What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-03-09 compared with 2022-03-01 · 219 added, 195 removed, 381 unchanged (52% of the section changed)

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Our fiscal year ends on December 31.

Overview and Recent Highlights

Established in 2018, a.k.a.

Brands is a brand accelerator of direct-to-consumer fashion brands for the next generation.

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.

Brands leverages its next-generation retail platform to help each brand accelerate its growth, scale in new markets and enhance its profitability.

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 shop for fashion on social media.

We have since built a portfolio of five high-growth digital brands with distinct fashion offerings and consumer followings:

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.

Princess Polly has successfully expanded in the U.S., growing U.S.

sales by 80% in 2021 as compared to 2020.

• In August 2019, we acquired a controlling interest in Petal & Pup, an Australian fashion brand offering an assortment of trendy, flattering and feminine styles and dresses for special occasions.

We acquired the remaining noncontrolling interest in tandem with our IPO.

The brand targets female customers typically in their 20s or 30s, with more than half of customers in the 18-34-year-old age bracket.

Since joining a.k.a., Petal & Pup has successfully expanded in the U.S., which was the brand’s fastest growing market in 2021.

• In December 2019, we acquired U.S.-based Rebdolls.

The brand offers apparel with a full range of sizes from 0 to 32 and emphasizes size inclusivity.

The typical customer is a diverse woman between the ages of 18 and 34.

• In March 2021, we acquired a controlling interest in Culture Kings, an Australia-based premium online retailer of streetwear apparel, footwear, headwear and accessories.

• 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.

We acquired the remaining noncontrolling interest in tandem with our IPO.

The brand targets male consumers between the ages of 18 and 35 who are fashion conscious, highly social and digitally focused.

• In October 2021, we acquired mnml, an LA-based streetwear brand that offers competitively priced on-trend wardrobe staples.

• 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, Petal & Pup and Rebdolls from before 2020, information presented hereafter on an “across a.k.a.

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, but subsequently sold the brand back to its original owner in February 2023.

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

Across a.k.a.

Brands for 2021, we attracted over 3.7 million active customers (a 61% increase from 2020), received 7.0 million orders (a 48% increase from 2020) and increased average order value from $81 to $87 (an approximately 7% increase from 2020).

In addition, our brands demonstrated rapid growth and strong profitability and free cash flow generation.

Our annual financial results discussed below represent the consolidated results of Princess Polly, Petal & Pup and Rebdolls for all of 2021 and 2020, and include nine months of Culture Kings operations from the date of their acquisition, March 31, 2021, as well as over two months of mnml’s operations from the date of their acquisition, October 14, 2021.

Results for 2019, as compared to 2020, include Princess Polly for all twelve months and Petal & Pup and Rebdolls from the dates of acquisition, August 2019 and December 2019, respectively.

Brands for 2022, we attracted over 3.8 million active customers (a 3% increase from 2021), received 7.4 million orders (a 14% increase from 2021) and had an average order value of $82.

Initial Public Offering

In September 2021, we completed an initial public offering (the “IPO”), in which we issued and sold 10,000,000 shares of newly authorized common stock for $11.00 per share for net proceeds of $95.7 million, after deducting underwriting discounts and commissions of $6.6 million, and offering costs of $7.7 million.

Goodwill Impairment

As part of the annual goodwill impairment test conducted in the fourth quarter of 2022, the Company determined that the carrying value of its 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.

As of December 31, 2022, $60.0 million of goodwill related to Culture Kings remained, 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 changing customer preferences towards 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.

Key Operating and Financial Metrics

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Net income (loss) margin

(29) % (1) % 7%

Adjusted EBITDA (in thousands)

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Adjusted EBITDA, Adjusted EBITDA margin and free cash flow are non-GAAP measures.

See “Non-GAAP Financial Measures” for information regarding our use of Adjusted EBITDA, Adjusted EBITDA margin and free cash flow and their reconciliation to net income, net income margin and net cash provided by operating activities, respectively.

See “Non-GAAP Financial Measures” for information regarding our use of Adjusted EBITDA, Adjusted EBITDA margin and free cash flow and their reconciliation to net income (loss), net income (loss) margin and net cash provided by operating activities, respectively.

Non-GAAP Financial Measures

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Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures.

Adjusted EBITDA

Adjusted EBITDA 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;

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, which we believe is the most directly comparable GAAP financial measure, including:

• Adjusted EBITDA does not reflect the interest income or expense we incur;

• Adjusted EBITDA does not reflect the provision for or benefit from income tax;

• Adjusted EBITDA does not reflect any attribution of costs to our operations related to our investments and capital expenditures through depreciation and amortization charges;

• Adjusted EBITDA does not reflect any transaction or debt extinguishment costs;

• Adjusted EBITDA does not reflect any amortization expense associated with fair value adjustments from purchase price accounting, including intangibles or inventory step-up;

• Adjusted EBITDA does not reflect the cost of compensation we provide to our employees in the form of equity awards.

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

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

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

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

Year Ended December 31,

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Depreciation and amortization expense 20,348 16,710 6,762

Inventory step-up amortization expense 15,908 — —

Equity-based compensation expense 6,730 8,043 1,380

Inventory step-up amortization expense 707 15,908 —

Distribution center relocation costs 1,302 — —

Transaction costs 140 5,387 —

Severance 306 — —

Goodwill impairment 173,786 — —

Sales tax penalties 592 — —

Adjusted EBITDA $ 31,872 $ 62,431 $ 30,282

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Free Cash Flow

We calculate free cash flow as net cash provided by operating activities reduced by purchases of property and equipment.

We calculate Free Cash Flow as net cash (used in) provided by operating activities reduced by purchases of property and equipment.

Management believes Free Cash Flow is a useful measure of liquidity and an additional basis for assessing our ability to generate cash.

There are limitations related to the use of free cash flow as an analytical tool, including:

other companies may calculate free cash flow differently, which reduces its usefulness as a comparative measure;

and free cash flow does not reflect our future contractual commitments nor does it represent the total residual cash flow for a given period.

The following table presents a reconciliation of free cash flow to net cash provided by operating activities, the most directly comparable financial measure prepared in accordance with GAAP:

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) provided by operating activities, the most directly comparable financial measure prepared in accordance with GAAP:

Year Ended December 31,

2022 2021 2020

Net cash provided by operating activities

Net cash (used in) provided by operating activities

$ (319) $ 23,968 $ 21,712

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While we have strong long-term relationships with our manufacturers, we usually pay for our inventory in advance.

This supports our test and repeat buying model and helps with our ability to move new designs we receive from our suppliers into production and then into inventory in as few as 30-45 days.

This supports our test and repeat buying model and helps with our ability to move new designs we receive from our suppliers into production and then into inventory in as few as 30 to 45 days.

Our operating model requires a low level of capital expenditure.

For the twelve months ended December 31, 2022, Free Cash Flow decreased by $(36.3) million compared to Free Cash Flow for the twelve months ended December 31, 2021.

This was attributable primarily to increased capital expenditures, the timing of payments and a decrease in net income after adjusting for non-cash items, partially offset by a smaller build of inventory compared to the prior year.

The increased capital expenditures was driven by the build-out of Culture Kings’ new store in Las Vegas.

Factors Affecting Our Performance

Macroeconomic Environment

The macroeconomic environment in which we operate has been, and we anticipate will continue to be, pressured by events and conditions worldwide.

Inflationary pressures on 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 impacts of the COVID-19 pandemic in Australia have pressured our net sales.

Additionally, lower return on marketing investments, 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 increased inventories and impairment to the goodwill associated with the Culture Kings and Rebdolls reporting units.

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;

• disruption to the supply chain affecting production, distribution and other logistical issues, including port closures and shipping backlogs;

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

• 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 and increased inventories.

Brand Awareness

Our ability to promote our brands and maintain brand awareness and loyalty is critical to our success.

We have a significant opportunity to continue to grow awareness and loyalty to our brands through word of mouth, brand marketing and performance marketing.

We have leveraged performance marketing to deliver our growth.

We plan to continue to invest in performance marketing and increase our investment in brand awareness across our brands to drive our future growth.

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.

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To continue to grow our business profitably, we intend to acquire new customers and retain our existing customers at a reasonable cost.

Our methods to acquire customers have evolved in response to changes in shopping behaviors and costs to advertise, but we have continued the trend of efficiently and effectively acquiring customers as initially established by each of our brands prior to their acquisitions.

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.

Failure to continue attracting customers efficiently and profitably would adversely impact our profitability and operating results.

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We monitor retention across our entire customer base.

While we did not have control over all five brands until 2021, each of our brands have always aimed to attract and convert visitors into active customers and foster relationships that drive repeat purchases.

Despite changes in customer shopping behaviors, impacted by the COVID-19 pandemic and other factors, we have maintained high rates of customer retention and repeat purchases.

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

With the onset of the COVID-19 pandemic, the ability to purchase through eCommerce channels became increasingly important to consumers, as many businesses, including brick-and-mortar retail stores, were ordered to close and people were required to stay at home.

While demand for our products improved during this time period, the extent of this heightened demand remains uncertain.

We believe the pandemic has accelerated the awareness of our brands and a shift in purchasing decisions that will continue to drive future growth.

As in-store shopping begins to regain momentum across the world, the growing awareness of our brand and future sales growth may begin to slow.

Certain of our manufacturers experienced delays and shut-downs due to the COVID-19 pandemic, which caused delays on shipments of products.

In order to manage the impact of these disruptions and meet our customers’ expectations, we increased our use of more expensive air freight during portions of 2020 and 2021, which increased our cost of goods sold.

In addition, the ongoing impact of the pandemic is continuing to result in reduced cargo capacity on airplanes, and as a result we expect increased demand and prices for shipping services to continue.

As a result, we expect to continue to make increased use of more expensive air freight, which will continue to result in increased cost of goods.

While we have been able to offset increased shipping prices to some extent to date, there can be no assurance that we will continue to be able to do so, or that prices for shipping services will not increase to a level that does not permit us to do so.

Other impacts of the pandemic on us have included, and in the future could include:

• volatility in demand for our products as a result of, among other things, the inability of customers to purchase our products due to financial hardship, unemployment, illness or fear of exposure to COVID-19, shifts in demand away from consumer discretionary products and reduced options for marketing and promotion of products or other restrictions in connection with the COVID-19 pandemic;

• cancellations of in-person events, including weddings and festivals, causing a reduction in demand for certain product categories;

• increased materials and procurement costs as a result of scarcity or increased prices of commodities and raw materials, and periods of reduced manufacturing capacity at our suppliers in response to the pandemic;

• increased sea and air freight shipping costs as a result of unprecedented levels of demand, reduced capacity, scrutiny or embargoing of goods produced in infected areas, port closures and other transportation challenges;

• closures or other restrictions that limit capacity at our distribution facilities and restrict our employees’ ability to perform necessary business functions, including operations necessary for the design, development, production, sale, marketing, delivery and support of our products;

• failure of our suppliers and other third parties on which we rely to meet their obligations to us in a timely manner or at all, as a result of their own financial or operational difficulties, including business failure or insolvency, the inability to access financing in the credit and capital markets on satisfactory terms or at all, and inability to collect existing receivables.

All of these factors have contributed to, and we expect will continue to contribute to, reduced orders, increased product returns, increased order cancellations, lower revenues, higher discounts, increased inventories, decreased value of inventories, reduced sales through Culture Kings experiential stores and lower gross margins.

In fiscal year 2022, the COVID-19 pandemic continued to impact our business and results of operations.

In the first half of 2022, certain of our supply chain partners, including third party manufacturers, logistics providers and other vendors experienced delays and shut-downs due to the COVID-19 pandemic, which delayed shipments of products and increased our cost of goods due to more expensive air freight rates.

In the second half of 2022, we started to experience some reductions in air freight costs, the impact of which we expect will 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

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General and administrative 102,700 88,816 28,077

Goodwill impairment 173,786 — —

Total operating expenses 509,286 291,281 104,261

Income from operations 16,383 22,140 2,593

Income (loss) from operations (172,039) 16,383 22,140

Other expense, net:

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

Other expense, net (1,213) (156) 133

Other expense (1,532) (1,213) (156)

Total other expense, net

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Income (loss) before income taxes (180,614) (5,239) 21,655

Provision for income tax (852) (6,850) (1,012)

Benefit from (provision for) income tax 3,917 (852) (6,850)

Net income (loss) (176,697) (6,091) 14,805

Net loss (income) attributable to noncontrolling interests

123 (471) (48)

Net income (loss) attributable to a.k.a.

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27 % 26 % 27 %

11 % 10 % 8 %

General and administrative

17 % 16 % 13 %

Goodwill impairment 28 % — % — %

Total operating expenses

83 % 52 % 48 %

Income from operations

Income (loss) from operations

(28 %) 3 % 10 %

Other expense, net:

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

Other expense, net — % —% —%

Other expense — % —% —%

Total other expense, net

(1 %) (4%) —%

Income (loss) before income taxes

(30 %) (1 %) 10 %

Provision for income tax — % (3%) (1%)

Benefit from (provision for) income tax 1 % —% (3%)

Net income (loss) (29 %) (1 %) 7 %

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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.

Additionally, an increase in our average order value of 15%, from $75 in 2020 to $86 in 2021 also contributed $32.2 million to the overall increase in net sales.

The increase in the number of orders was largely driven by the acquisition of Culture Kings on March 31, 2021 and growth of Princess Polly in the U.S.

The increase in our average order value was primarily due to the implementation of targeted price increases at Princess Polly and Petal & Pup.

On a constant currency basis, net sales and average order value for 2021 would have increased 154% and 13%, respectively.

Net sales for 2021 include the operations of Culture Kings and mnml, or $208.0 million of net sales, from the date of their acquisitions, March 31, 2021 and October 14, 2021, respectively.

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

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Cost of sales increased by $20.0 million, or 8%, in 2022 compared to 2021.

This increase was primarily driven by a 126% increase in the total number of orders in 2021, as compared to 2020, which includes the impact of the operations of Culture Kings and mnml, or $114.7 million of cost of sales, from the date of their acquisitions, March 31, 2021 and October 14, 2021, respectively.

The increase in cost of sales as a percentage of net sales was primarily due to the $15.9 million impact from the fair value increase in inventory acquired in the Culture Kings and mnml acquisitions, which will disproportionately increase cost of sales until the inventory is completely sold through, and higher air freight expense.

As of December 31, 2021, $0.7 million of impact from the fair value increase in inventory acquired in the mnml acquisition remains in inventory and will impact cost of sales in the first quarter of 2022.

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 date of their 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.

Years Ended December 31,

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This increase was primarily driven by the significant increase in net sales.

The decrease in gross margin was primarily due to the $15.9 million impact from the fair value increase in inventory acquired in the Culture Kings and mnml acquisitions, which disproportionately increases cost of sales until it is completely sold through, higher air freight expense and inclusion of Culture Kings, partially offset by the implementation of targeted price increases at Princess Polly and Petal & Pup.

Culture Kings has a lower mix of exclusive products compared to our overall portfolio.

Exclusive products have a higher gross margin compared to other products we sell.

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.

Selling Expenses

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Selling expenses increased by $21.7 million, or 15%, in 2022 compared to 2021.

This increase was driven by the 126% increase in the number of orders shipped in 2021 compared to 2020, which includes the operations of Culture Kings and mnml, or $48.0 million of selling expenses, from the date of their acquisitions, March 31, 2021 and October 14, 2021, respectively.

The decrease in selling expenses as a percentage of net sales was due to a higher percentage of Culture Kings’ sales from customers in Australia, where our products ship at a cheaper rate.

Shipping to customers in the U.S., whether from Australia or from a facility in the U.S., is more expensive on average due to distance or shipping upgrades.

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 date of their 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

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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 $23.6 million of marketing expenses, from the date of their acquisitions, March 31, 2021 and October 14, 2021, respectively, and increased marketing investment to acquire customers and retain existing customers to generate higher net sales.

The increase in marketing expenses as a percentage of net sales was primarily due to Culture Kings’ higher rate of advertising spend as they tested new marketing opportunities, as well as incremental holiday advertising spend across our brands.

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 date of their 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

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General and administrative expenses increased by $13.9 million, or 16%, in 2022 compared to 2021.

The increase was primarily driven by the inclusion of the operations of Culture Kings and mnml, or $20.3 million of general and administrative expenses, from the date of their acquisitions, March 31, 2021 and October 14, 2021, respectively.

Additionally, there was a $15.4 million increase in salaries and related benefits and equity-based compensation expense related to increases in our headcount across functions to support business growth, $5.4 million in transaction costs and $5.3 million in additional professional service fees.

Finally, increases in D&O insurance and depreciation contributed to the increase.

The increase in general and administrative expenses as a percentage of net sales resulted primarily from additional salaries and related benefits and equity-based compensation expense from corporate hires as well as additional professional service fees.

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 date of their 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.

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, 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

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Percent of net sales

Other expense, net increased by $21.1 million in 2021 compared to 2020 primarily due to the loss on extinguishment of debt resulting from the early payment and termination of our previous term debt, revolver and senior secured notes, as well as an increase in interest expense related to the senior secured notes, prior to their repayment, and the new term loan.

Provision for income tax

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,

Provision for income tax $ (852) $ (6,850)

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

Percent of net sales 1 % — %

Effective tax rate 2 % 16 %

Provision for income tax decreased by $6.0 million, or 88% in 2021 compared to 2020.

This decrease was due to a reduction in our income before income taxes, which was driven primarily by the loss on extinguishment of debt resulting from the early payment and termination of our previous term debt, revolver and senior secured notes, as well as an increase in interest expense related to such debt prior to its repayment.

The change in effective tax rate from 2020 is primarily due to the impact of permanent differences, the most significant of which was non-deductible stock-based compensation related to incentive units.

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.

Comparison of the Years Ended December 31, 2021 and 2020

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Net sales increased by $346.3 million, or 160%, in 2021 compared to 2020.

The overall increase in net sales was primarily driven by a 75% increase in the number of orders we processed in 2020 compared to 2019, driving an increase in net sales of $92.5 million, of which $0.7 million related to a slightly higher order frequency from our active customers.

Additionally, an increase in our average order value of 21%, from $62 in 2019 to $75 in 2020 drove a $21.0 million increase in net sales.

The increase in the number of orders was largely driven by the growth of Princess Polly in the U.S.

which launched in late-2019, as well as the acquisition of Petal & Pup and Rebdolls.

The higher order frequency from our active customers was due to increasing brand awareness and the impact of the COVID-19 pandemic driving customers to our website.

The increase in our average order value was due to the implementation of targeted price increases.

Fiscal 2020 includes a full year of operations of Petal & Pup and Rebdolls, or $26.6 million and $4.4 million of net sales, respectively, while 2019 includes $9.5 million and $0.1 million of net sales for Petal & Pup and Rebdolls from their dates of acquisition, August 2019 and December 2019, respectively.

The overall increase in net sales was primarily driven by a 126% increase in the number of orders we processed in 2021 compared to 2020, driving an increase in net sales of $339.0 million.

Additionally, an increase in our average order value of 15%, from $75 in 2020 to $86 in 2021 also contributed $32.2 million to the overall increase in net sales.

The increase in the number of orders was largely driven by the acquisition of Culture Kings on March 31, 2021 and growth of Princess Polly in the U.S.

The increase in our average order value was primarily due to the implementation of targeted price increases at Princess Polly and Petal & Pup.

On a constant currency basis, net sales and average order value for 2021 would have increased 154% and 13%, respectively.

Net sales for 2021 include the operations of Culture Kings and mnml, or $208.0 million of net sales, from the date of their acquisitions, March 31, 2021 and October 14, 2021, respectively.

Cost of Sales

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Cost of sales increased by $165.0 million, or 184%, in 2021 compared to 2020.

This increase was primarily driven by a 75% increase in the total number of orders in 2020, as compared to 2019.

The decrease in cost of sales as a percentage of net sales was due to the implementation of targeted price increases and a higher mix of exclusive offerings which have a higher gross margin rate than other items we sell.

The targeted price increases drove a 21% increase in our average order value.

Sales of exclusive offerings, as a percent of sales, grew by 5% primarily due to the focus on growing Princess Polly’s private label offerings.

Fiscal 2020 includes a full year of operations of Petal & Pup and Rebdolls, or $10.3 million and $1.9 million of cost of sales, respectively, while 2019 includes $3.7 million and $0.1 million of cost of sales for Petal & Pup and Rebdolls from their dates of acquisition, August 2019 and December 2019, respectively.

Years Ended December 31,

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Gross profit increased by $181.3 million, or 143%, in 2021 compared to 2020.

This increase was primarily driven by a significant increase in net sales and an improvement in our gross margin.

The increase in gross margin was due to the implementation of targeted price increases and a higher mix of exclusive offerings which have a higher gross margin rate than other items we sell.

The targeted price increases drove a 21% increase in our average order value.

Sales of exclusive offerings, as a percent of sales, grew by 5% primarily due to the focus on growing Princess Polly’s private label offerings.

Fiscal 2020 includes a full year of operations of Petal & Pup and Rebdolls, or $16.3 million and $2.4 million of gross profit, respectively, while 2019 only includes $5.8 million and no gross profit for Petal & Pup and Rebdolls from their dates of acquisition, August 2019 and December 2019, respectively.

This increase was primarily driven by the significant increase in net sales.

Culture Kings has a lower mix of exclusive products compared to our overall portfolio.

Exclusive products have a higher gross margin compared to other products we sell.

Selling Expenses

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Selling expenses increased by $86.0 million, or 148%, in 2021 compared to 2020.

This increase was driven by the 75% increase in the number of orders shipped in 2020 compared to 2019.

As a percentage of net sales, selling expenses were flat in 2020 compared to 2019.

Fiscal 2020 includes a full year of operations of Petal & Pup and Rebdolls, or $6.6 million and $0.9 million of selling expenses, respectively, while 2019 only includes $2.3 million of selling expenses for Petal & Pup from its date of acquisition, August 2019.

Rebdolls had an insignificant amount of selling expenses in 2019 as it was acquired in December 2019.

The decrease in selling expenses as a percentage of net sales was due to a higher percentage of Culture Kings’ sales from customers in Australia, where our products ship at a cheaper rate.

Shipping to customers in the U.S., whether from Australia or from a facility in the U.S., is more expensive on average due to distance or shipping upgrades.

Marketing Expenses

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Marketing expenses increased by $40.2 million, or 225%, in 2021 compared to 2020.

The increase in marketing expenses in dollars and as a percentage of net sales was driven by increased marketing investment to acquire customers and retain existing customers to generate higher net sales, particularly in the U.S.

where we spent more to grow awareness of our brands.

Fiscal 2020 includes a full year of operations of Petal & Pup and Rebdolls, or $4.7 million and $0.6 million of marketing expenses, respectively, while 2019 only includes $1.3 million of marketing expenses for Petal & Pup from its date of acquisition, August 2019.

Rebdolls had an insignificant amount of marketing expenses in 2019 as it was acquired in December 2019.

General and Administrative Expenses

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General and administrative expenses increased by $60.7 million, or 216%, in 2021 compared to 2020.

The increase was primarily driven by a $6.4 million increase in salaries and related benefits and equity-based compensation expense related to increases in our headcount across functions to support business growth.

The decrease in general and administrative expenses as a percentage of net sales resulted primarily from an increase in efficiencies gained from our rapid sales growth in 2020.

Fiscal 2020 includes a full year of operations of Petal & Pup and Rebdolls, or $2.6 million and $1.2 million of general and administrative expenses, respectively, while 2019 only includes $1.5 million and $0.1 million of general and administrative expenses for Petal & Pup and Rebdolls from their dates of acquisition, August 2019 and December 2019, respectively.

Finally, increases in D&O insurance and depreciation contributed to the increase.

Other expense, net

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Other expense, net

$ (485) $ (139)

Interest expense $ (9,485) $ (329)

Loss on extinguishment of debt (10,924) —

Other expense (1,213) (156)

Total other expense, net $ (21,622) $ (485)

Percent of net sales

Provision for income tax

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Percent of net sales — % (3 %)

Provision for income tax increased by $5.8 million, or 577% in 2020 compared to 2019.

This increase was driven by an increase in our income before income taxes.

Effective tax rate 16 % 32 %

Provision for income tax decreased by $6.0 million, or 88% in 2021 compared to 2020.

Quarterly Results of Operations

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General and administrative 13,430 19,220 28,900 27,266 24,778 25,703 26,133 26,086

Goodwill impairment — — — — — — — 173,786

Total operating expenses 37,908 74,151 84,945 94,277 80,847 90,021 84,115 254,303

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Income (loss) before income taxes 2,557 3,128 (14,424) 3,500 2,178 (5,167) (16) (177,609)

Provision for income tax 30 (1,054) (3,375) (2,451) (767) (939) 4,331 (3,477)

Benefit from (provision for) income tax (767) (939) 4,331 (3,477) (653) 955 (98) 3,713

Net income (loss) 1,790 2,189 (10,093) 23 1,525 (4,212) (114) (173,896)

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General and administrative 20 % 13 % 18% 15% 17% 16% 17% 17%

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

Total operating expenses 55 % 50 % 53% 52% 55% 57% 54% 171%

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Income (loss) before income taxes 4 % 2 % (9 %) 2 % 1 % (3 %) — % (119 %)

Provision for income tax —% (2%) (5%) (3%) (1%) (1%) 3% (2%)

Benefit from (provision for) income tax (1%) (1%) 3% (2%) —% 1% —% 2%

Net income (loss) 3 % 1 % (6 %) — % 1 % (3 %) — % (117 %)

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Net Sales, Cost of Sales and Gross Profit

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

Historically, such as seen throughout 2021, net sales had generally increased sequentially quarter-to-quarter as we made acquisitions (Culture Kings on March 31, 2021 and mnml on October 14, 2021) and launched our brands in the U.S.

(Princess Polly, Petal & Pup and Culture Kings), all while successfully gaining and retaining customers.

Our quarterly cost of sales and gross profit have fluctuated quarter-to-quarter primarily due to the quarterly fluctuations in net sales, targeted price increases in late 2020 and the impact from the amortization of the fair value increases in inventory acquired in the Culture Kings and mnml acquisitions.

However, in 2022, our net sales were 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 impacts of the COVID-19 pandemic in Australia.

Our quarterly cost of sales and gross profit have fluctuated quarter-to-quarter primarily due to the quarterly fluctuations in net sales, mix of inventory between private label and third-party products and the impact from the amortization of the fair value increases in inventory acquired in the Culture Kings and mnml acquisitions.

Operating Expenses

Selling expenses have generally increased sequentially quarter-to-quarter primarily due to an increase in shipping and fulfillment costs to support the increase in number of orders, as well as increased labor rates in fulfillment.

Marketing expenses have generally increased sequentially quarter-to-quarter as we have continued to scale our marketing efforts together with the growth of our business.

General and administrative expenses have generally increased sequentially quarter-to-quarter as we have continued to increase our headcount to support business growth.

In the third quarter of 2021, there were certain one-time stock-based compensation expenses related to the IPO.

We typically achieve our largest quarterly sales in the fourth fiscal quarter.

Selling expenses have fluctuated quarter-to-quarter primarily due to fluctuations in shipping and fulfillment costs.

Drivers of these fluctuations include the Company’s 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 timing of transaction costs, increases in our headcount to support business growth and certain one-time stock-based compensation expenses related to the IPO that occurred in the third quarter of 2021.

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 2021, our net sales in the first, second, third and fourth quarters represented 12%, 27%, 29% and 32%, respectively, of our total net sales for the year.

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.

Sales are typically higher during the months of November and December driven by higher holiday season spending.

Quarterly Adjusted EBITDA and Adjusted EBITDA Margin

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Depreciation and amortization expense 2,566 4,535 4,235 5,374 5,217 5,590 4,566 4,975

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

Equity-based compensation expense 523 609 5,582 1,329 1,368 1,494 1,586 2,282

Inventory step-up amortization expense — 6,266 5,985 3,657 707 — — —

Distribution center relocation costs — — — — — 1,291 12 —

Transaction costs 2,557 736 1,580 514 11 90 39 —

Severance — — — — — — 291 15

Goodwill impairment — — — — — — — 173,786

Sales tax penalties — — — — — — — 591

Adjusted EBITDA $ 8,326 $ 19,429 $ 18,547 $ 16,129 $ 10,652 $ 5,891 $ 9,236 $ 6,093

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Liquidity and Capital Resources

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

As of December 31, 2021, our principal sources of liquidity were cash and cash equivalents totaling $38.8 million.

As of December 31, 2022, our principal sources of liquidity were cash and cash equivalents totaling $46.3 million, our revolving line of credit and our term loan accordion provision.

Our cash equivalents primarily consist of money market funds.

As of December 31, 2022, most of our cash was held for working capital purposes.

We believe that our existing cash, together with cash generated from ongoing operations and available borrowing capacity under our line of credit, will be sufficient to meet our anticipated cash needs for the next 12 months.

We had 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 line of credit or raise additional funds at any time through equity, equity-linked or debt financing arrangements.

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 Facilities

On March 31, 2021, we entered into senior secured credit facilities with syndicated lenders and an affiliate of Fortress Credit Corp as administrative agent that provided us with up to $25.0 million aggregate principal in revolver borrowings and a $125 million senior secured term loan facility (the “Fortress credit facilities”) that we used in financing our acquisition of Culture Kings.

The $125 million senior term loan required us to make amortized quarterly payments equal to 0.75% of the original principal amounts, for an annual aggregate amount of 3.0%.

Borrowings under the credit agreement accrued interest, at the option of the borrower, at an adjusted LIBOR plus 7.5% or ABR plus 6.5%, subject to adjustment based on achieving certain total net secured leverage ratios.

In connection with the IPO, we entered into a new senior secured credit facility inclusive of a $100 million term loan and a $50 million revolving line of credit, with an option of up to $50 million in additional term loan through an accordion provision.

We used borrowings under this new credit facility, together with a portion of the proceeds from the IPO, to repay the Fortress credit facilities in full.

The $100 million term loan requires us to make amortized annual payments of 5.0% during the first and second years, 7.5% during the third and fourth years and 10.0% during the fifth year with the balance of the loan due at maturity.

Senior Secured Credit Facility

In connection with the IPO, we entered into a senior secured credit facility inclusive of a $100.0 million term loan and a $50.0 million revolving line of credit, with an option of up to $50.0 million in additional term loan through an accordion provision.

We used borrowings under this credit facility, together with a portion of the proceeds from the IPO, to repay the Fortress Credit Facilities in full.

As of December 31, 2022, the Company owed a combined $105.2 million in term loan and accordion borrowings, as well as $40.0 million borrowed under the revolving line of credit.

The term loan requires us to make amortized annual payments of 5.0% during the first and second years, 7.5% during the third and fourth years and 10.0% during the fifth year with the balance of the loan due at maturity.

Borrowings under the term loan accrue interest at a benchmark rate plus an applicable margin dependent upon our net leverage ratio.

The $50 million revolving line of credit accrues interest at a benchmark rate plus an applicable margin dependent upon our net leverage ratio.

The revolving line of credit accrues interest at a benchmark rate plus an applicable margin dependent upon our net leverage ratio.

The highest interest rates under the agreement for both the term loan and revolving line of credit occur at a net leverage ratio of greater than 2.75x, yielding an interest rate of a benchmark rate plus 3.25%.

The accordion provision allows us to borrow additional amounts of term loan at terms to be agreed upon at the time of issuance, but on substantially the same basis as the original term loan.

Principal payments of our term loan and accordion for the year ending December 31, 2022 are anticipated to total $5.6 million.

As part of our entering into the new senior secured credit facilities, we are subject to certain financial covenant ratios beginning with the fiscal quarter ended December 31, 2021, and certain annual mandatory prepayment terms based on excess cash flows, as defined by the credit agreement, based on our net leverage ratio for years beginning with the fiscal year ending December 31, 2022.

As of December 31, 2022, principal payments of our term loan and accordion for the next twelve months are anticipated to total $5.6 million.

As part of our entering into the 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 by the credit agreement, based on our net leverage ratio for years beginning with the fiscal year ending December 31, 2022.

If we are unable to comply with certain financial covenant ratios and terms requiring mandatory prepayment based on a percentage of excess cash flows, our long-term liquidity position may be adversely impacted.

Furthermore, the variable interest rates associated with our new senior secured credit facilities could result in interest payments that are higher than anticipated.

Refer to Note 8 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information regarding our senior secured credit facilities.

Lines of Credit

On November 6, 2018, we entered into a line of credit with Commonwealth Bank of Australia in the amount of $7 million under the subsidiary Princess Polly Bidco Pty.

The line of credit was amended on August 1, 2019 to increase the facility amount to $15.6 million.

Borrowings under the credit agreement accrued an interest rate of AU Screen Rate (ASX) + 3.25% per annum.

Obligations under the credit agreement were secured by cash, inventory and other liquid assets.

As of December 31, 2020, the amount outstanding was $6.2 million.

The facility was repaid in full and terminated as of February 28, 2021.

On December 31, 2019, we entered into a line of credit with Bank of America in the amount of $0.5 million under the subsidiary Rebdoll, Inc.

The line of credit was guaranteed by Excelerate, L.P.

Borrowings under the credit agreement accrued an interest rate of LIBOR + 2.25%.

As of December 31, 2020, the amount outstanding was $0.2 million.

The outstanding borrowings were repaid in full and the line of credit was terminated as of February 28, 2021.

On October 25, 2019, we entered into a line of credit with Moneytech in the amount of $2.8 million under the subsidiary Petal & Pup Pty Ltd.

Borrowings under the credit agreement accrued an interest rate of 7.27%.

The line of credit was terminated in February 2021.

Furthermore, the variable interest rates associated with our senior secured credit facility could result in interest payments that are higher than anticipated.

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

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Most of our property, equipment and software have been purchased with cash.

One newly executed lease for a new Culture Kings store in Las Vegas will be material to our operations with a first year annual cash payment of approximately $1.7 million, paid in monthly installments beginning in November 2022, that increase by 3.0% each year through the tenth anniversary of the lease commencement.

As of December 31, 2022, our future minimum payments under non-cancelable operating leases totaled $48.9 million, with $8.3 million payable within 12 months.

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Additionally, we plan to incur capital expenditures of approximately $8.0 to $10.0 million in 2023.

This reflects the opening of the new Culture Kings store in Las Vegas in addition to investments in infrastructure and technology.

This reflects the investments in infrastructure and technology in addition to the opening of new stores.

Historical Cash Flows

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2022 2021 2020

Net cash provided by operating activities

Net cash (used in) provided by operating activities

$ (319) $ 23,968 $ 21,712

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33,260 269,850 1,240

Net Cash Provided by Operating Activities

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

Net Cash (Used In) Provided by Operating Activities

Cash (used in) provided by 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 2022, net cash provided by operating activities decreased $24.3 million.

This was attributable primarily to timing of payments and a decrease in net income after adjusting for non-cash items, partially offset by a lower build of inventory compared to the prior year.

In 2021, net cash provided by operating activities increased $2.3 million.

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and Australia markets.

In 2020, net cash provided by operating activities increased $21.2 million.

This was attributable to a $13.4 million increase in net income, a $5.7 million decrease in cash used for inventory and a $2.7 million decrease in cash used for prepaid expenses when compared to the prior year.

The decrease in cash used for inventory and prepaid expenses from 2019 to 2020 was due to the launch of the Princess Polly brand in the U.S.

in 2019, requiring buildup of inventory and securing warehouse space.

Net Cash Used in Investing Activities

Our primary investing activities have consisted of acquisitions to support our overall business growth and investments in our fulfillment centers and our internally developed software to support our infrastructure.

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 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.

In 2021, net cash used in investing activities increased $275.7 million.

This was attributable to the acquisition of Culture Kings in March 2021, the purchase of the Petal & Pup noncontrolling interest in September 2021 and the acquisition of mnml in October 2021.

In 2020, net cash used in investing activities decreased $19.4 million.

This was attributable to the decrease in cash used to acquire businesses, as in 2019, a.k.a.

acquired a controlling interest in Petal & Pup.

Net Cash Provided by Financing Activities

Our financing activities have historically consisted of cash proceeds received from the issuance of borrowings, cash used to pay down borrowings or cash received in exchange for partner units, and more recently, the sale of our common stock in the IPO.

Our financing activities have historically consisted of cash proceeds received from the issuance of borrowings, cash used to pay down borrowings, cash received in exchange for partner units and cash received from the sale of our common stock in the IPO.

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.

In 2021, net cash provided by financing activities increased $268.6 million.

This was primarily attributable to the proceeds received from debt issuances and the IPO, as well as proceeds from the issuance of partner units to acquire Culture Kings in March 2021.

These proceeds were partially offset by repayments of certain borrowings and, specifically related to the IPO, underwriters’ discounts and commissions.

In 2020, net cash provided by financing activities decreased $19.3 million.

This was attributable to a decrease of $21.7 million in proceeds from the issuance of partner units to fund the acquisition of Petal & Pup, partially offset by a $2.4 million increase in cash used to repay lines of credit.

These proceeds were partially offset by repayments of certain borrowings and, specifically related to the IPO, underwriters’ discounts and commission.

Critical Accounting Estimates

We believe that the following accounting estimates involve a high degree of judgment and complexity.

Refer to Note 2 to our consolidated financial statements as of and for the years ended December 31, 2021, 2020 and 2019, included elsewhere in this Annual Report on Form 10-K for a description of our significant accounting policies.

Refer to Note 2, “Significant Account 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.

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

Revenue is recognized upon shipment when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.

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.

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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.

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.

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.

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Any impairment would be measured as the difference between the asset group's carrying amount and its estimated fair value.

Significant judgment and estimates are required in assessing impairment of goodwill and intangible assets, including identifying whether events or changes in circumstances require an impairment assessment, estimating future cash flows and determining appropriate discount rates.

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.

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

As part of the annual goodwill impairment test conducted in the fourth quarter of 2022, the Company determined that the carrying value of its Culture Kings and Rebdolls reporting units exceeded their fair values as of October 31, 2022 and recorded a non-cash goodwill impairment charge of $173.8 million during the year ended December 31, 2022.

As of December 31, 2022, $60.0 million of goodwill related to Culture Kings remained, while the goodwill related to Rebdolls was fully impaired.

No goodwill or intangible asset impairment was recorded for the year ended December 31, 2021.

Additionally, as of the testing date, the estimated fair value of the mnml reporting unit exceeded the carrying value by 7% and the carrying value of the related goodwill was $30.0 million.

Income taxes are accounted for under the asset and liability method.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis