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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 on December 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:

•In July 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 the U.S., growing U.S. sales by 80% in 2021 as compared to 2020.

•In August 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 the U.S., which was the brand’s fastest growing market in 2021.

•In December 2019, we acquired U.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 March 2021, we acquired a controlling interest in Culture Kings, an Australia-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.

•In October 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 and December 2019, respectively.

Initial Public Offering

In September 2021, we completed an initial public offering (the “IPO”), in which we issued and sold 10,000,000 shares of newly authorized common stock for $11.00 per share for net proceeds of $95.7 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,

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 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,

Net income (loss) margin (1) % 7 % 1%

Adjusted EBITDA margin 11 % 14 % 9 %

Net cash provided by operating activities (in thousands) $ 23,968 $ 21,712 $ 511

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,

Add (deduct):

Inventory step-up amortization expense 15,908 — —

Transaction costs 5,387 — —

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,

Less: purchases of property and equipment (7,734) (1,328) (1,031)

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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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 the U.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 than U.S. dollars are converted into U.S. dollars at constant exchange rates (i.e., the rates in effect on December 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,

Operating expenses:

Other expense, net:

Loss on extinguishment of debt (10,924) — —

Net loss (income) attributable to noncontrolling interests 123 (471) (48)

Year Ended December 31,

Operating expenses:

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 Corp. (1 %) 7 % 1 %

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Comparison of the Years Ended December 31, 2021 and 2020

Net Sales

Years Ended December 31,

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 on March 31, 2021 and growth of Princess Polly in the U.S. The increase in our average order value was primarily due to the implementation of targeted price increases 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 and October 14, 2021, respectively.

Cost of Sales

Years Ended December 31,

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 and October 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 of December 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,

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,

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,

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,

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,

Other expense, net:

Loss on extinguishment of debt (10,924) —

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,

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,

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,

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,

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,

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,

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,

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,

Other expense, net $ (485) $ (139)

Percent of net sales — % — %

Provision for income tax

Years Ended December 31,

Provision for income tax $ (6,850) $ (1,012)

Percent of net sales (3 %) (1 %)

Provision for income tax increased by $5.8 million, or 577% in 2020 compared to 2019. This increase was driven by an increase in our income before income taxes.

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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

Operating expenses:

Three Months Ended

Operating expenses:

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 %) — %

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Quarterly Trends and Seasonality

Net Sales, Cost of Sales and Gross Profit

Net sales have generally increased sequentially quarter-to-quarter as we have made acquisitions (Culture Kings on March 31, 2021 and mnml on October 14, 2021) and launched our brands in the U.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 December 31, 2021:

Three Months Ended

Add (deduct):

Inventory step-up amortization expense — — — — — 6,266 5,985 3,657

Net income (loss) margin — % 5 % 12 % 7 % 3 % 1 % (6) % — %

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Liquidity and Capital Resources

Since our inception through September 2021, we have financed our operations and capital expenditures primarily through cash flows generated by operations, private sales of equity securities or the incurrence of debt.

As of December 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 of December 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

On March 31, 2021, we entered into senior secured credit facilities with syndicated lenders and an affiliate of Fortress 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 ending December 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 ended December 31, 2021, and certain annual mandatory prepayment terms based on excess cash flows, as defined by the credit agreement, based on our net leverage ratio for years beginning with the fiscal year ending December 31, 2022. If we are unable to comply with certain financial covenant ratios and terms requiring mandatory prepayment based on a percentage of excess cash flows, our long-term liquidity position may be adversely impacted. 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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Lines of Credit

On November 6, 2018, we entered into a line of credit with Commonwealth Bank of Australia in the amount of $7 million under the subsidiary Princess Polly Bidco Pty. The line of credit was amended on August 1, 2019 to increase the facility amount to $15.6 million. Borrowings under the credit agreement accrued an interest rate of AU Screen Rate (ASX) + 3.25% per annum. Obligations under the credit agreement were secured by cash, inventory and other liquid assets. As of December 31, 2020, the amount outstanding was $6.2 million. The facility was repaid in full and terminated as of February 28, 2021.

On December 31, 2019, we entered into a line of credit with Bank of America in the amount of $0.5 million under the subsidiary Rebdoll, Inc. The line of credit was guaranteed by Excelerate, L.P. Borrowings under the credit agreement accrued an interest rate of LIBOR + 2.25%. As of December 31, 2020, the amount outstanding was $0.2 million. The outstanding borrowings were repaid in full and the line of credit was terminated as of February 28, 2021.

On October 25, 2019, we entered into a line of credit with Moneytech in the amount of $2.8 million under the subsidiary Petal & Pup Pty Ltd. Borrowings under the credit agreement accrued an interest rate of 7.27%. The line of credit was terminated in February 2021.

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 in Las Vegas will be material to our operations with a first year annual cash payment of approximately $1.7 million, paid in monthly installments beginning in November 2022, that increase by 3.0% each year through the tenth anniversary of the lease commencement. As of December 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 of December 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 in Las Vegas in addition to investments in infrastructure and technology.

Historical Cash Flows

Year Ended December 31,

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 the U.S. and Australia 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 the U.S. in 2019, requiring buildup of inventory and securing warehouse space.

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Net Cash Used in Investing Activities

Our primary investing activities have consisted of acquisitions to support our overall business growth and investments in our fulfillment centers and our internally developed software to support our infrastructure. Purchases of property and equipment may vary from period to period due to timing of the expansion of our operations.

In 2021, net cash used in investing activities increased $275.7 million. This was attributable to the acquisition of Culture Kings in March 2021, the purchase of the Petal & Pup noncontrolling interest in September 2021 and the acquisition of mnml in October 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 in March 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 ended December 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 ended December 31, 2021.

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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 ended December 31, 2021.

Goodwill and Impairment of Intangible Assets

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 ended December 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 ended December 31, 2021.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have operations within the United States and internationally, and we are exposed to market risks in the ordinary course of our business, including the effects of foreign currency fluctuations, interest rate changes and inflation. Information relating to quantitative and qualitative disclosures about these market risks is set forth below.

Interest Rate Sensitivity

Cash and cash equivalents were held primarily in cash deposits and money market funds. The fair value of our cash and cash equivalents would not be significantly affected by either an increase or decrease in interest rates due mainly to the short-term nature of these instruments. Interest on any line of credit borrowings incurred pursuant to the credit described above would accrue at a floating rate based on a formula tied to certain market rates at the time of incurrence; however, we do not expect that any change in prevailing interest rates will have a material impact on our results of operations. As of December 31, 2021, we had approximately $110.8 million in debt outstanding under our term loan. Based on the levels of borrowings under our new senior secured credit facility at December 31, 2021, a hypothetical 100 basis point increase or decrease in underlying interest rates would increase or decrease interest expense by approximately $1.0 million. This hypothetical analysis may differ from the actual change in interest expense due to potential changes in interest rates or gross borrowings outstanding under our credit facilities. We do not utilize derivative financial instruments to manage our interest rate risks.

Foreign Currency Risk

We are exposed to fluctuations in currency exchange rates as a result of our operations in countries other than the U.S., principally related to our significant operations in Australia. As of December 31, 2021, movements in currency exchange rates and the related impact on the translation of the balance sheets resulted in the $27.6 million net loss in the currency translation category of accumulated other comprehensive income (loss). A hypothetical 10% increase or decrease in the Australian dollar exchange rate could result in a $46.4 million foreign currency translation fluctuation, which would be recorded in accumulated other comprehensive loss in the condensed consolidated balance sheets.

Additionally, a portion of our sales and costs are earned and incurred, respectively, in USD for subsidiaries that use AUD as their functional currency. These sales and costs generate foreign currency exposure. Furthermore, we have various assets and liabilities, primarily cash and intercompany receivables and payables, denominated in USD where the functional currency is AUD. These balance sheet items are subject to remeasurement which may create fluctuations in other expense within our consolidated results of operations. For the year ended December 31, 2021, movements in currency exchange rates resulted in $0.9 million net loss in other expense.

Inflation

Currently, we do not believe that inflation has had a material effect on our business, financial condition or results of operations. We continue to monitor the impact of inflation to minimize its effects through sourcing and pricing strategies, productivity improvements and cost reductions. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations.

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ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

a.k.a. BRANDS HOLDING CORP.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page

CONSOLIDATED BALANCE SHEETS 78

CONSOLIDATED STATEMENTS OF INCOME 79

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 80

CONSOLIDATED STATEMENTS OF CASH FLOWS 82

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 84

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of a.k.a. Brands Holding Corp.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of a.k.a. Brands Holding Corp. and its subsidiaries (the “Company”) as of December 31, 2021 and 2020, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, partners’ capital and redeemable noncontrolling interest and cash flows for each of the three years in the period ended December 31, 2021, including the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021 in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers

Melbourne, Australia

March 1, 2022

We have served as the Company’s auditor since 2021.

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a.k.a. BRANDS HOLDING CORP.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

December 31,

Assets

Current assets:

Prepaid income taxes 4,059 —

Prepaid expenses and other current assets 20,809 4,080

Operating lease right-of-use assets 26,415 4,477

Other assets 850 —

Liabilities, stockholders’ equity and partners’ capital

Current liabilities:

Income taxes payable — 3,118

Operating lease liabilities, current 5,721 1,234

Current portion of long-term debt 5,600 6,353

Other long-term liabilities 1,333 144

Commitments and contingencies (Note 15)

Stockholders’ equity and partners’ capital:

Accumulated other comprehensive income (loss) (11,080) 5,839

Noncontrolling interest — 9,983

Total stockholders’ equity and partners’ capital 451,026 138,884

_________________

(1)Excelerate, L.P. was the predecessor entity to a.k.a. Brands Holding Corp. Refer to Note 1 for additional information.

The accompanying notes are an integral part of these consolidated financial statements

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a.k.a. BRANDS HOLDING CORP.

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except share and per share data)

Year Ended December 31,

Operating expenses:

Other expense, net:

Loss on extinguishment of debt (10,924) — —

Net loss (income) attributable to noncontrolling interests 123 (471) (48)

Net income (loss) per share:

Weighted average shares outstanding:

The accompanying notes are an integral part of these consolidated financial statements

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a.k.a. BRANDS HOLDING CORP.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

Year Ended December 31,

Other comprehensive income (loss):

The accompanying notes are an integral part of these consolidated financial statements

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a.k.a. BRANDS HOLDING CORP.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY, PARTNERS’ CAPITAL(1) AND REDEEMABLE NONCONTROLLING INTEREST

(in thousands, except share and unit data)

Shares Amount Units Amount

Equity-based compensation — — — — 353 — — — 353 —

Cumulative translation adjustment — — — — — (121) — 365 244 —

Noncontrolling interest from acquisition — — — — — — — 8,314 8,314 —

Equity-based compensation — — — — 1,380 — — — 1,380 —

Repurchase of incentive units — — — — (1,147) — — — (1,147) —

Noncontrolling interest from purchase of Culture Kings — — — — — — — — — 142,718

Equity-based compensation — — — — 8,043 — — — 8,043 —

_________

(1)Excelerate, L.P. was the predecessor entity to a.k.a. Brands Holding Corp. Refer to Note 1 for additional information.

The accompanying notes are an integral part of these consolidated financial statements

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a.k.a. BRANDS HOLDING CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

Year Ended December 31,

Cash flows from operating activities:

Amortization of inventory fair value adjustment 15,908 — —

Amortization of debt issuance costs 596 — —

Non-cash interest expense 11 — —

Loss on extinguishment of debt 10,924 — —

Lease incentives 361 — —

Non-cash operating lease expense 6,246 — —

Changes in operating assets and liabilities, net of effects of acquisitions:

Prepaid expenses and other current assets (11,543) 20 (2,707)

Cash flows from investing activities:

Acquisition of businesses, net of cash acquired (249,302) (600) (20,425)

Purchase of noncontrolling interest (20,198) — —

Purchase of intangible assets (841) (451) (372)

Cash flows from financing activities:

Proceeds from initial public offering, net of issuance costs 96,863 — —

Proceeds from line of credit, net of issuance costs 34,150 10,889 —

Proceeds from issuance of debt, net of issuance costs 254,134 — —

Repayment of debt (155,762) — —

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a.k.a. BRANDS HOLDING CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

Year Ended December 31,

Reconciliation of cash, cash equivalents and restricted cash:

Total cash, cash equivalents and restricted cash $ 41,018 $ 27,099 $ 5,791

Supplemental disclosure of cash flow information:

Supplemental disclosure of non-cash investing activities:

Right-of-use asset additions under operating leases 4,073 2,740 233

Offering costs not yet paid 1,142 — —

Debt issuance costs not yet paid 121 — —

The accompanying notes are an integral part of these consolidated financial statements

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a.k.a. BRANDS HOLDING CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(tabular amounts in thousands, except share, per share data, unit, per unit data, ratios, or as noted)

Note 1. Description of Business

a.k.a. Brands Holding Corp. (together with our wholly owned subsidiaries, collectively, the “Company”), which operates under the name “a.k.a. Brands” or “a.k.a.,” is an online fashion retailer focused on acquiring and accelerating the growth of next-generation, digitally native fashion brands targeting Gen Z and Millennial customers.

The Company is headquartered in San Francisco, California, with buying, studio, marketing, fulfillment and administrative functions primarily in Australia and the United States.

Initial Public Offering

In September 2021, the Company completed an initial public offering (the “IPO”), in which the Company issued and sold 10,000,000 shares of its 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.

Reorganization Transactions

a.k.a. Brands Holding Corp. was formed as a Delaware corporation on May 20, 2021 to be the issuer of common stock in the IPO.Excelerate, L.P. (“Excelerate”), a Cayman limited partnership, and the predecessor entity to a.k.a. Brands Holding Corp., had historically been the holding company of the entities that owned and operated the a.k.a. businesses prior to the IPO. The equity interests of Excelerate, which included the Series A partner units and incentive units, were owned by affiliates of Summit Partners (“Summit”), certain other investors and certain of our executive officers and directors and other members of management.

In connection with the IPO, a reorganization was undertaken to cause Excelerate to become a wholly-owned subsidiary of a.k.a. Brands Holding Corp. Immediately prior to the reorganization, Summit, management and certain other investors exchanged their limited partnership interests in Excelerate for limited partnership interests in New Excelerate, L.P. (“New Excelerate”), and New Excelerate became a limited partner of Excelerate. Immediately prior to the pricing of the IPO, New Excelerate and other Excelerate investors transferred their interests in Excelerate to a.k.a. Brands Holding Corp., in exchange for common stock in a.k.a. Brands Holding Corp (the “New Excelerate Reorganization”). As a result, Excelerate became a wholly-owned subsidiary of a.k.a. Brands Holding Corp.

As a result of the Culture Kings acquisition in March 2021 (refer to Note 3 for additional information), Excelerate indirectly owned 55% of the equity interests in CK Holdings, LP (“CK Holdings”), which owned 100% of the Company’s Culture Kings business prior to the IPO. The remaining 45% of the equity interests in CK Holdings were held by certain minority investors. Immediately following the New Excelerate Reorganization, the Company completed a series of transactions in which the minority investors exchanged their remaining interests in CK Holdings for 21,809,804 newly issued shares of a.k.a. Brands Holding Corp. common stock. The number of shares issued in exchange for the minority interests was determined based on the relative valuations of CK Holdings and consolidated a.k.a. at the time of the IPO.

Excelerate had historically owned 66.7% of the equity interests in P&P Holdings, LP (“P&P Holdings”), which operated the Company’s Petal & Pup business prior to the IPO. The remaining 33.3% of the equity interests in P&P Holdings were held by certain minority investors. On August 19, 2021, the Company repurchased approximately 6.0% of the equity held by the P&P minority investors for AUD $5.0 million. In connection with the completion of the IPO, the Company used a portion of the net proceeds from the IPO to fund the acquisition of the remaining 27.3% of the equity interests in P&P Holdings then owned by the P&P minority investors for cash of approximately AUD $22.8 million. Following the completion of this purchase, P&P Holdings became a wholly-owned subsidiary of a.k.a. Brands Holding Corp.

Refinancing Transactions

In March 2021, certain subsidiaries of the Company entered into senior secured credit facilities that provided the Company with a $125.0 million senior secured term loan facility and up to $25.0 million aggregate principal in revolving borrowings (the “Fortress Credit Facilities”), and also issued $25.0 million in senior subordinated notes to an affiliate of Summit (the “Summit Notes”) to provide financing for the Company’s acquisition of Culture Kings (refer to Note 3 for additional information on the Culture Kings acquisition).

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In connection with the IPO, certain subsidiaries of the Company entered into a new senior secured credit facility inclusive of a $100 million term loan and a $50 million revolving line of credit. The Company used borrowings under this new senior secured credit facility’s term loan, together with a portion of the proceeds from the IPO, to repay the Fortress Credit Facilities and Summit Notes in full and subsequently terminated them. Refer to Note 8 for additional information.

Historical Units

Prior to the IPO, incentive units had been issued to certain directors and members of management. These incentive units had a requirement that such shares could not participate in distributions and earnings of Excelerate, L.P. until after the holders of the Series A partner units received their return of capital plus a specified threshold amount per unit. Accordingly, at no time prior to IPO had such threshold been met. In September 2021, in connection with the IPO, all previous ownership interests in Excelerate, L.P., held by New Excelerate and other Excelerate investors were exchanged for shares of common stock in a.k.a. Brands Holdings Corp. in direct proportion to their respective Series A partner units and incentive units, subject to a reverse split factor of 61.25%. All unit, per unit and related information presented in the accompanying consolidated financial statements have been retroactively adjusted, where applicable, to reflect the impact of the split of units held by New Excelerate investors into a proportionate amount of shares of a.k.a. common stock. The terms of the incentive units remained unchanged and individual holders of such units will only be entitled to participate in the distributions and earnings of New Excelerate once the holders of the Series A partner units receive their return of capital plus a specified threshold amount per unit. However, as New Excelerate was issued shares of common stock in direct proportion to its combined Series A partner units and incentive units, New Excelerate will participate in all distributions and returns of the Company in relation to the total amount of shares of a.k.a. common stock that it holds.

Prior to the IPO, a.k.a. used the two-class method in calculating earnings per unit and had not deemed the incentive units to be potentially dilutive due to the requirement that such shares cannot participate in distributions and earnings of the Company until after the Series A units receive their return of capital plus a specified threshold amount per unit, and such threshold had not been met. Accordingly, basic and diluted earnings per share presented on the condensed consolidated statements of income for all periods prior to the IPO are the same. Post-IPO, the common stock held by New Excelerate includes shares issued in proportion to the ownership interests in respect to the incentive units. Therefore, the impact of the incentive unit ownership is included in the common stock issued and outstanding after the IPO.

Note 2. Significant Accounting Policies

Principles of Consolidation and Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The accompanying consolidated financial statements include the accounts of a.k.a. Brands Holding Corp. and its wholly-owned subsidiaries.All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities in the consolidated financial statements and accompanying notes. Actual results could materially differ from those estimates. On an ongoing basis, the Company evaluates items subject to significant estimates and assumptions. As of December 31, 2021, the effects of the ongoing COVID-19 pandemic on our business, results of operations and financial condition continue to evolve. As a result, many of our estimates and assumptions require increased judgment and carry a higher degree of variability and volatility.

Concentration of Credit Risk

Financial instruments that subject the Company to credit risk consist of cash and cash equivalents, restricted cash, and accounts receivable. Although the Company’s deposits held with banks may exceed the amount of federal insurance provided on such deposits, the Company has not experienced any losses in such accounts. The Company is exposed to credit risk in the event of a default by the financial institutions holding its cash and cash equivalents for the amounts reflected on the consolidated balance sheets.

As of December 31, 2021 and 2020, the Company had $28.2 million and $10.9 million, respectively, on deposit in banks outside of the United States.

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Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an original maturity (at date of purchase) of three months or less to be cash equivalents. Cash equivalents, which consist primarily of money market accounts and restricted cash are carried at cost, which approximates fair value.

Restricted Cash

Restricted cash primarily relates to letters of credit which are held as collateral under various lease agreements. Restricted cash is presented separately from cash and cash equivalents on the accompanying consolidated balance sheets.

Accounts Receivable

Accounts receivable consists of trade accounts receivable relating to the credit card receivables arising from the sale of products to customers through the Company’s digital platforms. Trade accounts receivable is reported net of an allowance for doubtful accounts. The Company had no allowance for doubtful accounts as of December 31, 2021 and 2020.

Inventory, Net

Inventories consist of finished goods and are accounted for using an average cost method. Inventory is valued at the lower of cost or net realizable value. Cost of inventory includes import duties and other taxes and transport and handling costs. The Company records a provision for excess and obsolete inventory to adjust the carrying value of inventory based on assumptions regarding future demand for the Company’s products.

Lower of cost or net realizable value is evaluated by considering obsolescence, excess levels of inventory, deterioration and other factors. The Company analyzes 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 net realizable value of its inventory. If the sales volume or sales price of specific products declines, additional write-downs may be required. Excess and obsolete inventory is charged to cost of goods sold in the period the write-down is estimated.

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist primarily of advance payments on inventory to be delivered from vendors, prepaid packaging and insurance.

Deferred Offering Costs

Deferred offering costs consist primarily of legal, accounting and other fees related to the IPO which were recorded in prepaid expenses and other current assets on the consolidated balance sheets prior to the IPO. After the completion of the IPO in September 2021, deferred offering costs of $7.7 million were reclassified to stockholders’ equity and recorded net against the proceeds from the IPO. No offering costs were deferred as of December 31, 2021 or 2020.

Property and Equipment, Net

Property and equipment are recorded at cost, net of accumulated depreciation. Repair and maintenance costs are expensed as incurred.

Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, which range from three to five years.

Estimated useful life (years)

Furniture and fixtures 5

Machinery and equipment 5

Computer equipment and capitalized software 3

Upon the sale or disposal of property and equipment, the cost and related accumulated depreciation and amortization are removed from the consolidated balance sheets and the resulting gain or loss is reflected in general and administrative expense in the consolidated statements of income.

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The Company has incurred costs related to the development of the Company’s websites. The Company capitalizes these website development costs, as applicable, in accordance with ASC Subtopic 350-50, Intangibles—Goodwill and Other—Website Development Costs (“ASC 350-50”). ASC 350-50 requires that costs incurred during the website development stage be capitalized. Capitalized website costs include salary and benefit costs for Company employees and contractors that develop the website. When the development phase is substantially complete and the website is ready for its intended purpose, capitalized costs are depreciated using the straight-line method over the three-year useful life.

Business Combinations

The Company accounts for business combinations using the acquisition method and accordingly, the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree are recorded at their acquisition date fair values. Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the acquired net tangible and intangible assets. Goodwill recorded in an acquisition is assigned to applicable reporting units based on expected revenues or expected cash flows. Identifiable intangible assets with finite lives are amortized over their useful lives. Amortization of intangible assets is recorded in general and administrative expense.

While the Company uses its best estimates and assumptions as a part of the determination of fair value to accurately value assets acquired, liabilities assumed and any noncontrolling interest on the business combination date, the Company’s estimates and assumptions are inherently subject to refinement. As a result, during the preliminary determination of fair value, which may be up to one year from the business combination date, the Company may record adjustments to the assets acquired or liabilities assumed subsequent to the completion of the determination of fair value in the Company’s operating results in the period in which the adjustments were determined.

Noncontrolling interest is part of the aggregate consideration paid for an acquisition. It is measured at the minorities’ share of the fair value of the subsidiaries’ identifiable assets and liabilities at the date of acquisition by the Company, subject to possible adjustments for up to one year from the business combination date, and the minorities’ share of changes in equity since the date of acquisition.

The Company also incurs acquisition-related and other expenses including legal, banking, accounting and other advisory fees of third parties which are recorded as general and administrative expenses as incurred. The results of operations of acquired businesses are included in the consolidated financial statements from the acquisition date.

Goodwill, Intangible Assets and Other Long-Lived Assets

Assets acquired and liabilities assumed are measured at fair value as of the acquisition date. Goodwill, which has an indefinite useful life, represents the excess of cost over fair value of the net assets acquired. As of December 31, 2021 and 2020, the Company had goodwill of $363.3 million and $88.3 million, respectively.

No goodwill impairment was recorded for the years ended December 31, 2021, 2020 and 2019.

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Impairment of Long-Lived Assets

The Company reviews long-lived assets for possible impairment whenever events or changes in circumstances indicate the carrying amount may not be recoverable. This determination includes evaluation of factors such as future asset utilization and future net undiscounted cash flows expected to result from the use of the assets. If circumstances require a long-lived asset or asset group be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by that asset group to its carrying amount. If the carrying amount of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying amount exceeds its fair value.

The Company’s identifiable intangible assets are typically comprised of customer relationships, brand names and acquired core website software. The cost of identifiable assets with finite lives is generally amortized on a straight-line basis over the assets’ respective estimated useful lives, which range from three to ten years.

No impairment losses were recognized during the years ended December 31, 2021, 2020 and 2019.

Leases

The Company generally leases office and warehouse facilities under non-cancellable agreements. Upon each agreement’s commencement date, the Company determines if the agreement is part of an arrangement that is or that contains a lease, determines the lease classification and recognizes right-of-use assets and lease liabilities for all leases with the exception of leases with terms of 12 months or less. The Company accounts for lease and non-lease components as a single lease component. Operating lease right-of-use assets are classified in operating lease right-of-use assets in the consolidated balance sheets. Operating lease liabilities are classified as current liabilities and long-term lease liabilities based on when lease payments are due. The Company’s lease payments consist primarily of fixed rental payments for the right to use the underlying leased assets over the lease terms as well as payments for common area maintenance and administrative services. As of December 31, 2021 and 2020, the Company did not have material finance lease arrangements.

Lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected term of the lease commencement date. As most of the Company’s leases do not provide an implicit rate, the Company uses an estimated incremental borrowing rate (“IBR”) based on the information available at the commencement date of the respective lease to determine the present value of future payments. The determination of the IBR requires judgment and is primarily based on publicly available information for companies within the same industry and with similar credit profiles. The Company adjusts the rate for the impact of collateralization, the lease term and other specific terms included in each lease arrangement. The IBR is determined at the lease commencement and is subsequently reassessed upon a modification to the lease arrangement. The right-of-use asset also includes any lease payments made prior to the commencement date and excludes lease incentives and initial direct costs incurred.

Lease expense for minimum lease payments on operating leases is recognized on a straight-line basis over the lease term. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.

The Company reviews right-of-use assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the right-of-use asset may not be recoverable. When such events occur, the Company compares the carrying amount of the right-of-use asset to the undiscounted expected future cash flows related to the right-of-use asset. If the comparison indicates that an impairment exists, the amount of the impairment is calculated as the difference between the excess of the carrying amount over the fair value of the right-of-use asset. If a readily determinable market price does not exist, fair value is estimated using discounted expected cash flows attributable to the right-of-use asset.

Income Taxes

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Deferred tax assets are recognized to the extent it is believed that these assets are more likely than not to be realized. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities (including the impact of available carry back and carry forward periods), projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences, net of the valuation allowance. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carry forward period are reduced.

The Company classifies interest and penalties, if applicable, related to income tax liabilities as a component of income tax expense.

The Company uses a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals and litigation processes, if any. The second step is to measure the largest amount of tax benefit as the largest amount that is more likely than not to be realized upon settlement.

Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. As of December 31, 2021, there are no known uncertain tax positions.

Equity-based Compensation

Restricted Stock Units and Stock Options

The Company has granted equity-based awards in the form of restricted stock units and stock options to employees. Equity-based compensation expense related to these equity-based awards is recognized based on the fair value of the awards granted. We estimate the fair value of restricted stock unit awards granted based upon the closing price of our common stock on the grant date. We estimate the fair value of stock option awards granted using the Black-Scholes option pricing model. The Black-Scholes option pricing model requires the input of highly subjective assumptions, including the fair value of the underlying shares of our common stock, the risk-free interest rate, the expected volatility of the price of our common stock, the expected dividend yield of our common stock and the expected term of the equity award. The assumptions used to determine the fair value of the equity awards represent management’s best estimates. These estimates involve inherent uncertainties and the application of management’s judgment. The related equity-based compensation expense is recognized on a straight-line basis over the requisite service period of the awards, which is generally four years. We account for forfeitures as they occur. If factors change and different assumptions are used, our equity-based compensation expense could be materially different in the future.

These assumptions and estimates are as follows:

•Risk-Free Interest Rate. The risk-free interest rate for the expected term of the equity award is based on the U.S. Treasury yield curve in effect at the time of the grant.

•Expected Volatility. As we have minimal trading history for our common stock, the expected volatility was estimated by taking the average historic stock price volatility for industry peers, consisting of several public companies in our industry which are either similar in size, stage of life cycle or financial leverage, over a period equivalent to the expected term of the awards.

•Expected Dividend Yield. We have never declared or paid any cash dividends and do not currently plan to pay cash dividends in the foreseeable future. As a result, an expected dividend yield of zero percent was used.

•Expected Term. For stock options, the expected term represents the period that a stock option award is expected to be outstanding. We have limited historical exercise data from which to derive expected term input assumptions. Consequently, we calculate expected term using the SEC simplified method whereby the expected term of a stock option award is equal to the average of the award's contractual term and vesting term.

We will continue to use judgment in evaluating the assumptions related to our equity-based compensation on a prospective basis.

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Partnership Units Valuations

For the partnership units granted prior to IPO, the Company relied on valuations prepared by an independent third-party valuation firm in accordance with the American Institute of Certified Public Accountants Accounting and Valuation Guide, Valuation of Privately-Held Company Equity Securities Issued as Compensation, Such valuations were aligned with the Company’s internal valuation approach. Subsequent to the IPO, it is no longer necessary for the Company to estimate the fair value of its partnership units, as no further incentive partnership unit awards will be granted subsequent to the IPO. See Note 12 for additional information.

Employee Benefit Programs

The Company has a 401(k) defined contribution plan covering eligible employees. Participants may contribute a percentage of their pre-tax earnings annually, subject to limitations imposed by the Internal Revenue Service.

The Company matches contributions, subject to Internal Revenue Service limitations, and contributions vest immediately.

The Company’s short-term obligations, which represent wages and salaries for vacation days earned, non-monetary benefits and accumulated sick leaves that are expected to settle wholly within 12 months after the end of the period in which the employees render the related service, are recognized in respect of employee services up to the end of the reporting period and are measured at the amounts expected to be paid when the liabilities are settled. The liabilities are included in accrued liabilities in the consolidated balance sheets.

Foreign Currencies

The functional currency for the Company and its United States and Cayman subsidiaries is the United States dollar, while the functional currency for the Company’s Australian subsidiaries is the Australian dollar. For those subsidiaries, the assets and liabilities are translated into U.S. dollars at the exchange rates in effect at the balance sheet date for assets and liabilities and an average rate for each period for revenues and expenses. Translation adjustments are recorded as a component of accumulated other comprehensive income (loss) in the consolidated statement of stockholders’ equity.

Transactions denominated in a currency other than the functional currency of the entity involved give rise to foreign currency remeasurement gains and losses, which are included in other expense on the consolidated statements of income. Foreign currency transaction losses were $1.7 million, $0.2 million and $0.1 million for the years ended December 31, 2021, 2020 and 2019, respectively.

Comprehensive Income (Loss)

Comprehensive income (loss) is composed of two components: net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) refers to revenue, expenses, gains and losses that under GAAP are recorded as an element of stockholders’ equity but are excluded from net income. The Company’s other comprehensive income (loss) consists of foreign currency translation adjustments from those subsidiaries not using the U.S. dollar as their functional currency. The Company has disclosed other comprehensive income (loss) as a component of stockholders’ equity.

Revenue Recognition

Revenue is primarily derived from the sale of apparel merchandise through the Company’s online websites and stores and, when applicable, shipping revenue.

Revenue is recognized in an amount that reflects the consideration expected to be received in exchange for products. To determine revenue recognition for contracts with customers in accordance with Revenue from Contracts with Customers (Topic 606), the Company recognizes revenue from the commercial sales of products and contracts by applying the following five steps: (1) identification of the contract, or contracts, with the customer; (2) identification of the performance obligations in the contract; (3) determination of the transaction price; (4) allocation of the transaction price to the performance obligations in the contract; and (5) recognition of revenue when, or as, the Company satisfies its performance obligation. A contract is created with the customer at the time the order is placed by the customer, which creates a single performance obligation. The Company recognizes revenue for its single performance obligation at the time control of the product passes to the customer, which is when the goods are transferred to a third-party common carrier, for purchases through the Company’s online websites, or at point of sale, for purchases in our stores. In addition, the Company has elected to treat shipping and handling as fulfillment activities and not a separate performance obligation.

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Net sales from product sales includes shipping charged to the customer and is recorded net of taxes collected from customers, which are recorded in accrued liabilities and are remitted to governmental authorities. Cash discounts earned by the customers at the time of purchase and estimates for sales return allowances are deducted from gross revenue in determining net sales.

The Company generally provides refunds for goods returned within 30 to 45 days from the original purchase date. A returns reserve is recorded by the Company based on historical refund experience with a corresponding reduction of sales and cost of sales. The returns reserve was $6.9 million and $3.5 million as of December 31, 2021 and 2020, respectively.

The following table presents a summary of the Company’s sales return reserve:

December 31,

The Company also sells gift cards and issues online credits in lieu of cash refunds or exchanges. Proceeds from the issuance of gift cards and online credits issued are recorded as deferred revenue and recognized as revenue when the gift cards or online credit are redeemed or, upon inclusion in gift card and online credit breakage estimates. Breakage estimates are determined based on prior historical experience.

Revenue recognized in net sales on breakage of gift cards and online credit for the years ended December 31, 2021, 2020 and 2019 was $0.5 million, $0.7 million and $0.4 million, respectively.

The following table presents the disaggregation of the Company’s net revenues by geography, based on customer address:

Year Ended December 31,

Cost of Sales

Cost of sales consists of the purchase price of merchandise sold to customers and includes import duties and other taxes, freight-in, defective merchandise returned from customers, inventory write-offs and other miscellaneous shrinkage.

Selling Expenses

Selling expenses consist of costs incurred in operating and staffing the fulfillment centers and stores, costs attributable to inspecting and warehousing inventory, picking, packaging and preparing customer orders for shipment, customer service, shipping and other transportation costs incurred delivering merchandise to customers and customers returning merchandise, merchant processing fees, and shipping supplies. The amount of shipping and handling costs included in selling expenses was $70.7 million, $34.1 million and $16.7 million for the years ended December 31, 2021, 2020 and 2019, respectively.

Marketing

Marketing expenses are expensed as incurred and consist primarily of targeted online performance marketing costs, such as display advertising, retargeting, paid search/product listing ads, affiliate marketing, paid social, search engine optimization, personalized email marketing, social media advertising and mobile “push” communications through the Company’s apps. Marketing expenses also include the Company’s spend on brand marketing channels, including cash compensation to influencers, events and other forms of online and offline marketing. Marketing expenses are primarily related to growing and retaining the customer base. Advertising costs are expensed as incurred.

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General and Administrative

General and administrative expenses consist primarily of payroll and related benefit costs and equity-based compensation expense for employees involved in general corporate functions including merchandising, marketing and technology, as well as costs associated with the use by these functions of facilities and equipment, including depreciation, rent and other occupancy expenses.

Other Expense, Net

Other expense, net, consists primarily of $10.9 million of loss on extinguishment of debt for the year ended December 31, 2021, interest expense of $9.5 million, $0.3 million and $0.3 million for the years ended December 31, 2021, 2020 and 2019, respectively, and foreign currency losses of $1.7 million, $0.2 million and $0.1 million for the years ended December 31, 2021, 2020 and 2019, respectively.

Net Income (Loss) Per Share

Basic net income (loss) per share is calculated using net income attributable to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share reflects the dilutive effects of stock options and restricted stock units outstanding during the period, to the extent such securities would not be anti-dilutive, and is determined using the treasury stock method.

Fair Value Measurements

The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. The carrying amounts for the Company’s cash and cash equivalents, accounts receivable, accounts payable, line of credit and accrued liabilities approximate fair value due to their short-term maturities. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:

•Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities.

•Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full-term of the asset or liability.

•Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date.

The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. The Company held cash in operating accounts as of December 31, 2021 and 2020.

Certain Risks and Concentrations

The Company is subject to certain risks, including dependence on third-party technology providers and hosting services for website servers, exposure to risks associated with online commerce security, credit card fraud, as well as the interpretation of state and local laws and regulations in regard to the collection and remittance of sales and use taxes. The Company does not have significant customer or vendor concentrations.

Segment Information

Operating segments are defined as components of an entity for which separate financial information is available and is regularly reviewed by the Chief Operating Decision Maker (“CODM”) in deciding how to allocate resources and in assessing performance. The Company has determined that its five brands are each an operating segment. The Company has aggregated its operating segments into one reportable segment based on the similar nature of products sold, production, merchandising and distribution processes involved, target customers and economic characteristics.

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Recently Adopted Accounting Pronouncements

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which amended its conceptual framework to improve the effectiveness of disclosures around the amount of, and reasons for, transfers between Level 1 and Level 2 of the fair value hierarchy. This guidance also adds new disclosure requirements for Level 3 measurements. The Company adopted this guidance on January 1, 2020, and the adoption did not have a material impact on its consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment. The ASU amended existing guidance to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to that reporting unit. The amendments were effective beginning in 2020. The adoption did not have a material impact on the Company’s consolidated financial statements.

New Accounting Pronouncements Not Yet Adopted

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This standard simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in Topic 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. The guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill and the allocation of consolidated income taxes to separate financial statements of entities not subject to income tax. ASU 2019-12 will be effective for the Company on January 1, 2022. Upon adoption, the Company must apply certain aspects of this standard retrospectively for all periods presented while other aspects are applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. The Company is currently evaluating the impact of this update on its consolidated financial statements and related disclosures.

In March, 2020, the FASB issued ASU 2020-04, Reference Rate Reform (ASC 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The pronouncement provides companies with guidance to ease the process of migrating away from LIBOR and other interbank offered rates to new reference rates. ASC 848 contains optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform, subject to meeting certain criteria that reference LIBOR or another reference rate expected to be discontinued. The Company is currently evaluating the impact of this update on its consolidated financial statements and related disclosures.

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Note 3. Acquisitions

Petal & Pup

On August 9, 2019, the Company acquired 66.7% of the share capital of Petal & Pup Limited (“Petal & Pup”) for an aggregate cash consideration of AUD $29.4 million, net of cash acquired of AUD $3.1 million (US $19.9 million, net of cash acquired of $2.1 million) and consideration payable of AUD $0.9 million ($0.6 million). In connection with the IPO, the Company acquired the remaining 33.3% (refer to Note 1 for additional information).

The acquisition expanded the Company’s customer following and products into online apparel for female customers in their twenties or thirties and provides the Company with an Australian brand that can be expanded into the North American market.

The fair values of assets acquired, liabilities assumed and noncontrolling interest as of the date of the acquisition, are as follows:

Trade receivables $ 6

Prepaid expenses and other current assets 78

Property and equipment, net 93

Operating lease right-of-use assets 430

Intangible assets 7,695

Trade and other payables (1,218)

Deferred tax liability (2,272)

Current tax liabilities (407)

Operating lease liabilities (430)

Total net assets acquired 4,605

Fair value of noncontrolling interest (8,314)

Total purchase price, net of cash acquired of $2,109 $ 20,505

The acquisition was accounted for as a business combination. The following table summarizes the identifiable intangible assets acquired as of the date of the acquisition:

Fair Value at Acquisition Date Amortization Period

Customer relationships 2,583 4 years

Total intangible assets $ 7,695

The fair value of the noncontrolling interest is determined by measuring the fair value of the subsidiaries’ identifiable assets and liabilities at the date of acquisition, adjusted for a discount to factor the non-marketable, noncontrolling holding.

The results of operations of Petal & Pup are included in the Company’s consolidated results beginning August 9, 2019. Total net sales of $9.4 million and net income attributable to the Company of less than $0.1 million of Petal & Pup are included in the accompanying consolidated statement of income for the year ended December 31, 2019. Goodwill of $24.2 million, none of which is deductible for tax purposes, represents the excess purchase price over the estimated fair values assigned to tangible and identifiable intangible assets acquired and liabilities assumed. The goodwill arising from the acquisition consists largely of anticipated synergies related to combining with the Company’s existing operations.

Total acquisition costs incurred by the Company in connection with the purchase primarily related to third-party legal, accounting and tax diligence fees, were $0.7 million. These costs are recorded in general and administrative expenses in the consolidated statement of income during the year ended December 31, 2019.

Rebdolls

On December 6, 2019, the Company acquired 100% of the share capital of Rebdolls, Inc. (“Rebdolls”), a New Jersey corporation, for $0.6 million, which consisted of upfront cash consideration of $0.5 million and the fair value of contingent consideration of $0.1 million. The conditions were ultimately not met in relation to the contingent consideration.

AKA US Equity

AKA · 10-K · period ended 2021-12-31

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

AKA US Equity☆

AKA · 10-K · period ended 2021-12-31

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

AKA US Equity