A.K.A. BRANDS HOLDING CORP. You should read the following discussion and analysis of our financial condition and results of operations together with the condensed consolidated financial statements and related notes that are included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements based upon current plans, expectations and beliefs that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements because of various factors, including those set forth in the sections captioned "Risk Factors" and "Forward-Looking Statements" and in other parts of this Quarterly Report on Form 10-Q. Our fiscal year ends onDecember 31 . Overview Established in 2018, a.k.a. Brands is a brand accelerator of direct-to-consumer fashion brands for the next generation. Each brand in the a.k.a. portfolio is customer obsessed, curates quality exclusive merchandise, creates authentic and inspiring social content and targets a distinct Gen Z and Millennial audience. a.k.a. Brands leverages its next-generation retail platform to help each brand accelerate its growth, scale in new markets and enhance its profitability. We founded a.k.a. with a focus on Millennial and Gen Z audiences who primarily shop for fashion on social media. We have since built a portfolio of four high-growth digital brands with distinct fashion offerings and consumer followings: •InJuly 2018 , we acquired a controlling interest inPrincess Polly , an Australian fashion brand focusing on fun, trendy dresses, tops, shoes and accessories with slim fit, body-confident and trendy fashion designs. The brand targets a female customer between the ages of 15 and 25.Princess Polly has successfully expanded in theU.S. , growingU.S. sales by 161% in 2020 as compared to 2019. •InAugust 2019 , we acquired a controlling interest in Petal & Pup, an Australian fashion brand offering an assortment of trendy, flattering and feminine styles and dresses for special occasions. The brand targets female customers typically in their 20s or 30s, with more than half of customers in the 18-34-year-old age bracket. Since joining a.k.a., Petal & Pup has successfully expanded in theU.S. , which was the brand's fastest growing market in 2020. In connection with the reorganization transactions and the IPO, Petal & Pup became our wholly-owned subsidiary. •InDecember 2019 , we acquiredU.S. -based Rebdolls. The brand offers apparel with a full range of sizes from 0 to 32 and emphasizes size inclusivity. The typical customer is a diverse woman between the ages of 18 and 34. •InMarch 2021 , we acquired a controlling interest in Culture Kings, anAustralia -based premium online retailer of streetwear apparel, footwear, headwear and accessories. The brand targets male consumers between the ages of 18 and 35 who are fashion conscious, highly social and digitally focused. In connection with the reorganization transactions and the IPO, Culture Kings became our wholly-owned subsidiary. Initial Public Offering InSeptember 2021 , we completed an initial public offering (the "IPO"), in which we issued and sold 10,000,000 shares of newly authorized common stock for$11.00 per share for net proceeds of$95.5 million , after deducting underwriting discounts and commissions of$6.6 million , and offering costs of$7.9 million .
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Key Operating and Financial MetricsOperating Metrics We use the following metrics to assess the progress of our business, make decisions on where to allocate capital, time and technology investments and assess the near-term and longer-term performance of our business. The following table sets forth our key operating metrics for each period presented:
Three Months Ended September 30, Nine Months Ended September 30,
(in millions, other than dollar 2021 2020
amounts) 2021 2020
Active customers 3.1 1.3 3.1 1.3
Active customers across a.k.a. 3.1 2.0 3.1 2.0
Brands(1)
Average order value $ 89$ 79 $ 87$ 74 Average order value across a.k.a. $ 89$ 84 $ 89$ 82
Brands(1)
Number of orders 1.8 0.8 4.4 2.0 Number of orders across a.k.a. 1.8 1.3 4.9 3.2
Brands(1)
(1) Includes the impact of Culture Kings as if it had been acquired onJanuary 1, 2020 . Active Customers We view the number of active customers as a key indicator of our growth, the value proposition and consumer awareness of our brand, and their desire to purchase our products. In any particular period, we determine our number of active customers by counting the total number of unique customer accounts who have made at least one purchase in the preceding 12-month period, measured from the last date of such period. Average Order Value We define average order value as net sales in a given period divided by the total orders placed in that period. Average order value may fluctuate as we expand into new categories or geographies or as our assortment changes. Key Financial Metrics The following table sets forth our key GAAP and non-GAAP financial metrics for for each period presented: Three Months EndedSeptember 30 ,
Nine Months Ended
2021 2020 2021 2020
Gross margin 53% 61 % 55% 58 %
Net income (loss) (in thousands)
$ (6,114) $ 9,508 Net income (loss) margin (6)% 12 % (2)% 7 % Adjusted EBITDA (in thousands)$ 18,548 $ 12,906 $ 46,302 $ 19,850 Adjusted EBITDA margin 11 % 20 % 12 % 14 % Net cash provided by operating $ 20,631$ 8,972 activities (in thousands) Free cash flow (in thousands) $ 15,916$ 7,969
Adjusted EBITDA, Adjusted EBITDA Margin and free cash flow are non-GAAP measures. See "Non-GAAP Financial Measures" for information regarding our use of Adjusted EBITDA, Adjusted EBITDA margin and free cash flow and their reconciliation to net income, net income margin and net cash provided by operating activities, respectively. See also "Components of Our Results of Operations" for more information.
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Non-GAAP Financial Measures
In addition to our results determined in accordance with GAAP, we monitor the
following non-GAAP financial measures to evaluate our operating performance,
identify trends, formulate financial projections and make strategic decisions on
a consolidated basis. Accordingly, we believe that non-GAAP financial
information, when taken collectively, may provide useful supplemental
information to investors and others in understanding and evaluating our results
of operations in the same manner as our management team. The non-GAAP financial
measures are presented for supplemental informational purposes only. They should
not be considered a substitute for financial information presented in accordance
with GAAP, and may be different from similarly-titled non-GAAP measures used by
other companies. A reconciliation is provided below for each non-GAAP financial
measure to the most directly comparable financial measure stated in accordance
with GAAP. Investors are encouraged to review the related GAAP financial
measures and the reconciliation of these non-GAAP financial measures to their
most directly comparable GAAP financial measures.
Adjusted EBITDA
Adjusted EBITDA does not represent net income or cash flow from operating
activities as it is defined by GAAP and does not necessarily indicate whether
cash flows will be sufficient to fund cash needs. Because other companies may
calculate EBITDA and Adjusted EBITDA differently than we do, Adjusted EBITDA may
not be comparable to similarly titled measures reported by other companies.
Adjusted EBITDA has other limitations as an analytical tool when compared to the
use of net income, which we believe is the most directly comparable GAAP
financial measure, including:
•Adjusted EBITDA does not reflect the interest income or expense we incur;
•Adjusted EBITDA does not reflect the provision of or benefit from income tax
expense;
•Adjusted EBITDA does not reflect any attribution of costs to our operations
related to our investments and capital expenditures through depreciation and
amortization charges;
•Adjusted EBITDA does not reflect any transaction or debt extinguishment costs;
•Adjusted EBITDA does not reflect any amortization expense associated with fair
value adjustments from purchase price accounting, including intangibles or
inventory step-up; and
•Adjusted EBITDA does not reflect the cost of compensation we provide to our
employees in the form of equity awards.
The following tables reflect a reconciliation of Adjusted EBITDA to net income,
the most directly comparable financial measure prepared in accordance with GAAP:
Three Months Ended September 30, Nine Months Ended September 30,
In thousands 2021 2020 2021 2020
Net income (loss) $ (10,093) $ 7,294 $ (6,114) $ 9,508
Add (deduct):
Total other expense, net 15,589 220 19,867 390
Provision for (benefit from) income tax (4,331) 3,375 (2,625) 4,399
Depreciation and amortization expense 4,235 1,602 11,336 4,719
Inventory step-up amortization expense 5,985 - 12,251 -
Equity-based compensation expense 5,582 415 6,714 834
Transaction costs 1,581 - 4,873 -
Adjusted EBITDA $ 18,548 $ 12,906 $ 46,302 $ 19,850
Net income (loss) margin (6) % 12 % (2) % 7 %
Adjusted EBITDA margin 11 % 20 % 12 % 14 %
Free Cash Flow
We calculate free cash flow as net cash provided by operating activities reduced
by purchases of property and equipment. Management believes free cash flow is a
useful measure of liquidity and an additional basis for assessing our ability to
generate cash. There are limitations related to the use of free cash flow as an
analytical tool, including: other companies may calculate free cash flow
differently, which reduces its usefulness as a comparative measure; and free
cash flow does not reflect our future contractual commitments nor does it
represent the total residual cash flow for a given period.
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The following table presents a reconciliation of free cash flow to net cash
provided by operating activities, the most directly comparable financial measure
prepared in accordance with GAAP:
Nine
Months Ended
2021 2020
Net cash provided by operating activities $ 20,631 $ 8,972
Less: purchases of property and equipment (4,715) (1,003)
Free cash flow $ 15,916 $ 7,969
Our free cash flow has fluctuated over time primarily as a result of timing of
inventory purchases to support our rapid growth. While we have strong long-term
relationships with our manufacturers, we usually pay for our inventory in
advance. This supports our test and repeat buying model and helps with our
ability to move new designs we receive from our suppliers into production and
then into inventory in as few as 30-45 days. Our operating model requires a low
level of capital expenditure.
Factors Affecting Our Performance
Impact of COVID-19
With the onset of the COVID-19 pandemic, the ability to purchase through
eCommerce channels became increasingly important to consumers, as many
businesses, including brick-and-mortar retail stores, were ordered to close and
people were required to stay at home. While demand for our products improved
during this time period, the extent of this heightened demand remains uncertain.
We believe the pandemic has accelerated the awareness of our brands and a shift
in purchasing decisions that will continue to drive future growth. As in-store
shopping begins to regain momentum across the world, the growing awareness of
our brand and future sales growth may begin to slow.
Certain of our manufacturers experienced delays and shut-downs due to the
COVID-19 pandemic, which caused delays on shipments of products. In order to
manage the impact of these disruptions and meet our customers' expectations, we
increased our use of more expensive air freight during portions of 2020 and
2021, which increased our cost of goods sold. In addition, the ongoing impact of
the pandemic is continuing to result in reduced cargo capacity on airplanes, and
as a result we expect increased demand and prices for shipping services to
continue. As a result, we expect to continue to make increased use of more
expensive air freight, which will continue to result in increased cost of goods.
While we have been able to offset increased shipping prices to some extent to
date by targeted price increases, there can be no assurance that we will
continue to be able to do so, or that prices for shipping services will not
increase to a level that does not permit us to do so. Other impacts of the
pandemic on us have included, and in the future could include:
•volatility in demand for our products as a result of, among other things, the
inability of customers to purchase our products due to financial hardship,
unemployment, illness or out of fear of exposure to COVID-19, shifts in demand
away from consumer discretionary products and reduced options for marketing and
promotion of products or other restrictions in connection with the COVID-19
pandemic;
•cancellations of in-person events, including weddings and festivals, such as
Coachella, causing a reduction in demand for certain product categories;
•increased materials and procurement costs as a result of scarcity of and/or
increased prices for commodities and raw materials, and periods of reduced
manufacturing capacity at our suppliers in response to the pandemic;
•increased sea and air freight shipping costs as a result of unprecedented
levels of demand, reduced capacity, scrutiny or embargoing of goods produced in
infected areas, port closures and other transportation challenges;
•closures or other restrictions that limit capacity at our distribution
facilities and restrict our employees' ability to perform necessary business
functions, including operations necessary for the design, development,
production, sale, marketing, delivery and support of our products; and
•failure of our suppliers and other third parties on which we rely to meet their
obligations to us in a timely manner or at all, as a result of their own
financial or operational difficulties, including business failure or insolvency,
the inability to access financing in the credit and capital markets on
satisfactory terms or at all, and collectability of existing receivables.
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Table of Contents Foreign Currency Rate Fluctuations Our international operations have provided and are expected to continue to provide a significant portion of our Company's net sales and operating income. As a result, our Company's net sales and operating income will continue to be affected by changes in theU.S. dollar against international currencies, but predominantly against the Australian dollar. In order to provide a framework for assessing the performance of our underlying business, excluding the effects of foreign currency rate fluctuations, we compare the percent change in the results from one period to another period in this Quarterly Report on Form 10-Q using a constant currency methodology wherein current and comparative prior period results for our operations reporting in currencies other thanU.S. dollars are converted intoU.S. dollars at constant exchange rates (i.e., the rates in effect onDecember 31, 2020 , which was the last day of our prior fiscal year) rather than the actual exchange rates in effect during the respective periods. Such disclosure throughout our management's discussion and analysis of financial condition and results of operations will be described as "on a constant currency basis." Volatility in currency exchange rates may impact the results, including net sales and operating income, of the Company in the future. Components of Our Results of OperationsNet Sales Net sales consist primarily of sales of apparel, footwear and accessories. We recognize product sales at the time control is transferred to the customer, which is when the product is shipped. Net sales represent the sales of these items and shipping revenue when applicable, net of estimated returns and promotional discounts. Net sales are primarily driven by growth in the number of our active customers, the frequency with which customers purchase and average order value. Cost of Sales Cost of sales consists of our purchase price for merchandise sold to customers and includes import duties and other taxes, freight-in, defective merchandise returned from customers, inventory write-offs and other miscellaneous shrinkage. Cost of sales is primarily driven by growth in orders placed by customers, the mix of the product available for sale on our sites and transportation costs related to inventory receipts from our vendors. We expect our cost of sales to fluctuate as a percentage of net sales depending on how we choose to manage our inventory and merchandise mix. Gross Profit We define gross profit as net sales less cost of goods sales. Cost of sales consists of our purchase price for merchandise sold to customers and includes import duties and other taxes, freight-in, defective merchandise returned from customers, inventory write-offs and other miscellaneous shrinkage. Gross Margin Gross margin is gross profit expressed as a percentage of net sales. Our gross margin has fluctuated historically and may continue to fluctuate from period to period based on a number of factors, including the mix of the product offerings, cost of finished goods, price promotions and percentage of exclusive assortment we sell as well as our ability to reduce costs, in any given period. Selling Expenses Selling expenses represent the costs incurred for fulfillment expenses and selling and distribution expenses. Fulfillment expenses consist of costs incurred in operating and staffing a third-party fulfillment center, including costs associated with inspecting and warehousing inventories and picking, packaging and preparing customer orders for shipment. Selling expenses consist primarily of shipping and other transportation costs incurred delivering merchandise to customers and from customers returning merchandise, merchant processing fees and packaging. We expect selling expenses to increase in absolute dollars as we increase our net sales. Marketing Expenses Marketing expenses consist primarily of targeted online performance marketing costs, such as retargeting, paid search/product listing ads, affiliate marketing, paid social, search engine optimization, personalized email marketing and mobile "push" communications through our apps. Marketing expenses also include our spend on brand marketing channels, including cash compensation to influencers and other forms of online and offline marketing. Marketing expenses are primarily related to growing and retaining our customer base, building a.k.a. Brands and building our owned brand presence. We make opportunistic investments in marketing and expect marketing expenses to increase in absolute dollars as we continue to scale our business but should remain consistent over time as a percentage of net sales. Failure to effectively attract customers on a cost-efficient basis would adversely impact our profitability and operating results.
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Table of Contents General and Administrative Expenses General and administrative expenses consist primarily of payroll and related benefit costs and equity-based compensation expense for our employees involved in general corporate functions including merchandising, marketing, studio and technology, as well as costs associated with the use by these functions of facilities and equipment, such as depreciation, rent and other occupancy expenses. General and administrative expenses are primarily driven by increases in headcount required to support business growth and meeting our obligations as a public company. Over time we expect general and administrative expenses to increase in absolute dollars as we continue to grow our business. IPO-related Expenses As a public company, we are implementing additional procedures and processes for the purpose of addressing the standards and requirements applicable to public companies. In particular, we expect our accounting, legal and personnel-related expenses and directors' and officers' insurance costs to increase as we establish more comprehensive compliance and governance functions, establish, maintain and review internal controls over financial reporting in accordance with the Sarbanes-Oxley Act, and prepare and distribute periodic reports in accordance withSEC rules. As discussed in our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, we recognized equity-based compensation expense of approximately$4.9 million in selling, marketing and general administration expenses related to certain performance-based incentive stock units. Other Expense, Net Other expense, net consists primarily of expenses related to extinguishing debt, interest expense, fees associated with our secured borrowings and foreign currency gains and losses. Provision for Income Taxes We are subject to income taxes inthe United States and foreign jurisdictions in which we do business. Foreign jurisdictions have different statutory tax rates than those inthe United States . Additionally, certain of our foreign earnings may also be taxable inthe United States . Accordingly, our effective tax rate is subject to significant variation due to several factors, including variability in our pre-tax and taxable income and loss and the mix of jurisdictions to which they relate, intercompany transactions, changes in how we do business, acquisitions, investments, tax audit developments, changes in our deferred tax assets and liabilities, foreign currency gains and losses, changes in statutes, regulations, case law, and administrative practices, principles, and interpretations related to tax, including changes to the global tax framework, competition, and other laws and accounting rules in various jurisdictions, and relative changes of expenses or losses for which tax benefits are not recognized.
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Results of OperationsThe following tables set forth our results of operations for the periods presented and express the relationship of certain line items as a percentage of net sales for those periods. The period-to-period comparison of financial results is not necessarily indicative of future results.
Three Months Ended September 30, Nine Months Ended September 30,
In thousands 2021 2020 2021 2020
Net sales $ 161,762 $ 63,336 $ 379,768 $ 145,135
Cost of sales 75,652 24,831 171,636 61,437
Gross profit 86,110 38,505 208,132 83,698
Operating expenses:
Selling 40,582 15,707 98,859 39,735
Marketing 15,463 4,602 36,595 11,839
General and administrative 28,900 7,307 61,550 17,827
Total operating expenses 84,945 27,616 197,004 69,401
Income from operations 1,165 10,889 11,128 14,297
Other expense, net:
Interest expense (4,104) (103) (8,320) (268)
Loss on extinguishment of debt (10,924) - (10,924) -
Other expense, net (561) (117) (623) (122)
Total other expense, net (15,589) (220) (19,867) (390)
Income (loss) before income taxes (14,424) 10,669 (8,739) 13,907
Benefit from (provision for) income taxes 4,331 (3,375) 2,625 (4,399)
Net income (loss) (10,093) 7,294 (6,114) 9,508
Net loss (income) attributable to 199 (232) 123 (302)
noncontrolling interests
Net income (loss) attributable to a.k.a. $ (9,894) $ 7,062 $ (5,991) $ 9,206
Brands Holding Corp.
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
Net sales 100 % 100 % 100 % 100 %
Cost of sales 47 % 39 % 45 % 42 %
Gross profit 53% 61% 55% 58%
Operating expenses:
Selling 25% 25% 26% 27%
Marketing 10% 7% 10% 8%
General and administrative 18 % 12 % 16 % 12 %
Total operating expenses 53 % 44 % 52 % 48 %
Income from operations 1% 17% 3% 10%
Other expense, net:
Interest expense (3%) -% (2%) -%
Loss on extinguishment of debt (7 %) - % (3 %) - %
Other expense, net - % - % - % - %
Total other expense, net (10 %) - % (5 %) - %
Income (loss) before income taxes (9 %) 17 % (2 %) 10 %
Benefit from (provision for) income taxes 3 % (5 %) 1 % (3 %)
Net income (loss) (6%) 12% (2%) 7%
Net loss (income) attributable to - % - % - % - %
noncontrolling interests
Net income (loss) attributable to a.k.a. (6%) 11% (2%) 6%
Brands Holding Corp.
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Comparison of the Three Months Ended September 30, 2021 and 2020
Net Sales
Three Months Ended September 30,
2021 2020
Net sales $ 161,762 $ 63,336
Net sales increased by $98.4 million , or 155%, for the three months ended
September 30, 2021 compared to the same period in 2020. The overall increase in
net sales was driven by a 128% increase in the number of orders we processed in
2021 compared to 2020, driving an increase in sales of $80.8 million .
Additionally, an increase in our average order value of 13%, from $79 in 2020 to
$89 in 2021, also contributed $18.2 million to the overall increase in net
sales. The increase in the number of orders was largely driven by the growth of
Princess Polly in the U.S. and the acquisition of Culture Kings on March 31,
2021 . The increase in our average order value was primarily due to the
implementation of targeted price increases in Princess Polly and Petal & Pup. On
a constant currency basis, net sales and average order value for the three
months ended September 30, 2021 would have increased 156% and 13%, respectively.
The three months ended September 30, 2021 includes the operations of Culture
Kings, or $62.8 million of net sales.
Cost of Sales
Three Months Ended September 30,
2021 2020
Cost of sales $ 75,652 $ 24,831
Percent of net sales 47 % 39 %
Cost of sales increased by $50.8 million , or 205%, for the three months ended
September 30, 2021 compared to the same period in 2020. This increase was
primarily driven by a 128% increase in the total number of orders in 2021, as
compared to 2020, which includes the impact of the operations of Culture Kings,
or $37.0 million of cost of sales, in the three months ended September 30, 2021 .
The increase in cost of sales as a percentage of net sales was primarily due to
the $6.0 million impact from the fair value increase in inventory acquired in
the Culture Kings acquisition, which will disproportionately increase cost of
sales until it is completely sold through in the fourth quarter of 2021, and
higher air freight expense.
Gross Profit
Three Months Ended September 30,
2021 2020
Gross profit $ 86,110 $ 38,505
Gross margin 53 % 61 %
Gross profit increased by $47.6 million , or 124%, for the three months ended
September 30, 2021 compared to the same period in 2020. This increase was
primarily driven by a significant increase in net sales. The decrease in gross
margin was primarily due to the $6.0 million impact of the fair value increase
in inventory acquired in the Culture Kings acquisition, which will
disproportionately decrease gross margin until it is sold through, higher air
freight expense and inclusion of Culture Kings, partially offset by the
implementation of targeted price increases in Princess Polly and Petal & Pup.
Culture Kings has a lower mix of exclusive products compared to our overall
portfolio. Exclusive products have a higher gross margin compared to other
products we sell.
Selling Expenses
Three Months Ended September 30,
2021 2020
Selling $ 40,582 $ 15,707
Percent of net sales 25 % 25 %
Selling expenses increased by $24.9 million , or 158%, for the three months ended
September 30, 2021 compared to the same period in 2020. This increase was driven
by the 128% increase in the number of orders shipped for Princess Polly , Petal &
Pup and Rebdolls in 2021 compared to 2020, and the operations of Culture Kings,
or $14.2 million of selling expenses, in the three months ended September 30,
2021 .
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Marketing Expenses
Three Months Ended September 30,
2021 2020
Marketing $ 15,463 $ 4,602
Percent of net sales 10 % 7 %
Marketing expenses increased by $10.9 million , or 236%, for the three months
ended September 30, 2021 compared to the same period in 2020. The increase in
marketing expenses was driven by the operations of Culture Kings, or $6.9
million of marketing expenses, in the three months ended September 30, 2021 and
increased marketing investment to acquire customers and retain existing
customers to generate higher net sales. The increase in marketing expenses as a
percentage of net sales was primarily due to Culture Kings' higher rate of
advertising spend as they tested new marketing opportunities.
General and Administrative Expenses
Three Months Ended September 30,
2021 2020
General and administrative $ 28,900 $ 7,307
Percent of net sales 18 % 12 %
General and administrative expenses increased by $21.6 million , or 296%, for the
three months ended September 30, 2021 compared to the same period in 2020. The
increase was primarily driven by a $14.5 million increase in salaries and
related benefits and equity-based compensation expense related to increases in
our headcount across functions to support business growth, $3.2 million in
additional professional service fees and $1.6 million in transaction costs.
Included in the equity-based compensation expense was $4.9 million in
performance-based incentive units that vested upon the IPO. Included in the
aforementioned amounts for the three months ended September 30, 2021 is $5.2
million of general and administrative expenses related to the operations of
Culture Kings. The increase in general and administrative expenses as a
percentage of net sales resulted primarily from additional salaries and related
benefits and equity-based compensation expense from corporate hires as well as
additional professional service fees.
Other expense, net
Three Months Ended September 30,
2021 2020
Other expense, net:
Interest expense $ (4,104) $ (103)
Loss on extinguishment of debt (10,924) -
Other expense (561) (117)
Total other expense, net $ (15,589) $ (220)
Percent of net sales (10) % 0 %
Other expense, net increased by $15.4 million for the three months ended
September 30, 2021 compared to the same period in 2020, primarily due to the
loss on extinguishment of debt resulting from the early payment and termination
of our previous term debt, revolver and senior secured notes, as well as an
increase in interest expense related to the debt prior to its repayment.
Provision for income taxes
Three Months Ended September 30,
2021 2020
Benefit from (provision for) income taxes $ 4,331 $ (3,375)
Percent of net sales 3 % (5 %)
Provision for income tax decreased by $7.7 million , or 228% for the three months
ended September 30, 2021 compared to the same period in 2020. This decrease was
due to a reduction in our income before income taxes, which was driven primarily
by the loss on extinguishment of debt resulting from the early payment and
termination of our previous term debt, revolver and senior secured notes, as
well as an increase in interest expense related to such debt prior to its
repayment.
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Comparison of the Nine Months Ended September 30, 2021 and 2020
Net Sales
Nine Months Ended September 30,
2021 2020
Net sales $ 379,768 $ 145,135
Net sales increased by $234.6 million , or 162%, for the nine months ended
September 30, 2021 compared to the same period in 2020. The overall increase in
net sales was primarily driven by a 120% increase in the number of orders we
processed in 2021 compared to 2020, driving an increase in sales of $177.6
million . Additionally, an increase in our average order value of 18%, from $74
in 2020 to $87 in 2021, also contributed $57.2 million to the overall increase
in net sales. The increase in the number of orders was largely driven by the
acquisition of Culture Kings on March 31, 2021 and growth of Princess Polly in
the U.S. The increase in our average order value was primarily due to the
implementation of targeted price increases in Princess Polly and Petal & Pup. On
a constant currency basis, net sales and average order value for the nine months
ended September 30, 2021 would have increased 151% and 13%, respectively. The
nine months ended September 30, 2021 includes two quarters of operations of
Culture Kings, or $121.1 million of net sales, from the date of its acquisition,
March 31, 2021 .
Cost of Sales
Nine Months Ended September 30,
2021 2020
Cost of sales $ 171,636 $ 61,437
Percent of net sales 45 % 42 %
Cost of sales increased by $110.2 million , or 179%, for the nine months ended
September 30, 2021 compared to the same period in 2020. This increase was
primarily driven by a 120% increase in the total number of orders in 2021, as
compared to 2020, which includes the impact of two quarters of operations of
Culture Kings, or $69.8 million of cost of sales, from the date of its
acquisition, March 31, 2021 . The increase in cost of sales as a percentage of
net sales was primarily due to the $12.3 million impact from the fair value
increase in inventory acquired in the Culture Kings acquisition, which will
disproportionately increase cost of sales until it is completely sold through in
the fourth quarter of 2021, and higher air freight expense.
Gross Profit
Nine Months Ended September 30,
2021 2020
Gross profit $ 208,132 $ 83,698
Gross margin 55 % 58 %
Gross profit increased by $124.4 million , or 149%, for the nine months ended
September 30, 2021 compared to the same period in 2020. This increase was
primarily driven by a significant increase in net sales. The decrease in gross
margin was primarily due the $12.3 million impact from the fair value increase
in inventory acquired in the Culture Kings acquisition, which will
disproportionately increase cost of sales until it is sold through, higher air
freight expense and inclusion of Culture Kings, partially offset by the
implementation of targeted price increases in Princess Polly and Petal & Pup.
Culture Kings has a lower mix of exclusive products compared to our overall
portfolio. Exclusive products have a higher gross margin compared to other
products we sell.
Selling Expenses
Nine Months Ended September 30,
2021 2020
Selling $ 98,859 $ 39,735
Percent of net sales 26 % 27 %
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Table of Contents Selling expenses increased by$59.1 million , or 149%, for the nine months endedSeptember 30, 2021 compared to the same period in 2020. This increase was driven by the 120% increase in the number of orders shipped forPrincess Polly , Petal & Pup and Rebdolls in 2021 compared to 2020, and two quarters of operations of Culture Kings, or$28.8 million of selling expenses, from the date of its acquisition,March 31, 2021 . The decrease in selling expenses as a percentage of net sales was due to a higher percentage of Culture Kings' sales from customers inAustralia , where our products ship at a cheaper rate. Shipping to customers in theU.S. , whether fromAustralia or from a facility in theU.S. , is more expensive on average due to distance or shipping upgrades. Marketing Expenses Nine Months Ended September 30, 2021 2020 Marketing$ 36,595 $ 11,839 Percent of net sales 10 % 8 % Marketing expenses increased by$24.8 million , or 209%, for the nine months endedSeptember 30, 2021 compared to the same period in 2020. The increase in marketing expenses was driven by two quarters of operations of Culture Kings, or$13.1 million of marketing expenses, from the date of its acquisition,March 31, 2021 and increased marketing investment to acquire customers and retain existing customers to generate higher net sales. The increase in marketing expenses as a percentage of net sales was primarily due to Culture Kings' higher rate of advertising spend as they tested new marketing opportunities. General and Administrative Expenses Nine Months Ended September 30, 2021 2020 General and administrative$ 61,550 $ 17,827 Percent of net sales 16 % 12 % General and administrative expenses increased by$43.7 million , or 245%, for the nine months endedSeptember 30, 2021 compared to the same period in 2020. The increase was primarily driven by a$29.6 million increase in salaries and related benefits and equity-based compensation expense related to increases in our headcount across functions to support business growth,$8.5 million in additional professional service fees and$4.9 million in transaction costs. Included in the equity-based compensation expense was$4.9 million in performance-based incentive units that vested upon the IPO. Included in the aforementioned amounts for the nine months endedSeptember 30, 2021 is$11.6 million of general and administrative expenses related to the operations of Culture Kings from the date of its acquisition,March 31, 2021 . The increase in general and administrative expenses as a percentage of net sales resulted primarily from additional salaries and related benefits and equity-based compensation expense from corporate hires as well as additional professional service fees. Other expense, net Nine Months Ended September 30, 2021 2020 Other expense, net: Interest expense $ (8,320)$ (268) Loss on extinguishment of debt (10,924) - Other expense (623) (122) Total other expense, net $ (19,867)$ (390) Percent of net sales (5) % 0 % Other expense, net increased by$19.5 million for the nine months endedSeptember 30, 2021 compared to the same period in 2020, primarily due to the loss on extinguishment of debt resulting from the early payment and termination of our previous term debt, revolver and senior secured notes, as well as an increase in interest expense related to such debt prior to its repayment.
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Provision for income taxes
Nine Months Ended September 30,
2021 2020
Benefit from (provision for) income taxes $ 2,625 $ (4,399)
Percent of net sales 1 % (3 %)
Provision for income tax decreased by $7.0 million , or 160% for the nine months
ended September 30, 2021 compared to the same period in 2020. This decrease was
due to a reduction in our income before income taxes, which was driven primarily
by the loss on extinguishment of debt resulting from the early payment and
termination of our previous term debt, revolver and senior secured notes, as
well as an increase in interest expense related to such debt prior to its
repayment.
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Liquidity and Capital Resources
Since our inception through September 2021 , we have financed our operations and
capital expenditures primarily through cash flows generated by operations,
private sales of equity securities or the incurrence of debt.
In September 2021 , we completed an initial public offering (the "IPO"), in which
we issued and sold 10,000,000 shares of newly authorized common stock for $11.00
per share for net proceeds of $95.5 million , after deducting underwriting
discounts and commissions of $6.6 million , and offering costs of $7.9 million .
As of September 30, 2021 , our principal sources of liquidity were cash and cash
equivalents totaling $54.4 million . Our cash equivalents primarily consist of
money market funds.
As of September 30, 2021 , most of our cash was held for working capital
purposes. We believe that our existing cash, together with cash generated from
operations and available borrowing capacity under our line of credit, will be
sufficient to meet our anticipated cash needs for at least the next 12 months.
However, our liquidity assumptions may prove to be incorrect, and we could
exhaust our available financial resources sooner than we currently expect. We
may seek to borrow funds under our line of credit or raise additional funds at
any time through equity, equity-linked or debt financing arrangements. Our
future capital requirements and the adequacy of available funds will depend on
many factors, including those described in the section of this Quarterly Report
on Form 10-Q captioned "Risk Factors." We may not be able to secure additional
financing to meet our operating requirements on acceptable terms, or at all. The
inability to raise capital if needed would adversely affect our ability to
achieve our business objectives.
Senior Secured Credit Facilities
On March 31, 2021 , we entered into our existing senior secured credit facilities
with syndicated lenders and an affiliate of Fortress Credit Corp as
administrative agent that provides us with up to $25.0 million aggregate
principal in revolver borrowings and a $125.0 million senior secured term loan
facility (the "Fortress Credit Facilities") that we used in financing our
acquisition of Culture Kings. The $125.0 million senior secured term loan
required us to make amortized quarterly payments equal to 0.75% of the original
principal amounts, for an annual aggregate amount of 3.0%. Borrowings under the
credit agreement accrued interest, at the option of the borrower, at an adjusted
LIBOR plus 7.5% or ABR plus 6.5%, subject to adjustment based on achieving
certain total net secured leverage ratios. Obligations under the senior credit
facilities were secured by all capital stock of CK Holdco Pty Ltd , CK Bidco Pty
Ltd , Polly Holdco Pty Ltd , Polly Bidco Pty Ltd , Princess Polly Group Pty Ltd ,
Princess Polly IP Pty Ltd , Princess Polly Online Pty Ltd , Excelerate US, Inc. ,
Princess Polly USA, Inc. , EXRB Purchaser Inc. , Rebdolls Inc. , and our pre-IPO
minority interest in Culture Kings.
Additionally, on March 31, 2021 , we issued $25.0 million in senior subordinated
notes to certain debt funds of Summit Partners , a related party of the company.
In connection with the IPO, we entered into a new senior secured credit facility
inclusive of a $100 million term loan and a $50 million revolving line of
credit. We used borrowings under this new credit facility together with a
portion of the proceeds from the IPO to repay the Fortress Credit Facilities and
the senior subordinated notes in full. Additionally, in October 2021 , we
borrowed $15.0 million under the revolving line of credit.
As part of our entering into the new senior secured credit facilities, we are
subject to certain financial covenant ratios beginning with the fiscal quarter
ended December 31, 2021 , and certain annual mandatory prepayment terms based on
excess cash flows, as defined by the credit agreement, based on our net leverage
ratio for years beginning with the fiscal year ended December 31, 2022 . If we
are unable to comply with certain financial covenant ratios and terms requiring
mandatory prepayment based on a percentage of excess cash flows, our long-term
liquidity position may be adversely impacted.
Refer to Note 8 to our condensed consolidated financial statements included
elsewhere in this Quarterly Report on Form 10-Q for additional information
regarding our senior secured credit facilities.
Lines of Credit
On November 6, 2018 , we entered into a line of credit with Commonwealth Bank of
Australia in the amount of $7 million under the subsidiary Princess Polly Bidco
Pty. The line of credit was amended on August 1, 2019 to increase the facility
amount to $15.6 million . Borrowings under the credit agreement accrued an
interest rate of AU Screen Rate (ASX) + 3.25% per annum. Obligations under the
credit agreement were secured by cash, inventory and other liquid assets. As of
December 31, 2020 , the amount outstanding was $6.2 million . The facility was
repaid in full and terminated in February 2021 .
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Table of Contents OnDecember 31, 2019 , we entered into a line of credit withBank of America in the amount of$0.5 million under the subsidiaryRebdoll, Inc. The line of credit was guaranteed byExcelerate, L.P. Borrowings under the credit agreement accrues an interest rate of LIBOR + 2.25%. As ofDecember 31, 2020 , the amount outstanding was$0.2 million . The outstanding borrowings were repaid in full and the line of credit was terminated as ofFebruary 28, 2021 . OnOctober 25, 2019 , we entered into a line of credit with Moneytech in the amount of$2.8 million under the subsidiaryPetal & Pup Pty Ltd. Borrowings under the credit agreement accrue an interest rate of 7.27%. No amounts were ever borrowed under the line of credit and it was terminated prior to the IPO. Historical Cash Flows Nine Months Ended September 30, 2021 2020 Net cash provided by operating activities$ 20,631 $ 8,972 Net cash used in investing activities (251,802) (1,583) Net cash (used in) provided by financing activities 261,528 953 Net Cash Provided by Operating Activities Cash from operating activities consists primarily of net income adjusted for certain non-cash items, including depreciation, amortization, equity-based compensation, the effect of changes in working capital and other activities. During the nine months endedSeptember 30, 2021 , as compared to the same period in 2020, net cash provided by operating activities increased$11.7 million . This was attributable primarily to an increase in net income after adjusting for non-cash items. These increases were partially offset by an increase in inventory to support our growth and expansion in both theU.S. andAustralia markets.Net Cash Used in Investing Activities Our primary investing activities have consisted of acquisitions to support our overall business growth and investments in our fulfillment centers and our internally developed software to support our infrastructure. Purchases of property and equipment may vary from period to period due to timing of the expansion of our operations. During the nine months endedSeptember 30, 2021 , as compared to the same period in 2020, net cash used in investing activities increased$250.2 million . This was attributable to the acquisition of Culture Kings inMarch 2021 and the purchase of the Petal & Pup noncontrolling interest inSeptember 2021 . Net Cash Provided by Financing Activities Our financing activities have historically consisted of cash proceeds received from the issuance of borrowings, cash used to pay down borrowings or cash received in exchange for partner units, and more recently, the sale of our common stock in the IPO. During the nine months endedSeptember 30, 2021 , as compared to the same period in 2020, net cash provided by financing activities increased$260.6 million . This was primarily attributable to the proceeds received from debt issuances and the IPO, as well as proceeds from the issuance of partner units to acquire Culture Kings inMarch 2021 . These proceeds were partially offset by repayments of certain borrowings and, specifically related to the IPO, underwriters' discounts and commissions. Off Balance Sheet Arrangements As ofSeptember 30, 2021 , we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K. Contractual Obligations As ofDecember 31, 2020 , we leased various offices under operating lease agreements that expire fromApril 2022 toJanuary 2027 . The terms of the lease agreements provide for rental payments on a graduated basis. We recognize rent expense on a straight-line basis over the lease periods. We do not have any material capital lease obligations and most of our property, equipment and software have been purchased with cash. We have no material long-term purchase obligations outstanding with any vendors or third parties.
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Critical Accounting Policies
We believe that the following accounting policies involve a high degree of
judgment and complexity. Accordingly, these are the policies we believe are the
most critical to aid in fully understanding and evaluating our financial
condition and results of our operations. Refer to Note 2 to our audited
consolidated financial statements and the related notes thereto for the year
ended December 31, 2020 which are included in the Prospectus, for a description
of our other significant accounting policies. The preparation of our financial
statements in conformity with GAAP requires us to make estimates and judgments
that affect the amounts reported in those financial statements and accompanying
notes. Although we believe that the estimates we use are reasonable, due to the
inherent uncertainty involved in making those estimates, actual results reported
in future periods could differ from those estimates.
Revenue Recognition
Our primary source of revenues is from sales of fashion apparel primarily
through our digital platforms and stores. We determine revenue recognition
through the following steps in accordance with Topic 606:
•identification of the contract, or contracts, with a customer;
•identification of the performance obligations in the contract;
•determination of the transaction price;
•allocation of the transaction price to the performance obligations in the
contract; and
•recognition of revenue when, or as, we satisfy a performance obligation.
Revenue is recognized upon shipment when control of the promised goods or
services is transferred to our customers, in an amount that reflects the
consideration we expect to be entitled to in exchange for those goods or
services. Our revenue is reported net of sales returns and discounts. We
estimate our liability for product returns based on historical return trends and
an evaluation of current economic and market conditions. We record the expected
customer refund liability as a reduction to revenue, and the expected inventory
right of recovery as a reduction of cost of goods sold. If actual return costs
differ from previous estimates, the amount of the liability and corresponding
revenue are adjusted in the period in which such costs occur.
Inventory
Inventories are stated at the lower of cost and net realizable value. Cost is
determined using the specific identification method. Cost of inventory includes
import duties and other taxes and transport and handling costs to deliver the
inventory to our distribution centers. We write down inventory where it appears
that the carrying cost of the inventory may not be recovered through subsequent
sale of the inventory. We analyze the quantity of inventory on hand, the
quantity sold in the past year, the anticipated sales volume, the expected sales
price and the cost of making the sale when evaluating the value of our
inventory. If the sales volume or sales price of specific products declines,
additional write-downs may be required.
Equity-based Compensation
We have granted equity-based awards consisting primarily of stock options,
restricted stock units, and prior to our initial public offering (the "IPO"),
incentive units, to employees. Equity-based compensation expense related to
equity-based awards is recognized based on the fair value of the awards granted.
We estimate the fair value of stock option and incentive unit equity awards
granted using the Black-Scholes option pricing model. The Black-Scholes option
pricing model requires the input of highly subjective assumptions, including the
fair value of the underlying shares of common stock or partnership units, the
risk-free interest rate, the expected volatility of the price of our common
stock or partnership units, the expected dividend yield of our common stock or
partnership units and the expected term of the equity award. The assumptions
used to determine the fair value of the equity awards represent management's
best estimates. These estimates involve inherent uncertainties and the
application of management's judgment. The related equity-based compensation
expense is recognized on a straight-line basis over the requisite service period
of the awards, which is generally four years. We account for forfeitures as they
occur. If factors change and different assumptions are used, our equity-based
compensation expense could be materially different in the future. These
assumptions and estimates are as follows:
•Fair Value of Partnership Unit. As our partnership units are not publicly
traded, the fair value was determined by our board of directors, with input from
management and valuation reports prepared by third-party valuation specialists
and management as described below under "-Partnership Units Valuations."
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Table of Contents •Risk-Free Interest Rate. The risk-free interest rate for the expected term of the equity award was based on theU.S. Treasury yield curve in effect at the time of the grant. •Expected Volatility. As we do not have a trading history for our common stock, the expected volatility was estimated by taking the average historic price volatility for industry peers, consisting of several public companies in our industry which are either similar in size, stage of life cycle or financial leverage, over a period equivalent to the expected term of the awards. •Expected Dividend Yield. We have never declared or paid any cash dividends and do not currently plan to pay cash dividends in the foreseeable future. As a result, an expected dividend yield of zero percent was used. •Expected Term. For stock options, the expected term represents the period that a stock option award is expected to be outstanding. We have limited historical exercise data from which to derive expected term input assumptions. Consequently, we calculate expected term using theSEC simplified method whereby the expected term of a stock option award is equal to the average of the award's contractual term and vesting term. There is no stated term of the incentive units. The pay-off will be determined when the limited partnership proceeds are distributed. As such, the expected term was estimated based upon the expected partnership distribution date. We will continue to use judgment in evaluating the assumptions related to our equity-based compensation on a prospective basis. Partnership Units Valuations Given the absence of a public trading market of our partnership units, and in accordance with theAmerican Institute of Certified Public Accountants Accounting and Valuation Guide , Valuation of Privately-Held Company Equity Securities Issued as Compensation, our board of directors exercised reasonable judgment and considered numerous and subjective factors to determine the best estimate of fair value of our partnership units at key grant dates, including: •third-party valuations of our partnership units; •our results of operations, financial position and capital resources; •industry outlook; •the lack of marketability of our partnership units; •the fact that the incentive unit grants involve illiquid securities in a private company; •the likelihood of achieving a liquidity event, such as an initial public offering or a sale of our company, given prevailing market conditions; •the history and nature of our business, industry trends and competitive environment; and •general economic outlook, including economic growth, inflation and unemployment, interest rate environment and global economic trends. In valuing our partnership units, the fair value of our business, or enterprise value, was determined using a combination of the market approach and income approach. The market approach estimates value based on a comparison of the subject company to comparable public companies in a similar line of business. From the comparable companies, a representative market value multiple is determined and then applied to the subject company's financial results to estimate the value of the subject company. The income approach estimates value based on the expectation of future cash flows, which are then discounted to present value. For each valuation, the enterprise value was then allocated to the partnership units using the Option Pricing Model, or "OPM." The OPM allocates a company's equity value among various capital investors, taking into account any liquidation preferences, participation rights, dividend policy and conversion rights. The use of OPM is appropriate when the range of possible future outcomes is difficult to predict and can result in a highly speculative forecast. Application of these approaches involved the use of estimates, judgment and assumptions that were highly complex and subjective, such as those regarding our expected future revenues, expenses, cash flows, discount rates and market multiples, the selection of comparable companies and the probability of possible future events. Changes in any or all of these estimates and assumptions, or the relationships between those assumptions, impacted our valuations as of each valuation date and may have had a material impact on the valuation of our partnership units. Subsequent to the IPO, all outstanding incentive partnership units were unchanged and no further incentive partnership unit awards will be granted. Refer to Note 12 to our consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional information.
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Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and are recorded
net on the face of the balance sheet. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date. We
recognize the effect of income tax positions only if those positions are more
likely than not of being sustained. Recognized income tax positions are measured
at the largest amount that is greater than 50% likely of being realized. Changes
in recognition or measurement are reflected in the period in which the change in
judgment occurs.
Deferred tax assets are recognized to the extent it is believed that these
assets are more likely than not to be realized. In assessing the realizability
of deferred tax assets, management considers whether it is more likely than not
that some portion or all the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary differences
become deductible. Management considers the scheduled reversal of deferred tax
liabilities (including the impact of available carryback and carryforward
periods), projected future taxable income and tax-planning strategies in making
this assessment. Based upon the level of historical taxable income and
projections for future taxable income over the periods in which the deferred tax
assets are deductible, management believes it is more likely than not that we
will realize the benefits of these deductible differences, net of the valuation
allowance. The amount of the deferred tax asset considered realizable, however,
could be reduced in the near term if estimates of future taxable income during
the carryforward period are reduced.
Recent Accounting Pronouncements
Refer to Note 2 to our consolidated financial statements included elsewhere in
this Quarterly Report on Form 10-Q for additional information regarding recent
accounting pronouncements.
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