UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

__________________________________________________________________________________________________

FORM 10-Q

__________________________________________________________________________________________________

(Mark One)

☒    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2023

OR

☐    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission File Number: 001-40828

__________________________________________________________________________________________________

a.k.a. Brands Holding Corp.

(Exact name of registrant as specified in its charter)

__________________________________________________________________________________________________

Delaware	87-0970919
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

100 Montgomery Street, Suite 2270

San Francisco, California 94104

(Address of principal executive offices, including zip code)

415-295-6085

(Registrant’s Telephone Number, Including Area Code)

__________________________________________________________________________________________________

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.001 per share	AKA	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	¨	Accelerated Filer	¨
Non-accelerated filer	x	Smaller Reporting Company	x
		Emerging Growth Company	x

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x

As of November 6, 2023, the registrant had 10,627,210 shares of common stock outstanding.

a.k.a. BRANDS HOLDING CORP.

FORM 10-Q

TABLE OF CONTENTS

		Page
	PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements	6
	Condensed Consolidated Balance Sheets	6
	Condensed Consolidated Statements of Income	7
	Condensed Consolidated Statements of Comprehensive Income	8
	Condensed Consolidated Statements of Changes in Stockholders’ Equity	9
	Condensed Consolidated Statements of Cash Flows	11
	Notes to Condensed Consolidated Financial Statements	12
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	38
Item 4.	Controls and Procedures	39
	PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	41
Item 1A.	Risk Factors	41
Item 2.	Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities	42
Item 3.	Defaults Upon Senior Securities	42
Item 4.	Mine Safety Disclosures	42
Item 5.	Other Information	42
Item 6.	Exhibits	43
	Signatures	44

2

FORWARD-LOOKING STATEMENTS

All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including statements regarding our future results of operations and financial position, or that describe our plans, goals, intentions, objectives, strategies, expectations, beliefs and assumptions, are forward-looking statements. The words “believe,” “may,” “might,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “project,” “plan,” “objective,” “could,” “would,” “should” and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. We caution that the forward-looking statements in this Quarterly Report on Form 10-Q are subject to a number of known and unknown risks, uncertainties and assumptions that may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. Factors that could contribute to these differences include, among other things:

•economic downturns and market conditions beyond our control, including periods of inflation;

•the quality of global financial markets;

•risks related to doing business in China, including changes in the political and economic policies of the Chinese government or in relations between China and the United States;

•rapid changes in consumer preferences in the apparel, footwear and accessories industry;

•our ability to acquire new customers in a cost-effective manner;

•our ability to retain existing customers and maintain average order value levels;

•the effectiveness of our marketing and our ability to maintain high customer traffic;

•the rate of merchandise returns;

•our ability to manage inventory effectively;

•our ability to procure sufficient quantities of third-party merchandise on favorable terms;

•our ability to identify brands to acquire or to integrate and manage our acquisitions and investments effectively;

•the effectiveness of our growth strategy;

•our ability to expand into new markets;

•risks related to doing business internationally, including international economic, geopolitical instability (including the ongoing Ukraine and Israel wars), legal, compliance and supply chain risks;

•interruptions in or increased costs of shipping;

•risks related to our direct-to-consumer business model;

•risks related to our use of social media and influencers in marketing, including potential impact to our reputation or regulatory scrutiny;

•our ability to achieve projected results or to meet the expectations of securities analysts or investors;

•fluctuations in our operating results;

•our ability to track our key operating metrics accurately;

•our ability to maintain our corporate integrity or the image and reputation of our brands;

•our ability to continue to comply with the New York Stock Exchange (the “NYSE”) listing standards and maintain the listing of our common stock on the NYSE;

•potential liability for uncollected sales tax in certain jurisdictions;

•foreign currency exchange rate fluctuations;

•the effects of weather conditions, natural disasters or other unexpected events, including global health crises;

•our ability to attract or retain key personnel, manage executive officer succession effectively or hire, develop and motive key employees;

•risks related to our decentralized brand management structure;

•increases in labor costs or fluctuations in wage rates or the price, availability or quality of raw materials and finished goods;

•risks related to distribution, including expansion of the capacity of our fulfillment centers;

3

•our ability to meet stakeholder expectations for ethically- and sustainably-sourced fashion;

•declines in the fair value of intangible assets, or impairment of goodwill, of a business unit;

•our ability to comply with changing laws or regulations or contractual or other obligations related to data privacy and security;

•our reliance upon third-party suppliers and manufacturers;

•changes in accounting standards and subjective assumptions, estimates and judgments by management relating to complex accounting matters;

•our and our suppliers’ compliance with laws or regulations regarding consumer protection, promotions, safety or other matters;

•risks related to climate change;

•our ability to comply with changing U.S., Australian or international trade policy, tariff or import/export regulations;

•our reliance on overseas manufacturing and supply partners, including vendors located in jurisdictions presenting an increased risk of bribery and corruption;

•inadequacy, interruption or integration or security failure of our and third parties’ information technology systems;

•security breaches or resulting loss, theft, misuse or unauthorized disclosure or access of customer, supplier or sensitive company information;

•risks related to customer use of mobile devices to shop;

•restrictions or changes to “cookie” technology as a means of tracking consumer behavior;

•third-party claims of infringement, misappropriation or other violation of intellectual property rights;

•our ability to adequately establish, maintain, protect or enforce our intellectual property or proprietary rights, or prevent third parties from making unauthorized use of such rights, such as by counterfeiting of our products;

•risks related to collecting payments from customers;

•system interruptions that impair customer access to our sites or other performance failures in our technology infrastructure;

•the impact of our indebtedness, including future indebtedness, on our business and growth prospects;

•our ability to service our indebtedness;

•limitations on our operations as a result of restrictive covenants in our financing documents;

•our ability to refinance our indebtedness;

•our ability to raise capital or generate cash flows necessary to expand our operations;

•risks related to Summit’s control of us;

•volatility in our stock price, including as a result of sales of substantial amounts of our common stock;

•our decisions concerning the allocation of capital including the extent to which we repurchase shares of our common stock;

•our ability to develop and maintain proper and effective internal control over financial reporting; and

•the other risk factors set forth elsewhere in this Quarterly Report on Form 10-Q and under Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the Securities and Exchange Commission (the “SEC”) on March 9, 2023 (the “2022 Form 10-K”).

Moreover, we operate in a very competitive and rapidly changing environment, and new risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Quarterly Report on Form 10-Q may not occur, and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

4

You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this Quarterly Report on Form 10-Q to conform these statements to actual results or changes in our expectations, unless otherwise required by law.

5

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

a.k.a. BRANDS HOLDING CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)

(unaudited)

	September 30, 2023		December 31, 2022
Assets
Current assets:
Cash and cash equivalents	$	20,742	$	46,319
Restricted cash	1,862		2,054
Accounts receivable	3,312		3,231
Inventory, net	99,950		126,533
Prepaid income taxes	10,270		6,089
Prepaid expenses and other current assets	18,027		13,378
Total current assets	154,163		197,604
Property and equipment, net	27,680		28,958
Operating lease right-of-use assets	37,270		37,317
Intangible assets, net	66,345		76,105
Goodwill	91,281		167,731
Deferred tax assets	1,009		1,070
Other assets	657		853
Total assets	$	378,405	$	509,638
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	27,480	$	20,903
Accrued liabilities	27,502		39,806
Sales returns reserve	7,482		3,968
Deferred revenue	10,938		11,421
Operating lease liabilities, current	7,046		6,643
Current portion of long-term debt	7,700		5,600
Total current liabilities	88,148		88,341
Long-term debt	98,985		138,049
Operating lease liabilities	35,273		34,404
Other long-term liabilities	1,540		1,483
Deferred income taxes	241		284
Total liabilities	224,187		262,561
Commitments and contingencies (Note 16)
Stockholders’ equity:
Preferred stock, $0.001 par value; 50,000,000 shares authorized; zero shares issued or outstanding as of September 30, 2023 and December 31, 2022, respectively	—		—
Common stock, $0.001 par value; 500,000,000 shares authorized; 10,684,386 and 10,750,586 shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively*	128		129
Additional paid-in capital	465,212		460,660
Accumulated other comprehensive loss	(57,592)		(45,185)
Accumulated deficit	(253,530)		(168,527)
Total stockholders’ equity	154,218		247,077
Total liabilities and stockholders’ equity	$	378,405	$	509,638

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

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

6

a.k.a. BRANDS HOLDING CORP.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except share and per share amounts)

(unaudited)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Net sales	$	140,833	$	155,822	$	397,346	$	462,612
Cost of sales	62,865		68,965		173,522		204,112
Gross profit	77,968		86,857		223,824		258,500
Operating expenses:
Selling	36,660		41,450		106,998		127,068
Marketing	18,511		16,532		51,642		51,301
General and administrative	24,622		26,133		74,681		76,614
Goodwill impairment	68,524		—		68,524		—
Total operating expenses	148,317		84,115		301,845		254,983
(Loss) income from operations	(70,349)		2,742		(78,021)		3,517
Other expense, net:
Interest expense	(2,798)		(1,835)		(8,490)		(4,487)
Other expense	(541)		(923)		(2,325)		(2,035)
Total other expense, net	(3,339)		(2,758)		(10,815)		(6,522)
Loss before income taxes	(73,688)		(16)		(88,836)		(3,005)
Benefit from (provision for) income taxes	3,278		(98)		3,833		204
Net loss	$	(70,410)	$	(114)	$	(85,003)	$	(2,801)
Net loss per share:
Basic and diluted*	$	(6.58)	$	(0.01)	$	(7.92)	$	(0.26)
Weighted average shares outstanding:
Basic and diluted*	10,695,621		10,723,859		10,736,628		10,721,995

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

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

7

a.k.a. BRANDS HOLDING CORP.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Net loss	$	(70,410)	$	(114)	$	(85,003)	$	(2,801)
Other comprehensive loss:
Currency translation	(6,552)		(28,263)		(12,407)		(52,889)
Total comprehensive loss	$	(76,962)	$	(28,377)	$	(97,410)	$	(55,690)

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

8

a.k.a. BRANDS HOLDING CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(in thousands, except share data)

(unaudited)

	Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Loss		Accumulated Deficit		Total Stockholders’ Equity
	Shares*	Amount
Balance as of December 31, 2022	10,750,586	$	129	$	460,660	$	(45,185)	$	(168,527)	$	247,077
Equity-based compensation	—	—		1,936		—		—		1,936
Issuance of common stock under employee equity plans, net of shares withheld	6,882	—		(43)		—		—		(43)
Cumulative translation adjustment	—	—		—		(3,925)		—		(3,925)
Net loss	—	—		—		—		(9,553)		(9,553)
Balance as of March 31, 2023	10,757,468	129		462,553		(49,110)		(178,080)		235,492
Equity-based compensation	—	—		1,824		—		—		1,824
Issuance of common stock under employee equity plans, net of shares withheld	42,117	—		66		—		—		66
Repurchase of shares	(56,153)	—		(299)		—		—		(299)
Cumulative translation adjustment	—	—		—		(1,930)		—		(1,930)
Net loss	—	—		—		—		(5,040)		(5,040)
Balance as of June 30, 2023	10,743,432	129		464,144		(51,040)		(183,120)		230,113
Equity-based compensation	—	—		1,719		—		—		1,719
Issuance of common stock under employee equity plans, net of shares withheld	13,802	—		(40)		—		—		(40)
Repurchase of shares	(72,848)	(1)		(611)		—		—		(612)
Cumulative translation adjustment	—	—		—		(6,552)		—		(6,552)
Net loss	—	—		—		—		(70,410)		(70,410)
Balance as of September 30, 2023	10,684,386	$	128	$	465,212	$	(57,592)	$	(253,530)	$	154,218

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

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

9

a.k.a. BRANDS HOLDING CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(in thousands, except share data)

(unaudited)

	Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)		Retained Earnings		Total Stockholders’ Equity
	Shares*	Amount
Balance as of December 31, 2021	10,720,653	$	129	$	453,807	$	(11,080)	$	8,170	$	451,026
Equity-based compensation	—	—		1,368		—		—		1,368
Cumulative translation adjustment	—	—		—		14,405		—		14,405
Net income	—	—		—		—		1,525		1,525
Balance as of March 31, 2022	10,720,653	129		455,175		3,325		9,695		468,324
Equity-based compensation	—	—		1,494		—		—		1,494
Issuance of common stock under employee equity plans, net of shares withheld	1,779	—		(32)		—		—		(32)
Cumulative translation adjustment	—	—		—		(39,031)		—		(39,031)
Net loss	—	—		—		—		(4,212)		(4,212)
Balance as of June 30, 2022	10,722,432	129		456,637		(35,706)		5,483		426,543
Equity-based compensation	—	—		1,586		—		—		1,586
Issuance of common stock under employee equity plans, net of shares withheld	12,134	—		(53)		—		—		(53)
Cumulative translation adjustment	—	—		—		(28,263)		—		(28,263)
Net loss	—	—		—		—		(114)		(114)
Balance as of September 30, 2022	10,734,566	$	129	$	458,170	$	(63,969)	$	5,369	$	399,699

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

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

10

a.k.a. BRANDS HOLDING CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Nine Months Ended September 30,
	2023		2022
Cash flows from operating activities:
Net loss	$	(85,003)	$	(2,801)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation expense	5,912		4,121
Amortization expense	8,782		11,252
Amortization of inventory fair value adjustment	—		707
Amortization of debt issuance costs	470		487
Lease incentives	1,499		1,384
Loss on disposal of businesses	1,533		—
Non-cash operating lease expense	5,786		7,211
Equity-based compensation	5,478		4,448
Deferred income taxes, net	3		(2,343)
Goodwill impairment	68,524		—
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable	111		(1,339)
Inventory	20,428		(31,067)
Prepaid expenses and other current assets	(5,448)		2,965
Accounts payable	7,495		9,430
Income taxes payable	(4,528)		(6,987)
Accrued liabilities	(10,912)		641
Returns reserve	3,714		(415)
Deferred revenue	(4)		(3,294)
Lease liabilities	(5,798)		(5,817)
Net cash provided by (used in) operating activities	18,042		(11,417)
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired	—		(2,095)
Purchases of intangible assets	(59)		(164)
Purchases of property and equipment	(5,462)		(13,946)
Net cash used in investing activities	(5,521)		(16,205)
Cash flows from financing activities:
Payments of costs related to initial public offering	—		(1,142)
Proceeds from line of credit, net of issuance costs	—		25,000
Repayment of line of credit	(33,100)		—
Proceeds from issuance of debt, net of issuance costs	—		(121)
Repayment of debt	(4,200)		(4,200)
Taxes paid related to net share settlement of equity awards	(107)		(84)
Proceeds from issuances under equity-based compensation plans	90		—
Repurchase of shares	(910)		—
Net cash (used in) provided by financing activities	(38,227)		19,453
Effect of exchange rate changes on cash, cash equivalents and restricted cash	(63)		211
Net decrease in cash, cash equivalents and restricted cash	(25,769)		(7,958)
Cash, cash equivalents and restricted cash at beginning of period	48,373		41,018
Cash, cash equivalents and restricted cash at end of period	$	22,604	$	33,060
Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents	$	20,742	$	31,114
Restricted cash	1,862		1,946
Total cash, cash equivalents and restricted cash	$	22,604	$	33,060

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

11

a.k.a. BRANDS HOLDING CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(unaudited)

Note 1. Organization and Description of Business

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

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

Note 2. Significant Accounting Policies

Principles of Consolidation and Basis of Presentation

The Company’s unaudited condensed consolidated interim financial statements have been prepared in accordance with Article 10 of the SEC’s Regulation S-X. As permitted under those rules, certain footnotes or other financial information that are normally required by generally accepted accounting principles in the United States (“GAAP”) can be condensed or omitted. These financial statements have been prepared on the same basis as our annual financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for the fair statement of our financial information. The accompanying unaudited condensed consolidated financial statements and related financial information should be read in conjunction with the audited consolidated financial statements and the related notes thereto for the year ended December 31, 2022 which are included in the 2022 Form 10-K. The year-end condensed consolidated balance sheet data were derived from audited financial statements, but do not include all disclosures required by GAAP. These interim results are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2023 or for any other interim period or for any other future year. The accompanying condensed 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.

Revenue Recognition

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

Revenue is recognized in an amount that reflects the consideration expected to be received in exchange for products. To determine revenue recognition for contracts with customers in accordance with Revenue from Contracts with Customers (Topic 606), the Company recognizes revenue from the commercial sales of products and contracts by applying the following five steps: (1) identification of the contract, or contracts, with the customer; (2) identification of the performance obligations in the contract; (3) determination of the transaction price; (4) allocation of the transaction price to the performance obligations in the contract; and (5) recognition of revenue when, or as, the Company satisfies its performance obligation. A contract is created with the customer at the time the order is placed by the customer, which creates a single performance obligation. The Company recognizes revenue for its single performance obligation at the time control of the product passes to the customer, which is when the goods are transferred to a third-party common carrier, for purchases through the Company’s online websites, or at point of sale, for purchases in 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.

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The Company generally provides refunds for goods returned within 30 to 45 days from the original purchase date. At the time of sale, we establish a reserve for merchandise returns, based on historical experience, merchandise mix and expected future returns, which is recorded as a reduction of sales. Accordingly, cost of sales is also reduced and an offsetting asset is recorded within prepaid expenses and other current assets for expected merchandise to be returned. A returns reserve is recorded by the Company based on historical refund experience with a corresponding reduction of sales and cost of sales. The returns reserve was $7.5 million and $4.0 million as of September 30, 2023 and December 31, 2022, respectively.

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

Balance as of December 31, 2021	$	6,887
Returns	(101,716)
Allowance	98,797
Balance as of December 31, 2022	3,968
Returns	(74,306)
Allowance	77,820
Balance as of September 30, 2023	$	7,482

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. The portion of gift cards and online credits not expected to be redeemed are recognized as revenue based on a pattern of historical redemptions, which are substantially within twenty-four months from the date of issuance.

Revenue recognized in net sales on breakage of gift cards and online credit for both the three months ended September 30, 2023 and 2022 was $0.4 million and immaterial, respectively. Revenue recognized in net sales on breakage of gift cards and online credit for the nine months ended September 30, 2023 and 2022 was $1.0 million and $0.1 million, respectively.

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
U.S.	$	83,846	$	82,172	$	236,439	$	242,117
Australia/New Zealand	50,022		67,038		139,505		196,638
Rest of world	6,965		6,612		21,402		23,857
Total	$	140,833	$	155,822	$	397,346	$	462,612

Segment Information

Operating segments are defined as components of an entity for which separate financial information is available and is regularly reviewed by the Company’s Chief Executive Officer, its 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.

Note 3. Disposals

Rebdolls

In March 2023, the Company completed the sale of its Rebdolls reporting unit back to its founder. Upon close of the transaction, the Company recorded a pre-tax loss of $1.0 million in other expense, net in its condensed consolidated statements of income in the first quarter of fiscal year 2023. As part of the sale, the Company retained an 18% ownership in Rebdolls, but retained no further rights related to Rebdolls. Such investment was determined to have no value, as recovery of any amount was deemed remote.

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Note 4. Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets are comprised of the following:

	September 30, 2023		December 31, 2022
Security deposits	$	624	$	2,945
Inventory prepayments	8,070		3,067
Other	9,333		7,366
Total prepaid expenses and other current assets	$	18,027	$	13,378

Note 5. Property and Equipment, Net

Property and equipment, net is comprised of the following:

	September 30, 2023		December 31, 2022
Furniture and fixtures	$	2,372	$	2,367
Machinery and equipment	5,772		5,188
Computer equipment and capitalized software	6,914		6,015
Leasehold improvements	26,824		24,816
Total property and equipment	41,882		38,386
Less: accumulated depreciation	(14,202)		(9,428)
Total property and equipment, net	$	27,680	$	28,958

Total depreciation expense was $1.7 million and $1.4 million for the three months ended September 30, 2023 and 2022, respectively, and was $5.9 million and $4.1 million for the nine months ended September 30, 2023 and 2022, respectively.

Note 6. Goodwill

The carrying value of goodwill, as of September 30, 2023 and December 31, 2022, was $91.3 million and $167.7 million, respectively. In August 2023, due to a continued worsening in global economic trends, 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 September 30, 2023, $10.6 million of goodwill related to Petal & Pup remained, while the goodwill related to Culture Kings was fully impaired. Additionally, as of the testing date, 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 goodwill impairment was recorded during the nine months ended September 30, 2022.

The goodwill of the acquired companies is primarily related to expected improvements in technology performance and functionality, as well as sales growth from future product and service offerings and new customers, together with certain intangible assets that do not qualify for separate recognition. The goodwill of acquired companies is generally not deductible for tax purposes.

The following table summarizes goodwill activity:

Balance as of December 31, 2022	$	167,731
Impairment	(68,524)
Changes in foreign currency translation	(7,926)
Balance as of September 30, 2023	$	91,281

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Note 7. Intangible Assets

The gross amounts and accumulated amortization of acquired identifiable intangible assets with finite useful lives as of September 30, 2023 and December 31, 2022, included in intangible assets, net in the accompanying condensed consolidated balance sheets, are as follows:

		September 30, 2023			December 31, 2022
	Useful life	Weighted Average Amortization Period 2023	2023		Weighted Average Amortization Period 2022	2022
Customer relationships	4 years	1.4 years	$	20,805	2.0 years	$	21,703
Brands	10 years	7.2 years	82,475		7.9 years	84,278
Trademarks	5 years	1.5 years	101		2.3 years	107
Total intangible assets			103,381			106,088
Less: accumulated amortization			(37,036)			(29,983)
Total intangible assets, net			$	66,345		$	76,105

Amortization of acquired intangible assets with finite useful lives is included in general and administrative expenses and was $2.9 million and $3.2 million for the three months ended September 30, 2023 and 2022, respectively, and was $8.8 million and $11.3 million for the nine months ended September 30, 2023 and 2022, respectively.

Future estimated amortization expense for acquired identifiable intangible assets is as follows:

	Amortization Expense
Year ending December 31:
Remainder of 2023	$	2,560
2024	10,101
2025	9,392
2026	8,650
2027	8,247
Thereafter	27,395
Total amortization expense	$	66,345

Note 8. Debt

Senior Secured Credit Facility

On September 24, 2021, in connection with the closing of the Company’s initial public offering (“IPO”), certain subsidiaries of the Company entered into a senior secured credit facility comprised of a $100.0 million term loan and a $50.0 million revolving line of credit, as well as an option for additional term loan of up to $50.0 million through an accordion feature. The senior secured credit facility also allows for the issuance of one or more letters of credit from time to time by syndicate lenders. Effective April 4, 2023, the Company modified its senior secured credit facility under existing contractual provisions to yield interest based on Term SOFR interest rates. Key terms and conditions of each facility were as follows as of September 30, 2023:

•The $100.0 million term loan matures five years after closing and requires the Company 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 Term SOFR plus an applicable margin dependent upon our net leverage ratio, as defined by the credit agreement. The highest interest rate under the agreement occurs at a net leverage ratio of greater than 2.75x, yielding an interest rate of Term SOFR plus 3.25%.

•The $50.0 million revolving line of credit, which matures five years after closing, accrues interest at Term SOFR plus an applicable margin dependent upon our net leverage ratio. The highest interest rate under the agreement occurs at a net leverage ratio of greater than 2.75x, yielding an interest rate of Term SOFR plus 3.25%. Additionally, a margin fee of 25-35 basis points is assessed on unused amounts under the revolving line of credit, subject to adjustment based on our net leverage ratio.

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•The $50.0 million accordion feature allows the Company to enter into additional term loan borrowings at terms to be agreed upon at the time of issuance, but on substantially the same basis as the original term loan, which includes the requirement to make amortized annual payments at the same cadence as that of the original term loan.

The senior secured credit facility requires that the Company maintain a maximum total net leverage ratio of 3.50 to 1.00 as of the last day of any fiscal quarter, beginning with the fiscal quarter ended December 31, 2021 through maturity. The senior secured credit facility also requires that the Company maintain a minimum fixed charge coverage ratio of 1.25 to 1.00 as of the last day of any fiscal quarter, beginning with the fiscal quarter ended December 31, 2021 through maturity. In the event that the Company fails to comply with the financial covenant, the Company will have the option to make certain equity contributions, directly or indirectly, to cure any non-compliance with such covenant, subject to certain other conditions and limitations. Beginning with the fiscal year ending December 31, 2022, and continuing annually thereafter, the Company is required to make a mandatory prepayment as a percentage of excess cash flows, as defined by the credit agreement, in the period based on the Company triggering certain net debt leverage ratios. Specifically, a mandatory prepayment of 50% of excess cash flows is required if the Company’s net leverage ratio exceeds 2.75x, and a mandatory prepayment of 25% of excess cash flows is required if the Company’s net leverage ratio is greater than or equal to 2.25x. As of September 30, 2023, the Company was in compliance with all debt covenants.

During the nine months ended September 30, 2023, the Company voluntarily repaid $33.1 million of the outstanding amount owed under its revolving line of credit.

As of September 30, 2023, the all-in rate (Term SOFR plus the applicable margin) for the Company’s term loan and borrowings under the revolving line of credit was 8.68%.

Total Debt and Interest

Outstanding debt consisted of the following:

	September 30, 2023		December 31, 2022
Term loan	$	100,950	$	105,150
Revolving credit facility	6,900		40,000
Capitalized debt issuance costs	(1,165)		(1,501)
Total debt	106,685		143,649
Less: current portion	(7,700)		(5,600)
Total long-term debt	$	98,985	$	138,049

Interest expense, which included the amortization of debt issuance costs, totaled $2.8 million and $1.8 million for the three months ended September 30, 2023 and 2022, respectively, and $8.5 million and $4.5 million for the nine months ended September 30, 2023 and 2022, respectively. Additionally, as of September 30, 2023, the Company had $1.3 million of outstanding letters of credit.

Note 9. Leases

The Company leases office locations, warehouse facilities and stores under various non-cancellable operating lease agreements. The Company’s leases have remaining lease terms of approximately 1 year to 10 years, which represent the non-cancellable periods of the leases and include extension options that the Company determined are reasonably certain to be exercised. The Company excludes from the lease terms any extension options that are not reasonably certain to be exercised, ranging from approximately 6 months to 3 years. 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. The Company often receives customary incentives from landlords, such as reimbursements for tenant improvements and rent abatement periods, which effectively reduce the total lease payments owed for these leases. Leases are classified as operating or financing at commencement. The Company does not have any material financing leases.

Operating lease right-of-use assets and liabilities on the condensed consolidated balance sheets represent the present value of the remaining lease payments over the remaining lease terms. The Company uses its incremental borrowing rate to calculate the present value of the lease payments, as the implicit rates in the leases are not readily determinable. Operating lease costs consist primarily of the fixed lease payments included in the operating lease liabilities and are recorded on a straight-line basis over the lease terms.

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The Company’s operating lease costs were as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Operating lease costs	$	2,557	$	2,180	$	7,467	$	6,691
Variable lease costs	246		145		640		463
Short-term lease costs	97		91		284		312
Total lease costs	$	2,900	$	2,416	$	8,391	$	7,466

The Company does not have any sublease income and the Company’s lease agreements do not contain any residual value guarantees or material restrictive covenants.

Supplemental cash flow information relating to the Company’s operating leases was as follows:

	Nine Months Ended September 30,
	2023		2022
Cash paid for operating lease liabilities	$	5,990	$	4,145
Operating lease right-of-use assets obtained in exchange for new operating lease liabilities	7,240		21,987

Other information relating to the Company’s operating leases was as follows:

	September 30, 2023	December 31, 2022
Weighted-average remaining lease term	6.7 years	7.4 years
Weighted-average discount rate	5.0%	4.3%

As of September 30, 2023, the maturities of operating lease liabilities were as follows:

Remainder of 2023	$	2,309
2024	8,829
2025	8,267
2026	6,936
2027	5,665
Thereafter	17,963
Total remaining lease payments	49,969
Less: imputed interest	7,650
Total operating lease liabilities	42,319
Less: current portion	(7,046)
Long-term operating lease liabilities	$	35,273

Note 10. Income Taxes

Interim income taxes are based on an estimated annualized effective tax rate applied to the respective quarterly periods, adjusted for discrete tax items in the period in which they occur. Although the Company believes its tax estimates are reasonable, the Company can make no assurance that the final tax outcome of these matters will not be different from that which it has reflected in its historical income tax provisions and accruals. Such differences could have a material impact on the Company’s income tax provision and operating results in the period in which the Company makes such determinations.

The Company is subject to income taxes in the United States and Australia. Significant judgment is required in evaluating the Company’s tax positions and determining the provision for income taxes. During the ordinary course of business, the Company considers tax positions for which the ultimate tax determination is uncertain for the purpose of determining whether a reserve is required, despite the Company’s belief that the tax positions are fully supportable. To date the Company has not established a reserve provision because the Company believes that all tax positions are highly certain.

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The following table summarizes our effective tax rate for the periods presented:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Loss before income taxes	$	(73,688)	$	(16)	$	(88,836)	$	(3,005)
Benefit from (provision for) income taxes	3,278		(98)		3,833		204
Effective tax rate	(4.4)%		612.5%		(4.3)%		(6.8)%

For the three and nine months ended September 30, 2023, the Company’s benefits from income tax were primarily due to the net loss before income taxes. When compared to the U.S. federal statutory rate of 21.0%, the lower effective tax rates for the three and nine months ended September 30, 2023 were primarily due to non-deductible permanent differences, including the goodwill impairment recorded related to the Culture Kings and Petal & Pup reporting units.

Note 11. Accrued Liabilities

Accrued liabilities consisted of the following:

	September 30, 2023		December 31, 2022
Accrued salaries and other benefits	$	8,617	$	10,569
Accrued freight costs	4,175		5,064
Sales tax payable	4,614		15,999
Accrued marketing costs	3,412		2,566
Accrued professional services	1,718		2,509
Other accrued liabilities	4,966		3,099
Total accrued liabilities	$	27,502	$	39,806

Note 12. Deferred Revenue

Deferred revenue consisted of the following:

	September 30, 2023		December 31, 2022
Gift cards	$	10,570	$	10,829
Other	368		592
Total deferred revenue	$	10,938	$	11,421

Note 13. Equity-based Compensation

Incentive Plans

2021 Omnibus Incentive Plan

In September 2021, the Company’s board of directors adopted, and its stockholders approved, the 2021 Omnibus Incentive Plan (the “2021 Plan”), which became effective in connection with the IPO. The 2021 Plan provides for the grant of stock options, stock appreciation rights, restricted stock awards, restricted stock units and other forms of equity and cash compensation. A total of 408,355 shares of the Company’s common stock, as adjusted for the one-for-12 Reverse Stock Split, were initially reserved for issuance under the 2021 Plan. The number of shares of common stock reserved and available for issuance under the 2021 Plan automatically increases on January 1 of each year by 1% of the number of shares of the Company’s common stock outstanding on the immediately preceding December 31, or such lesser number of shares as determined by the compensation committee of the Company’s board of directors. On May 30, 2023, the Company’s shareholders approved an amendment to the 2021 Omnibus Plan to increase the number of shares available for issuance under the 2021 Plan by 833,333 shares of the Company’s common stock, as adjusted for the one-for-12 Reverse Stock Split. As of September 30, 2023, there were 1,456,396 shares reserved for issuance of awards under the 2021 Plan, as adjusted for the one-for-12 Reverse Stock Split.

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2021 Employee Stock Purchase Plan

In September 2021, the Company’s board of directors adopted, and its stockholders approved, the 2021 Employee Stock Purchase Plan (the “ESPP”), which became effective in connection with the IPO. The ESPP authorizes the issuance of shares of the Company’s common stock pursuant to purchase rights granted to employees. A total of 102,088 shares of the Company’s common stock, as adjusted for the one-for-12 Reverse Stock Split, were initially reserved for issuance under the ESPP. The number of shares reserved and available for issuance under the ESPP automatically increases on January 1 of each year by 1% of the number of shares of the Company’s common stock outstanding on the immediately preceding December 31, or such lesser number of shares as determined by the compensation committee of the Company’s board of directors. As of September 30, 2023, there were 316,797 shares reserved for issuance of awards under the ESPP, as adjusted for the one-for-12 Reverse Stock Split.

The offering periods of the ESPP are six months long and are anticipated to be offered twice per year. The price at which common stock is purchased under the ESPP is equal to 85% of the fair market value of a share of the Company’s common stock on the first or last day of the offering period, whichever is lower. The fair value of the discount and the look-back period will be estimated using the Black-Scholes option pricing model.

2018 Stock and Incentive Compensation Plan

Prior to the IPO, the 2018 Stock and Incentive Compensation Plan, as amended, (the “2018 Plan”) provided for the issuance of time-based incentive units and performance-based incentive units issued by Excelerate, L.P. (the predecessor entity of a.k.a. Brands Holding Corp.). In connection with the reorganization transactions and the IPO, all of the equity interests in Excelerate, L.P., including outstanding incentive units issued as equity-based compensation under the 2018 Plan, were transferred to New Excelerate, L.P. The incentive units issued under the 2018 Plan participate in distributions from New Excelerate, L.P., but only after investors receive their return of capital plus a specified threshold amount per unit. The total incentive pool size under the plan was 16,475,735 units. The 2018 Plan was terminated in September 2021 in connection with the IPO, but continues to govern the terms of outstanding incentive units that were granted prior to the IPO. No further incentive units will be granted under the 2018 Plan.

Grant Activity

Stock Options

The 2021 Plan provides for the issuance of incentive and nonqualified stock options. Under the 2021 Plan, the exercise price of a stock option shall not be less than the fair market value of one share of the Company’s common stock on the date of grant. Stock options have a contractual term, the period during which they are exercisable, not to exceed ten years from the date of grant, and generally vest over time, based on performance or based on the achievement of a market condition. In September 2023, an award, including 416,667 stock options (the “Bryett Award”), was issued to Wesley Bryett, a member of the Company’s board of directors, co-founder of Princess Polly and the Global CEO of Culture Kings. This award expires after ten years, or upon the termination of Mr. Bryett, and includes four tranches of stock options that will vest and become exercisable based upon the achievement of various common stock price targets. The weighted average exercise price for the options in the Bryett Award is $109.27. Each tranche of stock options has a different derived service period, the average of which is approximately 5.5 years. As of September 30, 2023, no options issued as part of the Bryett Award had vested, the options held no intrinsic value, and total unrecognized compensation cost related to the Bryett Award was $1.2 million which is expected to be recognized over 5.4 years.

A summary of the Company's time-based stock option activity under the 2021 Plan, as adjusted for the one-for-12 Reverse Stock Split, was as follows:

	Number of Options	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (years)	Aggregate Intrinsic Value
Balance as of December 31, 2022	42,288	$	83.36	9.04	$	—
Granted	—	—
Exercised	—	—
Forfeited/Repurchased	(2,467)	114.00
Balance as of September 30, 2023	39,821	$	81.47	8.31	$	—
Vested as of September 30, 2023	19,608	$	83.58	8.29	$	—

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As of September 30, 2023, there was $0.9 million of total unrecognized compensation cost related to unvested time-based stock options issued under the 2021 Plan, which is expected to be recognized over a weighted-average period of 1.8 years.

Restricted Stock Units

The 2021 Plan provides for the issuance of restricted stock units (“RSUs”). RSUs issued prior to March 31, 2022 vest over four years while all RSUs issued after that date vest over three years.

A summary of the Company's RSU activity under the 2021 Plan, as adjusted for the one-for-12 Reverse Stock Split, was as follows:

	Number of Shares	Weighted Average Grant Date Fair Value
Balance as of December 31, 2022	367,512	$	32.81
Granted	33,764	4.91
Vested	(54,335)	51.50
Forfeited/Repurchased	(37,095)	36.68
Balance as of September 30, 2023	309,846	$	26.04

As of September 30, 2023, there was $6.9 million of total unrecognized compensation cost related to unvested RSUs issued under the 2021 Plan, which is expected to be recognized over a weighted-average period of 1.9 years.

Incentive Units

The 2018 Plan provided for the issuance of time-based incentive units and performance-based incentive units. Time-based incentive units generally vest over four years. Performance-based incentive units vested upon the satisfaction of the performance condition as described further below.

Time-Based Incentive Partnership Units

The following table summarizes time-based incentive unit activity under the 2018 Plan:

	Number of Units	Weighted Average Grant Date Fair Value		Weighted Average Participation Threshold		Aggregate Intrinsic Value
Balance as of December 31, 2022	3,363,856	$	1.43	$	18.64	$	—
Granted	—	—		—
Vested	(1,499,521)	1.36		17.65
Forfeited/Repurchased	(16,150)	3.19		22.68
Balance as of September 30, 2023	1,848,185	$	1.47	$	19.42	$	—
Vested as of September 30, 2023	7,373,102

As of September 30, 2023, there was $2.3 million of total unrecognized compensation cost related to unvested time-based incentive units issued under the 2018 Plan, which is expected to be recognized over a weighted average period of 1.1 years.

ESPP Purchase Rights

A six-month offering period for the ESPP ended on May 31, 2023. There were 21,892 shares purchased using ESPP purchase rights with a weighted average purchase price of $4.11.

Equity-Based Compensation Expense

The Company recognizes compensation expense in general and administrative expenses within operating expenses in the condensed consolidated statements of income for stock options, RSUs, ESPP purchase rights and time-based incentive units granted prior to the IPO, by amortizing the grant date fair value on a straight-line basis over the expected vesting period to the extent the vesting of the grant is considered probable. The Company recognizes equity-based award forfeitures in the period such forfeitures occur.

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The following table summarizes the Company’s equity-based compensation expense by award type for all Plans:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Stock options	$	142	$	146	$	390	$	359
RSUs	923		682		2,939		1,865
ESPP purchase rights	3		110		129		110
Time-based incentive units	650		648		2,020		2,114
Total	$	1,718	$	1,586	$	5,478	$	4,448

Note 14. Stockholders’ Equity

Preferred Stock

In connection with the IPO, the Company’s amended and restated certificate of incorporation became effective, which authorized the issuance of 50,000,000 shares of undesignated preferred stock with a par value of $0.001 per share with rights and preferences, including voting rights, designated from time to time by the Company’s board of directors. There were no shares of preferred stock issued and outstanding as of September 30, 2023.

Common Stock

The Company has one class of common stock. In connection with the IPO, the Company’s amended and restated certificate of incorporation became effective, which authorized the issuance of 500,000,000 shares of common stock with a par value of $0.001 per share, with one vote per share. Holders of common stock are entitled to receive any dividends as may be declared from time to time by the Company’s board of directors.

On September 29, 2023, the Company effected a one-for-12 reverse stock split of our common stock (the “Reverse Stock Split”). No fractional shares were issued in connection with the Reverse Stock Split and all holders of such fractional interests received cash equal to such fraction multiplied by the average of the closing sales prices of the Company’s common stock during the regular trading hours for the five consecutive trading days immediately preceding the effective date of the Reverse Stock Split, with such average closing sales prices being adjusted to give effect to the Reverse Stock Split. All references in this Quarterly Report on Form 10-Q to the Company’s outstanding common stock, including per share information, have been retrospectively adjusted to reflect this Reverse Stock Split.

Share Repurchase Program

On May 25, 2023, the Company's board of directors approved a share repurchase program (the “Share Repurchase Program”). Pursuant to the Share Repurchase Program, the Company is authorized to repurchase up to $2.0 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 subject to 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. During the three months ended September 30, 2023, the Company repurchased 106,566 shares of its common stock for $0.6 million, at an average price of $5.97 per share, of which 33,718 shares were held and not retired as of September 30, 2023. During the nine months ended September 30, 2023, the Company repurchased 162,716 shares of its common stock for $0.9 million, at an average price of $5.83 per share.

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Note 15. Net Income (Loss) Per Share

The following table sets forth the computation of basic and diluted net loss per share and a reconciliation of the weighted average number of shares outstanding:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Numerator:
Net loss	$	(70,410)	$	(114)	$	(85,003)	$	(2,801)
Denominator:
Weighted-average common shares outstanding, basic and diluted	10,695,621		10,723,859		10,736,628		10,721,995
Net loss per share:
Net loss per share, basic and diluted	$	(6.58)	$	(0.01)	$	(7.92)	$	(0.26)

Basic net income (loss) per share is calculated by dividing net income (loss) for the period by the weighted-average number of shares of common stock for the period. Diluted net income (loss) per share has been calculated in a manner consistent with that of basic net income (loss) per share while giving effect to shares of potentially dilutive stock option and RSU grants, as well as ESPP purchase rights, outstanding during the period, if applicable. Due to the net loss for all periods shown, no potentially dilutive securities had an impact on diluted loss per share for any period. For the three months ended September 30, 2023 and 2022, respectively, 332,873 and 151,536 shares were excluded from the calculation of weighted-average diluted common shares outstanding as they had an anti-dilutive effect. For the nine months ended September 30, 2023 and 2022, respectively, 358,863 and 105,890 shares were excluded from the calculation of weighted-average diluted common shares outstanding as they had an anti-dilutive effect.

Note 16. Commitments and Contingencies

Contingencies

The Company records a loss contingency when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. The Company also discloses material contingencies when it believes a loss is not probable but reasonably possible. Accounting for contingencies requires the Company to use judgment related to both the likelihood of a loss and the estimate of the amount or range of loss. Although the Company cannot predict with assurance the outcome of any litigation or tax matters, it does not believe there are currently any such actions that, if resolved unfavorably, would have a material impact on the Company’s operating results, financial position or cash flows.

Indemnifications

In the ordinary course of business, the Company may provide indemnifications of varying scope and terms to vendors, directors, officers and other parties with respect to certain matters. The Company has not incurred any material costs as a result of such indemnifications and has not accrued any liabilities related to such obligations in the consolidated financial statements.

Note 17. Subsequent Events

The Company has evaluated subsequent events occurring through November 8, 2023, the date that these financial statements were originally available to be issued, and determined the following subsequent event occurred that would require disclosure in these financial statements.

Draw on Revolving Line of Credit

On October 19, 2023, the Company borrowed $5.5 million under the revolving line of credit, which is part of the Company’s senior secured credit facility. The initial applicable interest rate for the borrowings is 8.70% and final payoff is due on September 24, 2026.

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ITEM 2. 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 condensed consolidated financial statements and related notes that are included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements based upon current plans, expectations and beliefs that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements because of various factors, including those set forth in the sections captioned “Risk Factors” and “Forward-Looking Statements” and in other parts of this Quarterly Report on Form 10-Q. Our fiscal year ends 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."

Overview

a.k.a. Brands is a brand accelerator of fashion brands for the next generation. Each brand in the a.k.a. portfolio is customer-led, curates quality exclusive merchandise, creates authentic and inspiring social content and targets a distinct Gen Z and Millennial audience. a.k.a. Brands leverages its next-generation operating model to help each brand accelerate its growth, scale in new markets and enhance its profitability.

We founded a.k.a. with a focus on Millennial and Gen Z audiences who primarily 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, an Australian fashion brand focusing on fun, trendy dresses, tops, shoes and accessories with slim fit, body-confident and trendy fashion designs. The brand targets a female customer between the ages of 15 and 25.

•In August 2019, we acquired Petal & Pup, an Australian fashion brand offering an assortment of trendy, flattering and feminine styles and dresses for special occasions. The brand targets female customers typically in their 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.

We acquired Rebdolls in December 2019 and sold it back to its founder in March 2023. Refer to Note 3, “Disposals,” in the Notes to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information regarding our disposition of Rebdolls.

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Key Operating and Financial Metrics

Operating Metrics

We use the following metrics to assess the progress of our business, make decisions on where to allocate capital, time and technology investments and assess the near-term and longer-term performance of our business.

The following table sets forth our key operating metrics for each period presented:

	Three Months Ended September 30,				Nine Months Ended September 30,
(in millions, other than dollar figures)	2023		2022		2023		2022
Active customers	3.6		3.8		3.6		3.8
Average order value	$	81	$	85	$	81	$	84
Number of orders	1.7		1.8		4.9		5.5

Active Customers

We view the number of active customers as a key indicator of our growth, the value proposition and consumer awareness of our brand, and their desire to purchase our products. In any particular period, we determine our number of active customers by counting the total number of unique customer accounts who have made at least one purchase in the preceding 12-month period, measured from the last date of such period.

Average Order Value

We define average order value as net sales in a given period divided by the total orders placed in that period. Average order value may fluctuate as we expand into new categories or geographies or as our assortment changes.

Key Financial Metrics

The following table sets forth our key GAAP and non-GAAP financial metrics for each period presented:

	Three Months Ended September 30,						Nine Months Ended September 30,
(dollars in thousands)	2023			2022			2023			2022
Gross margin	55%			56		%	56%			56		%
Net loss	$	(70,410)		$	(114)		$	(85,003)		$	(2,801)
Net loss margin	(50)%			—		%	(21)%			(1)		%
Adjusted EBITDA	$	4,697		$	9,236		$	12,451		$	25,779
Adjusted EBITDA margin	3		%	6		%	3		%	6		%
Net cash provided by (used in) operating activities							$	18,042		$	(11,417)
Free Cash Flow							$	12,580		$	(25,363)

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 used in operating activities, respectively.

Non-GAAP Financial Measures

In addition to our results determined in accordance with GAAP, we monitor certain non-GAAP financial measures to evaluate our operating performance, identify trends, formulate financial projections and make strategic decisions on a consolidated basis. Accordingly, we believe that non-GAAP financial information, when taken collectively, may provide useful supplemental information to investors and others in understanding and evaluating our results of operations in the same manner as our management team. The non-GAAP financial measures are presented for supplemental informational purposes only. They should not be considered a substitute for financial information presented in accordance with GAAP, and may be different from similarly-titled non-GAAP measures used by other companies. A reconciliation is provided below for each non-GAAP financial measure to the most directly comparable financial measure stated in accordance with GAAP. Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures.

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Adjusted EBITDA and Adjusted EBITDA Margin

We calculate Adjusted EBITDA as net income (loss) adjusted to exclude: interest and other expense; provision for income taxes; depreciation and amortization expense; 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, and Adjusted EBITDA margin as Adjusted EBITDA as a percentage of net sales. Adjusted EBITDA does not represent net income or cash flow from operating activities as it is defined by GAAP and does not necessarily indicate whether cash flows will be sufficient to fund cash needs. Because other companies may calculate EBITDA and Adjusted EBITDA differently than we do, Adjusted EBITDA may not be comparable to similarly titled measures reported by other companies. Adjusted EBITDA has other limitations as an analytical tool when compared to the use of net income (loss), which is the most directly comparable GAAP financial measure, including 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 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.

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

	Three Months Ended September 30,						Nine Months Ended September 30,
(dollars in thousands)	2023			2022			2023			2022
Net loss	$	(70,410)		$	(114)		$	(85,003)		$	(2,801)
Add (deduct):
Total other expense, net	3,339			2,758			10,815			6,522
(Benefit from) provision for income tax	(3,278)			98			(3,833)			(204)
Depreciation and amortization expense	4,533			4,566			14,694			15,373
Equity-based compensation expense	1,719			1,586			5,478			4,448
Inventory step-up amortization expense	—			—			—			707
Distribution center relocation costs	—			12			—			1,303
Transaction costs	—			39			—			140
Severance	211			291			894			291
Goodwill impairment	68,524			—			68,524			—
Sales tax penalties	55			—			586			—
Insured (gains) losses	4			—			296			—
Adjusted EBITDA	$	4,697		$	9,236		$	12,451		$	25,779
Net loss margin	(50)		%	—		%	(21)		%	(1)		%
Adjusted EBITDA margin	3		%	6		%	3		%	6		%

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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 used in operating activities, the most directly comparable financial measure prepared in accordance with GAAP:

	Nine Months Ended September 30,
(dollars in thousands)	2023		2022
Net cash provided by (used in) operating activities	$	18,042	$	(11,417)
Less: purchases of property and equipment	(5,462)		(13,946)
Free Cash Flow	$	12,580	$	(25,363)

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 expenditure.

For the nine months ended September 30, 2023, net cash provided by operating activities increased by $29.5 million compared to net cash used in operating activities for the nine months ended September 30, 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 and timing of payments.

For the nine months ended September 30, 2023, Free Cash Flow increased by $37.9 million compared to Free Cash Flow for the nine months ended September 30, 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 and timing of payments.

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 the potential impact of student loan repayments in the U.S., 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. 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.

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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 on our results of operations, 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. We continue to monitor vendor and manufacturer shipping times and other potential disruptions in our supply chain and implement mitigation plans as necessary.

Foreign Currency Rate Fluctuations

Our international operations have provided and are expected to continue to provide a significant portion of our Company’s net sales and operating income. As a result, our Company’s net sales and operating income will continue to be affected by changes in the U.S. dollar against international currencies, but predominantly against the Australian dollar. In order to provide a framework for assessing the performance of our underlying business, excluding the effects of foreign currency rate fluctuations, we compare the percent change in the results from one period to another period in this Quarterly Report on Form 10-Q using a constant currency methodology wherein current and comparative prior period results for our operations reporting in currencies other 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.

	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2023		2022		2023		2022
Net sales	$	140,833	$	155,822	$	397,346	$	462,612
Cost of sales	62,865		68,965		173,522		204,112
Gross profit	77,968		86,857		223,824		258,500
Operating expenses:
Selling	36,660		41,450		106,998		127,068
Marketing	18,511		16,532		51,642		51,301
General and administrative	24,622		26,133		74,681		76,614
Goodwill impairment	68,524		—		68,524		—
Total operating expenses	148,317		84,115		301,845		254,983
(Loss) income from operations	(70,349)		2,742		(78,021)		3,517
Other expense, net:
Interest expense	(2,798)		(1,835)		(8,490)		(4,487)
Other expense	(541)		(923)		(2,325)		(2,035)
Total other expense, net	(3,339)		(2,758)		(10,815)		(6,522)
Loss before income taxes	(73,688)		(16)		(88,836)		(3,005)
Benefit from (provision for) income taxes	3,278		(98)		3,833		204
Net loss	$	(70,410)	$	(114)	$	(85,003)	$	(2,801)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Net sales	100	%	100	%	100	%	100	%
Cost of sales	45	%	44	%	44	%	44	%
Gross profit	55%		56%		56%		56%
Operating expenses:
Selling	26%		27%		27%		27%
Marketing	13%		11%		13%		11%
General and administrative	17	%	17	%	19	%	17	%
Goodwill impairment	49	%	—	%	17	%	—	%
Total operating expenses	105	%	54	%	76	%	55	%
(Loss) income from operations	(50%)		2%		(20%)		1%
Other expense, net:
Interest expense	(2%)		(1%)		(2%)		(1%)
Other expense	—	%	(1	%)	(1	%)	—	%
Total other expense, net	(2	%)	(2	%)	(3	%)	(1	%)
Loss before income taxes	(52	%)	—	%	(22	%)	(1	%)
Benefit from (provision for) income taxes	2	%	—	%	1	%	—	%
Net loss	(50%)		—%		(21%)		(1%)

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Comparison of the Three Months Ended September 30, 2023 and 2022

Net Sales

	Three Months Ended September 30,
(in thousands)	2023		2022
Net sales	$	140,833	$	155,822

Net sales decreased by $15.0 million, or 10%, for the three months ended September 30, 2023 compared to the same period in 2022. The decrease in net sales was primarily driven by an 6% decrease in the number of orders, which drove a decrease in net sales of $8.1 million, and a decrease in our average order value of 5%, from $85 in 2022 to $81 in 2023, which drove a decrease in net sales of $6.9 million. The decreases in our 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 the three months ended September 30, 2023 would have decreased 8% and 2%, respectively.

Cost of Sales

	Three Months Ended September 30,
(dollars in thousands)	2023			2022
Cost of sales	$	62,865		$	68,965
Percent of net sales	45		%	44		%

Cost of sales decreased by $6.1 million, or 9%, for the three months ended September 30, 2023 compared to the same period in 2022. This decrease was primarily driven by the 10% reduction in net sales for the three months ended September 30, 2023 and lower inbound air freight costs, partially offset by a higher return rate. The increase in cost of sales as a percentage of net sales was primarily due to an approximately 150 basis point impact from targeted discounting in Culture Kings Australia and a higher merchandise return rate, partially offset by lower air freight expense.

Gross Profit

	Three Months Ended September 30,
(dollars in thousands)	2023			2022
Gross profit	$	77,968		$	86,857
Gross margin	55		%	56		%

Gross profit decreased by $8.9 million, or 10%, for the three months ended September 30, 2023 compared to the same period in 2022. This decrease was primarily due to the 10% reduction in net sales for the three months ended September 30, 2023 and a higher return rate, partially offset by lower inbound air freight costs. Gross margin decreased due to an approximately 150 basis point impact from targeted discounting in Culture Kings Australia and a higher merchandise return rate; partially offset by lower air freight expense.

Selling Expenses

	Three Months Ended September 30,
(dollars in thousands)	2023			2022
Selling	$	36,660		$	41,450
Percent of net sales	26		%	27		%

Selling expenses decreased by $4.8 million, or 12%, for the three months ended September 30, 2023 compared to the same period in 2022. This decrease was driven by the 10% reduction in net sales for the three months ended September 30, 2023, and improvements in operational efficiencies in distribution, fulfillment and outbound shipping. The decrease in selling expenses as a percentage of net sales was primarily due to operational efficiencies in distribution, fulfillment and outbound shipping and the impact, in the three months ended September 30, 2022, of costs related to the Culture Kings Las Vegas store that had not yet opened, partially offset by lower average order value in the three months ended September 30, 2023.

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Marketing Expenses

	Three Months Ended September 30,
(dollars in thousands)	2023			2022
Marketing	$	18,511		$	16,532
Percent of net sales	13		%	11		%

Marketing expenses increased by $2.0 million, or 12%, for the three months ended September 30, 2023 compared to the same period in 2022. The increase 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 sales volume in the third quarter compared to last year.

General and Administrative Expenses

	Three Months Ended September 30,
(dollars in thousands)	2023			2022
General and administrative	$	24,622		$	26,133
Percent of net sales	17		%	17		%

General and administrative expenses decreased by $1.5 million, or 6%, for the three months ended September 30, 2023 compared to the same period in 2022. The decrease was driven by a $1.4 million decrease in salaries and benefits, a $0.5 million decrease in insurance costs and a $0.5 million decrease in intangible amortization. Partially offsetting these decreases was a $1.0 million increase in professional fees.

Goodwill Impairment

	Three Months Ended September 30,
(dollars in thousands)	2023		2022
Goodwill impairment	$	68,524	$	—
Percent of net sales