PLBY Group, Inc. Form 10-Q Summary
Business context and reporting period
PLBY Group, Inc. markets the Playboy brand through licensing, direct-to-consumer products, digital subscriptions and content, and location-based entertainment. Its direct-to-consumer portfolio also included Honey Birdette, Lovers and Yandy. The filing covers the unaudited three months ended March 31, 2023, compared with the same period in 2022.
The company has three reportable segments: Licensing, Direct-to-Consumer, and Digital Subscriptions and Content. Management is shifting toward a capital-light model focused on licensing and digital platforms.
Key financial metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net revenue | $51.4 million | $69.4 million | Down 26% |
| Gross profit | $21.3 million | $40.5 million | Down 47% |
| Gross margin | 41% | 58% | Down 17 percentage points |
| Operating income (loss) | $(29.4) million | $6.9 million | Decline of $36.3 million |
| Net income (loss) | $(37.7) million | $5.5 million | Decline of $43.2 million |
| Adjusted EBITDA | $(10.8) million | $1.2 million | Decline of $12.0 million |
| Net cash used in operating activities | $(21.5) million | $(35.5) million | Improved by $14.1 million |
| Cash and cash equivalents | $24.7 million | $31.6 million at Dec. 31, 2022 | Down $6.9 million |
| Total debt, before discounts and issuance costs | $156.2 million | $201.6 million at Dec. 31, 2022 | Down $45.4 million |
Cost of sales was $30.1 million, or 59% of revenue, and selling and administrative expenses were $50.9 million, or 98% of revenue. Basic and diluted loss per share was $0.58, compared with diluted earnings per share of $0.12 in the prior-year quarter.
Revenue and segment performance
| Segment | Q1 2023 revenue | Q1 2022 revenue | Change |
|---|---|---|---|
| Licensing | $9.7 million | $14.6 million | Down 33% |
| Direct-to-Consumer | $37.0 million | $49.6 million | Down 25% |
| Digital Subscriptions and Content | $4.7 million | $4.7 million | Approximately flat |
Licensing operating income fell to $3.6 million from $9.8 million. Direct-to-Consumer generated a $17.5 million operating loss versus $0.6 million of operating income in the prior-year period. Digital Subscriptions and Content reduced its operating loss to $0.6 million from $3.1 million.
Revenue declines were attributed primarily to weaker consumer demand, lower China and U.S. licensee activity, lower Yandy and Playboy e-commerce sales, and lower sales in other direct-to-consumer businesses. Creator-platform revenue increased by approximately $0.5 million, partly offsetting lower television and cable programming revenue.
Material changes and unusual items
- The company recorded $5.8 million of additional inventory reserve charges, reflecting direct-to-consumer restructuring and weaker demand.
- A $5.0 million technology restructuring charge was recorded for terminating or not renewing costly or underutilized software. This included $1.5 million of accelerated prepaid-software amortization.
- Headcount reductions produced $1.7 million of severance expense and $1.0 million of accelerated stock-based compensation expense.
- Non-cash contingent-consideration fair-value gains fell to $0.2 million from $19.3 million in Q1 2022.
- The company recorded a $1.8 million loss on debt extinguishment related to $45 million of debt prepayments and a $3.0 million fair-value loss on its mandatorily redeemable Series A Preferred Stock.
- The company incurred $1.3 million of costs associated with forming the Playboy China joint venture.
- Yandy was classified as held for sale at March 31, 2023 and was sold on April 4, 2023 for $1 million in cash and a $2 million secured promissory note. The sale was not classified as discontinued operations.
- Equity financing generated $13.9 million of net proceeds from a January registered direct offering and $47.6 million from a February rights offering. Approximately $45 million of rights-offering proceeds was used to repay debt.
Liquidity, debt and outlook
Cash, cash equivalents and restricted cash totaled $28.2 million at March 31, 2023. Operating cash burn was $21.5 million during the quarter, while financing activities provided $16.1 million. Inventories declined to $18.6 million from $33.1 million at year-end, excluding $4.2 million of Yandy inventory classified as held for sale.
The term loan had a stated interest rate of 11.20% at March 31, 2023 and was scheduled to mature in 2027. The company obtained covenant relief after required debt prepayments, including a waiver of the total net leverage covenant through the second quarter of 2024 and elimination of cash-maintenance covenants.
After quarter-end, on May 10, 2023, the company amended and restated its credit agreement. The new arrangement increased principal debt to approximately $210 million, eliminated the Series A Preferred Stock through an exchange for approximately $53.6 million of term loans, and provided approximately $11.8 million of additional funding. The new debt uses SOFR rather than LIBOR, has no leverage-covenant testing through the first quarter of 2025, and retains a May 25, 2027 maturity. Management stated that available liquidity was expected to fund operations, lease obligations, debt service, capital expenditures and working capital for at least the next 12 months from filing.
No specific revenue or earnings guidance was provided. Management expects to pursue licensing growth, expand the Playboy digital platform, reduce costs and operate with lower working-capital intensity.
Risks, contingencies and controls
- Consumer demand for discretionary products weakened, and further economic pressure, inflation, interest rates, supply-chain disruption or competition could adversely affect results.
- The company has significant variable-rate secured debt and estimated that a 1% change in underlying rates would change annual interest expense by approximately $1.6 million based on the March 31 debt balance.
- Approximately 38% of Q1 2023 revenue came from international customers, creating foreign-exchange exposure. The company recorded a $1.7 million foreign-currency translation loss in accumulated other comprehensive loss.
- Pending litigation includes the AVS matter and a TNR lawsuit seeking more than $100 million in damages. The company believes the claims are without merit; the filing does not provide a clear estimate of potential loss.
- Management concluded that disclosure controls and internal control over financial reporting were not effective because of material weaknesses involving the control environment, IT general controls, accounting policies, management review controls and inventory controls. Remediation efforts were underway.
- The amended credit agreement contains customary covenants and events of default. Noncompliance could permit lenders to accelerate outstanding debt.
Investor verification checklist
- Verify the post-quarter-end credit agreement, including approximately $210 million of principal debt, interest-rate margins, covenant relief and mandatory-prepayment provisions.
- Assess whether the Yandy sale proceeds and transition to a capital-light model improve cash flow and margins.
- Monitor direct-to-consumer demand, inventory reserves, gross margin recovery and the effect of the $5.0 million technology restructuring.
- Track cash burn, liquidity and debt-service capacity given the Q1 operating cash outflow and increased post-quarter-end debt.
- Review remediation of the disclosed material weaknesses and any subsequent restatements or control deficiencies.
- Evaluate exposure to the AVS and TNR litigation, international currencies, China-market execution and customer concentration.