AKA BRANDS HOLDING CORP

Previous wording

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

Current wording

The following table sets forth our key financial metrics prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and non-GAAP financial metrics for each period presented:

Previous wording

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

Current wording

Adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”), Adjusted EBITDA margin and Free Cash Flow are non-GAAP measures. See “Non-GAAP Financial Measures” below for information regarding our use of Adjusted EBITDA, Adjusted EBITDA margin and Free Cash Flow and their reconciliation to net income (loss), net income (loss) margin and net cash from operating activities, respectively.

Previous wording

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

Current wording

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:

Previous wording

For the three months ended March 31, 2024, net cash used in operating activities increased by $4.7 million compared to net cash used in operating activities for the three months ended March 31, 2023. This was attributable primarily to more cash used to purchase inventory compared to the prior period, which was driven by reduced inventory buying and sell-through of aged inventory in the prior period, partially offset by timing of payments.

Current wording

For the six months ended June 30, 2024, net cash (used in) provided by operating activities decreased by $11.5 million compared to net cash (used in) provided by operating activities for the six months ended June 30, 2023. This was attributable primarily to more cash used to purchase inventory in the current period, as compared to the prior period, to support growth in the U.S., partially offset by timing of payments.

Previous wording

For the three months ended March 31, 2024, Free Cash Flow decreased by $3.6 million compared to Free Cash Flow for the three months ended March 31, 2023. This was attributable primarily to more cash used to purchase inventory compared to the prior period, which was driven by reduced inventory buying and sell-through of aged inventory in the prior period, and a reduction in purchases of property and equipment, partially offset by timing of payments.

Current wording

For the six months ended June 30, 2024, Free Cash Flow decreased by $10.6 million compared to Free Cash Flow for the six months ended June 30, 2023. This was attributable primarily to more cash used to purchase inventory in the current year, as compared to the prior year, to support growth in the U.S., partially offset by the timing of planned capital expenditures and the timing of payments.

Previous wording

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

Current wording

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

Previous wording

Cost of sales decreased by $0.8 million, or 2%, for the three months ended March 31, 2024 compared to the same period in 2023. This decrease was primarily driven by the 3% reduction in net sales for the three months ended March 31, 2024 and lower inbound air freight costs and duties, partially offset by targeted inventory actions in Culture Kings Australia and the effect of growing wholesale and marketplace initiatives. The increase in cost of sales as a percentage of net sales was primarily due to the effect of growing wholesale and marketplace initiatives, which have a lower gross margin and higher return rate than direct-to-consumer sales.

Current wording

Cost of sales increased by $4.3 million, or 7%, for the three months ended June 30, 2024 compared to the same period in 2023. This increase was primarily driven by the 9% increase in net sales for the three months ended June 30, 2024 and the effect of growing wholesale and marketplace initiatives, partially offset by lower inbound air freight costs and duties. The decrease in cost of sales as a percentage of net sales was primarily due to lower inbound air freight costs and duties, partially offset by the effect of growing wholesale initiatives, as well as growing marketplace initiatives, which have a higher return rate than direct-to-consumer sales.

Previous wording

Marketing expenses increased by $0.1 million, or 1%, for the three months ended March 31, 2024 compared to the same period in 2023. The increase was driven by additional marketing spend due to reduced marketing effectiveness. The increase in marketing expenses as a percentage of net sales was primarily due to lower sales in the first quarter compared to last year.

Current wording

General and administrative expenses increased by $1.7 million, or 7%, for the three months ended June 30, 2024 compared to the same period in 2023, primarily due to an increase in incentive compensation. The decrease in general and administrative expenses as a percentage of net sales was primarily due to higher sales in the second quarter compared to last year.

Previous wording

(Provision for) benefit from income tax changed by $0.9 million, or 102% for the three months ended March 31, 2024 compared to the same period in 2023. This change was due to an increase in the valuation allowance on the deferred tax assets in Australia.

Current wording

Provision for income tax changed by $0.1 million, or 42% for the three months ended June 30, 2024 compared to the same period in 2023. This change was due to an increase in the valuation allowance on the deferred tax assets in Australia, as well as an increase in income before income taxes in the United States.

Previous wording

Net sales decreased by $3.6 million, or 3%, for the three months ended March 31, 2024 compared to the same period in 2023. The decrease in net sales was primarily driven by a decrease in our average order value of 4%, from $80 in 2023 to $77 in 2024. The decrease in our average order value was primarily due to adverse macroeconomic conditions in Australia and New Zealand. On a constant currency basis, net sales and average order value for the three months ended March 31, 2024 would have decreased 1% and 2%, respectively, as compared to the same period in 2023.

Current wording

Net sales increased by $9.3 million, or 4%, for the six months ended June 30, 2024 compared to the same period in 2023. The increase in net sales was primarily driven by a 9% increase in the number of orders we processed in 2024 compared to 2023, partially offset by a decrease in our average order value of 5%, from $81 in 2023 to $77 in 2024. The increase in the number of orders was primarily driven by growth in the U.S. The decrease in our average order value was primarily due to adverse macroeconomic conditions in Australia and New Zealand and actions taken to improve our inventory position at Culture Kings. On a constant currency basis, net sales and average order value for the six months ended June 30, 2024 would have increased 5% and decreased 4%, respectively.

Previous wording

General and administrative expenses decreased by $3.2 million, or 12%, for the three months ended March 31, 2024 compared to the same period in 2023. The decrease, along with the decrease in general and administrative expenses as a percentage of net sales, was driven by a $1.3 million decrease in sales tax penalties and interest, a $1.0 million decrease in professional fees, a $0.5 million decrease in intangible amortization, and a $0.3 million decrease in insurance costs.

Current wording

General and administrative expenses decreased by $1.5 million, or 3%, for the six months ended June 30, 2024 compared to the same period in 2023. The decrease, as well as the decrease in general and administrative expenses as a percentage of net sales, was primarily driven by a $1.6 million decrease in professional and administrative fees, a $1.5 million decrease in sales tax penalties and interest, a $1.1 million decrease in intangible amortization and a $0.6 million decrease in insurance costs. Partially offsetting these decreases was a $2.1 million increase in incentive compensation and a $1.1 million increase in non-routine legal matters.

Previous wording

Other expense, net decreased by $1.1 million for the three months ended March 31, 2024 compared to the same period in 2023, primarily due to $0.6 million in lower interest expense from a reduction in our long-term debt balance and the loss recognized on the sale of the Rebdolls reporting unit last year.

Current wording

Other expense, net decreased by $2.2 million, or 30%, for the six months ended June 30, 2024 compared to the same period in 2023, primarily due to lower interest expense from a reduction in our long-term debt balance, the impact of changes in foreign currency exchange rates and the loss recognized on the sale of the Rebdolls reporting unit last year.

Previous wording

As of March 31, 2024, our principal sources of liquidity were cash and cash equivalents totaling $21.9 million, our revolving line of credit and our term loan accordion provision.

Current wording

As of June 30, 2024, our principal sources of liquidity were cash and cash equivalents totaling $25.5 million, our revolving line of credit and our term loan accordion provision.

Previous wording

In connection with the IPO, we entered into a senior secured credit facility comprised of a $100.0 million term loan and a $50.0 million revolving line of credit, with an option of up to $50.0 million in an additional term loan through an accordion provision. We used borrowings under this credit facility, together with a portion of the proceeds from the IPO, to repay our previous debt in full. As of March 31, 2024, we owed a combined $94.0 million in term loan and accordion borrowings, as well as $10.5 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 Term SOFR (as defined in the credit agreement for the senior secured credit facility (the “Credit Agreement”)) plus an applicable margin dependent upon our net leverage ratio, as defined in the Credit Agreement. The revolving line of credit, when used, also accrues interest at Term SOFR plus an applicable margin dependent upon our net leverage ratio. The highest interest rates under the Credit Agreement for both the term loan and the 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 March 31, 2024, principal payments of our term loan and accordion for the next twelve months are anticipated to total $4.7 million, which reflects the impact of the early prepayments made in 2023.

Current wording

In connection with our initial public offering (the “IPO”), we entered into a senior secured credit facility comprised of a $100.0 million term loan and a $50.0 million revolving line of credit, with an option of up to $50.0 million in an additional term loan through an accordion provision. We used borrowings under this credit facility, together with a portion of the proceeds from the IPO, to repay our previous debt in full. As of June 30, 2024, we owed a combined $93.3 million in term loan and accordion borrowings, as well as $14.5 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 Term SOFR (as defined in the credit agreement for the senior secured credit facility (the “Credit Agreement”)) plus an applicable margin dependent upon our net leverage ratio, as defined in the Credit Agreement. The revolving line of credit, when used, also accrues interest at Term SOFR plus an applicable margin dependent upon our net leverage ratio. The highest interest rates under the Credit Agreement for both the term loan and the 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 June 30, 2024, principal payments of our term loan and accordion for the next twelve months are anticipated to total $6.3 million, which reflects the impact of the early prepayments made in 2023 and 2024.

Previous wording

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

Current wording

Net 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.

Previous wording

During the three months ended March 31, 2024, net cash provided by financing activities increased by $20.3 million, as compared to the same period in 2023. This was primarily attributable to the $10.1 million in net proceeds from our senior secured credit facility in 2024, as well as the net repayment of $11.4 million in 2023 of borrowings issued under our senior secured credit facility.

Current wording

During the six months ended June 30, 2024, net cash (used in) provided by financing activities increased by $36.2 million, as compared to the same period in 2023. This was primarily attributable to the $13.3 million in net proceeds from our senior secured credit facility in 2024, as well as the net repayment of $23.9 million in 2023 of borrowings issued under our senior secured credit facility.