AKA US Equity☆

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.

On September 29, 2023, we effected a one-for-12 reverse stock split of our common stock (the "Reverse Stock Split"). As a result of the Reverse Stock Split, every twelve shares of our outstanding common stock was consolidated into one share. Accordingly, all per share values have been adjusted as necessary to reflect the Reverse Stock Split for all prior periods presented. Refer to Note 14, "Stockholders’ Equity," in the notes to our consolidated financial statements included in this Annual Report on Form 10-K.

Overview

a.k.a. Brands is a portfolio of next-generation fashion brands for the next generation of consumers. We seek to leverage our industry expertise and operational synergies to accelerate our brands so they can grow faster, reach broader audiences, achieve greater scale and enhance their profitability. We believe we are disrupting the status quo and pioneering a new approach to fashion.

a.k.a. was founded with a focus on Millennial and Gen Z audiences who primarily find inspiration for fashion on social media. We have since built a portfolio of next-generation brands with distinct fashion offerings and consumer followings:

•In July 2018, we acquired Princess Polly, a 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.

•In August 2019, we acquired Petal & Pup, a fashion brand offering an assortment of trendy, flattering and feminine styles and dresses for special occasions. The brand targets female customers typically in their twenties or thirties, with more than 70% of customers between the ages of 25 and 34.

•In March 2021, we acquired Culture Kings, an Australia-based premium online retailer of streetwear apparel, footwear, headwear and accessories. The brand targets male consumers between the ages of 18 and 35 who are fashion conscious, highly social and digitally focused.

•In October 2021, we acquired mnml, a Los Angeles-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 and Petal & Pup from before 2020, information presented hereafter on an “across a.k.a. Brands” basis assumes we also owned Culture Kings for all periods presented. We also owned Rebdolls for all periods shown prior to March 2023, when we sold the brand back to its original owner.

Our annual financial results discussed below represent the consolidated results of Princess Polly and Petal & Pup for all years shown, the results of Rebdolls for all periods shown prior to March 2023, the results of Culture Kings’ operations from the date of its acquisition on March 31, 2021, and the results of mnml’s operations from the date of its acquisition on October 14, 2021.

Across a.k.a. Brands for 2023, we attracted over 3.7 million active customers, received approximately 6.8 million orders and had an average order value of $80.

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Initial Public Offering

In September 2021, we completed an initial public offering (the “IPO”), in which we issued and sold 833,333 shares of newly authorized common stock for $132.00 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.

Goodwill Impairment

In August 2023, due to elevated interest rates and unfavorable demand in Australia, we reduced our earnings forecasts and expectations for the Culture Kings and Petal & Pup reporting units. This reduction was identified as a triggering event and a subsequent quantitative test concluded that the carrying value of the Culture Kings and Petal & Pup reporting units exceeded their fair values as of August 31, 2023. As a result, we recorded a non-cash goodwill impairment charge of $68.5 million during the third quarter of 2023. As of December 31, 2023, $11.3 million of goodwill related to Petal & Pup remained on our balance sheet, while the goodwill related to Culture Kings was fully impaired.

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 3.8 3.7

Average order value $ 80 $ 82 $ 86

Average order value across a.k.a. Brands(1) $ 80 $ 82 $ 87

Number of orders across a.k.a. Brands(1) 6.8 7.4 7.0

(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, our value proposition, 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 each period presented:

Year Ended December 31,

Net loss margin (18) % (29) % (1)%

Adjusted EBITDA margin 3 % 5 % 11 %

Net cash provided by (used in) operating activities $ 33,426 $ (319) $ 23,968

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Adjusted EBITDA, Adjusted EBITDA margin and Free Cash Flow are non-GAAP measures. See “Non-GAAP Financial Measures” below for information regarding our use of Adjusted EBITDA, Adjusted EBITDA margin and Free Cash Flow and their reconciliation to net income (loss), net income (loss) margin and net cash provided by (used in) operating activities, respectively.

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 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 and Adjusted EBITDA Margin

We calculate Adjusted EBITDA as net income (loss) adjusted to exclude: interest and other expense; benefit from or provision for income taxes; depreciation and amortization expense; equity-based compensation expense; inventory step-up amortization expense; distribution center relocation costs; transaction costs; costs related to severance from headcount reductions; goodwill and intangible asset impairment; sales tax penalties; insured losses, net of any recoveries; and one-time or non-recurring items. We calculate Adjusted EBITDA margin as Adjusted EBITDA as a percentage of net sales. Adjusted EBITDA does not represent net income (loss) or cash flow from or used in operating activities as it is defined by GAAP and does not necessarily indicate whether cash flows will be sufficient to fund cash needs. Because other companies may calculate EBITDA and Adjusted EBITDA differently than we do, Adjusted EBITDA may not be comparable to similarly titled measures reported by other companies. Adjusted EBITDA has other limitations as an analytical tool when compared to the use of net income (loss), which is the most directly comparable GAAP financial measure, including that Adjusted EBITDA does not reflect:

•the interest or other expense we incur;

•the provision for or benefit from income tax;

•any attribution of costs to our operations related to our investments and capital expenditures through depreciation and amortization charges;

•any transaction or debt extinguishment costs;

•any costs to establish or relocate distribution centers;

•any costs related to severance from headcount reductions;

•any impairment of goodwill or intangible assets;

•any costs related to sales tax penalties;

•any insured losses, net of recoveries;

•any non-routine legal matters;

•any amortization expense associated with fair value adjustments from purchase price accounting, including intangibles or inventory step-up; and

•the cost of compensation we provide to our employees in the form of equity awards.

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The following table reflects a reconciliation of Adjusted EBITDA to net income (loss) and Adjusted EBITDA margin to net income (loss) margin, the most directly comparable financial measure prepared in accordance with GAAP:

Year Ended December 31,

Add (deduct):

(Benefit from) provision for income tax 1,921 (3,917) 852

Inventory step-up amortization expense — 707 15,908

Net loss margin (18) % (29) % (1) %

Adjusted EBITDA margin 3 % 5 % 11 %

*Non-routine items include costs to establish or relocate distribution centers; severance from headcount reductions; sales tax penalties; insured losses, net of recoveries; and non-routine legal matters.

Free Cash Flow

We calculate Free Cash Flow as net cash provided by (used in) 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 that 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.

The following table presents a reconciliation of Free Cash Flow to net cash provided by (used in) operating activities, the most directly comparable financial measure prepared in accordance with GAAP:

Year Ended December 31,

Net cash provided by (used in) operating activities $ 33,426 $ (319) $ 23,968

Less: purchases of property and equipment (5,970) (19,746) (7,734)

Our Free Cash Flow has fluctuated over time primarily as a result of timing of inventory purchases, purchases of property and equipment and fluctuations in earnings. Our operating model requires a low level of capital expenditures.

For the twelve months ended December 31, 2023, net cash provided by operating activities increased by $33.7 million compared to net cash used in operating activities for the twelve months ended December 31, 2022. This was attributable primarily to a decrease in inventory compared to the prior period, which was driven by reduced inventory buying and sell-through of aged inventory, partially offset by lower earnings.

For the twelve months ended December 31, 2023, Free Cash Flow increased by $47.5 million compared to Free Cash Flow for the twelve months ended December 31, 2022. This was attributable primarily to a decrease in inventory compared to the prior period, which was driven by reduced inventory buying and sell-through of aged inventory, and a reduction in purchases of property and equipment, partially offset by lower earnings. The reduction in purchases of property and equipment in 2023 was primarily due to the build-out of the Culture Kings Las Vegas store in 2022.

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Factors Affecting Our Performance

Macroeconomic Environment

The macroeconomic environment in which we operate has been and, we anticipate, will continue to be pressured by adverse conditions worldwide. Inflationary pressures on consumers globally, particularly on our Australian customers, and our supply chain, rising interest rates and shifts in global spending in anticipation of a potential economic slowdown or recession have pressured our net sales. Additionally, lower return on marketing investments, increasing labor rates, a higher-than-historical competitive promotional environment and higher merchandise returns, all stemming from the pressures previously identified, led to reduced operating income and Adjusted EBITDA performance, as well as impairment to the goodwill associated with Culture Kings and Petal & Pup. Consequently, our business and results of operations, including earnings and cash flows, could continue to be adversely impacted, including as a result of:

•decreased consumer confidence and consumer spending and consumption habits, including spending for the merchandise that we sell and shifting to more in-store retail experiences, and negative trends in consumer purchasing patterns due to inflationary pressures and changes in consumers’ disposable income, credit availability and debt levels;

•challenges filling staffing requirements at our stores, corporate headquarters and distribution centers; and

•increased materials and procurement costs as a result of scarcity or increased prices of commodities and raw materials.

All of these factors have contributed and may continue to contribute to reduced orders, increased merchandise returns, higher discounts, lower net sales, lower gross margins, reduced effectiveness of marketing, increased inventories and goodwill impairment, and it is possible that future annual or interim impairment tests could result in additional impairment charges.

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, performance marketing and increased store openings in key locations. We plan to continue to invest in performance marketing and increase our investment in brand awareness across our brands, including wholesale and marketplace opportunities, 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 and will need to continue evolving in response to changes in shopping behaviors, content consumption, costs to advertise and developments in technology. As a result of macroeconomic pressures, we reduced certain of our marketing efforts, which may result in acquiring customers at slower rates. 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. Our brands are at various stages of rolling out and evolving loyalty programs. Failure to retain customers would adversely impact our profitability and operating results.

Impact of COVID-19

In the second half of 2022, we started to experience reductions in air freight costs (which had increased in the first half of 2022 as a result of vendor delays and shutdowns due to the COVID-19 pandemic), the impact of which has been and will continue to be realized in the Company’s cost of goods sold during 2023 and 2024. We continue to monitor vendor and manufacturer shipping times and other potential disruptions in our supply chain and implement mitigation plans as necessary.

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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, 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, 2022, 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)

(Provision for) benefit from income tax (1,921) 3,917 (852)

Net loss attributable to noncontrolling interests — — 123

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Year Ended December 31,

Operating expenses:

General and administrative 18 % 17 % 16 %

Goodwill impairment 13 % 28 % — %

Total operating expenses 70 % 83 % 52 %

(Loss) income from operations (15 %) (28 %) 3 %

Other expense, net:

Interest expense (2 %) (1%) (2%)

Loss on extinguishment of debt — % —% (2%)

Other expense — % —% —%

Total other expense, net (2 %) (1%) (4%)

Loss before income taxes (18 %) (30 %) (1 %)

(Provision for) benefit from income tax — % 1% —%

Net loss (18 %) (29 %) (1 %)

Net loss attributable to noncontrolling interests — % — % — %

Net loss attributable to a.k.a. Brands Holding Corp. (18 %) (29 %) (1 %)

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Comparison of the Years Ended December 31, 2023 and 2022

Net Sales

Years Ended December 31,

Net sales decreased by $65.5 million, or 11%, in 2023 compared to 2022. The overall decrease in net sales was primarily driven by an 8% decrease in the number of orders we processed in 2023 compared to 2022, which drove a decrease in net sales of $49.7 million, and a decrease in our average order value of 2%, from $82 in 2022 to $80 in 2023, which drove a decrease in net sales of $15.8 million. The decrease in the number of orders and average order value were primarily due to adverse macroeconomic conditions in Australia and New Zealand. On a constant currency basis, net sales and average order value for 2023 would have decreased 9% and 1%, respectively, as compared to 2022.

Cost of Sales

Years Ended December 31,

Percent of net sales 45 % 45 %

Cost of sales decreased by $28.5 million, or 10%, in 2023 compared to 2022. This decrease was primarily driven by an 8% decrease in the total number of orders in 2023, as compared to 2022, a decrease in our average order value of 2% and lower inbound air freight costs, partially offset by a higher merchandise return rate. While cost of sales as a percent of net sales was flat in 2023 compared to 2022, cost of sales as a percent of net sales would have increased due to targeted discounting in Culture Kings Australia and a higher merchandise return rate if not offset by lower inbound air freight costs.

Gross Profit

Years Ended December 31,

Gross margin 55 % 55 %

Gross profit decreased by $37.0 million, or 11%, in 2023 compared to 2022. This decrease was primarily driven by the 11% decrease in net sales, as well as a higher merchandise return rate. These impacts were partially offset by lower air freight expense. While gross margin was flat in 2023 compared to 2022, gross margin would have decreased due to targeted discounting in Culture Kings Australia and a higher merchandise return rate, if not offset by lower inbound air freight costs.

Selling Expenses

Years Ended December 31,

Percent of net sales 27 % 27 %

Selling expenses decreased by $16.8 million, or 10%, in 2023 compared to 2022. This decrease was driven by the 8% decrease in the number of orders shipped in 2023 compared to 2022, and operational efficiencies in distribution, fulfillment and outbound shipping.

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Marketing Expenses

Years Ended December 31,

Percent of net sales 13 % 11 %

Marketing expenses increased by $2.2 million, or 3%, in 2023 compared to 2022. The increase in marketing expenses was driven by additional marketing spend due to reduced marketing effectiveness, particularly in Australia. The increase in marketing expenses as a percentage of net sales was primarily due to lower net sales in 2023 compared to 2022.

General and Administrative Expenses

Years Ended December 31,

Percent of net sales 18 % 17 %

General and administrative expenses decreased by $5.7 million, or 6%, in 2023 compared to 2022. The decrease was primarily driven by a $2.7 million decrease in intangible amortization, a $2.1 million decrease in wages and benefits and a $1.5 million decrease in insurance costs. A $1.2 million increase in professional fees partially offset these decreases. The increase in general and administrative expenses as a percentage of net sales resulted primarily from lower net sales in 2023 compared to 2022.

Goodwill Impairment

Years Ended December 31,

Percent of net sales 13 % 28 %

Goodwill impairment decreased by $105.3 million, or 61%, in 2023 compared to 2022. Goodwill impairment in 2023 was recognized on the goodwill recorded from the acquisitions of the Culture Kings and Petal & Pup reporting units. Goodwill impairment in 2022 was recognized on the goodwill recorded from the acquisitions of the Culture Kings and Rebdolls reporting units. In August 2023, due to elevated interest rates and unfavorable demand in Australia, we reduced our earnings forecasts and expectations for the Culture Kings and Petal & Pup reporting units. This reduction was identified as a triggering event and a subsequent quantitative test concluded that the carrying value of the Culture Kings and Petal & Pup reporting units exceeded their fair values as of August 31, 2023. As of December 31, 2023, the goodwill related to Culture Kings was fully impaired, while $11.3 million of the goodwill related to Petal & Pup remained on our balance sheet.

Other Expense, net

Years Ended December 31,

Other expense, net:

Percent of net sales (2) % (1) %

Other expense, net increased by $5.0 million in 2023 compared to 2022 primarily due to $4.1 million in additional interest expense from rising interest rates on our variable rate debt.

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(Provision for) Benefit from Income Tax

Years Ended December 31,

(Provision for) benefit from income tax $ (1,921) $ 3,917

Percent of net sales — % 1 %

Effective tax rate 2 % (2 %)

Provision for income tax increased by $5.8 million, or 149%, in 2023 compared to 2022. This increase was primarily due to the increase in the valuation allowance on the net deferred tax assets in Australia.

Comparison of the Years Ended December 31, 2022 and 2021

Net Sales

Years Ended December 31,

Net sales increased by $49.5 million, or 9%, in 2022 compared to 2021. The overall increase in net sales was primarily driven by a 14% increase in the number of orders we processed in 2022 compared to 2021, driving an increase in net sales of $76.0 million. A decrease in our average order value of 5%, from $86 in 2021 to $82 in 2022, partially offset the increase in net sales by $26.4 million. The increase in the number of orders was largely driven by the acquisition of Culture Kings on March 31, 2021, the acquisition of mnml in October of 2021 and growth of Princess Polly in the U.S. The decrease in our average order value was primarily due to the impact of foreign currency, higher return rates and incremental promotional activity. On a constant currency basis, net sales and average order value for 2022 would have increased 13% and been flat, respectively. Net sales for 2022 include the operations of Culture Kings and mnml, or $269.6 million of net sales, while 2021 includes the operations of Culture Kings and mnml, or $208.0 million of net sales, from the date of their acquisitions.

Cost of Sales

Years Ended December 31,

Percent of net sales 45 % 45 %

Cost of sales increased by $20.0 million, or 8%, in 2022 compared to 2021. This increase was primarily driven by a 14% increase in the total number of orders in 2022, as compared to 2021, which includes the impact of the operations of Culture Kings and mnml, or $132.0 million of cost of sales, while 2021 includes the impact of the operations of Culture Kings, or $114.7 million of cost of sales, from the dates of their respective acquisitions. While cost of sales as a percent of net sales was flat in 2022 compared to 2021, the impact of the fair value adjustment to inventory acquired in the Culture Kings acquisition of $15.9 million, included in 2021, was offset by a change in the mix of products sold due to the acquisition of Culture Kings, as Culture Kings inventory has higher average costs.

Gross Profit

Years Ended December 31,

Gross margin 55 % 55 %

Gross profit increased by $29.6 million, or 10%, in 2022 compared to 2021. This increase was primarily driven by the significant increase in net sales. While gross margin was flat in 2022 compared to 2021, the impact of the fair value adjustment to inventory acquired in the Culture Kings acquisition of $15.9 million, included in 2021, was offset by a change in the mix of products sold due to the acquisition of Culture Kings, as Culture Kings inventory has lower average gross margins.

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Selling Expenses

Years Ended December 31,

Percent of net sales 27 % 26 %

Selling expenses increased by $21.7 million, or 15%, in 2022 compared to 2021. This increase was driven by the 14% increase in the number of orders shipped in 2022 compared to 2021, which includes the operations of Culture Kings and mnml, or $71.6 million of selling expenses, while 2021 includes the impact of the operations of Culture Kings and mnml, or $48.0 million of selling expenses, from the dates of their respective acquisitions. The increase in selling expenses as a percentage of net sales was primarily due to increased costs for distribution facilities and stores, the 5% decrease in our average order value and a $1.3 million charge related to a relocation of distribution centers for Culture Kings and mnml.

Marketing Expenses

Years Ended December 31,

Percent of net sales 11 % 10 %

Marketing expenses increased by $8.6 million, or 15%, in 2022 compared to 2021. The increase in marketing expenses was driven by the inclusion of the operations of Culture Kings and mnml, or $31.4 million of marketing expenses, while 2021 includes the impact of the operations of Culture Kings and mnml, or $23.6 million of marketing expenses, from the dates of their respective acquisitions. The increase in marketing expenses as a percentage of net sales was primarily due to reduced effectiveness of our marketing channels at driving traffic to our websites, and the inclusion of mnml, which had a higher rate of advertising spend as compared to some of our other brands.

General and Administrative Expenses

Years Ended December 31,

Percent of net sales 17 % 16 %

General and administrative expenses increased by $13.9 million, or 16%, in 2022 compared to 2021. The increase was primarily driven by a $18.3 million increase in salaries and related benefits related to increases in our headcount across functions to support business growth and $3.7 million in additional insurance costs. Partially offsetting these increases was a $5.8 million decrease in professional fees, including transaction costs, and a $1.3 million decrease in equity-based compensation, due to vesting of performance-based incentive units upon the Company’s IPO in 2021. General and administrative expenses for 2022 include the operations of Culture Kings and mnml, or $32.8 million of general and administrative expenses, while 2021 includes the impact of the operations of Culture Kings and mnml, or $20.3 million of general and administrative expenses, from the dates of their respective acquisitions. The increase in general and administrative expenses as a percentage of net sales resulted primarily from additional salaries and related benefits, as well as additional insurance costs.

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Goodwill Impairment

Years Ended December 31,

Goodwill impairment $ 173,786 $ —

Percent of net sales 28 % — %

Goodwill impairment was $173.8 million in 2022 and recognized on the goodwill recorded from the acquisitions of the Culture Kings and Rebdolls reporting units. As of December 31, 2022, $60.0 million of goodwill related to Culture Kings remained on our balance sheet, while the goodwill related to Rebdolls was fully impaired. The worsening economic trends in the fourth quarter of 2022, including continued inflation and rising interest rates, as well as unfavorable demand due to a gradual customer shift from primarily online shopping to a mix of online and physical store shopping led the Company to lower its forecasts and expectations for the Culture Kings and Rebdolls brands, driving the reduction in their fair values.

Other Expense, net

Years Ended December 31,

Other expense, net

Loss on extinguishment of debt — (10,924)

Percent of net sales (1) % (4) %

Other expense, net decreased by $13.0 million in 2022 compared to 2021 primarily due to the 2021 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 a decrease in interest expense in 2022 from more favorable rates related to borrowings under our senior secured credit facility compared to our previous term debt, revolver and senior secured notes in 2021.

Benefit from (Provision for) Income Tax

Years Ended December 31,

Benefit from (provision for) income tax $ 3,917 $ (852)

Percent of net sales 1 % — %

Effective tax rate 2 % 16 %

Benefit from (provision for) income tax changed by $4.8 million, or 560%, in 2022 compared to 2021. This change was driven primarily by the finalization of Australia tax basis allocation pertaining to the inventory and intangibles included in the purchase of the Culture Kings noncontrolling interest, as well as an intra-entity transfer of certain intellectual property rights related to the Culture Kings’ brands to one of our subsidiaries in the U.S., aligning the ownership of these rights with our evolving business. The change in our effective tax rate is primarily driven by the impairment recognized on the goodwill recorded from the acquisitions of the Culture Kings and Rebdolls reporting units.

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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, 2023, 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:

Goodwill impairment — % — % —% 117% —% —% 49% —%

Income (loss) from operations 2 % (2 %) 2 % (118 %) (5 %) (1 %) (50 %) (4 %)

Total other expense, net (1%) (2%) (2%) (1%) (3%) (3%) (2%) (2%)

Income (loss) before income taxes 1 % (3 %) — % (119 %) (9 %) (3 %) (52 %) (5 %)

(Provision for) benefit from income tax —% 1% —% 2% 1% —% 2% (4%)

Net income (loss) 1 % (3 %) — % (117 %) (8 %) (4 %) (50 %) (9 %)

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Quarterly Trends and Seasonality

Net Sales, Cost of Sales and Gross Profit

Our net sales are impacted by foreign currency exchange rates, inflationary pressures on consumers globally and our supply chain, shifts in global spending in anticipation of a potential economic slowdown or recession, increasing labor rates and a slower-than-expected recovery from the economic downturn in Australia.

Our quarterly cost of sales and gross profit have fluctuated quarter-to-quarter primarily due to the quarterly fluctuations in net sales and the mix of inventory between private label and third-party products.

Operating Expenses

Selling expenses have fluctuated quarter-to-quarter primarily due to fluctuations in shipping and fulfillment costs. Drivers of these fluctuations include our mix of air and sea freight, increases or decreases in number of orders, as well as generally increasing labor rates in fulfillment over time.

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, or to drive growth in our business.

General and administrative expenses have fluctuated quarter-to-quarter, with such fluctuations primarily driven by the increases in our headcount to support business growth.

Seasonality

Historically, we have achieved our largest quarterly sales in the fourth fiscal quarter. However, as our expansion into the U.S. market continues, our quarterly revenues are less concentrated in the fourth fiscal quarter. In fiscal year 2023, our net sales in the first, second, third and fourth quarters represented 22%, 25%, 26% and 27%, respectively of our total net sales for the year. In fiscal year 2022, our net sales in the first, second, third and fourth quarters represented 24%, 26%, 25% and 24%, respectively, of our total net sales for the year.

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, 2023:

Three Months Ended

Add (deduct):

Inventory step-up amortization expense 707 — — — — — — —

Transaction costs 11 90 39 — — — — —

Net income (loss) margin 1 % (3) % — % (117) % (8) % (4) % (50) % (9) %

Adjusted EBITDA margin 7 % 4 % 6 % 4 % 2 % 4 % 3 % 1 %

*Non-routine items include costs to establish or relocate distribution centers; severance from headcount reductions; sales tax penalties; insured losses, net of recoveries; and non-routine legal matters.

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Liquidity and Capital Resources

As of December 31, 2023, our principal sources of liquidity were cash and cash equivalents totaling $21.9 million, our revolving line of credit and our term loan accordion provision.

As of December 31, 2023, most of our cash was held for working capital purposes. We have historically financed our operations and capital expenditures primarily through cash flows generated by operations, the incurrence of debt and through the issuance of equity. We believe that our existing cash, together with cash generated from operations and available borrowing capacity under our credit facilities and lines of credit, will be sufficient to meet our anticipated cash needs for the next 12 months. We believe that cash generated from ongoing operations and continued access to debt markets will be sufficient to satisfy our cash requirements beyond 12 months. However, our liquidity assumptions may prove to be incorrect, and we could exhaust our available financial resources sooner than we currently expect. We may seek to borrow funds under our credit facility 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 Facility

In connection with the IPO, we entered into a senior secured credit facility comprised of a $100.0 million term loan and a $50.0 million revolving line of credit, with an option of up to $50.0 million in an additional term loan through an accordion provision. We used borrowings under this credit facility, together with a portion of the proceeds from the IPO, to repay our previous debt in full. As of December 31, 2023, we owed a combined $94.5 million in term loan and accordion borrowings. As of December 31, 2023, there were no amounts outstanding under the revolving line of credit. The term loan requires us to make amortized annual payments of 5.0% during the first and second years, 7.5% during the third and fourth years and 10.0% during the fifth year with the balance of the loan due at maturity. Borrowings under the term loan accrue interest at a benchmark rate (Term SOFR, as defined in the credit agreement for the senior secured credit facility (the “Credit Agreement”)) plus an applicable margin dependent upon our net leverage ratio, as defined in the Credit Agreement. The revolving line of credit, when used, also accrues interest at a benchmark rate plus an applicable margin dependent upon our net leverage ratio, as defined in the Credit Agreement. 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. As of December 31, 2023, principal payments of our term loan and accordion for the next twelve months are anticipated to total $3.3 million, which reflects the impact of early prepayments made in 2023.

Under the senior secured credit facility, we are subject to certain financial covenant ratios and certain annual mandatory prepayment terms based on excess cash flows, as defined in the Credit Agreement, based on our net leverage ratio. If we are unable to comply with certain financial covenant ratios, which include provisions that are not precisely defined and are subject to interpretation, 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 senior secured credit facility could result in interest payments that are higher than anticipated. We were in compliance with all debt covenants as of December 31, 2023, and expect to be in compliance beyond 12 months, although our ability to meet these financial ratios and tests can be affected by the interpretation of certain provisions within our Credit Agreement, macro economic factors and the seasonality of our business, which is more concentrated in the third and fourth fiscal quarters.

Refer to Note 8, “Debt,” in the notes to our consolidated financial statements included in this Annual Report on Form 10-K for additional information regarding our senior secured credit facility.

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. As of December 31, 2023, our future minimum payments under non-cancelable operating leases totaled $50.3 million, with $9.5 million payable within 12 months.

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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, 2023, inventory and other purchase obligations payable within the next 12 months totaled $2.7 million, which primarily represent open purchase orders for materials and merchandise as of that date.

Additionally, we plan to incur capital expenditures of approximately $10.0 to $12.0 million in 2024. This reflects the opening of new stores, as well as investments in infrastructure and technology.

Historical Cash Flows

Year Ended December 31,

Net cash provided by (used in) operating activities $ 33,426 $ (319) $ 23,968

Net Cash Provided by (Used in) Operating Activities

Cash provided by (used in) operating activities consists primarily of net income (loss) adjusted for certain non-cash items, including depreciation, amortization, equity-based compensation, the effect of changes in working capital and other activities.

In 2023, net cash provided by operating activities increased $33.7 million. This was attributable primarily to a decrease in inventory compared to the prior period, which was driven by reduced inventory buying and sell-through of aged inventory, partially offset by lower earnings.

In 2022, net cash provided by operating activities decreased $24.3 million. This was attributable primarily to timing of payments and a decrease in earnings after adjusting for non-cash items, partially offset by a lower build of inventory compared to the prior year.

Net Cash Used in Investing Activities

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

In 2023, net cash used in investing activities decreased $19.3 million. This was attributable to a reduction in purchases of property and equipment and the cash paid from holdbacks in the prior period related to the mnml acquisition. The purchases of property and equipment in the prior year were primarily due to the build-out of the Culture Kings Las Vegas store.

In 2022, net cash used in investing activities decreased $252.8 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. The impact of this prior year activity was partially offset by purchases of property and equipment, which was driven by the build-out of the Culture Kings Las Vegas store.

Net Cash (Used in) 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, cash received from the sale of our common stock in the IPO and cash used to repurchase shares.

In 2023, net cash used in financing activities increased $86.1 million. This was primarily attributable to the combined $50.7 million in principal payments, net of borrowings, on our senior secured credit facility in 2023 and the $34.4 million in borrowings, net of repayments, under our senior secured credit facility in 2022.

In 2022, net cash provided by financing activities decreased $236.6 million. This was primarily attributable to the 2021 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. The impact of these proceeds in 2021 was partially offset by proceeds from the line of credit in 2022.

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Share Repurchase Program

On May 25, 2023, the Company’s board of directors approved the Share Repurchase Program, authorizing the Company to repurchase up to $2.0 million of shares of the Company’s common stock. Subsequently, in 2023, the Company’s board of directors approved an additional repurchase capacity under the Share Repurchase Program of $3.0 million of shares of the Company’s common stock. The timing of any repurchases by the Company and the actual number of shares repurchased are at the Company’s discretion, and, in deciding when to repurchase shares and the amount of shares to repurchase, the Company will consider available liquidity, general market and economic conditions, alternate uses for the capital and other factors. Share repurchases may be made from time to time through a Rule 10b5-1 trading plan, open market transactions, block trades or in private transactions in accordance with applicable securities laws and regulations and other legal requirements. The Share Repurchase Program may be suspended or discontinued at any time and has no expiration date. All repurchased shares under the Share Repurchase Program will be retired.

During the year ended December 31, 2023, the Company repurchased 319,486 shares of its common stock under the Share Repurchase Program for $2.1 million, at an average price of $6.71 per share.

Critical Accounting Estimates

We believe that the following accounting estimates involve a high degree of judgment and complexity. Refer to Note 2, “Significant Accounting Policies,” in the notes to our consolidated financial statements included 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 sources of revenues are from sales of fashion apparel primarily through our digital platforms, stores, third-party marketplaces and, when applicable, shipping revenue. We determine revenue recognition through the following steps in accordance with the Financial Accounting Standards Board’s Revenue from Contracts with Customers (Topic 606):

•identification of the contract, or contracts, with a customer;

•identification of the performance obligations in the contract;

•determination of the transaction price;

•allocation of the transaction price to the performance obligations in the contract; and

•recognition of revenue when, or as, we satisfy a performance obligation.

Revenue is recognized upon shipment when control of the promised goods or services is transferred to our customers, or at point of sale for purchases in our stores, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Our revenue is reported net of sales returns and discounts. We estimate our liability for product returns based on historical return trends and an evaluation of current economic and market conditions, all of which have a degree of uncertainty. We record the expected customer refund liability as a reduction to revenue, and the expected inventory right of recovery as a reduction of cost of goods sold. If actual return costs differ from previous estimates, the amount of the liability and corresponding revenue are adjusted in the period in which such costs occur. We have not made any material changes to our assumptions included in our calculations of expected customer refund activity during the year ended December 31, 2023.

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, 2023.

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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. 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. Annually, as of October 31, a quantitative test for goodwill impairment is performed by determining the fair value of the related reporting units using both income-based and market-based valuation methods. The income-based approach is based on the reporting unit’s forecasted future cash flows that are discounted to present value using the reporting unit’s weighted average cost of capital. The market-based approach is based on the guideline company and similar transaction methods. The guideline company method analyzes market multiples of revenues and earnings before interest, taxes, depreciation and amortization (“EBITDA”) for a group of comparable public companies. Under the similar transactions method, valuation multiples are calculated utilizing actual transaction prices and revenue/EBITDA data from target companies deemed similar to the reporting unit.

Based on the range of estimated fair values developed from the income and market-based methods, the Company determines the estimated fair value for the reporting unit. If the estimated fair value of the reporting unit exceeds its carrying value, the goodwill is not impaired and no further review is required. However, if the estimated fair value of the reporting unit is less than its carrying value, the Company calculates the impairment loss as the difference between the carrying value of the reporting unit and the estimated fair value.

The income-based fair value methodology requires management’s assumptions and judgments regarding economic conditions in the markets in which the Company operates and conditions in the capital markets, many of which are outside of management’s control. At the reporting unit level, fair value estimation requires management’s assumptions and judgments regarding the effects of overall economic conditions on the specific reporting unit, along with assessment of the reporting unit’s strategies and forecasts of future cash flows. Forecasts of individual reporting unit cash flows involve management’s estimates and assumptions regarding:

•Annual cash flows, on a debt-free basis, arising from future revenues and earnings, changes in working capital, capital spending and income taxes for at least a 10-year forecast period.

•A terminal growth rate for years beyond the forecast period. The terminal growth rate is selected based on consideration of growth rates used in the forecast period, historical performance of the reporting unit and economic conditions.

•A discount rate that reflects the risks inherent in realizing the forecasted cash flows.

Under the market-based fair value methodology, judgment is required in evaluating market multiples and recent transactions. Management believes that the assumptions used for its impairment tests are representative of those that would be used by market participants performing similar valuations of the Company’s reporting units.

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.

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As discussed above, 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.

In August 2023, due to elevated interest rates and unfavorable demand in Australia, the Company reduced its forecasts and expectations for the Culture Kings and Petal & Pup reporting units. This reduction was identified as a triggering event and a subsequent quantitative test concluded that the carrying value of the Culture Kings and Petal & Pup reporting units exceeded their fair values as of August 31, 2023. As a result, the Company recorded a non-cash goodwill impairment charge of $68.5 million during the third quarter of 2023. As of December 31, 2023, $11.3 million of goodwill related to Petal & Pup remained on the Company’s balance sheet, while the goodwill related to Culture Kings was fully impaired. Additionally, as of August 31, 2023, the estimated fair value of the mnml reporting unit exceeded the carrying value by 1.4%, and the carrying value of the related goodwill was $30.0 million. Holding all other assumptions used in the fair value measurement of the mnml reporting unit constant, a 2% increase in the selected discount rate would result in impairment. No additional impairment was identified as part of the annual goodwill impairment test conducted in the fourth quarter of 2023.

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 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, 2023.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a “smaller reporting company,” as defined in Item 10 of Regulation S-K, we are not required to provide this information.

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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 75

CONSOLIDATED STATEMENTS OF INCOME 76

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 77

CONSOLIDATED STATEMENTS OF CASH FLOWS 79

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 81

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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, 2023 and 2022, 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, 2023, 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, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023 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 7, 2024

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 — 6,089

Prepaid expenses and other current assets 15,846 13,378

Liabilities and stockholders’ equity

Current liabilities:

Income taxes payable 257 —

Operating lease liabilities, current 7,510 6,643

Current portion of long-term debt 3,300 5,600

Deferred income taxes — 284

Commitments and contingencies (Note 16)

Stockholders’ equity:

Accumulated other comprehensive loss (50,269) (45,185)

Total liabilities and stockholders’ equity $ 361,721 $ 509,638

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

* Adjusted for the one-for-12 Reverse Stock Split. Refer to Note 14, “Stockholders’ Equity.”

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a.k.a. BRANDS HOLDING CORP.

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except share and per share amounts)

Year Ended December 31,

Operating expenses:

Other expense, net:

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

(Provision for) benefit from income tax (1,921) 3,917 (852)

Net loss attributable to noncontrolling interests — — 123

Net loss per share, basic and diluted* $ (9.24) $ (16.47) $ (0.77)

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

* Adjusted for the one-for-12 Reverse Stock Split. Refer to Note 14, “Stockholders’ Equity.”

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a.k.a. BRANDS HOLDING CORP.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

Year Ended December 31,

Other comprehensive loss:

Comprehensive loss attributable to noncontrolling interests — — 10,824

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(2) Amount Units Amount

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

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

Equity-based compensation — — — — 6,730 — — — 6,730 —

Cumulative translation adjustment — — — — — (34,105) — — (34,105) —

Equity-based compensation — — — — 7,640 — — — 7,640 —

Cumulative translation adjustment — — — — — (5,084) — — (5,084) —

_________

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

(2)Adjusted for the one-for-12 Reverse Stock Split. Refer to Note 14, “Stockholders’ Equity.”

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 — 707 15,908

Amortization of debt issuance costs 624 647 607

Loss on extinguishment of debt — — 10,924

Loss on disposal of businesses 1,533 — —

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

Net cash provided by (used in) operating activities 33,426 (319) 23,968

Cash flows from investing activities:

Acquisition of businesses, net of cash acquired — (5,321) (249,302)

Purchase of noncontrolling interest — — (20,198)

Purchases of intangible assets (61) (247) (841)

Cash flows from financing activities:

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

Payments of costs related to initial public offering — (1,142) —

Proceeds from issuance of debt, net of issuance costs — (121) 254,134

Taxes paid related to net share settlement of equity awards (191) (104) —

Proceeds from issuances under equity-based compensation plans 162 227 —

Proceeds from issuance of units — — 82,669

Repurchase of shares (2,100) — —

Net change in cash, cash equivalents and restricted cash (24,344) 7,355 13,919

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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:

Supplemental disclosure of cash flow information:

Supplemental disclosure of non-cash investing activities:

Consideration payable in connection with a business acquisition $ — $ — $ 4,901

Right-of-use asset additions under operating leases 8,447 22,237 4,073

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. Organization and Description of Business

a.k.a. Brands Holding Corp. (together with its wholly owned subsidiaries, collectively, the “Company”), which operates under the name “a.k.a. Brands” or “a.k.a.,” is a portfolio of next-generation fashion brands for the next generation of consumers. The Company seeks to leverage its industry expertise and operational synergies to accelerate its brands so they can grow faster, reach broader audiences, achieve greater scale and enhance their profitability.

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 833,333 shares of its newly authorized common stock for $132.00 per share, both as adjusted for the one-for-12 Reverse Stock Split (as defined in Note 14, “Stockholders’ Equity”), 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., was 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 LP (“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, “Acquisitions,” for additional information on the Culture Kings acquisition), 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 1,817,483 newly issued shares of a.k.a. Brands Holding Corp.’s common stock, as adjusted for the one-for-12 Reverse Stock Split. 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 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.

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In connection with the IPO, certain subsidiaries of the Company entered into a 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 senior secured credit facility’s term loan, together with a portion of the proceeds from the IPO, to repay the Fortress Credit Facilities in full and to redeem the Summit Notes in full and subsequently terminated them. Refer to Note 8, “Debt,” 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 until after the holders of the Series A partner units received their return of capital plus a specified threshold amount per unit. 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, 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. Brands Holdings Corp.’s 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. Brands Holdings Corp.’s common stock that it holds.

Prior to the IPO, the Company used the two-class method in calculating earnings per unit and had not deemed the incentive units to be potentially dilutive because 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 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 balances of the Company and all of its wholly-owned subsidiaries.All intercompany transactions and balances 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.

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, 2023 and 2022, the Company had $9.3 million and $21.7 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 and cash equivalents consist primarily of demand deposits and receivables from third-party credit card processors. Cash equivalents are carried at cost, which approximates fair value.

Restricted Cash

Restricted cash primarily relates to amounts held by counterparties 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 that are reported net of an allowance for doubtful accounts. The Company had $0.2 million in allowance for doubtful accounts as of December 31, 2023. The Company had no allowance for doubtful accounts as of December 31, 2022.

Inventory, Net

Inventories are accounted for using an average cost method and are 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, security deposits, prepaid packaging and insurance.

Deferred Offering Costs

Deferred offering costs consisted 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.

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 ten years.

Estimated useful life (years)

Furniture and fixtures 5 - 10 years

Machinery and equipment 5 - 10 years

Computer equipment and capitalized software 3 - 5 years

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. Property and equipment that is fully depreciated as of the last day of a fiscal year is written off during the first quarter of the following year.

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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 and Intangible 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 the purchase price over the fair value of the net assets acquired, 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. As of December 31, 2023 and 2022, the Company had goodwill of $94.9 million and $167.7 million, respectively.

Intangible assets, other than goodwill, acquired by the Company include brand names, customer relationships and trademarks. Intangible assets that are fully depreciated as of the last day of a fiscal year are written off during the first quarter of the following year. None of the Company’s intangible assets, other than goodwill, are indefinite lived.

Impairment of Long-Lived Assets and Goodwill

The Company’s long-lived assets consist of intangible assets and property and equipment. The Company’s goodwill has an indefinite useful life.

Goodwill is tested for impairment at least annually, in the fourth quarter and whenever changes in circumstances indicate an impairment may exist. The goodwill impairment test is performed at the reporting unit level, which is generally at the level of or one level below an operating segment. Generally, a qualitative assessment is first performed to determine whether a quantitative goodwill impairment test is necessary. If management determines, after performing an assessment based on the qualitative factors, that the fair value of the reporting unit is more likely than not less than the carrying amount, or that a fair value of the reporting unit substantially in the excess of the carrying amount cannot be assured, then a quantitative goodwill impairment test would be required. The quantitative test for goodwill impairment is performed by determining the fair value of the related reporting units. Fair value is measured based on the discounted cash flow method and relative market-based approaches. An impairment charge is recorded equal to any shortfall between the fair value of a reporting unit and its carrying value.

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In 2023, the Company concluded that the carrying value of the Culture Kings and Petal & Pup reporting units exceeded their fair values as of August 31, 2023. As a result, the Company recorded a non-cash goodwill impairment charge of $68.5 million during the third quarter of 2023. As part of the annual goodwill impairment test conducted in the fourth quarter of 2022, the Company concluded that the carrying value of the Company’s Culture Kings and Rebdolls reporting units exceeded their fair values and recorded a total non-cash goodwill impairment charge of $173.8 million during the year ended December 31, 2022. Refer to Note 6, “Goodwill,” for further information. No goodwill impairment was recorded for the year ended December 31, 2021.

The Company reviews finite-lived intangible assets and property and equipment 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 and brand names. 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 four to ten years.

No impairment losses related to finite-lived intangible assets or property and equipment were recognized during the years ended December 31, 2023, 2022 and 2021.

Leases

The Company generally leases office space, warehouse facilities and stores 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 as long-term assets in the consolidated balance sheets. Operating lease liabilities are classified as current lease 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, 2023 and 2022, 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 the Company’s uncollateralized borrowing rate, adjusted 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.

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Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and are recorded net on the 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.

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, 2023, 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. The Company estimates the fair value of restricted stock unit awards granted based upon the closing price of the Company’s common stock on the grant date. The Company estimates 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 the Company’s common stock, the risk-free interest rate, the expected volatility of the price of the Company’s common stock, the expected dividend yield of the Company’s 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 three or four years. The Company accounts for forfeitures as they occur.

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. Until the Company has sufficient trading history for its common stock, the expected volatility is estimated by taking the average historic stock price volatility for industry peers, consisting of several public companies in the Company’s 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. The Company has never declared or paid any cash dividends and does not currently plan to pay cash dividends in the foreseeable future. As a result, an expected dividend yield of zero percent is used.

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•Expected Term. For stock options, the expected term represents the period that a stock option award is expected to be outstanding. The Company has limited historical exercise data from which to derive expected term input assumptions. Consequently, the Company calculates expected term using the Securities and Exchange Commission’s 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.

The Company will continue to use judgment in evaluating the assumptions related to its equity-based compensation on a prospective basis.

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 partnership units, as no further incentive partnership unit awards will be granted. See Note 13, “Equity-based Compensation,” 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 statements 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 $0.8 million, $1.6 million and $1.7 million for the years ended December 31, 2023, 2022 and 2021, 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.

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Revenue Recognition

Revenue is primarily derived from the sale of apparel merchandise through the Company’s online websites, stores, third-party marketplaces 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 its stores. In addition, the Company has elected to treat shipping and handling as fulfillment activities and not a separate performance obligation.

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 sales return reserve was $9.6 million and $4.0 million as of December 31, 2023 and 2022, 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, 2023, 2022 and 2021 was $1.6 million, $0.2 million and $0.5 million, respectively.

The following table presents the disaggregation of the Company’s net sales 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.

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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 in 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, inclusive of outbound shipping and returned freight costs, was $69.3 million, $80.5 million and $70.7 million for the years ended December 31, 2023, 2022 and 2021, 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.

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; costs associated with the use by those functions of facilities and equipment, including depreciation, rent and other occupancy expenses; professional services; and amortization associated with the Company’s intangible assets, including acquired brand names, customer relationships and trademarks.

Other Expense, Net

Other expense, net, consists primarily of interest expense of $11.2 million, $7.0 million and $9.5 million for the years ended December 31, 2023, 2022 and 2021, respectively, foreign currency losses of $0.8 million, $1.6 million and $1.7 million for the years ended December 31, 2023, 2022 and 2021, respectively, and $10.9 million of loss on extinguishment of debt for the year ended December 31, 2021.

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.

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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 in deciding how to allocate resources and in assessing performance. The Company has determined that its four 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.

Recent Accounting Pronouncements

In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. This standard requires disclosure of significant segment expenses and other segment items by reportable segment. This ASU becomes effective for annual periods beginning in 2024 and interim periods in 2025. The Company is assessing the impact of this ASU.

In December 2023, FASB issued ASU 2023-09, Improvements to Income Tax Disclosures, which will require incremental income tax disclosures on an annual basis for all public entities. The amendments require that public business entities disclose specific categories in the rate reconciliation and provide additional information for reconciling items meeting a quantitative threshold. The amendments also require disclosure of income taxes paid to be disaggregated by jurisdiction, and disclosure of income tax expense disaggregated by federal, state and foreign. ASU 2023-09 is effective for annual reporting beginning with the fiscal year ending December 31, 2025. The Company is currently evaluating the incremental disclosures that will be required in the Company’s consolidated financial statements.

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Note 3. Acquisitions

Culture Kings