Playboy, Inc. quarterly report, Q1 FY2021

Business Context and Reporting Period

PLBY Group, Inc. (formerly Mountain Crest Acquisition Corp., conducting business through Playboy Enterprises, Inc.) filed this unaudited Form 10-Q for the three months ended March 31, 2021. The company markets the Playboy brand through licensing, direct-to-consumer products, digital subscriptions and content, and location-based entertainment.

The February 10, 2021 business combination with MCAC was accounted for as a reverse recapitalization. The company began trading on Nasdaq as PLBY on February 11, 2021. On March 1, 2021, PLBY acquired TLA Acquisition Corp., the parent of the Lovers sexual-wellness retail chain, for approximately $24.7 million in cash. TLA operated 41 stores in five states and is included in consolidated results beginning March 1, 2021; therefore, reported results are not fully comparable with the prior period.

Key Financial Metrics

Metric	Q1 2021	Q1 2020	Change
Net revenue	$42.7 million	$31.8 million	Up 34.3%
Gross profit	$22.3 million	$15.5 million	Up 43.7%
Gross margin	52.2%	48.8%	Up approximately 340 basis points
Operating income (loss)	$(4.5) million	$2.5 million	Declined $7.1 million
Operating margin	(10.6%)	7.9%	Down approximately 1,850 basis points
Net loss	$(5.0) million	$(2.4) million	Loss increased $2.6 million
Net loss per share	$(0.17)	$(0.11)	Loss per share increased
Adjusted EBITDA	$6.7 million	$6.8 million	Down 1.4%
Cash flow from operations	$(14.3) million	$(11.3) million	Outflow increased $3.0 million

Revenue consisted of $15.0 million from Licensing, $22.0 million from Direct-to-Consumer, $5.6 million from Digital Subscriptions and Content, and $0.01 million from All Other. Direct-to-Consumer revenue more than doubled, primarily from higher e-commerce sales and the TLA acquisition. Licensing revenue declined 4.3%, while Digital Subscriptions and Content revenue increased 8.4%.

Selling and administrative expense increased 108.8% to $26.6 million, driven by approximately $6.3 million of non-recurring business-combination-related items, higher stock-based compensation, merger and acquisition expenses, acquired-business costs, and expenses associated with becoming a public company. Stock-based compensation was $3.5 million, compared with $0.7 million in the prior-year quarter.

Balance Sheet, Debt and Liquidity

Cash and cash equivalents were $70.2 million at March 31, 2021, compared with $13.4 million at December 31, 2020. Including restricted cash, total cash was $72.4 million.
Total assets were $502.7 million and total liabilities were $323.9 million. Stockholders’ equity was $179.1 million.
Total debt was $158.2 million before unamortized debt issuance costs, consisting primarily of a term loan. Net debt was $157.9 million.
The term loan bears interest at 8.25%, matures in 2023, and is secured by substantially all company assets. Principal maturities are approximately $3.8 million for the remainder of 2021, $3.8 million in 2022, and $150.7 million in 2023.
The company received $100.7 million of net cash from the business combination and PIPE financing, partially offset by the $24.8 million TLA acquisition, $2.8 million repayment of UTA convertible notes, and $0.8 million of debt repayments.
Management stated that existing liquidity is expected to fund operations, lease obligations, debt service, capital expenditures, and working capital requirements for at least the next 12 months, while noting that additional financing may be required for growth or adverse developments.

Material Changes Versus the Prior Comparable Period

Revenue growth was led by Direct-to-Consumer sales, including the newly acquired TLA business. Excluding TLA revenue of approximately $5.3 million, revenue increased by approximately $5.6 million, primarily from higher direct-to-consumer sales.
Direct-to-Consumer operating results improved from a $1.2 million loss to $1.7 million of operating income. TLA contributed approximately $0.8 million of operating income during the period.
Corporate operating expense increased to $19.8 million from $9.1 million because of merger-related costs, stock-based compensation, M&A expenses, acquired-business costs, and public-company costs.
Licensing operating income declined to $10.6 million from $11.1 million, partly because Q1 2020 included accelerated revenue recognition from a terminated license agreement.
Playboy magazine ceased publication with the spring 2020 issue. All Other revenue declined to approximately $14,000 from $645,000, while related editorial, printing, and shipping costs were largely eliminated.
Operating cash outflow increased to $14.3 million, primarily because of higher prepaid expenses and other assets, lower deferred revenue, lower accrued compensation, and other working-capital uses.
Adjusted EBITDA was broadly stable, but the measure includes substantial adjustments for stock-based compensation and non-recurring items; Q1 2021 non-recurring adjustments were approximately $6.0 million.

Outlook, Commentary, Risks and Unusual Items

No formal revenue, earnings, or cash-flow guidance is provided in the filing. Management expects to expand owned and branded consumer products, direct-to-consumer channels, and potential acquisition opportunities. The company expects consumer-product sales to remain seasonal, with stronger revenue and profit typically occurring in the fourth quarter because of Halloween and holiday sales.

Management expects North American consumer-product growth to reduce reliance on China licensing revenue. China licensing represented approximately 23.4% of revenue in Q1 2021.
COVID-19 has had both negative and positive effects, including supply-chain disruption, slower product development, and closure of certain licensed locations, offset partly by increased online sales. The future impact remains uncertain.
The company has significant debt, including a large maturity in 2023, and its credit agreement restricts additional indebtedness, liens, investments, asset transfers, dividends, and changes in business activities.
Trademark and trade-name assets totaled approximately $331.5 million and goodwill totaled $19.2 million at March 31, 2021. Impairment testing and acquisition accounting depend on significant estimates.
Operating lease commitments totaled approximately $34.3 million, partially offset by expected sublease income of approximately $1.1 million. TLA added 41 retail-store leases.
An April 2021 aircraft purchase agreement committed the company to a $12.0 million purchase price, including a generally nonrefundable $0.5 million deposit.
Potential risks include integration of TLA and the business combination, execution of the direct-to-consumer strategy, competition, supply-chain disruption, litigation and regulatory matters, Nasdaq listing requirements, reliance on key licensees, and the ability to obtain financing on acceptable terms.
Management reported that disclosure controls and procedures were effective as of March 31, 2021. Internal controls were modified to reflect the business combination and transition to a public company.

Facts Investors Should Verify

Whether direct-to-consumer growth and TLA integration can offset elevated corporate, public-company, and acquisition-related costs.
The company’s ability to refinance or repay the approximately $150.7 million term-loan maturity scheduled for 2023.
The extent to which reported Adjusted EBITDA depends on recurring stock-based compensation and non-recurring adjustments.
Progress toward converting approximately $408.0 million of disclosed future performance obligations into recognized revenue, particularly the $401.0 million related to trademark licensing.
Potential impairment of the substantial trademark, trade-name, and goodwill balances if operating performance or brand expectations weaken.
The final cash requirement and closing status of the $12.0 million aircraft purchase agreement disclosed after quarter-end.
The effect of COVID-19, retail-store performance, supply-chain conditions, and seasonal fourth-quarter concentration on future results.