Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with the consolidated financial statements and related notes that are included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements based upon current plans, expectations and beliefs that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements because of various factors, including those set forth in the sections captioned “Risk Factors” and “Forward-Looking Statements” and in other parts of this Annual Report on Form 10-K. Our fiscal year ends on December 31.
Overview
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. 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, a Los Angeles-based streetwear brand that offers competitively priced on-trend wardrobe staples. The brand targets male consumers between the ages of 18 and 35.
While we have owned Princess Polly and Petal & Pup from before 2020, information presented hereafter on an “across a.k.a. Brands” basis assumes we also owned Culture Kings for all periods presented. We also owned Rebdolls for all periods shown, 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 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.
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Key Operating and Financial Metrics
Operating Metrics
We use the following metrics to assess the progress of our business, make decisions on where to allocate capital, time and technology investments and assess the near-term and longer-term performance of our business.
The following table sets forth our key operating metrics for each period presented.
Year Ended December 31,
(in millions, other than dollar figures)
2022 2021 2020
Active customers
3.8 3.7 1.4
Active customers across a.k.a. Brands (1)
3.8 3.7 2.3
Average order value
$ 82 $ 86 $ 75
Average order value across a.k.a. Brands (1)
$ 82 $ 87 $ 81
Number of orders
7.4 6.5 2.9
Number of orders across a.k.a. Brands (1)
7.4 7.0 4.7
(1) Includes the impact of Culture Kings as if we had owned it for all periods presented.
Active Customers
We view the number of active customers as a key indicator of our growth, the value proposition and consumer awareness of our brand, and their desire to purchase our products. In any particular period, we determine our number of active customers by counting the total number of unique customer accounts who have made at least one purchase in the preceding 12-month period, measured from the last date of such period.
Average Order Value
We define average order value as net sales in a given period divided by the total orders placed in that period. Average order value may fluctuate as we expand into new categories or geographies or as our assortment changes.
Key Financial Metrics
The following table sets forth our key GAAP and non-GAAP financial metrics for for each period presented:
Year Ended December 31,
2022 2021 2020
Gross margin
55 % 55 % 59%
Net income (loss) (in thousands)
$ (176,697) $ (6,091) $ 14,805
Net income (loss) margin
(29) % (1) % 7%
Adjusted EBITDA (in thousands)
$ 31,872 $ 62,431 $ 30,282
Adjusted EBITDA margin
5 % 11 % 14 %
Net cash provided by operating activities (in thousands)
$ (319) $ 23,968 $ 21,712
Free cash flow (in thousands)
$ (20,065) $ 16,234 $ 20,384
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 (loss), net income (loss) margin and net cash provided by operating activities, respectively.
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Non-GAAP Financial Measures
In addition to our results determined in accordance with GAAP, we monitor the following supplemental non-GAAP financial measures to evaluate our operating performance, identify trends, formulate financial projections and make strategic decisions on a consolidated basis. Accordingly, we believe that non-GAAP financial information, when taken collectively, may provide useful supplemental information to investors and others in understanding and evaluating our results of operations in the same manner as our management team. The non-GAAP financial measures are presented for supplemental informational purposes only. They should not be considered a substitute for financial information presented in accordance with GAAP, and may be different from similarly-titled non-GAAP measures used by other companies. A reconciliation is provided below for each non-GAAP financial measure to the most directly comparable financial measure stated in accordance with GAAP. Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures.
Adjusted EBITDA 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 (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; and
• the cost of compensation we provide to our employees in the form of equity awards.
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The following table reflects a reconciliation of Adjusted EBITDA to net income (loss) and Adjusted EBITDA Margin to net income (loss) margin, the most directly comparable financial measure prepared in accordance with GAAP:
Year Ended December 31,
In thousands 2022 2021 2020
Net income (loss) $ (176,697) $ (6,091) $ 14,805
Add (deduct):
Total other expense, net 8,575 21,622 485
Provision for income tax (3,917) 852 6,850
Depreciation and amortization expense 20,348 16,710 6,762
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
Net income (loss) margin (29) % (1) % 7 %
Adjusted EBITDA margin 5 % 11 % 14 %
Free Cash Flow
We calculate Free Cash Flow as net cash (used in) provided by operating activities reduced by purchases of property and equipment. Management believes Free Cash Flow is a useful measure of liquidity and an additional basis for assessing our ability to generate cash. There are limitations related to the use of Free Cash Flow as an analytical tool, including 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 (used in) provided by operating activities
$ (319) $ 23,968 $ 21,712
Less: purchases of property and equipment
(19,746) (7,734) (1,328)
Free cash flow
$ (20,065) $ 16,234 $ 20,384
Our Free Cash Flow has fluctuated over time primarily as a result of timing of inventory purchases to support our rapid growth. While we have strong long-term relationships with our manufacturers, we usually pay for our inventory in advance. This supports our test and repeat buying model and helps with our ability to move new designs we receive from our suppliers into production and then into inventory in as few as 30 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.
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Factors Affecting Our Performance
Macroeconomic Environment
The macroeconomic environment in which we operate has been, and we anticipate will continue to be, pressured by 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; 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 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, 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. 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 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.
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Foreign Currency Rate Fluctuations
Our international operations have provided and are expected to continue to provide a significant portion of our Company’s net sales and operating income. As a result, our Company’s net sales and operating income will continue to be affected by changes in the U.S. dollar against international currencies, but predominantly against the Australian dollar. In order to provide a framework for assessing the performance of our underlying business, excluding the effects of foreign currency rate fluctuations, we compare the percent change in the results from one period to another period in this Annual Report on Form 10-K using a constant currency methodology wherein current and comparative prior period results for our operations reporting in currencies other than U.S. dollars are converted into U.S. dollars at constant exchange rates (i.e., the rates in effect on December 31, 2021, which was the last day of our prior fiscal year) rather than the actual exchange rates in effect during the respective periods. Such disclosure throughout our Management’s Discussion and Analysis of Financial Condition and Results of Operations will be described as “on a constant currency basis.” Volatility in currency exchange rates may impact the results, including net sales and operating income, of the Company in the future.
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Results of Operations
The following tables set forth our results of operations for the periods presented and express the relationship of certain line items as a percentage of net sales for those periods. The period-to-period comparison of financial results is not necessarily indicative of future results.
Year Ended December 31,
In thousands 2022 2021 2020
Net sales $ 611,738 $ 562,191 $ 215,916
Cost of sales 274,491 254,527 89,515
Gross profit 337,247 307,664 126,401
Operating expenses:
Selling 166,070 144,345 58,313
Marketing 66,730 58,120 17,871
General and administrative 102,700 88,816 28,077
Goodwill impairment 173,786 — —
Total operating expenses 509,286 291,281 104,261
Income (loss) from operations (172,039) 16,383 22,140
Other expense, net:
Interest expense (7,043) (9,485) (329)
Loss on extinguishment of debt — (10,924) —
Other expense (1,532) (1,213) (156)
Total other expense, net
(8,575) (21,622) (485)
Income (loss) before income taxes (180,614) (5,239) 21,655
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)
Net income (loss) attributable to a.k.a. Brands Holding Corp. $ (176,697) $ (5,968) $ 14,334
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Year Ended December 31,
2022 2021 2020
Net sales
100 % 100 % 100 %
Cost of sales
45 % 45 % 41 %
Gross profit
55 % 55 % 59 %
Operating expenses:
Selling
27 % 26 % 27 %
Marketing
11 % 10 % 8 %
General and administrative
17 % 16 % 13 %
Goodwill impairment 28 % — % — %
Total operating expenses
83 % 52 % 48 %
Income (loss) from operations
(28 %) 3 % 10 %
Other expense, net:
Interest expense (1 %) (2%) —%
Loss on extinguishment of debt — % (2%) —%
Other expense — % —% —%
Total other expense, net
(1 %) (4%) —%
Income (loss) before income taxes
(30 %) (1 %) 10 %
Benefit from (provision for) income tax 1 % —% (3%)
Net income (loss) (29 %) (1 %) 7 %
Net loss (income) attributable to noncontrolling interests
— % — % — %
Net income (loss) attributable to a.k.a. Brands Holding Corp. (29 %) (1 %) 7 %
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Comparison of the Years Ended December 31, 2022 and 2021
Net Sales
Years Ended December 31,
2022 2021
Net sales
$ 611,738 $ 562,191
Net sales increased by $49.5 million, or 9%, in 2022 compared to 2021. The overall increase in net sales was primarily driven by a 14% increase in the number of orders we processed in 2022 compared to 2021, driving an increase in net sales of $76.0 million. A decrease in our average order value of 5%, from $86 in 2021 to $82 in 2022, partially offset the increase in net sales by $26.4 million. The increase in the number of orders was largely driven by the acquisition of Culture Kings on March 31, 2021, the acquisition of mnml in October of 2021 and growth of Princess Polly in the U.S. The decrease in our average order value was primarily due to the impact of foreign currency, higher return rates and incremental promotional activity. On a constant currency basis, net sales and average order value for 2022 would have increased 13% and been flat, respectively. Net sales for 2022 include the operations of Culture Kings and mnml, or $269.6 million of net sales, while 2021 includes the operations of Culture Kings and mnml, or $208.0 million of net sales, from the date of their acquisitions.
Cost of Sales
Years Ended December 31,
2022 2021
Cost of sales
$ 274,491 $ 254,527
Percent of net sales
45 % 45 %
Cost of sales increased by $20.0 million, or 8%, in 2022 compared to 2021. This increase was primarily driven by a 14% increase in the total number of orders in 2022, as compared to 2021, which includes the impact of the operations of Culture Kings and mnml, or $132.0 million of cost of sales, while 2021 includes the impact of the operations of Culture Kings, or $114.7 million of cost of sales, from the 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.
Gross Profit
Years Ended December 31,
2022 2021
Gross profit $ 337,247 $ 307,664
Gross margin 55 % 55 %
Gross profit increased by $29.6 million, or 10%, in 2022 compared to 2021. This increase was primarily driven by the significant increase in net sales. While gross margin was flat in 2022 compared to 2021, the impact of the fair value adjustment to inventory acquired in the Culture Kings acquisition of $15.9 million, included in 2021, was offset by a change in the mix of products sold due to the acquisition of Culture Kings, as Culture Kings inventory has lower average gross margins.
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Selling Expenses
Years Ended December 31,
2022 2021
Selling
$ 166,070 $ 144,345
Percent of net sales
27 % 26 %
Selling expenses increased by $21.7 million, or 15%, in 2022 compared to 2021. This increase was driven by the 14% increase in the number of orders shipped in 2022 compared to 2021, which includes the operations of Culture Kings and mnml, or $71.6 million of selling expenses, while 2021 includes the impact of the operations of Culture Kings and mnml, or $48.0 million of selling expenses, from the 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
Years Ended December 31,
2022 2021
Marketing
$ 66,730 $ 58,120
Percent of net sales
11 % 10 %
Marketing expenses increased by $8.6 million, or 15%, in 2022 compared to 2021. The increase in marketing expenses was driven by the inclusion of the operations of Culture Kings and mnml, or $31.4 million of marketing expenses, while 2021 includes the impact of the operations of Culture Kings and mnml, or $23.6 million of marketing expenses, from the 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
Years Ended December 31,
2022 2021
General and administrative $ 102,700 $ 88,816
Percent of net sales 17 % 16 %
General and administrative expenses increased by $13.9 million, or 16%, in 2022 compared to 2021. The increase was primarily driven by a $18.3 million increase in salaries and related benefits related to increases in our headcount across functions to support business growth and $3.7 million in additional insurance costs. Partially offsetting these increases was a $5.8 million decrease in professional fees, including transaction costs, and a $1.3 million decrease in equity-based compensation, due to vesting of performance-based incentive units upon the Company’s IPO in 2021. General and administrative expenses for 2022 include the operations of Culture Kings and mnml, or $32.8 million of general and administrative expenses, while 2021 includes the impact of the operations of Culture Kings and mnml, or $20.3 million of general and administrative expenses, from the 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,
2022 2021
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.
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Other expense, net
Years Ended December 31,
2022 2021
Other expense, net:
Interest expense $ (7,043) $ (9,485)
Loss on extinguishment of debt — (10,924)
Other expense (1,532) (1,213)
Total other expense, net
$ (8,575) $ (21,622)
Percent of net sales
(1) % (4) %
Other expense, net decreased by $13.0 million in 2022 compared to 2021 primarily due to the 2021 loss on extinguishment of debt resulting from the early payment and termination of our previous term debt, revolver and senior secured notes, as well as a decrease in interest expense in 2022 from more favorable rates related to borrowings under our senior secured credit facility compared to our previous term debt, revolver and senior secured notes in 2021.
Benefit from (Provision for) Income Tax
Years Ended December 31,
2022 2021
Benefit from (provision for) income tax $ 3,917 $ (852)
Percent of net sales 1 % — %
Effective tax rate 2 % 16 %
Benefit from (provision for) income tax changed by $4.8 million, or 560% in 2022 compared to 2021. This change was driven primarily by the finalization of Australia tax basis allocation pertaining to the inventory and intangibles included in the purchase of the Culture Kings noncontrolling interest, as well as an intra-entity transfer of certain intellectual property rights related to the Culture Kings’ brands to one of our subsidiaries in the U.S., aligning the ownership of these rights with our evolving business. The change in our effective tax rate is primarily driven by the impairment recognized on the goodwill recorded from the acquisitions of the Culture Kings and Rebdolls reporting units.
Comparison of the Years Ended December 31, 2021 and 2020
Net Sales
Years Ended December 31,
2021 2020
Net sales
$ 562,191 $ 215,916
Net sales increased by $346.3 million, or 160%, in 2021 compared to 2020. The overall increase in net sales was primarily driven by a 126% increase in the number of orders we processed in 2021 compared to 2020, driving an increase in net sales of $339.0 million. Additionally, an increase in our average order value of 15%, from $75 in 2020 to $86 in 2021 also contributed $32.2 million to the overall increase in net sales. The increase in the number of orders was largely driven by the acquisition of Culture Kings on March 31, 2021 and growth of Princess Polly in the U.S. The increase in our average order value was primarily due to the implementation of targeted price increases at Princess Polly and Petal & Pup. On a constant currency basis, net sales and average order value for 2021 would have increased 154% and 13%, respectively. Net sales for 2021 include the operations of Culture Kings and mnml, or $208.0 million of net sales, from the date of their acquisitions, March 31, 2021 and October 14, 2021, respectively.
Cost of Sales
Years Ended December 31,
2021 2020
Cost of sales
$ 254,527 $ 89,515
Percent of net sales
45 % 41 %
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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 126% increase in the total number of orders in 2021, as compared to 2020, which includes the impact of the operations of Culture Kings and mnml, or $114.7 million of cost of sales, from the date of their acquisitions, March 31, 2021 and October 14, 2021, respectively. The increase in cost of sales as a percentage of net sales was primarily due to the $15.9 million impact from the fair value increase in inventory acquired in the Culture Kings and mnml acquisitions, which will disproportionately increase cost of sales until the inventory is completely sold through, and higher air freight expense. As of December 31, 2021, $0.7 million of impact from the fair value increase in inventory acquired in the mnml acquisition remains in inventory and will impact cost of sales in the first quarter of 2022.
Gross Profit
Years Ended December 31,
2021 2020
Gross profit $ 307,664 $ 126,401
Gross margin 55 % 59 %
Gross profit increased by $181.3 million, or 143%, in 2021 compared to 2020. This increase was primarily driven by the significant increase in net sales. The decrease in gross margin was primarily due to the $15.9 million impact from the fair value increase in inventory acquired in the Culture Kings and mnml acquisitions, which disproportionately increases cost of sales until it is completely sold through, higher air freight expense and inclusion of Culture Kings, partially offset by the implementation of targeted price increases at Princess Polly and Petal & Pup. Culture Kings has a lower mix of exclusive products compared to our overall portfolio. Exclusive products have a higher gross margin compared to other products we sell.
Selling Expenses
Years Ended December 31,
2021 2020
Selling
$ 144,345 $ 58,313
Percent of net sales
26 % 27 %
Selling expenses increased by $86.0 million, or 148%, in 2021 compared to 2020. This increase was driven by the 126% increase in the number of orders shipped in 2021 compared to 2020, which includes the operations of Culture Kings and mnml, or $48.0 million of selling expenses, from the date of their acquisitions, March 31, 2021 and October 14, 2021, respectively. The decrease in selling expenses as a percentage of net sales was due to a higher percentage of Culture Kings’ sales from customers in Australia, where our products ship at a cheaper rate. Shipping to customers in the U.S., whether from Australia or from a facility in the U.S., is more expensive on average due to distance or shipping upgrades.
Marketing Expenses
Years Ended December 31,
2021 2020
Marketing
$ 58,120 $ 17,871
Percent of net sales
10 % 8 %
Marketing expenses increased by $40.2 million, or 225%, in 2021 compared to 2020. The increase in marketing expenses was driven by the inclusion of the operations of Culture Kings and mnml, or $23.6 million of marketing expenses, from the date of their acquisitions, March 31, 2021 and October 14, 2021, respectively, and increased marketing investment to acquire customers and retain existing customers to generate higher net sales. The increase in marketing expenses as a percentage of net sales was primarily due to Culture Kings’ higher rate of advertising spend as they tested new marketing opportunities, as well as incremental holiday advertising spend across our brands.
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General and Administrative Expenses
Years Ended December 31,
2021 2020
General and administrative $ 88,816 $ 28,077
Percent of net sales 16 % 13 %
General and administrative expenses increased by $60.7 million, or 216%, in 2021 compared to 2020. The increase was primarily driven by the inclusion of the operations of Culture Kings and mnml, or $20.3 million of general and administrative expenses, from the date of their acquisitions, March 31, 2021 and October 14, 2021, respectively. Additionally, there was a $15.4 million increase in salaries and related benefits and equity-based compensation expense related to increases in our headcount across functions to support business growth, $5.4 million in transaction costs and $5.3 million in additional professional service fees. Finally, increases in D&O insurance and depreciation contributed to the increase. The increase in general and administrative expenses as a percentage of net sales resulted primarily from additional salaries and related benefits and equity-based compensation expense from corporate hires as well as additional professional service fees.
Other expense, net
Years Ended December 31,
2021 2020
Other expense, net
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
(4) % — %
Other expense, net increased by $21.1 million in 2021 compared to 2020 primarily due to the loss on extinguishment of debt resulting from the early payment and termination of our previous term debt, revolver and senior secured notes, as well as an increase in interest expense related to the senior secured notes, prior to their repayment, and the new term loan.
Provision for income tax
Years Ended December 31,
2021 2020
Provision for income tax $ (852) $ (6,850)
Percent of net sales — % (3 %)
Effective tax rate 16 % 32 %
Provision for income tax decreased by $6.0 million, or 88% in 2021 compared to 2020. This decrease was due to a reduction in our income before income taxes, which was driven primarily by the loss on extinguishment of debt resulting from the early payment and termination of our previous term debt, revolver and senior secured notes, as well as an increase in interest expense related to such debt prior to its repayment. The change in effective tax rate from 2020 is primarily due to the impact of permanent differences, the most significant of which was non-deductible stock-based compensation related to incentive units.
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Quarterly Results of Operations
The following tables set forth selected unaudited quarterly results of operations for the eight quarters ended December 31, 2022, as well as the percentage that each line item represents of net sales. The information for each of these quarters has been prepared on the same basis as the audited annual consolidated financial statements included elsewhere in this Annual Report on Form 10-K and in the opinion of management, includes all adjustments, which include only normal recurring adjustments, necessary for the fair statement of our consolidated results of operations for these periods. This data should be read in conjunction with our audited consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. Our quarterly results of operations will vary in the future. These quarterly operating results are not necessarily indicative of our operating results for any future period.
Three Months Ended
In thousands Mar 31,
2021 Jun 30,
2021 Sep 30,
2021 Dec 31,
2021 Mar 31,
2022 Jun 30,
2022 Sep 30,
2022 Dec 31,
2022
Net sales $ 68,779 $ 149,227 $ 161,762 $ 182,423 $ 148,319 $ 158,471 $ 155,822 $ 149,126
Cost of sales 28,191 67,793 75,652 82,891 64,123 71,024 68,965 70,379
Gross profit 40,588 81,434 86,110 99,532 84,196 87,447 86,857 78,747
Operating expenses:
Selling 18,254 40,023 40,582 45,486 40,364 45,254 41,450 39,002
Marketing 6,224 14,908 15,463 21,525 15,705 19,064 16,532 15,429
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
Income (loss) from operations 2,680 7,283 1,165 5,255 3,349 (2,574) 2,742 (175,556)
Total other expense, net (123) (4,155) (15,589) (1,755) (1,171) (2,593) (2,758) (2,053)
Income (loss) before income taxes 2,557 3,128 (14,424) 3,500 2,178 (5,167) (16) (177,609)
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)
Net income (loss) attributable to noncontrolling interests
(318) 242 199 — — — — —
Net income (loss) attributable to a.k.a. Brands Holding Corp. $ 1,472 $ 2,431 $ (9,894) $ 23 $ 1,525 $ (4,212) $ (114) $ (173,896)
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Three Months Ended
Mar 31,
2021 Jun 30,
2021 Sep 30,
2021 Dec 31,
2021 Mar 31,
2022 Jun 30,
2022 Sep 30,
2022 Dec 31,
2022
Net sales 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 %
Cost of sales 41 % 45 % 47 % 45 % 43 % 45 % 44 % 47 %
Gross profit 59 % 55 % 53 % 55 % 57 % 55 % 56 % 53 %
Operating expenses:
Selling 27 % 27 % 25% 25% 27% 29% 27% 26%
Marketing 9 % 10 % 10% 12% 11% 12% 11% 10%
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%
Income (loss) from operations 4 % 5 % 1 % 3 % 2 % (2 %) 2 % (118 %)
Total other expense, net —% (3%) (10%) (1%) (1%) (2%) (2%) (1%)
Income (loss) before income taxes 4 % 2 % (9 %) 2 % 1 % (3 %) — % (119 %)
Benefit from (provision for) income tax (1%) (1%) 3% (2%) —% 1% —% 2%
Net income (loss) 3 % 1 % (6 %) — % 1 % (3 %) — % (117 %)
Net income (loss) attributable to noncontrolling interests
— % — % — % — % — % — % — % — %
Net income (loss) attributable to a.k.a. Brands Holding Corp. 2 % 2 % (6 %) — % 1 % (3 %) — % (117 %)
Quarterly Trends and Seasonality
Net Sales, Cost of Sales and Gross Profit
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. 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 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.
Seasonality
Historically, we have achieved our largest quarterly sales in the fourth fiscal quarter. However, as our expansion into the U.S. market continues, our quarterly revenues are less concentrated in the fourth fiscal quarter. In fiscal year 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.
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Quarterly Adjusted EBITDA and Adjusted EBITDA Margin
The following table sets forth a reconciliation of net income (loss) to adjusted EBITDA for the eight fiscal quarters ended December 31, 2022:
Three Months Ended
In thousands Mar 31,
2021 Jun 30,
2021 Sep 30,
2021 Dec 31,
2021 Mar 31,
2022 Jun 30,
2022 Sep 30,
2022 Dec 31,
2022
Net income (loss) $ 1,790 $ 2,189 $ (10,093) $ 23 $ 1,525 $ (4,212) $ (114) $ (173,896)
Add (deduct):
Total other expense, net 123 4,155 15,589 1,755 1,171 2,593 2,758 2,053
Provision for (benefit from) income tax 767 939 (4,331) 3,477 653 (955) 98 (3,713)
Depreciation and amortization expense 2,566 4,535 4,235 5,374 5,217 5,590 4,566 4,975
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
Net income (loss) margin 3 % 1 % (6) % — % 1 % (3) % — % (117) %
Adjusted EBITDA margin 12 % 13 % 11 % 9 % 7 % 4 % 6 % 4 %
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Liquidity and Capital Resources
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 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 credit facility or raise additional funds at any time through equity, equity-linked or debt financing arrangements. Our future capital requirements and the adequacy of available funds will depend on many factors, including those described in the section of this Annual Report on Form 10-K captioned “Risk Factors.” We may not be able to secure additional financing to meet our operating requirements on acceptable terms, or at all. The inability to raise capital if needed would adversely affect our ability to achieve our business objectives.
Senior Secured Credit Facility
In connection with the IPO, we entered into a senior secured credit facility 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 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. 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 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
Our material cash requirements include operating lease obligations and inventory purchase commitments.
We have lease arrangements for certain equipment and facilities, primarily office locations, warehouse facilities and retail stores. Most of our property, equipment and software have been purchased with cash. As of December 31, 2022, our future minimum payments under non-cancelable operating leases totaled $48.9 million, with $8.3 million payable within 12 months.
While we routinely contract for the purchase of inventory from vendors, we have no material long-term purchase obligations outstanding with any vendors or third parties. As of December 31, 2022, i nventory and other purchase obligations payable within the next 12 months totaled $10.2 million, which primarily represent open purchase orders for materials and merchandise as of that date.
Additionally, we plan to incur capital expenditures of approximately $8.0 to $10.0 million in 2023. This reflects the investments in infrastructure and technology in addition to the opening of new stores.
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Historical Cash Flows
Year Ended December 31,
2022 2021 2020
Net cash (used in) provided by operating activities
$ (319) $ 23,968 $ 21,712
Net cash used in investing activities
(25,314) (278,075) (2,379)
Net cash provided by financing activities
33,260 269,850 1,240
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. This was attributable primarily to an increase in net income after adjusting for non-cash items. These increases were partially offset by an increase in inventory to support our growth and expansion in both the U.S. and Australia markets.
Net Cash Used in Investing Activities
Our primary investing activities have consisted of acquisitions to support our overall business growth, investments in our fulfillment centers and our internally developed software to support our infrastructure, and investments in stores. Purchases of property and equipment may vary from period to period due to timing of the expansion of our operations.
In 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.
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, 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 commission.
Critical Accounting Estimates
We believe that the following accounting estimates involve a high degree of judgment and complexity. 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. Although we believe that the estimates we use are reasonable, due to the inherent uncertainty involved in making those estimates, actual results reported in future periods could differ from those estimates.
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Revenue Recognition
Our primary source of revenues is from sales of fashion apparel primarily through our digital platforms and stores. We determine revenue recognition through the following steps in accordance with Topic 606:
• identification of the contract, or contracts, with a customer;
• identification of the performance obligations in the contract;
• determination of the transaction price;
• allocation of the transaction price to the performance obligations in the contract; and
• recognition of revenue when, or as, we satisfy a performance obligation.
Revenue is recognized upon shipment when control of the promised goods or services is transferred to our customers, or at point of sale for purchases in our stores, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Our revenue is reported net of sales returns and discounts. We estimate our liability for product returns based on historical return trends and an evaluation of current economic and market conditions, all of which have a degree of uncertainty. We record the expected customer refund liability as a reduction to revenue, and the expected inventory right of recovery as a reduction of cost of goods sold. If actual return costs differ from previous estimates, the amount of the liability and corresponding revenue are adjusted in the period in which such costs occur. We have not made any material changes to our assumptions included in our calculations of expected customer refund activity during the year ended December 31, 2022.
Inventory
Inventories are stated at the lower of cost and net realizable value. Cost is determined using an average cost method. Cost of inventory includes import duties and other taxes and transport and handling costs to deliver the inventory to our distribution centers or stores. We write down inventory where it appears that the carrying cost of the inventory may not be recovered through subsequent sale of the inventory. We analyze the quantity of inventory on hand, the quantity sold in the past year, the anticipated sales volume, the expected sales price and the cost of making the sale when evaluating the value of our inventory. If the sales volume or sales price of specific products declines, additional write-downs may be required. We have not made any material changes to our assumptions included in the calculations of the lower of cost or net realizable value reserves during the year ended December 31, 2022.
Goodwill and Impairment of Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of net assets, including the amount assigned to identifiable intangible assets. The primary drivers that generate goodwill are the value of synergies between the acquired entities and the Company and the acquired assembled workforce, neither of which qualifies as a separately identifiable intangible asset.
Goodwill is tested for impairment at least annually, in the fourth quarter and whenever changes in circumstances indicate an impairment may exist. The goodwill impairment test is performed at the reporting unit level, which is generally at the level of or one level below an operating segment. A qualitative assessment is first performed to determine whether a quantitative goodwill impairment test is necessary. If management determines, after performing an assessment based on the qualitative factors, that the fair value of the reporting unit is more likely than not less than the carrying amount, or that a fair value of the reporting unit substantially in the excess of the carrying amount cannot be assured, then a quantitative goodwill impairment test would be required. Annually, as of October 31, a quantitative test for goodwill impairment is performed by determining the fair value of the related reporting units using both income-based and market-based valuation methods. The income-based approach is based on the reporting unit’s forecasted future cash flows that are discounted to present value using the reporting unit’s weighted average cost of capital. The market-based approach is based on the guideline company and similar transaction methods. The guideline company method analyzes market multiples of revenues and earnings before interest, taxes, depreciation and amortization (“EBITDA”) for a group of comparable public companies. Under the similar transactions method, valuation multiples are calculated utilizing actual transaction prices and revenue/EBITDA data from target companies deemed similar to the reporting unit.
Based on the range of estimated fair values developed from the income and market-based methods, the Company determines the estimated fair value for the reporting unit. If the estimated fair value of the reporting unit exceeds its carrying value, the goodwill is not impaired and no further review is required. However, if the estimated fair value of the reporting unit is less than its carrying value, the Company calculates the impairment loss as the difference between the carrying value of the reporting unit and the estimated fair value.
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The income-based fair value methodology requires management’s assumptions and judgments regarding economic conditions in the markets in which the Company operates and conditions in the capital markets, many of which are outside of management’s control. At the reporting unit level, fair value estimation requires management’s assumptions and judgments regarding the effects of overall economic conditions on the specific reporting unit, along with assessment of the reporting unit’s strategies and forecasts of future cash flows. Forecasts of individual reporting unit cash flows involve management’s estimates and assumptions regarding:
• Annual cash flows, on a debt-free basis, arising from future revenues and earnings, changes in working capital, capital spending and income taxes for at least a 10-year forecast period.
• A terminal growth rate for years beyond the forecast period. The terminal growth rate is selected based on consideration of growth rates used in the forecast period, historical performance of the reporting unit and economic conditions.
• A discount rate that reflects the risks inherent in realizing the forecasted cash flows.
Under the market-based fair value methodology, judgment is required in evaluating market multiples and recent transactions. Management believes that the assumptions used for its impairment tests are representative of those that would be used by market participants performing similar valuations of the Company’s reporting units.
The carrying value of definite-lived intangible assets is reviewed whenever events or changes in circumstances indicate the carrying amount of the assets might not be recoverable. Factors that would necessitate an impairment assessment include a significant adverse change in the extent or manner in which an asset is used, a significant adverse change in legal factors or the business climate that could affect the value of the asset or a significant decline in the observable market value of an asset, among others. If such facts indicate a potential impairment, the Company would assess the recoverability of an asset group by determining if the carrying value of the asset group exceeds the sum of the projected undiscounted cash flows expected to result from the use and eventual disposition of the assets over the remaining economic life of the primary asset in the asset group. If the recoverability test indicates the carrying value of the asset group is not recoverable, the Company will estimate the fair value of the asset group using the discounted cash flow method. Any impairment would be measured as the difference between the asset group's carrying amount and its estimated fair value.
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. 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. 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. 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
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and are recorded net on the face of the balance sheet. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. We recognize the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. This assessment involves uncertainty and judgment. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. We have not made any material changes to our assumptions and estimates related to our income tax positions during the year ended December 31, 2022.
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