Playboy, Inc.: Form 10-Q for the period ended Sep 30, 2024

You should read the following discussion of our financial condition and results of operations in conjunction with our unaudited interim condensed consolidated financial statements as of and for the three and nine months ended September 30, 2024 and 2023 and the related notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q, our audited consolidated financial statements as of and for the years ended December 31, 2023 and 2022 and the related notes thereto included in our Annual Report on Form 10-K filed with the SEC on March 29, 2024. This discussion contains forward-looking statements that involve risks and uncertainties and that are not historical facts, including statements about our beliefs and expectations. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and particularly under the headings “Risk Factors”, “Business” and “Cautionary Note Regarding Forward-Looking Statements” contained in our Annual Report on Form 10-K filed with the SEC on March 29, 2024. As used herein, “we”, “us”, “our”, the “Company”, and “PLBY” refer to PLBY Group, Inc. and its subsidiaries.

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains statements that are forward-looking and as such are not historical facts. These statements are based on the expectations and beliefs of the management of the Company in light of historical results and trends, current conditions and potential future developments, and are subject to a number of factors and uncertainties that could cause actual results to differ materially from those anticipated in these forward-looking statements. These forward-looking statements include all statements other than historical fact, including, without limitation, statements regarding the financial position, capital structure, dividends, indebtedness, business strategy and plans and objectives of management for future operations of the Company. These statements constitute projections, forecasts and forward-looking statements, and are not guarantees of performance. Such statements can be identified by the fact that they do not relate strictly to historical or current facts. When used in this Quarterly Report on Form 10-Q, words such as “anticipate”, “believe”, “continue”, “could”, “estimate”, “expect”, “intend”, “may”, “might”, “plan”, “possible”, “potential”, “predict”, “project”, “should”, “strive”, “would” and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking. When we discuss our strategies or plans, we are making projections, forecasts or forward-looking statements. Such statements are based on the beliefs of, as well as assumptions made by and information currently available to, our management.

The forward-looking statements contained in this Quarterly Report on Form 10-Q are based on current expectations and beliefs concerning future developments and their potential effects on our business. There can be no assurance that future developments affecting us will be those that we anticipated. These forward-looking statements involve significant risks and uncertainties that could cause the actual results to differ materially from those discussed in the forward-looking statements. Factors that may cause such differences include, but are not limited to: (1) the inability to maintain the listing of the Company’s shares of common stock on Nasdaq; (2) the risk that the Company’s completed or proposed transactions disrupt the Company’s current plans and/or operations, including the risk that the Company does not complete any such proposed transactions or achieve the expected benefits from any transactions; (3) the ability to recognize the anticipated benefits of corporate transactions, commercial collaborations, commercialization of digital assets, cost reduction initiatives and proposed transactions, which may be affected by, among other things, competition, the ability of the Company to grow and manage growth profitably, and the Company’s ability to retain its key employees; (4) costs related to being a public company, corporate transactions, commercial collaborations and proposed transactions; (5) changes in applicable laws or regulations; (6) the possibility that the Company may be adversely affected by global hostilities, supply chain delays, inflation, interest rates, foreign currency exchange rates or other economic, business, and/or competitive factors; (7) risks relating to the uncertainty of the projected financial information of the Company, including changes in the Company’s estimates of cash flows and the fair value of certain of its intangible assets, including goodwill; (8) risks related to the organic and inorganic growth of the Company’s businesses, and the timing of expected business milestones; (9) changing demand or shopping patterns for the Company’s products and services; (10) failure of licensees, suppliers or other third-parties to fulfill their obligations to the Company; (11) the Company’s ability to comply with the terms of its indebtedness and other obligations; (12) changes in financing markets or the inability of the Company to obtain financing on attractive terms; and (13) other risks in this Quarterly Report on Form 10-Q, including those under “Part II—Item 1A. Risk Factors”, and in “Part I—Item 1A. Risk Factors” in our most recent Annual Report on Form 10-K. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements. We caution that the foregoing list of factors is not exclusive, and readers should not place undue reliance upon any forward-looking statements.

Forward-looking statements included in this Quarterly Report on Form 10-Q speak only as of the date of this Quarterly Report on Form 10-Q or any earlier date specified for such statements. We do not undertake any obligation to update or revise any forward-looking statements to reflect any change in its expectations or any change in events, conditions, or circumstances on which any such statement is based, except as may be required under applicable securities laws. All subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf are qualified in their entirety by this Cautionary Note Regarding Forward-Looking Statements.

Business Overview

We are a global consumer lifestyle company marketing our brands through a wide range of licensing initiatives, digital subscriptions and content, online and location-based entertainment businesses and direct-to-consumer products. We reach consumers worldwide with products across four key market categories: Style and Apparel, including a variety of apparel and accessories products; Digital Entertainment and Lifestyle, including our creator platform, web and television-based entertainment, and our spirits and hospitality products; Sexual Wellness, including lingerie and intimacy products; and Beauty and Grooming, including fragrance, skincare, grooming and cosmetics.

We have three reportable segments: Licensing, Digital Subscriptions and Content, and Direct-to-Consumer. The Licensing segment derives revenue from trademark licenses for third-party consumer products, and online and location-based entertainment businesses. The Digital Subscriptions and Content segment derives revenue from the subscription of Playboy programming, which is distributed through various channels, including websites and domestic and international television, and sales of creator content offerings and memberships to consumers at the Playboy Club on playboy.com. The Direct-to-Consumer segment in prior year comparative periods is comprised of playboy.com e-commerce business, which in the third quarter of 2023 fully transitioned from an owned-and-operated model to a licensing model in the third quarter of 2023. As a result of such transition, the Yandy Sale, the TLA Sale, and the operating activities of Honey Birdette being classified as discontinued operations, there is no Direct-to-Consumer segment results presented for the three and nine months ended September 30, 2024.

Key Factors and Trends Affecting Our Business

We believe that our performance and future success depends on several factors that present significant opportunities for us but also pose risks and challenges, including those discussed below and referenced in the section of this Quarterly Report on Form 10-Q titled “Risk Factors”.

Pursuing a More Capital-Light Business Model

We continue to pursue a commercial strategy that relies on a more capital-light business model focused on revenue streams with higher margin, lower working capital requirements and higher growth potential. We are doing this by leveraging our flagship Playboy brand to scale our digital content businesses and attract best-in-class strategic partners. We are focused on our two key growth pillars: first, investing in the Playboy digital platform as we return to our roots as a place to see and be seen for creators and up and coming cultural influencers; and second, strategically expanding our licensing business in key categories and territories. We will continue to use our licensing business as a marketing tool and brand builder, in particular through our high-end designer collaborations and our large-scale strategic partnerships.

China Licensing Revenues

Our licensing revenues from China (including Hong Kong) as a percentage of our total revenues from continuing operations were 26% and 40% for the three months ended September 30, 2024 and 2023, respectively, and 24% and 41% for the nine months ended September 30, 2024 and 2023, respectively. At the end of the first quarter of 2023, we entered into a joint venture (the “China JV”) with Charactopia Licensing Limited, the brand management unit of Fung Group. The China JV owns and operates the Playboy consumer products business in mainland China, Hong Kong and Macau. In 2023, due to challenging economic conditions in China, collections from certain of our Chinese licensees slowed significantly, and we had to renegotiate terms of, or terminate, certain licenses. Future contract modifications and collectability issues could further impact the revenue recognized against our ongoing contract assets. Nonetheless, we continue to work with our China JV partner to re-invigorate our China-market Playboy direct-to-consumer and licensing businesses, by building on Playboy’s current roster of licensees and online storefronts and developing additional revenue through expanding into new product categories with new licensees.

Impairments

Our indefinite-lived intangible assets, including trademarks and goodwill, that are not amortized, and the carrying amounts of our long-lived assets, including property and equipment, stores, acquired intangible assets and right-of-use operating lease assets, may continue to be subject to impairment testing and impairments which reduce their value on our balance sheet. We periodically review for impairments whenever events or changes in our circumstances indicate that such assessment would be appropriate. We experienced further declines in revenue and profitability during the three months ended September 30, 2024, which caused us to test the recoverability of our indefinite-lived and long-lived assets and resulted in the impairments set forth in our condensed consolidated financial statements. If we continue to experience declines in revenue or profitability, which could occur upon further declines in consumer demand or additional discontinued operations, we may record further non-cash asset impairment charges as of the applicable impairment testing date.

Seasonality of Our Revenues

While we receive revenue throughout the year, our licensing business has experienced, and may continue to experience, seasonality. Historical seasonality of revenues may be subject to change as increasing pressure from competition and economic conditions impact our licensees and consumers. The further transition of our business to a capital-light business model may further impact the seasonality of our business in the future.

How We Assess the Performance of Our Business

In assessing the performance of our business, we consider a variety of performance and financial measures. The key indicators of the financial condition and operating performance of the business are revenues, salaries and benefits, and selling and administrative expenses. To help assess performance with these key indicators, we use Adjusted EBITDA as a non-GAAP financial measure. We believe this non-GAAP measure provides useful information to investors and expanded insight to measure revenue and cost performance as a supplement to the GAAP consolidated financial statements. See the “EBITDA and Adjusted EBITDA” section below for reconciliations of Adjusted EBITDA to net loss, the closest GAAP measure.

Components of Results of Operations

Revenues

We generate revenue from sales of trademark licenses for third-party consumer products and online and location-based entertainment businesses, and sales of creator content offerings and memberships to consumers on our creator-led platform on playboy.com, in addition to subscriptions to our programming, which is distributed through various channels, including websites and domestic and international television.

Trademark Licensing

We license trademarks under multi-year arrangements to third-party consumer products and online and location-based entertainment businesses. Typically, the initial contract term ranges between one to ten years. Renewals are separately negotiated through amendments. Under these arrangements, we generally receive an annual non-refundable minimum guarantee that is recoupable against a sales-based royalty generated during the license year. Earned royalties received in excess of the minimum guarantee (“Excess Royalties”) are typically payable quarterly. We recognize revenue for the total minimum guarantee specified in the agreement on a straight-line basis over the term of the agreement and recognize Excess Royalties only when the annual minimum guarantee is exceeded. Generally, Excess Royalties are recognized when they are earned. In the event that the collection of any royalty becomes materially uncertain or unlikely, we recognize revenue from our licensees on a cash basis.

Digital Subscriptions

Digital subscription revenue is derived from subscription sales of playboyplus.com and playboy.tv, which are online content platforms. We receive fixed consideration shortly before the start of the subscription periods from these contracts, which are primarily sold in monthly, annual, or lifetime subscriptions. Revenues from lifetime subscriptions are recognized ratably over a five-year period, representing the estimated period during which the customer accesses the platforms. Revenues from digital subscriptions are recognized ratably over the subscription period.

Revenues generated from the sales of creator content offerings and memberships to consumers via our creator platform on playboy.com are recognized at the point in time when the sale is processed. Revenues generated from subscriptions to our creator platform are recognized ratably over the subscription period.

TV and Cable Programming

We license programming content to certain cable television operators and direct-to-home satellite television operators who pay royalties based on monthly subscriber counts and pay-per-view and video-on-demand buys for the right to distribute our programming under the terms of affiliation agreements. Royalties are generally collected monthly and recognized as revenue as earned.

Cost of Sales

Cost of sales primarily consist of agency fees, website expenses, digital platform expenses, marketplace traffic acquisition costs, credit card processing fees, personnel and affiliate costs, including stock-based compensation and costs associated with branding events.

Selling and Administrative Expenses

Selling and administrative expenses primarily consist of corporate occupancy costs, personnel costs, including stock-based compensation, and contractor fees for accounting/finance, legal, human resources, information technology and other administrative functions, general marketing and promotional activities and insurance.

Impairments

Impairments consist of the impairments of our artwork held for sale, internally developed software, certain licensing contracts, right-of-use assets, Playboy-branded trademarks, trade names and goodwill.

Other Operating (Expense) Income, Net

Other operating (expense) income, net consists primarily of gains recognized from the sale of crypto assets and other miscellaneous items.

Nonoperating (Expense) Income

Interest Expense

Interest expense consists of interest on our long-term debt and the amortization of deferred financing costs and debt discount.

Gain on Extinguishment of Debt

In the first quarter of 2023, we recorded a loss on partial extinguishment of debt in the amount of $1.8 million related to the write-off of unamortized debt discount and deferred financing costs as a result of $45 million in prepayments of our senior debt pursuant to the third and fourth amendments of our 2021 Credit Agreement in February 2023. In the second quarter of 2023, we recorded a gain on partial extinguishment of debt in amount of $8.0 million upon the amendment and restatement of the 2021 Credit Agreement (as such term is defined in Note 10, Debt within the notes to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q; refer to Note 10, Debt and “Liquidity and Capital Resources” for additional details).

Fair Value Remeasurement Gain

Fair value remeasurement gain consists of changes to the fair value of mandatorily redeemable preferred stock liability related to its remeasurement.

Other Income, Net

Other income, net consists primarily of other miscellaneous nonoperating items, such as foreign exchange gains or losses, bank charges as well as non-recurring transaction fees.

(Expense) Benefit from Income Taxes

(Expense) benefit from income taxes consists of an estimate for U.S. federal, state, and foreign income taxes based on enacted rates, as adjusted for allowable credits, deductions, uncertain tax positions, changes in deferred tax assets and liabilities, and changes in the tax law. Due to cumulative losses, we maintain a valuation allowance against our U.S. federal and state deferred tax assets, as well as our Australia, U.K. and China deferred tax assets.

Results of Operations

Comparison of the Three Months Ended September 30, 2024 and 2023

The following table summarizes key components of our results of operations for the periods indicated (in thousands, except percentages):

The following table sets forth our condensed consolidated statements of operations data expressed as a percentage of total revenue for the periods indicated:

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Net Revenues

The decrease in net revenues for the three months ended September 30, 2024, as compared to the prior year comparative period, was primarily due to lower licensing revenue of $3.6 million, largely driven by the termination of certain Chinese licensing agreements in 2023, partly offset by $0.3 million of higher revenue from our creator platform.

Cost of Sales

The increase in cost of sales for the three months ended September 30, 2024, as compared to the prior year comparative period, was primarily due to a $4.0 million increase in licensing commissions, primarily due to a nonrecurring reversal of commission accrual in the prior year related to the termination of certain Chinese licensing agreements, which was partly offset by $0.1 million less of licensing product costs, primarily due to the termination of Playboy’s e-commerce licensing agreement in the second quarter of 2024 and a $0.5 million decrease in payment processing and agency fees related to our creator platform.

Selling and Administrative Expenses

The increase in selling and administrative expenses for the three months ended September 30, 2024, as compared to the prior year comparative period, was primarily due to a $1.6 million increase in stock-based compensation expense and a $0.2 million increase in marketing spend, partly offset by lower audit, legal and consulting fees of $0.7 million, a $0.5 million decrease in China JV expenses due to cost cuts, a $0.3 million decline in payroll expenses due to headcount reductions, a $0.3 million reduction in severance expense, and a $0.1 million decrease in insurance expense due to the renegotiation of our insurance policies.

Impairments

The increase in impairments for the three months ended September 30, 2024, as compared to the prior year comparative period, was related to the write-off of our internally developed software of $4.7 million and the write-down of goodwill of $17.0 million, offset by $0.4 million of impairment charges on a certain licensing contract recorded in the prior year comparative period.

Other Operating Expense, Net

The decrease in other operating expense, net was due to the loss from settlement of a promissory note in the prior year comparative period.

Nonoperating (Expense) Income

Interest Expense

The increase in interest expense for the three months ended September 30, 2024, as compared to the prior year comparative period, was primarily due to the higher interest rate on our senior secured debt during the three months ended September 30, 2024, compared to the prior year comparative period, as a result of the amendment and restatement of our senior secured debt in May 2023 and the A&R First Amendment in November 2023.

Other Income, Net

The increase in other income, net for the three months ended September 30, 2024, as compared to the prior year comparative period, was primarily due to foreign exchange adjustment in relation to certain of our Chinese licenses denominated in foreign currency.

(Expense) Benefit from Income Taxes

The change from benefit from income taxes to expense for the three months ended September 30, 2024, as compared to the prior year comparative period, was primarily driven by the change in valuation allowance due to the reduction in net indefinite-lived deferred tax liabilities, offset by increased foreign income taxes in the three months ended September 30, 2024.

Comparison of the Nine Months Ended September 30, 2024 and 2023

The following table summarizes key components of our results of operations for the periods indicated (in thousands, except percentages):

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The following table sets forth our condensed consolidated statements of operations data expressed as a percentage of total revenue for the periods indicated:

Net Revenues

The decrease in net revenues for the nine months ended September 30, 2024, as compared to the prior year comparative period, was primarily due to lower licensing revenue of $14.2 million, largely driven by the termination of certain Chinese licensing agreements in 2023, lower direct-to-consumer revenue as a result of $5.0 million less revenue from Playboy’s e-commerce site, as it changed from our ownership and operation to a licensed business model in the third quarter of 2023, partly offset by $1.7 million of higher revenue from our creator platform.

Cost of Sales

The decrease in cost of sales for the nine months ended September 30, 2024, as compared to the prior year comparative period, was primarily due to inventory reserve charges of $3.7 million related to Playboy’s e-commerce site recognized in the prior year comparative period, a $3.4 million decrease in direct-to-consumer product costs from Playboy’s e-commerce site, as it changed from our ownership and operation to a licensed business model in the third quarter of 2023, $1.1 million less of licensing product costs due to the termination of Playboy’s e-commerce licensing agreement in the second quarter of 2024, a $0.5 million decrease in payment processing and agency fees related to our creator platform, and $1.3 million less of digital subscriptions product costs, which were partly offset by $5.5 million of higher licensing commissions, primarily due to a partial reversal of commission accrual in the prior year comparative period related to the termination of certain Chinese licensing agreements.

Selling and Administrative Expenses

The decrease in selling and administrative expenses for the nine months ended September 30, 2024, as compared to the prior year comparative period, was primarily due to a $4.0 million decrease in stock-based compensation expense, lower technology costs of $1.0 million, primarily due to a restructuring charge taken on direct-to-consumer cloud-based software attributable to continuing operations in 2023, a $3.2 million decline in payroll expense due to headcount reductions, a $1.9 million reduction in severance expense, a $2.7 million decrease in China JV expense due to cost cuts and non-recurring transaction expenses in 2023, lower audit, legal and consulting fees of $3.8 million, a $1.4 million decrease in marketing spend, and a $2.0 million decrease in insurance expense due to the renegotiation of our insurance policies.

Impairments

The decrease in impairments for the nine months ended September 30, 2024, as compared to the prior year comparative period, was primarily due to $65.5 million of impairment charges on Playboy-branded trademarks as well as $8.5 million of impairment charges on a certain licensing contract recorded in the prior year comparative period, partly offset by impairment charges of $17.0 million on our goodwill in the third quarter of 2024, impairment charges of $4.7 million related to our internally developed software in the third quarter of 2024, $2.4 million of impairment charges on our artwork held for sale in the first quarter of 2024 and $0.6 million of impairment charges on our corporate leases in the second quarter of 2024.

Other Operating Income (Expense) Income, Net

The decrease in other operating income (expense), net was due to the $0.7 million loss from settlement of a promissory note, partly offset by a $0.2 million gain on sale of our crypto assets in the prior year comparative period.

Nonoperating (Expense) Income

Interest Expense

The increase in interest expense for the nine months ended September 30, 2024, as compared to the prior year comparative period, was primarily due to the higher interest rate on our senior secured debt during the nine months ended September 30, 2024, compared to the prior year comparative period, as a result of the amendment and restatement of our senior secured debt in May 2023 and the A&R First Amendment in November 2023.

Gain on Extinguishment of Debt

Gain on extinguishment of debt for the nine months ended September 30, 2023 represented a $6.1 million gain due to the partial extinguishment of debt upon the amendment and restatement of our senior secured credit agreement in the second quarter of 2023, net of a $1.8 million loss recorded in the first quarter of 2023 due to the partial extinguishment of debt related to $45 million of prepayments of our senior debt.

Fair Value Remeasurement Gain

Fair value remeasurement gain for the nine months ended September 30, 2023 represented the remeasurement of our mandatorily redeemable preferred stock liability to its fair value during the period, which was exchanged (and thereby eliminated) in connection with the A&R Credit Agreement in the second quarter of 2023.

Other Income, Net

The increase in other income, net for the nine months ended September 30, 2024, as compared to the prior year comparative period, was primarily due to foreign exchange adjustment in relation to certain of our Chinese licenses denominated in foreign currency.

(Expense) Benefit from Income Taxes

The change from benefit to expense from income taxes for the nine months ended September 30, 2024, as compared to the prior year comparative period, was primarily driven by the change in valuation allowance due to a reduction in net indefinite-lived deferred tax liabilities, offset by increased foreign income taxes in the nine months ended September 30, 2024.

Non-GAAP Financial Measures

In addition to our results determined in accordance with GAAP, we believe the following non-GAAP measure is useful in evaluating our operational performance. We use the following non-GAAP financial information to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that non-GAAP financial information, when taken collectively, may be helpful to investors in assessing our operating performance.

EBITDA and Adjusted EBITDA

“EBITDA” is defined as net income or loss before results from discontinued operations, interest, income tax expense or benefit, and depreciation and amortization. “Adjusted EBITDA” is defined as EBITDA adjusted for stock-based compensation and other special items determined by management. Adjusted EBITDA is intended as a supplemental measure of our performance that is neither required by, nor presented in accordance with, GAAP. We believe that the use of EBITDA and Adjusted EBITDA provides an additional tool for investors to use in evaluating ongoing operating results and trends and in comparing our financial measures with those of comparable companies, which may present similar non-GAAP financial measures to investors. However, investors should be aware that when evaluating EBITDA and Adjusted EBITDA, we may incur future expenses similar to those excluded when calculating these measures. In addition, our presentation of these measures should not be construed as an inference that our future results will be unaffected by unusual or nonrecurring items. Our computation of Adjusted EBITDA may not be comparable to other similarly titled measures computed by other companies, because not all companies may calculate Adjusted EBITDA in the same fashion.

In addition to adjusting for non-cash stock-based compensation, non-cash charges for the fair value remeasurements of certain liabilities and non-recurring non-cash impairments, asset write-downs and inventory reserve charges, we typically adjust for non-operating expenses and income, such as non-recurring special projects, including the implementation of internal controls, non-recurring gain or loss on the sale of assets, expenses associated with financing activities, and reorganization and severance expenses that result from the elimination or rightsizing of specific business activities or operations.

Because of these limitations, EBITDA and Adjusted EBITDA should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. We compensate for these limitations by relying primarily on our GAAP results and using EBITDA and Adjusted EBITDA on a supplemental basis. Investors should review the reconciliation of net loss to EBITDA and Adjusted EBITDA below and not rely on any single financial measure to evaluate our business.

The following table reconciles net loss to EBITDA and Adjusted EBITDA (in thousands):

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• Impairments for the three months ended September 30, 2024 related primarily to impairments of our internally developed software and goodwill related to our Digital Subscriptions and Content business.
• Impairments for the nine months ended September 30, 2024 related to impairment charges on our artwork held for sale, corporate leases and assets related to our Digital Subscriptions and Content business.
• Impairments for the three and nine months ended September 30, 2023 related primarily to the impairments of intangible assets, including goodwill and impairments on certain of our licensing contracts.
• Inventory reserve charges for the nine months ended September 30, 2023 related to non-cash inventory reserve charges, excluding certain ordinary inventory reserve items, recorded in the first quarter of 2023 to reflect the restructuring of the Playboy Direct-to-Consumer business.
• Mandatorily redeemable preferred stock fair value remeasurement for the three and nine months ended September 30, 2023 related to the fair value remeasurement, non-cash fair value gain of the liability for such preferred stock.
• Write-down of capitalized software for the nine months ended September 30, 2023 related to a restructuring charge taken on direct-to-consumer cloud-based software in the first quarter of 2023, excluding costs related to discontinued operations.
• Adjustments for the three and nine months ended September 30, 2024 are primarily related to non-cash fair value change related to contingent liabilities fair value remeasurement with respect to potential shares issuable for the acquisition of GlowUp that remained unsettled as of September 30, 2024, loss on the sale of artwork, consulting, advisory and other costs relating to corporate transactions and other strategic opportunities as well as reorganization and severance costs resulting in the elimination or rightsizing of specific business activities or operations.
• Adjustments for the three and nine months ended September 30, 2023 are related to non-cash fair value change related to contingent liabilities fair value remeasurement with respect to potential shares issuable for the acquisition of GlowUp that remained unsettled as of September 30, 2023, consulting, advisory and other costs relating to corporate transactions and other strategic opportunities, as well as reorganization and severance costs resulting in the elimination or rightsizing of specific business activities or operations.

Segments

Our Chief Executive Officer is our Chief Operating Decision Maker. Our segment disclosure is based on our intention to provide the users of our condensed consolidated financial statements with a view of the business from our perspective. We operate our business in three primary operating and reportable segments: Licensing, Digital Subscriptions and Content and Direct-to-Consumer. Our Licensing segment includes the licensing of one or more of our trademarks, our Playboy retail platform operations effective July 2023, and/or images for consumer products and online and location-based entertainment businesses. Our Digital Subscriptions and Content segment includes the production, marketing and sales of programming under the Playboy brand name, which is distributed through various channels, including domestic and international television, and sales of creator content offerings and memberships to consumers through the Playboy Club on playboy.com. Effective as of the third quarter of 2024, our Direct-to-Consumer segment constituted discontinued operations. The Direct-to-Consumer segment in prior year comparative periods is comprised of playboy.com e-commerce business, which in the third quarter of 2023 fully transitioned from an owned-and-operated model to a licensing model in the third quarter of 2023. The Honey Birdette direct-to consumer business, which derives revenue from sales of consumer products sold online and at Honey Birdette brick-and-mortar stores, met the criteria for discontinued operations classification as of September 30, 2024 (refer to Note 3, Assets and Liabilities Held for Sale and Discontinued Operations). Therefore, while the Direct-to-Consumer segment is listed in the table below, its results are excluded from the table below and classified as discontinued operations in our condensed consolidated statements of operations for all periods presented.

Comparison of the Three Months Ended September 30, 2024 and 2023

The following are our results of financial performance from continuing operations by segment for each of the periods presented (in thousands):

Licensing

The decrease in net revenues for the three months ended September 30, 2024, compared to the comparable prior year period, was primarily due to the termination of certain Chinese licensing agreements in the fourth quarter of 2023.

The decrease in operating income for the three months ended September 30, 2024, compared to the comparable prior year period, was primarily due to a $4.0 million increase in licensing commissions primarily due to a nonrecurring reversal of commission accrual in the prior year comparative period related to the termination of certain Chinese licensing agreements and a $3.6 million decrease in licensing gross profit as a result of lower revenue, partly offset by the $0.4 million impairment of a certain licensing contract in the prior year comparative period, $0.1 million less of lower licensing product costs due to the termination of Playboy’s e-commerce licensing agreement in the second quarter of 2024 and a $0.3 million decrease in legal fees and China JV expenses.

Digital Subscriptions and Content

The increase in net revenues for the three months ended September 30, 2024, compared to the comparable prior year period, was primarily due to a $0.3 million increase in net revenue from our creator platform.

The decrease in operating loss for the three months ended September 30, 2024, compared to the comparable prior year period, was primarily due to non-cash impairment charges of $4.7 million related to our internally developed software and $17.0 million related to our goodwill, $0.9 million increase in expenses related to our creator platform and a $0.6 million increase in stock-based compensation expense.

Direct-to-Consumer

The change in net revenues and operating loss for the three months ended September 30, 2024, compared to the comparable prior year period, was immaterial as the majority of our direct-to-consumer operating activities are classified as discontinued operations in the condensed consolidated statements of operations for the three months ended September 30, 2024 and 2023.

Corporate

The decrease in corporate expenses for the three months ended September 30, 2024, compared to the comparable prior year period, was primarily due to a $1.1 million decrease in payroll expenses due to headcount reductions and a $0.8 million decrease in audit and consulting services, partly offset by a $1.0 million increase in stock-based compensation expense.

Comparison of the Nine Months Ended September 30, 2024 and 2023

The following are our results of financial performance from continuing operations by segment for each of the periods presented (in thousands):

Licensing

The decrease in net revenues for the nine months ended September 30, 2024, compared to the comparable prior year period, was primarily due to the termination of certain Chinese licensing agreements in the fourth quarter of 2023.

The change from an operating loss to operating income for the nine months ended September 30, 2024, compared to the comparable prior year period, was primarily due to $65.5 million of non-cash impairment charges and $8.5 million of impairment of a certain licensing contract in the prior year comparative period, $1.1 million less of licensing product costs due to the termination of Playboy’s e-commerce licensing agreement in the second quarter of 2024 and a $5.2 million decrease in legal fees and China JV expenses, partly offset by a $14.2 million decrease in licensing gross profit as a result of lower revenue and a $5.5 million increase in licensing commissions, primarily due to a partial reversal of commission accrual in the prior year comparative period related to the termination of certain Chinese licensing agreements.

Digital Subscriptions and Content

The increase in net revenues for the nine months ended September 30, 2024, compared to the comparable prior year period, was primarily due to a $1.7 million increase in net revenues from our creator platform, partly offset by a $0.7 million decrease in other digital subscriptions and content revenue.

The increase in operating loss for the nine months ended September 30, 2024, compared to the comparable prior year period, was primarily due to a $7.2 million increase in expenses related to our creator platform, non-cash impairment charges of $4.7 million related to our internally developed software and $17.0 million related to goodwill, partly offset by a $1.0 million reversal of stock based-compensation in the prior year comparative period, a $1.0 million increase in net revenues and a $1.2 million decrease in payroll.

Direct-to-Consumer

Net revenues for the nine months ended September 30, 2023 were due to $5.0 million of revenue from Playboy’s e-commerce site, which changed from our ownership and operation to a licensed business model in the third quarter of 2023.

Operating loss for the nine months ended September 30, 2023 was primarily due to inventory reserve charges of $3.7 million related to Playboy’s e-commerce site, a $1.0 million restructuring charge taken in 2023 on direct-to-consumer cloud-based software attributable to continuing operations, payroll expense of $2.2 million from Playboy’s e-commerce site, which changed from our ownership and operation to a licensed business model in the third quarter of 2023, and $1.6 million in marketing spend related to our discontinued e-commerce site.

Corporate

The decrease in corporate expenses for the nine months ended September 30, 2024, compared to the comparable prior year period, was primarily due to a $6.0 million decrease in stock-based compensation expense, a $1.1 million decrease in severance costs, a decrease of $2.0 million in insurance expense, a decrease of $1.6 million in audit and consulting services and a $3.0 million decrease in payroll expenses due to headcount reductions, partly offset by $2.4 million of impairments on our artwork held for sale and a loss of $0.5 million on the sale of assets in the first quarter of 2024.

Liquidity and Capital Resources

Sources of Liquidity

Our sources of liquidity are cash generated from operating activities, which primarily includes cash derived from revenue generating activities, from financing activities, including proceeds from our issuance of debt, and proceeds from stock offerings (as described further below), and from investing activities, which includes the sale of assets (as described further below). As of September 30, 2024, our principal source of liquidity was cash in the amount of $9.5 million, which is primarily held in operating and deposit accounts.

On January 24, 2023, we issued 6,357,341 shares of our common stock in a registered direct offering to a limited number of investors. We received $15 million in gross proceeds from the registered direct offering, and net proceeds of $13.9 million, after the payment of offering fees and expenses.

We also completed a rights offering in February 2023, pursuant to which we issued 19,561,050 shares of our common stock. We received net proceeds of approximately $47.6 million from the rights offering, after the payment of offering fees and expenses. We used $45 million of the net proceeds from the rights offering for repayment of debt under our senior secured credit agreement, with the remainder to be used for other general corporate purposes.

On April 4, 2023, we completed the Yandy Sale to an unaffiliated, third-party buyer. The consideration we received for the Yandy Sale consisted of $1.0 million in cash and a $2.0 million secured promissory note payable over three years (which note was then settled in the third quarter of 2023 for a cash payment to us of $1.3 million).

On November 3, 2023, we completed the TLA Sale to an unaffiliated, third-party buyer for approximately $13.5 million in cash (the “Purchase Price”). Approximately $2.1 million of the Purchase Price was placed into a short-term escrow account at the closing of the TLA Sale in connection with a post-closing working capital adjustment, certain possible indemnification claims payable by us and for certain post-closing items to be completed by us. As of the date of this Quarterly Report on Form 10-Q, such escrow funds had been released to us in full.

In November 2023, we also sold a small amount of our art assets, and we have continued the sale of our art assets in 2024.

On November 5, 2024, we issued 14,900,000 unregistered shares of our common stock in a private placement to a third-party investor, at a price of $1.50 per share, for total proceeds to us of $22.35 million.

Due to challenging economic conditions in China, collections from certain of our Chinese licensees slowed significantly in 2022 and 2023, and we have renegotiated terms of certain agreements. In October 2023, we also terminated licensing agreements with certain Chinese licensees. We have replaced certain terminated licensees with new licensees in China. Future contract modifications and collectability issues could further impact the revenue recognized against our ongoing contract assets.

Since going public in 2021, we have yet to generate operating income from our core business operations and have incurred significant operating losses. Our operating losses for the nine months ended September 30, 2024 were $44.3 million. We expect to continue to incur operating losses for the foreseeable future.

Our capital expenditures and working capital requirements in 2024 have been, and are expected to continue to be, largely consistent with 2023, as we have continued to invest in our Digital Subscriptions and Content segment. We may, however, need additional cash resources to fund our operations until the Digital Subscriptions and Content segment achieves a level of revenue that provides for operating profitability. To the extent that our current resources are insufficient to satisfy our cash requirements, we may need to seek additional equity or debt financing, or dispose of additional assets, and there can be no assurance that we will be successful in these efforts. If the financing is not available, or if the terms of financing are less desirable than we expect, we may be forced to decrease our planned level of investment in our creator platform or scale back its operations, which could have an adverse impact on our business and financial prospects.

We evaluated whether there are any conditions and events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern over the next twelve months from the date of filing this Quarterly Report on Form 10-Q. Although consequences of ongoing macroeconomic uncertainty could adversely affect our liquidity and capital resources in the future, and cash requirements may fluctuate based on the timing and extent of many factors, such as those discussed above, we believe our existing sources of liquidity, along with proceeds from asset dispositions and savings from cost reductions initiatives, will be sufficient to meet our obligations as they become due under the A&R Credit Agreement and our other obligations for at least one year following the date of the filing of this Quarterly Report on Form 10-Q. We may seek additional equity or debt financing in the future to satisfy capital requirements, respond to adverse developments such as changes in our circumstances or unforeseen events or conditions, or fund organic or inorganic growth opportunities. However, in the event that additional financing is required from third-party sources, we may not be able to raise it on acceptable terms or at all.

Debt

On May 10, 2023, we entered into an amendment and restatement of our prior credit agreement to reduce the interest rate applicable to our senior secured debt and the implied interest rate on our Series A Preferred Stock, exchange (and thereby eliminate) our outstanding Series A Preferred Stock, and obtain additional covenant relief and funding. For the terms of the 2021 Credit Agreement, as amended, refer to Note 10, Debt, within the notes to our audited consolidated financial statements set forth in our Annual Report on Form 10-K filed with the SEC on March 29, 2024.

In connection with the A&R Credit Agreement, Fortress Credit Corp. and its affiliates became our lender with respect to approximately 90% of the term loans under the A&R Credit Agreement. Fortress exchanged 50,000 shares of our Series A Preferred Stock (representing all of our issued and outstanding preferred stock) for approximately $53.6 million of the A&R Term Loans, and we obtained approximately $11.8 million of additional funding as part of the A&R Term Loans. As a result, our Series A Preferred Stock was eliminated, and the principal balance of the A&R Term Loans under the A&R Credit Agreement became approximately $210.0 million on the Restatement Date.

In connection with the A&R Credit Agreement, the term loan under the 2021 Credit Agreement was apportioned into approximately $20.6 million of Tranche A term loans and approximately $189.4 million of Tranche B term loans. The prior amortization payments applicable to the term loan under the 2021 Credit Agreement were eliminated. The A&R Credit Agreement only requires that the smaller Tranche A be subject to quarterly amortization payments of approximately $76,000 per quarter. The benchmark rate for the A&R Term Loans is the applicable term of SOFR as published by the U.S. Federal Reserve Bank of New York (rather than LIBOR, as under the 2021 Credit Agreement). As of the Restatement Date, Tranche A accrued interest at SOFR plus 6.25% and 0.10% SOFR adjustment, with a SOFR floor of 0.50%. As of the Restatement Date, Tranche B accrued interest at SOFR plus 4.25% and 0.10% SOFR adjustment, with a SOFR floor of 0.50%.

We obtained additional leverage covenant relief through the first quarter of 2025, with testing of a total net leverage ratio covenant commencing following the quarter ending March 31, 2025, which covenant will be initially set at 7.25:1.00, reducing in 0.25 increments per quarter until the ratio reaches 5.25:1.00 for the quarter ending March 31, 2027.

In July 2023, DBD Credit Funding LLC, an affiliate of Fortress, became the administrative agent and collateral agent under the A&R Credit Agreement.

In connection with the TLA Sale, on November 2, 2023, we entered into Amendment No. 1 to the A&R Credit Agreement, to permit, among other things: (a) the TLA Sale and the sale of certain other assets (and the proceeds of such sales will not be required to prepay the A&R Term Loans); and (b) the Company to elect, through August 31, 2025, to pay in cash accrued interest equal to the applicable SOFR plus 1.00%, with the remainder of any applicable accrued interest not paid in cash capitalized into the A&R Term Loans. The other terms of the A&R Credit Agreement remained substantially unchanged from those prior to the A&R First Amendment.

On March 27, 2024, we entered into Amendment No. 2 to the A&R Credit Agreement, which provided for, among other things:

(a) the amendment of the Total Net Leverage Ratio covenant to (i) suspend testing of such covenant until the quarter ending June 30, 2026, (ii) adjust the Total Net Leverage Ratio financial covenant levels once the covenant testing is resumed, and (iii) add a mechanism for the Total Net Leverage Ratio to be eliminated permanently upon the satisfaction of certain prepayment-related conditions;

(b) the addition of a covenant to maintain a $7.5 million minimum balance of unrestricted cash and cash equivalents (on a consolidated basis), subject to periodic testing and certification, as well as the ability to cure a below-minimum balance, and which covenant will be in effect (i) from March 27, 2024 until March 31, 2026 and (ii) from and after the Financial Covenant Sunset Date; and

(c) that assignments of commitments or loans under the A&R Credit Agreement from existing lenders to certain eligible assignees under the A&R Credit Agreement (i.e. a commercial bank, insurance company, investment or mutual fund or other entity that is an “accredited investor” (as defined in Regulation D under the Securities Act of 1933) and which extends credit or buys loans in the ordinary course of business) shall not require consent from us while the minimum cash balance financial covenant is in effect.

The other terms of the A&R Credit Agreement prior to the A&R Second Amendment remained substantially unchanged.

The stated interest rate of Tranche A and Tranche B term loans as of September 30, 2024 was 11.46% and 9.46%, respectively. The stated interest rate of Tranche A and Tranche B term loans as of December 31, 2023 was 11.41% and 9.41%, respectively. The effective interest rate of Tranche A and Tranche B A&R Term Loans as of September 30, 2024 was 12.08% and 13.32%, respectively. The effective interest rate of Tranche A and Tranche B A&R Term Loans as of December 31, 2023 was 12.03% and 13.27%, respectively. The difference between the stated interest rate and effective interest rate for Tranche B as of September 30, 2024 and December 31, 2023 is driven primarily by the amortization of $21.3 million of debt discount which is included in the calculation of the effective interest rate.

Leases

Our principal lease commitments are for office space and operations under several noncancelable operating leases with contractual terms expiring through 2033. Some of these leases contain renewal options and rent escalations. As of September 30, 2024 and December 31, 2023, our fixed leases were $10.8 million and $13.4 million, respectively, with $3.2 million and $3.3 million due in the next 12 months. For further information on our lease obligations, refer to Note 13, Commitments and Contingencies within the notes to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.

Cash Flows

The following table summarizes our cash flows from continuing operations for the periods indicated (in thousands):

Cash Flows from Operating Activities

The decrease in net cash used in operating activities from continuing operations for nine months ended September 30, 2024, compared to the prior year comparable period, was primarily due to a reduction in net loss from continuing operations of $33.4 million, partly offset by changes in assets and liabilities that had a current period cash flow impact, such as $5.0 million of net changes in working capital and $24.6 million of changes in non-cash charges. The change in assets and liabilities, as compared to the prior year comparable period, was primarily driven by a $12.5 million increase in deferred revenues due to the termination of certain Chinese licensing agreements in the prior year comparative period, a $6.5 million increase in accrued agency fees and commissions primarily due to a nonrecurring reversal of commission accrual in the prior year comparative period related to the termination of certain Chinese licensing agreements, a $1.8 million decrease in prepaid expenses and other current assets, and a $0.6 million decrease in contract assets due to the impairment, modification or termination of certain trademark licensing contracts, partly offset by a $8.8 million decrease in other liabilities and accrued expenses, $4.9 million change in accounts receivable due to the timing of royalties collections and modifications of certain trademark licensing contracts, a $1.7 million decrease in accounts payable due to the timing of payments, a $0.6 million decrease in other liabilities, net, and a $0.4 million decrease in operating lease liabilities. The change in non-cash charges, compared to the change in the prior year comparable period, was primarily driven by a $49.3 million decrease in non-cash impairment charges, a $3.6 million decrease in stock-based compensation expense, and a decrease in inventory reserve charges of $3.4 million, partly offset by a $6.1 million net gain on the extinguishment of debt in 2023, a $6.9 million change in fair value remeasurement charges, a $11.0 million increase in deferred income taxes, and $6.3 million of capitalized paid-in-kind interest.

Cash Flows from Investing Activities

The decrease in net cash provided by investing activities for the nine months ended September 30, 2024 over the prior year comparable period was primarily due to $1.0 million of proceeds from the Yandy Sale and $1.3 million of proceeds from the repayment of a promissory note related to the Yandy Sale in the prior year comparable period, partly offset by proceeds from the sale of certain of our artwork of $1.6 million and a $0.2 million decrease in purchases of property and equipment.

Cash Flows from Financing Activities

The change in net cash (used in) provided by financing activities for the nine months ended September 30, 2024, compared to the prior year comparable period, was primarily due to net proceeds of $13.9 million from our registered direct offering in January of 2023, net proceeds of $47.6 million from the issuance of common stock in our rights offering in February of 2023, and gross proceeds of $11.8 million from the amendment and restatement of our senior secured debt in the second quarter of 2023, partly offset by a $45.3 million decrease in the repayment of long-term debt from the proceeds of our equity offerings.

Contractual Obligations

For the nine months ended September 30, 2024, there were no material changes to our contractual obligations from December 31, 2023, as disclosed in our audited consolidated financial statements included in our Annual Report on Form 10-K filed on March 29, 2024.

Critical Accounting Estimates

Our interim condensed consolidated financial statements have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the condensed consolidated financial statements, as well as the reported expenses incurred during the reporting periods. Estimates and judgments used in the preparation of our interim condensed consolidated financial statements are, by their nature, uncertain and unpredictable, and depend upon, among other things, many factors outside of our control, such as demand for our products, inflation, foreign currency exchange rates, economic conditions and other current and future events, such as the impact of public health crises and epidemics and global hostilities. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

During the nine months ended September 30, 2024, there were no material changes to our critical accounting policies or in the methodology used for estimates from those described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K filed with the SEC on March 29, 2024.

Recent Accounting Pronouncements

Refer to Note 1, Basis of Presentation and Summary of Significant Accounting Policies, within the notes to the to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for more information about recent accounting pronouncements, the timing of their adoption, and our assessment, to the extent we have made one, of their potential impact on our financial condition and results of operations.

We are exposed to a variety of market and other risks, including the effects of changes in interest rates, inflation, and foreign currency exchange rates, as well as risks to the availability of funding sources, hazard events, and specific asset risks.

Interest Rate Risk

The market risk inherent in our financial instruments and our financial position represents the potential loss arising from adverse changes in interest rates. As of September 30, 2024 and December 31, 2023, we had unrestricted cash and cash equivalents of $9.5 million and $28.1 million, respectively, primarily held in interest-bearing deposit accounts for which the fair market value would be affected by changes in the general level of U.S. interest rates. As of September 30, 2024 and December 31, 2023, we had restricted cash of $1.7 million and $3.0 million, respectively. However, an immediate 10% change in interest rates would not have a material effect on the fair market value of our cash and restricted cash and cash equivalents.

In order to maintain liquidity and fund business operations, our long-term A&R Term Loans are subject to a variable interest rate based on prime, federal funds, or SOFR plus an applicable margin based on our total net leverage ratio. The nature and amount of our long-term debt can be expected to vary as a result of future business requirements, market conditions, and other factors. We may elect to enter into interest rate swap contracts to reduce the impact associated with interest rate fluctuations, but as of September 30, 2024, we have not entered into any such contracts.

As of September 30, 2024 and December 31, 2023, we had outstanding debt obligations of $217.7 million and $211.6 million, respectively, which accrued interest at a rate of 11.46% and 9.46% for Tranche A and Tranche B term loans, respectively, during the third quarter of 2024. Based on the balance outstanding under our A&R Term Loans at September 30, 2024, we estimate that a 0.5% or 1% increase or decrease in underlying interest rates would increase or decrease annual interest expense by $1.1 million or $2.3 million, respectively, in any given fiscal year. See also our “Risk Factors—Risks Related to Our Business and Industry—Our variable rate debt subjects us to interest rate risk that could cause our debt service obligations to increase significantly.” included in Item 1A of our Annual Report on Form 10-K filed on March 29, 2024.

Foreign Currency Risk

We transact business in various foreign currencies and have significant international revenues, as well as costs denominated in foreign currencies other than the U.S. dollar. Accordingly, changes in exchange rates, and in particular a strengthening of the U.S. dollar, have in the past, and may in the future, negatively affect our revenue and other operating results as expressed in U.S. dollars. For the three and nine months ended September 30, 2024 and 2023, there were no material revenues from continuing operations denominated in foreign currency. For the three months ended September 30, 2024 and 2023, we derived approximately 60% and 58%, respectively, of our revenue from discontinued operations outside the United States, all of which was denominated in foreign currency. For the nine months ended September 30, 2024 and 2023, we derived approximately 58% and 57%, respectively, of our revenue from discontinued operations outside the United States, all of which was denominated in foreign currency. We expect the percentage of revenue derived from outside the United States to increase in future periods as we continue to expand globally. Revenue and related expenses generated from our international operations (other than most international licenses) are denominated in the functional currencies of the corresponding country. The functional currency of our subsidiaries that either operate in or support these markets is generally the same as the corresponding local currency. The majority of our international licenses are denominated in U.S. dollars. The results of operations of, and certain of our intercompany balances associated with, our international operations are exposed to foreign exchange rate fluctuations. Upon consolidation, as exchange rates vary, our revenue and other operating results may differ materially from expectations, and we may record significant gains or losses on the remeasurement of intercompany balances. We do not have an active foreign exchange hedging program.

There are numerous factors impacting the amount by which our financial results are affected by foreign currency translation and transaction gains and losses resulting from changes in currency exchange rates, including, but not limited to, the volume of foreign currency-denominated transactions in a given period. Foreign currency transaction exposure from a 10% movement of currency exchange rates would have a material impact on our results, assuming no foreign currency hedging. For the three and nine months ended September 30, 2024, we recorded an unrealized gain of $1.1 million and $0.2 million, respectively, which is included in accumulated other comprehensive income as of September 30, 2024. This primarily relates to our discontinued operations of Honey Birdette and the decrease in the U.S. dollar against the Australian dollar during the three and nine months ended September 30, 2024, respectively.

Inflation Risk

Inflationary factors such as increases in the cost of our product and overhead costs may adversely affect our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations in recent periods, a high rate of inflation in the future may have an adverse effect on our ability to maintain or improve current levels of revenue, gross margin and selling and administrative expenses, or the ability of our customers to make discretionary purchases of our goods and services. See our “Risk Factors—Risks Related to Our Business and Industry—Our business depends on consumer purchases of discretionary goods and content, which can be negatively impacted during an economic downturn or periods of inflation. This could materially impact our sales, profitability and financial condition,” included in Item 1A of our Annual Report on Form 10-K filed on March 29, 2024.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation and supervision of our Chief Executive Officer and our Chief Financial Officer, have evaluated our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were not effective due to the material weaknesses in our internal control over financial reporting described below. However, after giving full consideration to such material weaknesses, and the additional analyses and other procedures that we performed to ensure that our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q were prepared in accordance with GAAP, our management has concluded that our condensed consolidated financial statements present fairly, in all material respects, our financial position, results of operations and cash flows for the periods disclosed in conformity with GAAP.

Management has determined that the Company had the following material weaknesses in its internal control over financial reporting:

Control Environment, Risk Assessment, and Monitoring

We did not maintain appropriately designed entity-level controls impacting the control environment, risk assessment procedures, and effective monitoring controls to prevent or detect material misstatements to the consolidated financial statements. These deficiencies were attributed to: (i) lack of structure and responsibility, insufficient number of qualified resources and inadequate oversight and accountability over the performance of controls, (ii) ineffective identification and assessment of risks impacting internal control over financial reporting, and (iii) ineffective evaluation and determination as to whether the components of internal control were present and functioning.

Control Activities and Information and Communication

These material weaknesses contributed to the following additional material weaknesses within certain business processes and the information technology environment:

• We did not fully design, implement and monitor general information technology controls in the areas of program change management, user access, and segregation of duties for systems supporting substantially all of the Company’s internal control processes. Accordingly, the Company did not have effective automated process-level controls, and manual controls that are dependent upon the information derived from the IT systems are also determined to be ineffective.
• We did not design and implement, and retain appropriate documentation of formal accounting policies, procedures and controls across substantially all of the Company’s business processes to achieve timely, complete, accurate financial accounting, reporting, and disclosures. Additionally, we did not design and implement controls at the corporate level at a sufficient level of precision to provide for the appropriate level of oversight of business process activities and related controls.
• We did not appropriately design and implement management review controls at a sufficient level of precision around complex accounting areas and disclosure including asset impairments, revenue contracts, income tax, stock-based compensation and lease accounting.
• We did not appropriately design and implement controls over the existence, accuracy, completeness, valuation and cutoff of inventory.

Although these material weaknesses did not result in any material misstatement of our consolidated financial statements for the periods presented, they could lead to a material misstatement of account balances or disclosures. Accordingly, management has concluded that these control deficiencies constitute material weaknesses.

Remediation Efforts

We continue to work on designing and implementing effective internal controls measures to improve our internal control over financial reporting and remediate the material weaknesses. Our internal control remediation efforts include the following:

• We hired additional qualified resources to oversee risk assessment procedures and remedial actions over internal controls.
• We are in the process of reassessing and formalizing the design of certain accounting and information technology policies relating to controls with respect to systems security and change management.
• We engaged an outside firm to assist management with (i) reviewing our current processes, procedures, and systems and assessing the design of controls to identify opportunities to enhance the design of controls that would address relevant risks identified by management, and (ii) enhancing and implementing protocols to retain sufficient documentary evidence of operating effectiveness of such controls.

In addition to implementing and refining the above activities, we expect to engage in additional remediation activities in coming fiscal years, including:

• Continuing to enhance and formalize our accounting, business operations, and information technology policies, procedures, and controls to achieve complete, accurate, and timely financial accounting, reporting and disclosures.
• Establishing effective general controls over our accounting and operating systems to ensure that our automated process level controls and information produced and maintained in our IT systems is relevant and reliable.
• Designing and implementing controls that address the completeness and accuracy of underlying data used in the performance of controls over accounting transactions and disclosures.
• Enhancing policies and procedures to retain adequate documentary evidence for certain management review controls over certain business processes including precision of review and evidence of review procedures performed to demonstrate effective operation of such controls.
• Developing monitoring controls and protocols that will allow us to timely assess the design and the operating effectiveness of controls over financial reporting and make necessary changes to the design of controls, if any.

While these actions and planned actions are subject to ongoing management evaluation and will require validation and testing of the design and operating effectiveness of internal controls over a sustained period of financial reporting cycles, we are committed to the continuous improvement of our internal control over financial reporting and will continue to diligently review our internal control over financial reporting.

Changes in Internal Control over Financial Reporting

As described above, we are in the process of implementing changes to our internal control over financial reporting to remediate the material weaknesses described herein. There have been no changes in our internal control over financial reporting during the quarter ended September 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on Effectiveness of Controls and Procedures

The effectiveness of any system of internal control over financial reporting, including ours, is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct completely. Accordingly, any system of internal control over financial reporting, including ours, no matter how well designed and operated, can only provide reasonable, not absolute assurances. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business, but there can be no assurance that such improvements will be sufficient to provide us with effective internal control over financial reporting.

In addition to the other information set forth in this Quarterly Report on Form 10-Q, including the risk factors set forth below, please carefully consider the risk factors described under the heading “Part I – Item 1A. Risk Factors” in our most recent Annual Report on Form 10-K for the fiscal year ended December 31, 2023. Such risks described are not the only risks facing us. Additional risks and uncertainties not currently known to us, or that our management currently deems to be immaterial, also may adversely affect our business, financial condition and/or operating results.

There can be no assurance that our common stock will continue to be listed on The Nasdaq Global Market (“Nasdaq”) and the de-listing of our common stock could, among other things, limit investors’ ability to trade our common stock and negatively impact the price of our common stock and our ability to access the capital markets.

Our common stock is traded on Nasdaq under the symbol “PLBY”. To maintain our listing we are required to satisfy continued listing requirements, including the requirement commonly referred to as the minimum bid price rule (Nasdaq Listing Rule 5450(a)(1)). The minimum bid price rule requires that the closing bid price of our common stock be at least $1.00 per share. On June 27, 2024, we received a letter from the Staff of the Listing Qualifications Department of The Nasdaq Stock Market LLC indicating that based upon our common stock’s closing bid price during the previous 32 consecutive business days, we no longer satisfied the Nasdaq minimum bid price rule. The notice had no immediate effect on the listing of our common stock on Nasdaq, and we have until December 24, 2024 to regain compliance. If at any time during such 180-calendar day period the closing bid price of our common stock is at least $1.00 for a minimum of 10 consecutive business days, Nasdaq will provide us written confirmation of compliance and the matter will be closed. If we do not regain compliance by December 24, 2024, and we apply to transfer the listing of our common stock from The Nasdaq Global Market to The Nasdaq Capital Market, we may be eligible for an additional 180-calendar day compliance period, subject to satisfying the conditions in the applicable Nasdaq Listing Rules. However, there can be no assurance that we will be able to regain compliance with the minimum bid price rule or continue to satisfy other continued listing standards and maintain the listing of our common stock on Nasdaq. The suspension or delisting of our common stock, or the commencement of delisting proceedings, could, among other things, materially impair our stockholders’ ability to buy and sell shares of our common stock and could have an adverse effect on the market price of, and the efficiency of the trading market for, our common stock. Although we may effect a reverse stock split of our issued and outstanding common stock in the future, there can be no assurance that such reverse stock split will enable us to regain, or maintain, compliance with the Nasdaq minimum bid price requirement.

Any delisting determination by Nasdaq could seriously decrease or eliminate the value of an investment in our common stock and other securities linked to our common stock. While an alternative listing on an over-the-counter exchange could maintain some degree of a market in our common stock, we could face substantial material adverse consequences, including, but not limited to, the following: limited availability for market quotations for our common stock; reduced liquidity with respect to and decreased trading prices of our common stock; a determination that shares of our common stock are “penny stock” under the SEC rules, subjecting brokers trading our common stock to more stringent rules on disclosure and the class of investors to which the broker may sell the common stock; limited news and analyst coverage for our company, in part due to the “penny stock” rules; decreased ability to issue additional securities or obtain additional financing in the future; and potential breaches under or terminations of our agreements with current or prospective large stockholders, strategic investors and banks.