The 10-K was delayed due to the necessary auditing process when PLBY's mid year market cap made it a large accelerated filer. Here are the key callouts…
Revenue
A quick overview of the revenue subcategories. 4Q Licensing revenue was flat YY at $17mm, we knew DTC revenue was up 160% to $62mm, and Digital Subscription revenue was up 220% to $17.5mm driven by the Rabbitar NFT sale.
Honey Birdette and Lovers
The 10-K included proforma numbers on Honey Birdette and Lovers as if the deals were closed on either the start of 2020 or the start of 2021 vs their middle of 2021 actual close date. Running the numbers it implies Honey Birdette's growth was in 2021 was 46% (despite Australian door closures from Covid), and Lovers was 38%, or annualized revenue of $78mm and $54mm respectively. Also, excluding the acquisitions, PLBY revenue growth was 15%, and 8% excluding NFT contributions.
Licensing
On the licensing side, the company noted its top 5 license agreements range from 3-9 years in length and generated $49.1mm, or 77% of revenue. Plus the contracts include royalty guarantee payments of $325mm through 2031 assuming no contract renewal.
A couple other notable comments include the size of its largest license partners from the 10-K risks section, as well as legal cases related to licensee actions suggesting that management is being proactive in taking back or terminating licenses when seeing a bad arrangement or better business opportunity. Fixing the licensing arrangements to the betterment of the PLBY P&L will be an ongoing process and will likely see further legal battles/processes.
Risks
- Our licensing revenues are concentrated with a limited number of licensees and retail partners. For instance, during the years ended December 31, 2021 and 2020, the five largest license agreements comprised 20% and 32% of consolidated revenues, respectively, and the largest licensee contributed 9% and 15% of consolidated revenues, respectively, during those years.
Legal Cases
- On December 17, 2021, Thai Nippon Rubber Industry Public Limited Company, a manufacturer of condoms and lubricants and a publicly traded Thailand company (“TNR”), filed a complaint in the U.S. District Court for the Central District of California against Playboy and its subsidiary Products Licensing, LLC. TNR alleges a variety of claims relating to Playboy’s termination of a license agreement with TNR and the business relationship between Playboy and TNR prior to such termination. TNR alleges, among other things, breach of contract, unfair competition, breach of the implied covenant of good faith and fair dealing, and interference with contractual and business relations due to Playboy’s conduct. TNR is seeking over $100 million in damages arising from the loss of expected profits, declines in the value of TNR’s business, unsalable inventory and investment losses. Playboy believes TNR’s claims and allegations are without merit, and Playboy will defend itself vigorously in this matter.
- In March 2020, our subsidiary Playboy Enterprises International, Inc. (together with its subsidiaries, “PEII”) terminated its license agreement with a licensee, AVS Products, LLC (“AVS”), for AVS’s failure to make required payments to PEII under the agreement, following notice of breach and an opportunity to cure. On February 6, 2021, PEII received a letter from counsel to AVS alleging that the termination of the contract was improper, and that PEII failed to meet its contractual obligations, preventing AVS from fulfilling its obligations under the license agreement. On February 25, 2021, PEII brought suit against AVS in Los Angeles Superior Court to prevent further unauthorized sales of PLAYBOY branded products and for disgorgement of unlawfully obtained funds. On March 1, 2021, PEII also brought a claim in arbitration against AVS for outstanding and unpaid license fees.
NOLs
The company has reduced cash tax exposure from prior NOLs.
"We have significant net operating losses (“NOLs”) as of December 31, 2021. In the US we had federal NOLs available to carryforward to future periods of $203 million, which begin expiring in 2028 and we had state and local NOLs available to carryforward to future periods of $73 million, which began expiring in 2022. In Australia, we also had $1.6 million NOLs available to carryforward indefinitely."
M&A Strategy
Commentary suggests the near term M&A strategy from here to be smaller tuck-ins (if any) and supported by operating cash flow.
"We will continue focusing on potential tuck-in opportunities to complement our organic growth with potential for larger, strategic mergers and acquisitions initiatives over the long-term. We believe our mergers and acquisitions strategy will be supported by our operating cash flow and balance sheet flexibility."
Leases
With the acquired store bases PLBY now has a reasonably sized lease portfolio. The total average duration of operating lease obligations is 3.9 years, the duration of minimum lease commitments is 7.4 years. Healthy levels given the business model and still growing store base for Honey Birdette.
Geographic Exposure
The M&A and business changes are making for a bullish change in geographic exposure. Revenue is becoming more diversified globally while also adding in more US exposure, which is good for a US based company. China is becoming a lower percentage of revenue.
Source: PLBY 10-K
Stock Based Comp
Below is detail on current stock based comp plan. 4Q21 stock based comp was abnormally high due to formally granted performance-based restricted stock awards, RSUs and options that were pursuant to employment agreements entered into in early 2021. The CFO told us on follow up that stock based comp is likely to fall between 2% and 4% of sales going forward depending on where the stock price is at a given point in time.
Source: PLBY 10-K
Material Weakness
As was signaled in the 10-K filing extension, PLBY disclosed a "material weakness" in financial controls. These disclosures are actually not uncommon, especially for newly public companies. PLBY's looks to be particularly focused on controls around new acquisitions, which are still being integrated from a process/systems standpoint. Details on the weaknesses and the remedies being put in place are described in the 10-K filing. We don't see any unique risk around the weakness disclosure, but we'll see how the controls develop in future filings.
