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 consolidated financial statements and related notes that are included elsewhere in this Annual Report on Form 10-K. 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 Annual Report on Form 10-K. Our fiscal year ends onDecember 31 . Overview and Recent Highlights 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-led, 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 five high-growth digital brands with distinct fashion offerings and consumer followings:
•InJuly 2018 , we acquired Princess 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 80% in 2021 as compared to 2020. •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. We acquired the remaining noncontrolling interest in tandem with our IPO. 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 2021. •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. We acquired the remaining noncontrolling interest in tandem with our IPO. The brand targets male consumers between the ages of 18 and 35 who are fashion conscious, highly social and digitally focused. •InOctober 2021 , we acquired mnml, an LA-based streetwear brand that offers competitively priced on-trend wardrobe staples. The brand targets male consumers between the ages of 18 and 35. While we have owned Princess Polly, Petal & Pup and Rebdolls from before 2020, information presented hereafter on an "across a.k.a. Brands" basis assumes we also owned Culture Kings for all periods presented. Across a.k.a. Brands for 2021, we attracted over 3.7 million active customers (a 61% increase from 2020), received 7.0 million orders (a 48% increase from 2020) and increased average order value from$81 to$87 (an approximately 7% increase from 2020). In addition, our brands demonstrated rapid growth and strong profitability and free cash flow generation. Our annual financial results discussed below represent the consolidated results of Princess Polly, Petal & Pup and Rebdolls for all of 2021 and 2020, and include nine months of Culture Kings operations from the date of their acquisition,March 31, 2021 , as well as over two months of mnml's operations from the date of their acquisition,October 14, 2021 . Results for 2019, as compared to 2020, include Princess Polly for all twelve months and Petal & Pup and Rebdolls from the dates of acquisition,August 2019 andDecember 2019 , respectively. 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$95.7 million , after deducting underwriting discounts and commissions of$6.6 million , and offering costs of$7.7 million .
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Key Operating and Financial Metrics
Operating Metrics
We use the following metrics to assess the progress of our business, make decisions on where to allocate capital, time and technology investments and assess the near-term and longer-term performance of our business.
The following table sets forth our key operating metrics for each period presented.
Year Ended December 31,
(in millions, other than dollar figures) 2021 2020 2019 Active customers 3.7 1.4
0.9
Active customers across a.k.a. Brands(1) 3.7 2.3
1.4
Average order value$ 86 $ 75 $ 62 Average order value across a.k.a. Brands(1)$ 87 $ 81 $ 71 Number of orders 6.5 2.9
1.7
Number of orders across a.k.a. Brands(1) 7.0 4.7
3.1
(1) Includes the impact of Culture Kings as if we had owned it for all periods presented.
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:
Year Ended December 31,
2021 2020 2019
Gross margin 55 % 59 % 55%
Net income (loss) (in thousands) $ (6,091) $ 14,805 $ 1,442
Net income (loss) margin (1) % 7 % 1%
Adjusted EBITDA (in thousands) $ 62,431 $ 30,282 $ 9,173
Adjusted EBITDA margin 11 % 14 % 9 %
Net cash provided by operating activities (in $ 23,968 $ 21,712 $ 511
thousands )
Free cash flow (in thousands) $ 16,234 $
20,384
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.
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Non-GAAP Financial Measures
In addition to our results determined in accordance with GAAP, we monitor the
following supplemental 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 for or benefit from income tax;
•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 table reflects a reconciliation of Adjusted EBITDA to net income,
the most directly comparable financial measure prepared in accordance with GAAP:
Year Ended December 31,
In thousands 2021 2020 2019
Net income (loss) $ (6,091) $ 14,805 $ 1,442
Add (deduct):
Total other expense, net 21,622 485 139
Provision for income tax 852 6,850 1,012Depreciation and amortization expense 16,710 6,762 6,227 Inventory step-up amortization expense 15,908
- -
Equity-based compensation expense 8,043 1,380 353 Transaction costs 5,387 - - Adjusted EBITDA$ 62,431 $ 30,282 $ 9,173 Net income (loss) margin (1) % 7 % 1 % Adjusted EBITDA margin 11 % 14 % 9 % 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:
Year Ended December 31,
2021 2020 2019
Net cash provided by operating activities
(1,031) Free cash flow$ 16,234 $ 20,384 $ (520) 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
Brand Awareness
Our ability to promote our brands and maintain brand awareness and loyalty is critical to our success. We have a significant opportunity to continue to grow awareness and loyalty to our brands through word of mouth, brand marketing and performance marketing. We have leveraged performance marketing to deliver our growth. We plan to continue to invest in performance marketing and increase our investment in brand awareness across our brands to drive our future growth. Failure to successfully promote our brands and maintain brand awareness would have an adverse impact to our operating results.
Customer Acquisition
To continue to grow our business profitably, we intend to acquire new customers and retain our existing customers at a reasonable cost. Our methods to acquire customers have evolved in response to changes in shopping behaviors and costs to advertise, but we have continued the trend of efficiently and effectively acquiring customers as initially established by each of our brands prior to their acquisitions. Failure to continue attracting customers efficiently and profitably would adversely impact our profitability and operating results.
Customer Retention
Our results are driven not only by the ability of our brands to acquire
customers, but also by their ability to retain customers and encourage repeat
purchases. We monitor retention across our entire customer base. While we did
not have control over all five brands until 2021, each of our brands have always
aimed to attract and convert visitors into active customers and foster
relationships that drive repeat purchases. Despite changes in customer shopping
behaviors, impacted by the COVID-19 pandemic and other factors, we have
maintained high rates of customer retention and repeat purchases.
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Table of Contents 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, 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 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, causing a reduction in demand for certain product categories;
•increased materials and procurement costs as a result of scarcity or increased prices of 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 inability to collect existing receivables.
All of these factors have contributed to, and we expect will continue to contribute to, reduced orders, increased product returns, increased order cancellations, lower revenues, higher discounts, increased inventories, decreased value of inventories, reduced sales through Culture Kings experiential stores and lower gross margins.
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 Annual Report on Form 10-K 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.
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Results of Operations
The 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.
Year Ended December 31,
In thousands 2021 2020 2019
Net sales $ 562,191 $ 215,916 $ 102,440
Cost of sales 254,527 89,515 46,575
Gross profit 307,664 126,401 55,865
Operating expenses:
Selling 144,345 58,313 28,091
Marketing 58,120 17,871 7,666
General and administrative 88,816 28,077 17,515
Total operating expenses 291,281 104,261 53,272
Income from operations 16,383 22,140 2,593
Other expense, net:
Interest expense (9,485) (329) (272)
Loss on extinguishment of debt (10,924) - -
Other expense, net (1,213) (156) 133
Total other expense, net (21,622) (485) (139)
Income (loss) before income taxes (5,239) 21,655 2,454
Provision for income tax (852) (6,850) (1,012)
Net income (loss) (6,091) 14,805 1,442
Net loss (income) attributable to noncontrolling 123 (471) (48)
interests
Net income (loss) attributable to a.k.a. Brands
14,334$ 1,394 Holding Corp. Year Ended December 31, 2021 2020 2019 Net sales 100 % 100 % 100 % Cost of sales 45 % 41 % 45 % Gross profit 55 % 59 % 55 % Operating expenses: Selling 26 % 27 % 27 % Marketing 10 % 8 % 7 % General and administrative 16 % 13 % 17 % Total operating expenses 52 % 48 % 52 % Income from operations 3 % 10 % 3 % Other expense, net: Interest expense (2 %) -% -% Loss on extinguishment of debt (2 %) -% -% Other expense, net - % -% -% Total other expense, net (4 %) -% -% Income (loss) before income taxes (1 %) 10 % 2 % Provision for income tax - % (3%) (1%) Net income (loss) (1 %) 7 % 1 % Net loss (income) attributable to noncontrolling interests - % - % - % Net income (loss) attributable to a.k.a. Brands Holding (1 %) 7 % 1 % Corp. 63
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Comparison of the Years Ended December 31, 2021 and 2020
Net Sales Years Ended December 31, 2021 2020 Net sales$ 562,191 $ 215,916 Net sales increased by$346.3 million , or 160%, in 2021 compared to 2020. The overall increase in net sales was primarily driven by a 126% increase in the number of orders we processed in 2021 compared to 2020, driving an increase in net sales of$339.0 million . Additionally, an increase in our average order value of 15%, from$75 in 2020 to$86 in 2021 also contributed$32.2 million to the overall increase in net sales. The increase in the number of orders was largely driven by the acquisition of Culture Kings onMarch 31, 2021 and growth of Princess Polly in theU.S. The increase in our average order value was primarily due to the implementation of targeted price increases at Princess Polly and Petal & Pup. On a constant currency basis, net sales and average order value for 2021 would have increased 154% and 13%, respectively. Net sales for 2021 include the operations of Culture Kings and mnml, or$208.0 million of net sales, from the date of their acquisitions,March 31, 2021 andOctober 14, 2021 , respectively. Cost of Sales Years Ended December 31, 2021 2020 Cost of sales$ 254,527 $ 89,515 Percent of net sales 45 % 41 % Cost of sales increased by$165.0 million , or 184%, in 2021 compared to 2020. This increase was primarily driven by a 126% increase in the total number of orders in 2021, as compared to 2020, which includes the impact of the operations of Culture Kings and mnml, or$114.7 million of cost of sales, from the date of their acquisitions,March 31, 2021 andOctober 14, 2021 , respectively. The increase in cost of sales as a percentage of net sales was primarily due to the$15.9 million impact from the fair value increase in inventory acquired in the Culture Kings and mnml acquisitions, which will disproportionately increase cost of sales until the inventory is completely sold through, and higher air freight expense. As ofDecember 31, 2021 ,$0.7 million of impact from the fair value increase in inventory acquired in the mnml acquisition remains in inventory and will impact cost of sales in the first quarter of 2022. Gross Profit Years Ended December 31, 2021 2020 Gross profit$ 307,664 $ 126,401 Gross margin 55 % 59 % Gross profit increased by$181.3 million , or 143%, in 2021 compared to 2020. This increase was primarily driven by the significant increase in net sales. The decrease in gross margin was primarily due to the$15.9 million impact from the fair value increase in inventory acquired in the Culture Kings and mnml acquisitions, which disproportionately increases cost of sales until it is completely sold through, higher air freight expense and inclusion of Culture Kings, partially offset by the implementation of targeted price increases at 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.
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Selling Expenses
Years Ended December 31,
2021 2020
Selling $ 144,345 $ 58,313
Percent of net sales 26 % 27 %
Selling expenses increased by $86.0 million , or 148%, in 2021 compared to 2020.
This increase was driven by the 126% increase in the number of orders shipped in
2021 compared to 2020, which includes the operations of Culture Kings and mnml,
or $48.0 million of selling expenses, from the date of their acquisitions, March
31, 2021 and October 14, 2021 , respectively. The decrease in selling expenses as
a percentage of net sales was due to a higher percentage of Culture Kings' sales
from customers in Australia , where our products ship at a cheaper rate. Shipping
to customers in the U.S. , whether from Australia or from a facility in the U.S. ,
is more expensive on average due to distance or shipping upgrades.
Marketing Expenses
Years Ended December 31,
2021 2020
Marketing $ 58,120 $ 17,871
Percent of net sales 10 % 8 %
Marketing expenses increased by $40.2 million , or 225%, in 2021 compared to
2020. The increase in marketing expenses was driven by the inclusion of the
operations of Culture Kings and mnml, or $23.6 million of marketing expenses,
from the date of their acquisitions, March 31, 2021 and October 14, 2021 ,
respectively, 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, as well as
incremental holiday advertising spend across our brands.
General and Administrative Expenses
Years Ended December 31,
2021 2020
General and administrative $ 88,816 $ 28,077
Percent of net sales 16 % 13 %
General and administrative expenses increased by $60.7 million , or 216%, in 2021
compared to 2020. The increase was primarily driven by the inclusion of the
operations of Culture Kings and mnml, or $20.3 million of general and
administrative expenses, from the date of their acquisitions, March 31, 2021 and
October 14, 2021 , respectively. Additionally, there was a $15.4 million increase
in salaries and related benefits and equity-based compensation expense related
to increases in our headcount across functions to support business growth, $5.4
million in transaction costs and $5.3 million in additional professional service
fees. Finally, increases in D&O insurance and depreciation contributed to the
increase. 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
Years Ended December 31,
2021 2020
Other expense, net:
Interest expense $ (9,485) $ (329)
Loss on extinguishment of debt (10,924) -
Other expense (1,213) (156)
Total other expense, net $ (21,622) $ (485)
Percent of net sales (4) % - %
Other expense, net increased by $21.1 million in 2021 compared to 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 senior secured notes,
prior to their repayment, and the new term loan.
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Provision for income tax
Years Ended December 31,
2021 2020
Provision for income tax $ (852) $ (6,850)
Percent of net sales - % (3 %)
Effective tax rate 16 % 32 %
Provision for income tax decreased by $6.0 million , or 88% in 2021 compared to
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. The change in effective tax rate from 2020 is primarily
due to the impact of permanent differences, the most significant of which was
non-deductible stock-based compensation related to incentive units.
Comparison of the Years Ended December 31, 2020 and 2019
Net Sales
Years Ended December 31,
2020 2019
Net sales $ 215,916 $ 102,440
Net sales increased by $113.5 million , or 111%, in 2020 compared to 2019. The
overall increase in net sales was primarily driven by a 75% increase in the
number of orders we processed in 2020 compared to 2019, driving an increase in
net sales of $92.5 million , of which $0.7 million related to a slightly higher
order frequency from our active customers. Additionally, an increase in our
average order value of 21%, from $62 in 2019 to $75 in 2020 drove a $21.0
million increase in net sales. The increase in the number of orders was largely
driven by the growth of Princess Polly in the U.S. which launched in late-2019,
as well as the acquisition of Petal & Pup and Rebdolls. The higher order
frequency from our active customers was due to increasing brand awareness and
the impact of the COVID-19 pandemic driving customers to our website. The
increase in our average order value was due to the implementation of targeted
price increases. Fiscal 2020 includes a full year of operations of Petal & Pup
and Rebdolls, or $26.6 million and $4.4 million of net sales, respectively,
while 2019 includes $9.5 million and $0.1 million of net sales for Petal & Pup
and Rebdolls from their dates of acquisition, August 2019 and December 2019 ,
respectively.
Cost of Sales
Years Ended December 31,
2020 2019
Cost of sales $ 89,515 $ 46,575
Percent of net sales 41 % 45 %
Cost of sales increased by $42.9 million , or 92%, in 2020 compared to 2019. This
increase was primarily driven by a 75% increase in the total number of orders in
2020, as compared to 2019. The decrease in cost of sales as a percentage of net
sales was due to the implementation of targeted price increases and a higher mix
of exclusive offerings which have a higher gross margin rate than other items we
sell. The targeted price increases drove a 21% increase in our average order
value. Sales of exclusive offerings, as a percent of sales, grew by 5% primarily
due to the focus on growing Princess Polly's private label offerings. Fiscal
2020 includes a full year of operations of Petal & Pup and Rebdolls, or $10.3
million and $1.9 million of cost of sales, respectively, while 2019 includes
$3.7 million and $0.1 million of cost of sales for Petal & Pup and Rebdolls from
their dates of acquisition, August 2019 and December 2019 , respectively.
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Gross Profit
Years Ended December 31,
2020 2019
Gross profit $ 126,401 $ 55,865
Gross margin 59 % 55 %
Gross profit increased by $70.5 million , or 126%, in 2020 compared to 2019. This
increase was primarily driven by a significant increase in net sales and an
improvement in our gross margin. The increase in gross margin was due to the
implementation of targeted price increases and a higher mix of exclusive
offerings which have a higher gross margin rate than other items we sell. The
targeted price increases drove a 21% increase in our average order value. Sales
of exclusive offerings, as a percent of sales, grew by 5% primarily due to the
focus on growing Princess Polly's private label offerings. Fiscal 2020 includes
a full year of operations of Petal & Pup and Rebdolls, or $16.3 million and $2.4
million of gross profit, respectively, while 2019 only includes $5.8 million and
no gross profit for Petal & Pup and Rebdolls from their dates of acquisition,
August 2019 and December 2019 , respectively.
Selling Expenses
Years Ended December 31,
2020 2019
Selling $ 58,313 $ 28,091
Percent of net sales 27 % 27 %
Selling expenses increased by $30.2 million , or 108%, in 2020 compared to 2019.
This increase was driven by the 75% increase in the number of orders shipped in
2020 compared to 2019. As a percentage of net sales, selling expenses were flat
in 2020 compared to 2019. Fiscal 2020 includes a full year of operations of
Petal & Pup and Rebdolls, or $6.6 million and $0.9 million of selling expenses,
respectively, while 2019 only includes $2.3 million of selling expenses for
Petal & Pup from its date of acquisition, August 2019 . Rebdolls had an
insignificant amount of selling expenses in 2019 as it was acquired in December
2019 .
Marketing Expenses
Years Ended December 31,
2020 2019
Marketing $ 17,871 $ 7,666
Percent of net sales 8 % 7 %
Marketing expenses increased by $10.2 million , or 133%, in 2020 compared to
2019. The increase in marketing expenses in dollars and as a percentage of net
sales was driven by increased marketing investment to acquire customers and
retain existing customers to generate higher net sales, particularly in the U.S.
where we spent more to grow awareness of our brands. Fiscal 2020 includes a full
year of operations of Petal & Pup and Rebdolls, or $4.7 million and $0.6 million
of marketing expenses, respectively, while 2019 only includes $1.3 million of
marketing expenses for Petal & Pup from its date of acquisition, August 2019 .
Rebdolls had an insignificant amount of marketing expenses in 2019 as it was
acquired in December 2019 .
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General and Administrative Expenses
Years Ended December 31,
2020 2019
General and administrative $ 28,077 $ 17,515
Percent of net sales 13 % 17 %
General and administrative expenses increased by $10.6 million , or 60%, in 2020
compared to 2019. The increase was primarily driven by a $6.4 million increase
in salaries and related benefits and equity-based compensation expense related
to increases in our headcount across functions to support business growth. The
decrease in general and administrative expenses as a percentage of net sales
resulted primarily from an increase in efficiencies gained from our rapid sales
growth in 2020. Fiscal 2020 includes a full year of operations of Petal & Pup
and Rebdolls, or $2.6 million and $1.2 million of general and administrative
expenses, respectively, while 2019 only includes $1.5 million and $0.1 million
of general and administrative expenses for Petal & Pup and Rebdolls from their
dates of acquisition, August 2019 and December 2019 , respectively.
Other expense, net
Years Ended December 31,
2020 2019
Other expense, net $ (485) $ (139)
Percent of net sales - % - %
Provision for income tax
Years Ended December 31,
2020 2019
Provision for income tax $ (6,850) $ (1,012)
Percent of net sales (3 %) (1 %)
Provision for income tax increased by
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Quarterly Results of Operations
The following tables set forth selected unaudited quarterly results of
operations for the eight quarters ended December 31, 2021 , as well as the
percentage that each line item represents of net sales. The information for each
of these quarters has been prepared on the same basis as the audited annual
consolidated financial statements included elsewhere in this Annual Report on
Form 10-K and in the opinion of management, includes all adjustments, which
include only normal recurring adjustments, necessary for the fair statement of
our consolidated results of operations for these periods. This data should be
read in conjunction with our audited consolidated financial statements and
related notes included elsewhere in this Annual Report on Form 10-K. Our
quarterly results of operations will vary in the future. These quarterly
operating results are not necessarily indicative of our operating results for
any future period.
Three Months Ended
Mar 31, Jun 30, Sep 30, Dec 31, Mar 31, Jun 30, Sep 30, Dec 31,
In thousands 2020 2020 2020 2020 2021 2021 2021 2021
Net sales $ 35,006 $ 46,793 $ 63,336 $ 70,781 $ 68,779 $ 149,227 $ 161,762 $ 182,423
Cost of sales 15,842 20,764 24,831 28,078 28,191 67,793 75,652 82,891
Gross profit 19,164 26,029 38,505 42,703 40,588 81,434 86,110 99,532
Operating expenses:
Selling 10,620 13,408 15,707 18,577 18,254 40,023 40,582 45,486
Marketing 4,079 3,158 4,602 6,032 6,224 14,908 15,463 21,525
General and administrative 4,503 6,017 7,307 10,250 13,430 19,220 28,900 27,266
Total operating expenses 19,202 22,583 27,616 34,859 37,908 74,151 84,945 94,277 Income (loss) from operations (38) 3,446 10,889 7,844 2,680 7,283 1,165 5,255 Total other expense, net (56) (114) (220) (96) (123) (4,155) (15,589) (1,755) Income (loss) before income taxes (94) 3,332 10,669 7,748 2,557 3,128 (14,424) 3,500 Provision for income tax 30 (1,054) (3,375) (2,451) (767) (939) 4,331 (3,477) Net income (loss) (64) 2,278 7,294 5,297 1,790 2,189 (10,093) 23 Net income (loss) attributable to noncontrolling interests 2 (72) (232) (169) (318) 242 199 - Net income (loss) attributable to a.k.a. Brands Holding Corp.$ (62) $ 2,206 $ 7,062 $ 5,128 $ 1,472 $ 2,431 $ (9,894) $ 23 Three Months Ended Mar 31, Jun 30, Sep 30, Dec 31, Mar 31, Jun 30, Sep 30, Dec 31, 2020 2020 2020 2020 2021 2021 2021 2021 Net sales 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % Cost of sales 45 % 44 % 39 % 40 % 41 % 45 % 47 % 45 % Gross profit 55 % 56 % 61 % 60 % 59 % 55 % 53 % 55 % Operating expenses: Selling 30 % 29 % 25% 26% 27% 27% 25% 25% Marketing 12 % 7 % 7% 9% 9% 10% 10% 12% General and administrative 13 % 13 % 12% 14% 20% 13% 18% 15% Total operating expenses 55 % 48 % 44% 49% 55% 50% 53% 52% Income (loss) from operations - % 7 % 17 % 11 % 4 % 5 % 1 % 3 % Total other expense, net -% -% -% -% -% (3%) (10%) (1%) Income (loss) before income taxes - % 7 % 17 % 11 % 4 % 2 % (9 %) 2 % Provision for income tax -% (2%) (5%) (3%) (1%) (1%) 3% (2%) Net income (loss) - % 5 % 12 % 7 % 3 % 1 % (6 %) - % Net income (loss) attributable to noncontrolling interests - % - % - % - % - % - % - % - % Net income (loss) attributable to a.k.a. Brands Holding Corp. - % 5 % 11 % 7 % 2 % 2 % (6 %) - % 69
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Quarterly Trends and Seasonality
Net sales have generally increased sequentially quarter-to-quarter as we have made acquisitions (Culture Kings onMarch 31, 2021 and mnml onOctober 14, 2021 ) and launched our brands in theU.S. (Princess Polly, Petal & Pup and Culture Kings), all while successfully gaining and retaining customers. Our quarterly cost of sales and gross profit have fluctuated quarter-to-quarter primarily due to the quarterly fluctuations in net sales, targeted price increases in late 2020 and the impact from the amortization of the fair value increases in inventory acquired in the Culture Kings and mnml acquisitions.
Operating Expenses
Selling expenses have generally increased sequentially quarter-to-quarter primarily due to an increase in shipping and fulfillment costs to support the increase in number of orders, as well as increased labor rates in fulfillment.
Marketing expenses have generally increased sequentially quarter-to-quarter as we have continued to scale our marketing efforts together with the growth of our business.
General and administrative expenses have generally increased sequentially quarter-to-quarter as we have continued to increase our headcount to support business growth. In the third quarter of 2021, there were certain one-time stock-based compensation expenses related to the IPO.
Seasonality
We typically achieve our largest quarterly sales in the fourth fiscal quarter.
In fiscal year 2020, our net sales in the first, second, third and fourth
quarters represented 16%, 22%, 29% and 33%, respectively, of our total net sales
for the year. In fiscal year 2021, our net sales in the first, second, third and
fourth quarters represented 12%, 27%, 29% and 32%, respectively of our total net
sales for the year. Sales are typically higher during the months of November and
December driven by higher holiday season spending.
Quarterly Adjusted EBITDA and Adjusted EBITDA Margin
The following table sets forth a reconciliation of net income (loss) to adjusted
EBITDA for the eight fiscal quarters ended
Three Months Ended
Mar 31, Jun 30, Sep 30, Dec 31, Mar 31, Jun 30, Sep 30, Dec 31,
In thousands 2020 2020 2020 2020 2021 2021 2021 2021
Net income (loss) $ (64) $ 2,278 $ 7,294 $ 5,297 $ 1,790 $ 2,189 $ (10,093) $ 23
Add (deduct):
Total other expense, net 56 114 220 96 123 4,155 15,589 1,755
Provision for (benefit from) income tax (30) 1,054 3,375 2,451 767 939 (4,331)
3,477
Depreciation and amortization expense 1,449 1,654 1,697 1,962 2,566 4,535 4,235 5,374 Inventory step-up amortization expense - - - - - 6,266 5,985 3,657 Equity-based compensation expense 122 297 418 542 523 609 5,582 1,329 Transaction costs - - - - 2,557 736 1,580 514 Adjusted EBITDA$ 1,533 $ 5,397 $ 13,004 $ 10,348 $ 8,326 $ 19,429 $ 18,547 $ 16,129 Net income (loss) margin - % 5 % 12 % 7 % 3 % 1 % (6) % - % Adjusted EBITDA margin 4 % 12 % 21 % 15 % 12 % 13 % 11 % 9 % 70
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Liquidity and Capital Resources
Since our inception through
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$95.7 million , after deducting underwriting discounts and commissions of$6.6 million , and offering costs of$7.7 million . As ofDecember 31, 2021 , our principal sources of liquidity were cash and cash equivalents totaling$38.8 million . Our cash equivalents primarily consist of money market funds. As ofDecember 31, 2021 , most of our cash was held for working capital purposes. We believe that our existing cash, together with cash generated from ongoing operations and available borrowing capacity under our line of credit, will be sufficient to meet our anticipated cash needs for the next 12 months. We believe that cash generated from ongoing operations and continued access to debt markets will be sufficient to satisfy our cash requirements beyond 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 Annual Report on Form 10-K 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
OnMarch 31, 2021 , we entered into senior secured credit facilities with syndicated lenders and an affiliate ofFortress Credit Corp as administrative agent that provided us with up to$25.0 million aggregate principal in revolver borrowings and a$125 million senior secured term loan facility (the "Fortress credit facilities") that we used in financing our acquisition of Culture Kings. The$125 million senior 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. 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, with an option of up to$50 million in additional term loan through an accordion provision. We used borrowings under this new credit facility, together with a portion of the proceeds from the IPO, to repay the Fortress credit facilities in full. The$100 million term loan requires us to make amortized annual payments of 5.0% during the first and second years, 7.5% during the third and fourth years and 10.0% during the fifth year with the balance of the loan due at maturity. Borrowings under the term loan accrue interest at a benchmark rate plus an applicable margin dependent upon our net leverage ratio. The$50 million revolving line of credit accrues interest at a benchmark rate plus an applicable margin dependent upon our net leverage ratio. The highest interest rates under the agreement for both the term loan and revolving line of credit occur at a net leverage ratio of greater than 2.75x, yielding an interest rate of a benchmark rate plus 3.25%. The accordion provision allows us to borrow additional amounts of term loan at terms to be agreed upon at the time of issuance, but on substantially the same basis as the original term loan. Principal payments of our term loan and accordion for the year endingDecember 31, 2022 are anticipated to total$5.6 million . 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 endedDecember 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 endingDecember 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. Furthermore, the variable interest rates associated with our new senior secured credit facilities could result in interest payments that are higher than anticipated. Refer to Note 8 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information regarding our senior secured credit facilities.
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Table of Contents Lines of Credit OnNovember 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 onAugust 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 ofDecember 31, 2020 , the amount outstanding was$6.2 million . The facility was repaid in full and terminated as ofFebruary 28, 2021 . 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 accrued 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 .
On
Material Cash Requirements
Our material cash requirements include operating lease obligations and inventory purchase commitments.
We have lease arrangements for certain equipment and facilities, primarily office locations, warehouse facilities and retail stores. Most of our property, equipment and software have been purchased with cash. One newly executed lease for a new Culture Kings store inLas Vegas will be material to our operations with a first year annual cash payment of approximately$1.7 million , paid in monthly installments beginning inNovember 2022 , that increase by 3.0% each year through the tenth anniversary of the lease commencement. As ofDecember 31, 2021 , our future minimum payments under non-cancelable operating leases totaled$30.7 million , with$6.7 million payable within 12 months. While we routinely contract for the purchase of inventory from vendors, we have no material long-term purchase obligations outstanding with any vendors or third parties. As ofDecember 31, 2021 , inventory and other purchase obligations payable within the next 12 months totaled$9.2 million , which primarily represent open purchase orders for materials and merchandise as of that date. Additionally, we plan to incur capital expenditures of approximately$18.0 to$20.0 million in 2022. This reflects the opening of the new Culture Kings store inLas Vegas in addition to investments in infrastructure and technology. Historical Cash Flows Year Ended December 31, 2021 2020 2019
Net cash provided by operating activities
(278,075) (2,379) (21,828)
Net cash provided by financing activities 269,850 1,240
20,583
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.
In 2021, net cash provided by operating activities increased$2.3 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. In 2020, net cash provided by operating activities increased$21.2 million . This was attributable to a$13.4 million increase in net income, a$5.7 million decrease in cash used for inventory and a$2.7 million decrease in cash used for prepaid expenses when compared to the prior year. The decrease in cash used for inventory and prepaid expenses from 2019 to 2020 was due to the launch of the Princess Polly brand in theU.S. in 2019, requiring buildup of inventory and securing warehouse space.
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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.
In 2021, net cash used in investing activities increased$275.7 million . This was attributable to the acquisition of Culture Kings inMarch 2021 , the purchase of the Petal & Pup noncontrolling interest inSeptember 2021 and the acquisition of mnml inOctober 2021 . In 2020, net cash used in investing activities decreased$19.4 million . This was attributable to the decrease in cash used to acquire businesses, as in 2019, a.k.a. acquired a controlling interest in Petal & Pup.
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.
In 2021, net cash provided by financing activities increased$268.6 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. In 2020, net cash provided by financing activities decreased$19.3 million . This was attributable to a decrease of$21.7 million in proceeds from the issuance of partner units to fund the acquisition of Petal & Pup, partially offset by a$2.4 million increase in cash used to repay lines of credit. Critical Accounting Estimates We believe that the following accounting estimates involve a high degree of judgment and complexity. Refer to Note 2 to our consolidated financial statements as of and for the years endedDecember 31, 2021 , 2020 and 2019, included elsewhere in this Annual Report on Form 10-K for a description of our 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, all of which have a degree of uncertainty. 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. We have not made any material changes to our assumptions included in our calculations of expected customer refund activity during the year endedDecember 31, 2021 .
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Table of Contents Inventory Inventories are stated at the lower of cost and net realizable value. Cost is determined using an average cost method. Cost of inventory includes import duties and other taxes and transport and handling costs to deliver the inventory to our distribution centers or stores. 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. We have not made any material changes to our assumptions included in the calculations of the lower of cost or net realizable value reserves during the year endedDecember 31, 2021 .
Goodwill represents the excess of the purchase price over the fair value of net assets, including the amount assigned to identifiable intangible assets. The primary drivers that generate goodwill are the value of synergies between the acquired entities and the Company and the acquired assembled workforce, neither of which qualifies as a separately identifiable intangible asset.Goodwill is tested for impairment at least annually, in the fourth quarter and whenever changes in circumstances indicate an impairment may exist. The goodwill impairment test is performed at the reporting unit level, which is generally at the level of or one level below an operating segment. Generally, a qualitative assessment is first performed to determine whether a quantitative goodwill impairment test is necessary. If management determines, after performing an assessment based on the qualitative factors, that the fair value of the reporting unit is more likely than not less than the carrying amount, or that a fair value of the reporting unit substantially in the excess of the carrying amount cannot be assured, then a quantitative goodwill impairment test would be required. The quantitative test for goodwill impairment is performed by determining the fair value of the related reporting units. Fair value is measured based on the discounted cash flow method and relative market-based approaches. An impairment charge is recorded equal to any shortfall between the fair value of a reporting unit and its carrying value. The carrying value of definite-lived intangible assets is reviewed whenever events or changes in circumstances indicate the carrying amount of the assets might not be recoverable. Factors that would necessitate an impairment assessment include a significant adverse change in the extent or manner in which an asset is used, a significant adverse change in legal factors or the business climate that could affect the value of the asset or a significant decline in the observable market value of an asset, among others. If such facts indicate a potential impairment, the Company would assess the recoverability of an asset group by determining if the carrying value of the asset group exceeds the sum of the projected undiscounted cash flows expected to result from the use and eventual disposition of the assets over the remaining economic life of the primary asset in the asset group. If the recoverability test indicates the carrying value of the asset group is not recoverable, the Company will estimate the fair value of the asset group using the discounted cash flow method. Any impairment would be measured as the difference between the asset group's carrying amount and its estimated fair value. Significant judgment and estimates are required in assessing impairment of goodwill and intangible assets, including identifying whether events or changes in circumstances require an impairment assessment, estimating future cash flows and determining appropriate discount rates. Our estimates of fair value are based on assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. No goodwill or intangible asset impairment was recorded for the years endedDecember 31, 2021 and 2020.
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. This assessment involves uncertainty and judgment. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. We have not made any material changes to our assumptions and estimates related to our income tax positions during the year endedDecember 31, 2021 .
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