | $687,846 | | Total Current Liabilities | $90,002 | $108,015 | | Long-term debt | $126,901 | $103,182 | | Total Liabilities | $259,303 | $236,820 | | Total Stockholders' Equity | $468,324 | $451,026 | Condensed Consolidated Statements of Income Net sales more than doubled to $148.3 million, but higher operating expenses resulted in a slight decrease in net income to $1.5 million Income Statement Summary (in thousands, except per share data) | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :--- | :--- | :--- | | Net sales | $148,319 | $68,779 | | Gross profit | $84,196 | $40,588 | | Income from operations | $3,349 | $2,680 | | Net income | $1,525 | $1,790 | | Diluted EPS | $0.01 | $0.02 | Condensed Consolidated Statements of Cash Flows Net cash from operations turned to a $14.9 million outflow due to increased inventory and liability payments, a reversal from the prior year's inflow Cash Flow Summary (in thousands) | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(14,903) | $18,974 | | Net cash used in investing activities | $(4,703) | $(226,022) | | Net cash provided by financing activities | $22,337 | $219,743 | | Net increase in cash | $2,654 | $12,369 | Notes to Condensed Consolidated Financial Statements The notes detail the company's business, recent acquisitions like Culture Kings and mnml, accounting policies, and new credit facilities - The company is an online fashion retailer targeting Gen Z and Millennial customers through a portfolio of digitally native brands[27] - In March 2021, the company acquired a 55% ownership stake in Culture Kings for cash consideration of AUD $307.4 million ($235.9 million) and a noncontrolling interest valued at AUD $186.0 million ($142.7 million)[44] - In October 2021, the company acquired mnml for total consideration of $46.1 million, consisting of $28.2 million in cash and $17.3 million in common stock[52] Net Sales by Geography (in thousands) | Geography | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :--- | :--- | :--- | | United States | $77,668 | $42,830 | | Australia | $51,895 | $19,015 | | Rest of world | $18,756 | $6,934 | | Total | $148,319 | $68,779 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the 116% net sales growth driven by acquisitions, a decrease in gross margin, and ongoing remediation of two material weaknesses in internal controls Key Operating Metrics | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :--- | :--- | :--- | | Active Customers (millions) | 3.8 | 1.6 | | Average Order Value | $83 | $78 | | Total Orders (millions) | 1.8 | 0.9 | Reconciliation of Net Income to Adjusted EBITDA (in thousands) | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :--- | :--- | :--- | | Net income | $1,525 | $1,790 | | Adjustments | $9,127 | $6,536 | | Adjusted EBITDA | $10,652 | $8,326 | | Adjusted EBITDA margin | 7% | 12% | - Net sales increased by $79.5 million (116%) YoY, driven by a 100% increase in orders processed and a 6% increase in average order value; acquisitions contributed $59.5 million to net sales[134] - Gross margin decreased from 59% to 57% primarily due to higher air freight expenses and the inclusion of Culture Kings, which has a lower mix of exclusive products[136] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from interest rate changes on its $109.4 million of variable-rate debt and foreign currency fluctuations, particularly with the Australian dollar - A hypothetical 100 basis point increase or decrease in underlying interest rates would change annual interest expense by approximately $1.0 million based on debt levels at March 31, 2022[159] - The company has significant exposure to the Australian dollar; a hypothetical 10% change in the AUD exchange rate could lead to a $47.8 million foreign currency translation fluctuation[160] Item 4. Controls and Procedures Management concluded that disclosure controls were ineffective as of March 31, 2022, due to two unremediated material weaknesses in internal control over financial reporting - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were not effective as of March 31, 2022, due to two material weaknesses[162] - The first material weakness is the insufficient design, implementation, and documentation of internal controls at the entity level and across key financial processes[163][164] - The second material weakness is the failure to design and implement controls to maintain appropriate segregation of duties in manual and IT-based business processes[163][164] - Remediation efforts are in progress, including hiring additional personnel and a third-party consulting firm, but the material weaknesses were not considered remediated as of March 31, 2022[165] PART II - OTHER INFORMATION Item 1. Legal Proceedings The company is involved in ordinary course legal proceedings that are not expected to have a material adverse financial impact - Management believes that ongoing legal proceedings will not have a material adverse impact on the company's financial condition or results[171] Item 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K - No material changes to the risk factors previously disclosed in the Annual Report have been identified[172] Item 6. Exhibits This section lists filed exhibits, including corporate governance documents, credit agreements, and officer certifications required by the Sarbanes-Oxley Act - The report includes standard corporate governance documents, credit agreements, and equity compensation plans as exhibits[176] - Certifications from the Principal Executive Officer and Principal Financial Officer, as required by Sections 302 and 906 of the Sarbanes-Oxley Act, are filed with the report[176]