a.k.a. Brands Holding Corp. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Acquisitions

Acquisitions

12 Months Ended

Dec. 31, 2023

Business Combination and Asset Acquisition [Abstract]

Culture Kings

On March 31, 2021, pursuant to a share sale agreement, the Company, through its subsidiary CK Holdings, acquired a 55% ownership stake in Culture Kings. The previous shareholders of Culture Kings retained a 45% noncontrolling interest in Culture Kings by receipt of an equity interest in CK Holdings. The Company recognized goodwill as the excess of the fair value of the total purchase consideration and noncontrolling interests over the net fair value of the identifiable assets acquired and the liabilities assumed. The purchase price consisted of AUD $307.4 million ($235.9 million) in cash consideration and noncontrolling interest with a fair value of AUD $186.0 million ($142.7 million). In connection with the IPO, the Company completed a series of transactions in which the minority investors exchanged their interests in CK Holdings for newly issued shares of the Company’s common stock.

Culture Kings is focused on street apparel aimed at the young adult age group and has a combination of online sales as well as stores based in Australia. Culture Kings expanded the Company’s consumer market to include male consumers and further expanded the Company’s presence in the United States.

The following table sets forth the final allocation of the total consideration to the identifiable tangible and intangible assets acquired and liabilities assumed, as of the date of the acquisition, with the excess recorded to goodwill:


Purchase consideration:
Total purchase price, net of cash acquired of $8,831	$	227,053
Fair value of noncontrolling interest	142,717
Total consideration	$	369,770

Identifiable net assets acquired:
Account receivable, net	$	625
Inventory (1)	62,937
Prepaid expenses and other current assets	4,800
Property and equipment, net	8,048
Intangible assets, net (2)	73,209
Operating lease right-of-use assets	24,299
Accounts payable	(13,449)
Deferred revenue	(141)
Income taxes payable	(1,778)
Other current liabilities	(2,533)
Operating lease liabilities	(24,299)
Deferred income taxes, net	(25,439)
Accrued liabilities, non-current	(1,058)
Net assets acquired	105,221
Goodwill	$	264,549

The purchase price allocation includes significant judgments, assumptions and estimates to determine the fair value of assets acquired and liabilities assumed. The valuations involving the most significant assumptions, estimates and judgment are:

(1)Inventory was adjusted by $15.1 million to step-up inventory cost to estimated fair value. The fair value of the inventory was determined utilizing the net realizable value method, which was based on the expected selling price of the inventory to customers adjusted for related disposal costs and a profit allowance for the post-acquisition selling effort.

(2)The fair value of the acquired intangible assets was determined with the assistance of a valuation specialist and include:


	Fair Value at Acquisition Date		Annual Amortization Expense		Estimated Useful Life in Years
Brand names	$	68,354	$	6,835	10 years
Customer relationships	4,855		1,214		4 years
Total	$	73,209

Brand names are valued using a relief from royalty approach, which estimates the license fee that would need to be paid by Culture Kings if it was deprived of the brand names and domain names, and instead had to pay a license fee for their use. The fair value is the present value of the expected future license fee cash flows.

Customer relationship intangible assets are valued using the multi-period excess earnings method, which is the present value of the projected cash flows that are expected to be generated by the existing intangible asset after reduction by an estimated fair rate of return on contributory assets required to generate the customer relationship revenues. Key assumptions included discounted cash flow, estimated life cycle and customer attrition rates.

Total acquisition costs incurred by the Company in connection with its purchase of Culture Kings primarily related to third-party legal, accounting and tax diligence fees, which were $3.3 million. These costs are recorded in general and administrative expenses in the consolidated statements of income for the year ended December 31, 2021.

Goodwill of $264.5 million, none of which is deductible for tax purposes, represents the excess purchase price over the estimated fair value assigned to tangible and identifiable intangible assets acquired and liabilities assumed. The goodwill arising from the acquisition consists largely of anticipated synergies related to combining Culture Kings with the Company’s existing operations. See Note 6, “Goodwill,” for additional information about goodwill impairment.

The fair value of the noncontrolling interest was determined by measuring the fair value of the subsidiaries’ identifiable assets and liabilities at the date of acquisition, adjusted for a discount to factor the non-marketable, noncontrolling holding.

The noncontrolling interest in Culture Kings contained a put right whereby the minority investors could have caused CK Holdings to purchase all of their units at a per unit price equal to six times the EBITDA of CK Holdings, calculated as of the twelve-month period ending on the end of the most recent fiscal quarter. The put right was only exercisable after December 31, 2023. In accordance with ASC 810, Consolidation, as this put right was redeemable outside of the Company’s control, the noncontrolling interest was classified outside the permanent equity section of the Company’s consolidated balance sheets prior to the IPO. In connection with the IPO, the Company completed a series of transactions in which the CK Holdings minority investors exchanged their interests in CK Holdings for newly issued shares of the Company’s common stock, thereby eliminating the noncontrolling interest classified outside of permanent equity.

Since the date of acquisition, March 31, 2021, the results of Culture Kings have been included in the Company’s consolidated results. For the year ended December 31, 2021, Culture Kings’ net sales of $196.5 million and a net loss of $(5.9) million are included in the accompanying consolidated statements of income.

The unaudited pro forma financial information below is presented to illustrate the estimated effects of the acquisition of Culture Kings and the associated financing as if they had occurred on January 1, 2020:


	Year Ended December 31, 2021

Net sales	$	613,390
Net income attributable to a.k.a. Brands Holding Corp.	16,781
Net income per share, basic and diluted:	$	2.07

The pro forma information was prepared using the acquisition method of accounting in accordance with ASC 805, Business Combinations. The unaudited pro forma financial information has been prepared for informational purposes only and is not indicative of what the Company’s results of operations would have been had the transactions occurred on January 1, 2020, nor does it project the results of operations of the combined company following the transaction.

mnml

On October 14, 2021, the Company acquired all of the equity interests of Third Estate LLC (“mnml”) for total consideration of $46.1 million, including cash consideration of $28.2 million, net of cash acquired of $0.6 million, and subject to working capital adjustments. The remaining consideration of $17.3 million was paid in the form of 171,474 shares of the Company’s common stock. mnml is an LA-based streetwear brand that offers competitively priced on-trend wardrobe staples. This acquisition allowed the Company to continue its growth into the U.S. market and provides opportunities for customer cross-sell.

The final fair values of assets acquired and liabilities assumed, as of the date of the acquisition, are as follows:


Accounts receivable, net	$	68
Inventory (1)	7,321
Prepaid expenses and other current assets	1,838
Other assets	15
Intangible assets (2)	14,300
Accounts payable	(504)
Deferred income	(164)
Accrued liabilities	(1,794)
Assumed loan	(1,312)
Sales and use tax liability	(1,100)
Deferred income taxes, net	(3,159)
Total net assets acquired	15,509
Goodwill	29,990
Total purchase price, net of cash acquired of $605	$	45,499

(1)Inventory was adjusted by $1.9 million to step-up inventory cost to estimated fair value. The fair value of the inventory was determined utilizing the net realizable value method, which was based on the expected selling price of the inventory to customers adjusted for related disposal costs and a profit allowance for the post-acquisition selling effort.

(2)The fair value of the acquired intangible assets was determined with the assistance of a valuation specialist and include:


	Fair Value at Acquisition Date		Amortization Period
Brand	$	11,800	10 years
Customer relationships	2,500		3 years
Total intangible assets	$	14,300

The results of operations of mnml are included in the Company’s consolidated statements of income beginning October 14, 2021. For the year ended December 31, 2021, mnml’s net sales of $11.6 million and net income attributable to the Company of $1.0 million are included in the accompanying consolidated statements of income. Goodwill of $30.0 million, none of which is deductible for tax purposes, represents the excess purchase price over the estimated fair values assigned to tangible and identifiable intangible assets acquired and liabilities assumed. The goodwill arising from the acquisition consists largely of anticipated synergies related to combining mnml with the Company’s existing operations.

Total acquisition costs incurred by the Company in connection with the purchase primarily related to third-party legal, accounting and tax diligence fees, which were $1.3 million. These costs are recorded in general and administrative expenses in the consolidated statement of income for the year ended December 31, 2021.

Purchase of Noncontrolling Interests

Immediately following the New Excelerate Reorganization (as described in Note 1, “Organization and Description of Business”), the Company completed a series of transactions in which the CK Holdings minority investors exchanged their interests in CK Holdings for 1,817,483 newly issued shares of a.k.a. Brands Holding Corp.’s common stock, as adjusted for the one-for-12 Reverse Stock Split. The number of shares issued in exchange for the minority interests was determined based on the relative valuations of CK Holdings and a.k.a. Brands Holding Corp.’s consolidated group at the time of the IPO. This exchange resulted in the elimination of the noncontrolling interest in Culture Kings, with a value of $132.3 million, and an increase in additional paid-in capital with a nominal amount recorded as common stock at a value of $0.001 per issued share in the exchange. Following the completion of this transaction, CK Holdings became a wholly-owned subsidiary of a.k.a. Brands Holding Corp.

The Company had historically owned 66.7% of the equity interests in P&P Holdings, which operated the Company’s Petal & Pup business prior to the IPO. The remaining 33.3% of the equity interests in P&P Holdings were held by certain minority investors. On August 19, 2021, the Company repurchased approximately 6.0% of the equity held by the P&P minority investors for AUD $5.0 million. In connection with the completion of the IPO, the Company used a portion of the net proceeds from the IPO to fund the acquisition of the remaining 27.3% of the equity interests in P&P Holdings then owned by the P&P minority investors for cash of approximately AUD $22.8 million. As a result of the transaction, noncontrolling interest of $9.6 million was eliminated and the $10.6 million paid in excess of the noncontrolling interest was recorded as a reduction to additional paid-in capital. Following the completion of this purchase, P&P Holdings became a wholly-owned subsidiary of the Company.

Rebdolls

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