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-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 female customers between the ages of 15 and 25. Princess Polly has 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 concurrently 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.
•In
•InOctober 2021 , we acquired mnml, an LA-based streetwear brand that offers competitively priced on-trend wardrobe staples. The brand targets male customers between the ages of 18 and 35. While we have owned Princess Polly, Petal & Pup and Rebdolls since before 2020, information presented hereafter on an "across a.k.a. Brands" basis assumes we also owned Culture Kings for all periods presented. 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 . 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.
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The following table sets forth our key operating metrics for each period presented:
Three Months Ended June 30, Six Months Ended June 30,
(in millions, other than dollar 2022 2021
figures) 2022 2021
Active customers 3.9 2.9 3.9 2.9
Active customers across a.k.a. 3.9 2.9 3.9 2.9
Brands(1)
Average order value $ 85$ 89 $ 84$ 86 Average order value across a.k.a. $ 85$ 89 $ 84$ 89
Brands(1)
Number of orders 1.9 1.7 3.7 2.5 Number of orders across a.k.a. 1.9 1.7 3.7 3.0
Brands(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 ("AOV") 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 Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Gross margin 55% 55 % 56% 56 %
Net income (in thousands) $ (4,212) $ 2,189 $ (2,687) $ 3,979
Net income (loss) margin (3)% 1 % (1)% 2 %
Adjusted EBITDA (in thousands) $ 5,891 $ 19,429 $ 16,543 $ 27,755
Adjusted EBITDA margin 4 % 13 % 5 % 13 %
Net cash (used in) provided by $ (23,587) $ 7,480
operating activities (in thousands)
Free cash flow (in thousands)
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 (used in) provided
by operating activities, respectively. See also "Components of Our Results of
Operations" for more information.
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.
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Adjusted EBITDA and Adjusted EBITDA Margin
We calculate Adjusted EBITDA as net income (loss) adjusted to exclude: interest and other expense; provision for income taxes; depreciation and amortization expense; stock-based compensation expense; transaction costs; costs to establish or relocate distribution centers; and one-time or non-recurring items, and Adjusted EBITDA Margin as Adjusted EBITDA as a percentage of Net income (loss). 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 (loss), which 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 costs to establish or relocate distribution centers;
•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
(loss) and Adjusted EBITDA Margin to net income (loss) margin, the most directly
comparable financial measure prepared in accordance with GAAP:
Three Months Ended June 30, Six Months Ended June 30,
In thousands 2022 2021 2022 2021
Net income (loss) $ (4,212) $ 2,189 $ (2,687) $ 3,979
Add:
Total other expense, net 2,593 4,155 3,764 4,278
Provision for (benefit from) income tax (955) 939 (302) 1,706
Depreciation and amortization expense 5,590 4,535 10,807 7,101
Inventory step-up amortization expense - 6,266 707 6,266
Equity-based compensation expense 1,494 609 2,862 1,132
Distribution center relocation costs 1,291 - 1,291 -
Transaction costs 90 736 101 3,293
Adjusted EBITDA $ 5,891 $ 19,429 $ 16,543 $ 27,755
Net income (loss) margin (3) % 1 % (1) % 2 %
Adjusted EBITDA margin 4 % 13 % 5 % 13 %
Free Cash Flow
We calculate free cash flow as net cash (used in) 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 (used in) provided by operating activities, the most directly comparable financial measure prepared in accordance with GAAP:
Six
Months Ended
2022 2021
Net cash (used in) provided by operating activities $ (23,587) $ 7,480
Less: purchases of property and equipment (5,803) (3,361)
Free cash flow $ (29,390) $ 4,119
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.
For the six months ended June 30, 2022 , free cash flow decreased by $33.5
million compared to free cash flow for the six months ended June 30, 2021 . This
was attributable primarily to a build-up of inventory, a reduction in net income
and an increase in capital expenditures. The build-up of inventory was driven by
Culture Kings' growth into the U.S. The increase in capital expenditures was
primarily due to the build-out of Culture Kings' new store in Las Vegas .
Factors Affecting Our PerformanceMacroeconomic Environment
The macroeconomic environment in which we operate has been, and we anticipate will continue to be, pressured by events and conditions worldwide. Inflationary pressures on the consumer, shifts in spending and a slower-than-expected recovery from the economic impacts of the COVID-19 pandemic inAustralia have pressured our net sales. Additionally, lower return on marketing investments, a competitive promotional environment and higher merchandise returns, all stemming from the pressures previously identified, led to reduced operating income and Adjusted EBITDA performance. Consequently, our business and results of operations, including earnings and cash flows, could continue to be adversely impacted, including as a result of:
•decreased consumer confidence and consumer spending and consumption habits, including spending for the merchandise that we sell, and negative trends in consumer purchasing patterns due to inflationary pressures and changes in consumers' disposable income, credit availability and debt levels?
•disruption to the supply chain affecting production, distribution and other logistical issues, including port closures and shipping backlogs?
•challenges filling staffing requirements at distribution centers; and
•increased materials and procurement costs as a result of scarcity or increased prices of commodities and raw materials.
All of these factors have contributed to, and may continue to contribute to, reduced orders, increased product returns, higher discounts, lower net sales, lower gross margins, reduced effectiveness of marketing and increased inventories.
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 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. Failure to continue attracting customers efficiently and profitably
would adversely impact our profitability and operating results.
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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. Failure to retain customers would adversely impact our profitability and operating results.
Impact of COVID-19
The COVID-19 pandemic continued to impact our business and results of operations in the first half of fiscal year 2022. Certain of our supply chain partners, including third party manufacturers, logistics providers and other vendors have experienced delays and shut-downs due to the COVID-19 pandemic, which have delayed shipments of products. As a result, we have increased our use of more expensive air freight, which has increased our cost of goods. While we have been able to offset increased shipping prices to some extent, 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, particularly if our supply chain partners continue to be impacted by the COVID-19 pandemic. We continue to monitor these delays and shut-downs and other potential disruptions in our supply chain and implement mitigation plans as necessary.
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, 2021 , 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 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 June 30, Six Months Ended June 30,
In thousands 2022 2021 2022 2021
Net sales $ 158,471 $ 149,227 $ 306,790 $ 218,006
Cost of sales 71,024 67,793 135,147 95,984
Gross profit 87,447 81,434 171,643 122,022
Operating expenses:
Selling 45,254 40,023 85,618 58,277
Marketing 19,064 14,908 34,769 21,132
General and administrative 25,703 19,220 50,481 32,650
Total operating expenses 90,021 74,151 170,868 112,059
Income (loss) from operations (2,574) 7,283 775 9,963
Other expense, net:
Interest expense (1,393) (4,113) (2,652) (4,217)
Other expense (1,200) (42) (1,112) (61)
Total other expense, net (2,593) (4,155) (3,764) (4,278)
Income (loss) before income taxes (5,167) 3,128 (2,989) 5,685
Benefit from (provision for) income taxes 955 (939) 302 (1,706)
Net income (loss) (4,212) 2,189 (2,687) 3,979
Net loss (income) attributable to - 242 - (76)
noncontrolling interests
Net income (loss) attributable to a.k.a. $ (4,212) $ 2,431 $ (2,687) $ 3,903
Brands Holding Corp.
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Net sales 100 % 100 % 100 % 100 %
Cost of sales 45 % 45 % 44 % 44 %
Gross profit 55% 55% 56% 56%
Operating expenses:
Selling 29% 27% 28% 27%
Marketing 12% 10% 11% 10%
General and administrative 16 % 13 % 16 % 15 %
Total operating expenses 57 % 50 % 56 % 51 %
Income (loss) from operations (2%) 5% -% 5%
Other expense, net:
Interest expense (1%) (3%) (1%) (2%)
Other expense (1 %) - % - % - %
Total other expense, net (2 %) (3 %) (1 %) (2 %)
Income (loss) before income taxes (3 %) 2 % (1 %) 3 %
Benefit from (provision for) income taxes 1 % (1 %) - % (1 %)
Net income (loss) (3%) 1% (1%) 2%
Net loss (income) attributable to - % - % - % - %
noncontrolling interests
Net income (loss) attributable to a.k.a. (3%) 2% (1%) 2%
Brands Holding Corp.
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Comparison of the Three Months Ended
Net Sales Three Months Ended June 30, 2022 2021 Net sales$ 158,471 $ 149,227 Net sales increased by$9.2 million , or 6%, for the three months endedJune 30, 2022 compared to the same period in 2021. The overall increase in net sales was primarily driven by a 12% increase in the number of orders we processed in 2022 compared to 2021, driving an increase in sales of$15.1 million . Additionally, a decrease in our average order value of 4%, from$89 in 2021 to$85 in 2022, partially offset the increase in net sales by$5.9 million . The increase in the number of orders was driven by the growth of Princess Polly in theU.S. , as well as the acquisition of mnml. The decrease in our average order value was primarily due to higher promotional activity and higher return rates. On a constant currency basis, net sales and average order value for the three months endedJune 30, 2022 would have increased 11% and decreased 1%, respectively. The three months endedJune 30, 2022 includes the operations of mnml, or$9.4 million of net sales. Cost of Sales Three Months Ended June 30, 2022 2021 Cost of sales$ 71,024 $ 67,793 Percent of net sales 45 % 45 % Cost of sales increased by$3.2 million , or 5%, for the three months endedJune 30, 2022 compared to the same period in 2021. This increase was primarily driven by a 12% increase in the total number of orders we processed in 2022, as compared to 2021, which includes the impact of the operations of mnml, or$3.4 million of cost of sales, in the three months endedJune 30, 2022 . Cost of sales as a percent of net sales for the three months endedJune 30, 2022 included higher air freight costs compared to the same period in 2021, however, such increases were offset by the$6.3 million impact from the fair value increase in inventory acquired in the Culture Kings acquisition for the three months endedJune 30, 2021 . Gross Profit Three Months Ended June 30, 2022 2021 Gross profit$ 87,447 $ 81,434 Gross margin 55 % 55 % Gross profit increased by$6.0 million , or 7%, for the three months endedJune 30, 2022 compared to the same period in 2021. This increase was primarily driven by a 6% increase in net sales, which includes a 12% increase in the number of orders, partially offset by a 4% decrease in our average order value. Gross margin for the three months endedJune 30, 2022 was detrimentally impacted by higher air freight expense, higher promotional activity and higher return rates, the effective of which was offset by a$6.3 million impact in the three months endedJune 30, 2021 from the fair value increase in inventory acquired in the Culture Kings acquisition. Selling Expenses Three Months Ended June 30, 2022 2021 Selling$ 45,254 $ 40,023 Percent of net sales 29 % 27 % Selling expenses increased by$5.2 million , or 13%, for the three months endedJune 30, 2022 compared to the same period in 2021. This increase was driven by the 12% increase in the number of orders shipped, which includes the operations of mnml, or$3.8 million of selling expenses, in the three months endedJune 30, 2022 . The increase in selling expenses as a percentage of net sales was primarily due to a$1.3 million charge related to a change in the third-party fulfillment provider for Culture Kings and mnml.
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Marketing Expenses
Three Months Ended June 30,
2022 2021
Marketing $ 19,064 $ 14,908
Percent of net sales 12 % 10 %
Marketing expenses increased by $4.2 million , or 28%, for the three months ended
June 30, 2022 compared to the same period in 2021. The increase in marketing
expenses was driven by the operations of mnml, or $1.8 million of marketing
expenses, in the three months ended June 30, 2022 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 reduced effectiveness of our marketing channels at driving
traffic to our websites, and the inclusion of mnml, which had a higher rate of
advertising spend.
General and Administrative Expenses
Three Months Ended June 30,
2022 2021
General and administrative $ 25,703 $ 19,220
Percent of net sales 16 % 13 %
General and administrative expenses increased by $6.5 million , or 34%, for the
three months ended June 30, 2022 compared to the same period in 2021. The
increase was primarily driven by a $5.5 million increase in salaries and related
benefits and equity-based compensation expense related to increases in our
headcount across functions to support business growth and $1.5 million in
additional insurance costs. 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, as well as additional insurance
costs. The three months ended June 30, 2022 includes the operations of mnml, or
$1.4 million of general and administrative expenses,
Other Expense, Net
Three Months Ended June 30,
2022 2021
Other expense, net:
Interest expense $ (1,393) $ (4,113)
Other income (expense) (1,200) (42)
Total other expense, net $ (2,593) $ (4,155)
Percent of net sales (2) % (3) %
Other expense, net decreased by $1.6 million for the three months ended June 30,
2022 compared to the same period in 2021, primarily due to a reduction in
interest expense related to more favorable rates from our new senior secured
credit facilities compared to those of our credit facilities in the previous
year.
Benefit From (Provision For) Income Taxes
Three Months Ended June 30,
2022 2021
Benefit from (provision for) income taxes$ 955 $ (939) Percent of net sales 1 % (1 %) Benefit from (provision for) income tax decreased by$1.9 million , or 202% for the three months endedJune 30, 2022 compared to the same period in 2021. This decrease was due to a reduction in our income before income taxes.
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Comparison of the Six Months Ended June 30, 2022 and 2021Net Sales Six Months Ended June 30, 2022 2021 Net sales$ 306,790 $ 218,006 Net sales increased by$88.8 million , or 41%, for the six months endedJune 30, 2022 compared to the same period in 2021. The overall increase in net sales was primarily driven by a 48% increase in the number of orders we processed in 2022 compared to 2021, driving an increase in sales of$102.4 million . A decrease in our average order value of 2%, from$86 in 2021 to$84 in 2022, partially offset the increase in net sales by$13.6 million . The increase in the number of orders was largely driven by the acquisition of Culture Kings onMarch 31, 2021 , the acquisition of mnml in October of 2021 and growth of Princess Polly in theU.S. The decrease in our average order value was primarily due to higher promotional activity and higher return rates. On a constant currency basis, net sales and average order value for the six months endedJune 30, 2022 would have increased 45% and 1%, respectively. The six months endedJune 30, 2022 includes the operations of Culture Kings and mnml, or$122.8 million of net sales, while the comparable period in 2021 includes one quarter of operations of Culture Kings, or$58.3 million of net sales, from the date of its acquisition,March 31, 2021 . Cost of Sales Six Months Ended June 30, 2022 2021 Cost of sales$ 135,147 $ 95,984 Percent of net sales 44 % 44 % Cost of sales increased by$39.2 million , or 41%, for the six months endedJune 30, 2022 compared to the same period in 2021. This increase was primarily driven by a 48% increase in the total number of orders in 2022, as compared to 2021, which includes the impact of the operations of Culture Kings and mnml, or$58.9 million of cost of sales, in the six months endedJune 30, 2022 , while the comparable period in 2021 includes the impact of one quarter of operations of Culture Kings, or$32.7 million of cost of sales, from the date of its acquisition,March 31, 2021 . Gross Profit Six Months Ended June 30, 2022 2021 Gross profit$ 171,643 $ 122,022 Gross margin 56 % 56 % Gross profit increased by$49.6 million , or 41%, for the six months endedJune 30, 2022 compared to the same period in 2021. This increase was primarily driven by a significant increase in net sales, which includes a 48% increase in the total number of orders, partially offset by a 2% decrease in our average order value. Additionally, the six months endedJune 30, 2021 included a$6.3 million detrimental impact to gross profit from the fair value increase in inventory acquired in the Culture Kings acquisition, while the six months endedJune 30, 2022 includes a detrimental impact of$0.7 million related to the fair value increase in inventory acquired in the mnml acquisition. Selling Expenses Six Months Ended June 30, 2022 2021 Selling$ 85,618 $ 58,277 Percent of net sales 28 % 27 % Selling expenses increased by$27.3 million , or 47%, for the six months endedJune 30, 2022 compared to the same period in 2021. This increase was driven by the 48% increase in the number of orders we processed in 2022 compared to 2021, which includes the impact of the operations of Culture Kings and mmnl. The six months endedJune 30, 2022 includes the operations of Culture Kings and mnml, or$33.8 million of selling expenses, while the comparable period in 2021 includes one quarter of operations of Culture Kings, or$14.6 million of selling expenses, from the date of its acquisition,March 31, 2021 . The increase in selling expenses as a percentage of net sales was primarily due a$1.3 million charge related to a change in the third-party fulfillment provider for Culture Kings and mnml.
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Marketing Expenses
Six Months Ended June 30,
2022 2021
Marketing $ 34,769 $ 21,132
Percent of net sales 11 % 10 %
Marketing expenses increased by $13.6 million , or 65%, for the six months ended
June 30, 2022 compared to the same period in 2021. The increase in marketing
expenses was driven by the inclusion of Culture Kings and mnml and increased
marketing investment to acquire customers and retain existing customers to
generate higher net sales. The six months ended June 30, 2022 includes the
operations of Culture Kings and mnml, or $15.7 million of marketing expenses,
while the comparable period in 2021 includes one quarter of operations of
Culture Kings, or $6.2 million of marketing expenses, from the date of its
acquisition, March 31, 2021 . The increase in marketing expenses as a percentage
of net sales was primarily due to reduced effectiveness of our marketing
channels at driving traffic to our websites, and the inclusion of mnml, which
had a higher rate of advertising spend as compared to some of our other brands.
General and Administrative Expenses
Six Months Ended June 30,
2022 2021
General and administrative $ 50,481 $ 32,650
Percent of net sales 16 % 15 %
General and administrative expenses increased by $17.8 million , or 55%, for the
six months ended June 30, 2022 compared to the same period in 2021. The increase
was primarily driven by a $16.8 million increase in salaries and related
benefits and equity-based compensation expense related to increases in our
headcount across functions to support business growth and $3.0 million in
additional insurance costs, partially offset by a $3.2 million decrease in
transaction costs. The six months ended June 30, 2022 includes the operations of
Culture Kings and mnml, or $15.7 million of general and administrative expenses,
while the comparable period in 2021 includes one quarter of operations of
Culture Kings, or $6.4 million of general and administrative expenses, 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,
as well as additional insurance costs.
Other Expense, Net
Six Months Ended June 30,
2022 2021
Other expense, net:
Interest expense $ (2,652) $ (4,217)
Other expense (1,112) (61)
Total other expense, net $ (3,764) $ (4,278)
Percent of net sales (1) % (2) %
Other expense, net decreased by $0.5 million for the six months ended June 30,
2022 compared to the same period in 2021, primarily due to a reduction in
interest expense related to more favorable rates from our new senior secured
credit facilities compared to those of our credit facilities in the previous
year.
Benefit From (Provision For) Income Taxes
Six Months Ended June 30,
2022 2021
Benefit from (provision for) income taxes$ 302 $ (1,706) Percent of net sales - % (1 %) Benefit from (provision for) income tax decreased by$2.0 million , or 118% for the six months endedJune 30, 2022 compared to the same period in 2021. This decrease was due to a reduction in our income before income taxes.
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Liquidity and Capital Resources
From our inception through
InSeptember 2021 , we completed 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 of
As ofJune 30, 2022 , 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 credit facilities and lines 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 credit facilities and lines 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 our 2021 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$125.0 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. In connection with the IPO, we entered into a new senior secured credit facility inclusive of a$100.0 million term loan and a$50.0 million revolving line of credit, with an option of up to$50.0 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. As ofJune 30, 2022 , the Company owes a combined$108.0 million in term loan and accordion borrowings, as well as$25.0 million borrowed under the revolving line of credit. The 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 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 next twelve months 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 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 condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional information regarding our senior secured credit facilities.
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Lines of Credit
OnNovember 6, 2018 , we entered into a line of credit with Commonwealth Bank of Australia in the amount of$7.0 million under the subsidiary Princess Polly Bidco Pty. The line of credit was amended onAugust 1, 2019 to increase the facility amount to$15.4 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 with Bank 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
There have been no significant changes in our material cash requirements from those reported in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of our 2021 Form 10-K.
Historical Cash Flows
Six Months Ended June 30,
2022 2021
Net cash (used in) provided by operating activities $ (23,587) $ 7,480
Net cash used in investing activities (7,962) (229,105)
Net cash provided by financing activities 20,905 231,515
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 six months ended
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, and investments in our flagship and other stores. Purchases of property and equipment may vary from period to period due to timing of the expansion of our operations. During the six months endedJune 30, 2022 , as compared to the same period in 2021, net cash used in investing activities decreased$221.1 million . This was attributable to the acquisition of Culture Kings inMarch 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 the sale of our common stock in the IPO. During the six months endedJune 30, 2022 , as compared to the same period in 2021, net cash provided by financing activities decreased$210.6 million . This was primarily attributable to the proceeds received from debt issuances and from the issuance of partner units to acquire Culture Kings inMarch 2021 . Offsetting the 2021 activity is$25.0 million in proceeds from the revolving line of credit in 2022.
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Critical Accounting Estimates
We believe that the following accounting estimates involve a high degree of
judgment and complexity. Refer to Note 2 to our audited consolidated financial
statements and the related notes thereto for the years ended December 31, 2021 ,
2020 and 2019, included in our 2021 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, or at point of sale for purchases in our stores, 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 six months endedJune 30, 2022 . 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 six months endedJune 30, 2022 .
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.
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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 six months endedJune 30, 2022 . 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 three months endedJune 30, 2022 .
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