Results
Playboy Inc.
03/16/2026 | Press release | Distributed by Public on 03/16/2026 14:48
Annual Report for Fiscal Year Ending December 31, 2025 (Form 10-K)
Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the consolidated financial statements and accompanying notes included in Part II, Item 8 of this Annual Report on Form 10-K. This section of this Annual Report on Form 10-K generally discusses 2025 and 2024 items and year-to-year comparisons between 2025 and 2024. In addition to historical information, the following discussion and analysis contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results and the timing of events could differ materially from those anticipated in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed in Item 1A. Risk Factors.
Unless otherwise indicated or the context otherwise requires, references to the "Company", "Playboy", "we", "us", "our" and other similar terms refer to Playboy, Inc. and its consolidated subsidiaries.
Business Overview
We are a global consumer lifestyle company marketing our brands through a wide range of licensing initiatives, direct-to-consumer products, Playboy magazine, digital subscriptions and content, and online and location-based entertainment. As of January 1, 2025, we licensed certain intellectual property and our Playboy Plus, Playboy TV (online and linear) and Playboy Club digital businesses to Byborg pursuant to a License & Management Agreement. As a result, we have two reportable segments: Direct-to-Consumer and Licensing. Our Direct-to-Consumer segment derives revenue from sales of consumer products sold by Honey Birdette online or at its brick-and-mortar stores, with 51 stores in three countries as of December 31, 2025. Our Licensing segment derives revenue from trademark licenses for third-party consumer products, primarily for various apparel and accessories categories, hospitality, digital gaming and location-based entertainment businesses, and starting January 1, 2025, revenue from licensing our digital subscriptions and content operations to Byborg.
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 in the section of this Annual Report on Form 10-K 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 attract best-in-class operators. We also use our licensing business as a marketing tool and brand builder, including through high profile collaborations and our large-scale strategic partnerships.
In the fourth quarter of 2024, we entered into the LMA with Byborg to license intellectual property and select Playboy digital assets for $300.0 million in minimum guaranteed payments over the initial 15-year term of the license, which began January 1, 2025.
After having stabilized Playboy's China business in 2024 and 2025, in the fourth quarter of 2025, we mutually agreed with CTL to terminate our joint venture arrangement with respect to Playboy's China licensing business. On February 9, 2026, we then entered into the Purchase Agreement with UTG for the New China JV in which UTG would ultimately own a 50% interest and operate Playboy's China licensing business. The initial closing pursuant to the Purchase Agreement is expected to occur, and the New China JV is expected to be established, by March 31, 2026. We expect our licensing business in China to continue to represent a material part of our overall business. Our licensing revenues from China as a percentage of our total revenues were 10% for each of the years ended December 31, 2025 and 2024. Refer to "Item 1. Business-Our Corporate History-Recent Developments" for more information about the New China JV deal.
We are focused on strategically expanding our Playboy licensing business into new categories and territories with high quality strategic partners and supporting them with brand marketing in the form of content, experiences and editorial works, including through our re-launch of Playboymagazine in 2025.
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, 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. During the years ended December 31, 2025 and 2024, we recorded non-cash impairment charges of $0.5 million and $3.8 million on our artwork held for sale and $1.5 million and $0.6 million on our corporate leases, respectively.
During the year ended December 31, 2024, we experienced declines in revenue and profitability, which caused us to test the recoverability of our indefinite-lived and certain long-lived assets. As a result, we recognized $4.7 million of impairment charges related to the write-off of internally developed software and $17.0 million of impairment charges related to the write-down of goodwill during the year ended December 31, 2024. No such impairments were recorded in 2025. However, if we experience declines in revenue or profitability, which could occur upon further declines in consumer demand, we may record further non-cash asset impairment charges as of the applicable impairment testing date.
Recent Trade Developments
We continue to monitor ongoing changes in U.S. trade policies, including increasing tariffs on imports, in some cases significantly, and changes to existing international trade agreements. These actions have prompted retaliatory tariffs and other measures by a number of countries. Starting in the second quarter of 2025, actions were taken by the U.S. and certain other countries to modify the timing, rates and/or other aspects of certain of these tariffs. However, some of the new tariffs remain in effect, including tariffs between the U.S. and China, where we source the manufacturing of our Honey Birdette products and where many of our licensees source their products. While the impact of such trade policies on our business remains uncertain, we continue to closely monitor such matters and potential impacts, including increased production costs and higher pricing to our customers, either of which could negatively affect our business, results of operations and financial condition.
Seasonality of Our Consumer Product Sales
While we receive revenue throughout the year, our Honey Birdette direct-to-consumer 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 EBITDA and Adjusted EBITDA as non-GAAP financial measures. We believe these non-GAAP measures provide useful information to investors and expanded insight to measure revenue and cost performance as a supplement to the GAAP consolidated financial statements. Refer to the "EBITDA and Adjusted EBITDA" section below for reconciliations of EBITDA and Adjusted EBITDA to net loss, the closest GAAP measure.
Components of Results of Operations
Revenues
We generate revenue from sales of consumer products sold through our Honey Birdette retail stores or online directly to customers, trademark licenses for third-party consumer products and online and location-based entertainment businesses, and starting January 1, 2025, licensing the operation of our digital subscriptions and content businesses, which were owned and operated by us in the prior year comparative period.
Consumer Products
Revenue from sales of online apparel and accessories is recognized upon delivery of the goods to the customer. Revenue from sales of apparel at our retail stores is recognized at the time of transaction. Revenue is recognized net of incentives and estimated returns. We periodically offer promotional incentives to customers, which include basket promotional code discounts and other credits, which are recorded as a reduction of revenue.
Licensing
We license trademarks under multi-year arrangements to consumer products and online and location-based entertainment businesses. Typically, the initial contract term ranges between one to 15 years. Renewals are separately negotiated through amendments. Under these arrangements, we generally receive an annual or quarterly 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 up to the cash we have received.
Starting January 1, 2025, we licensed the operation of our Playboy Plus, Playboy TV (online and linear) and Playboy Club digital businesses, which was previously owned and operated by us and included in our Digital Subscriptions and Content reportable segment in the prior year comparative period, to Byborg pursuant to the LMA.
Prior to January 1, 2025, digital subscription revenue was derived from subscription sales of playboyplus.comand playboy.tv, which are online content platforms. We received fixed consideration shortly before the start of the subscription periods from these contracts, which were primarily sold in monthly, annual, or lifetime subscriptions. Revenues from lifetime subscriptions were recognized ratably over a five-year period, representing the estimated period during which the customer accesses the platforms. Revenues from digital subscriptions were recognized ratably over the subscription period. Revenues generated from the sales of creator content offerings and memberships to consumers via our Playboy Club creator platform were 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.
Prior to January 1, 2025, we also licensed programming content to certain cable television operators and direct-to-home satellite television operators who paid 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 were generally collected monthly and recognized as revenue as earned.
Cost of Sales
Cost of sales primarily consist of merchandise costs, warehousing and fulfillment costs, agency and commission fees, website expenses, marketplace traffic acquisition costs, digital platform expenses (prior to January 1, 2025), transition expenses per the TSA (commencing January 1, 2025 through June 30, 2025), credit card processing fees, personnel and affiliate costs, including stock-based compensation, costs associated with branding activities, customer shipping and handling expenses, fulfillment activity costs and freight-in expenses.
Selling and Administrative Expenses
Selling and administrative expenses primarily consist of corporate office and retail store occupancy costs, personnel costs, including stock-based compensation, transition expenses per the TSA (commencing January 1, 2025 through June 30, 2025), brand marketing costs, 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, right-of-use assets related to our corporate leases, internally developed software and goodwill.
Other Operating Expense, Net
Other operating income (expense), net consists primarily of gains and losses on disposal of 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 premium/discount.
Other Income (Expense), Net
Other income (expense), net consists primarily of other miscellaneous nonoperating items, such as nonrecurring transaction fees, foreign exchange realized and unrealized transaction gains or losses, debt related costs, bank charges and interest income.
Benefit (expense) from Income Taxes
Benefit (expense) 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 Australia, U.K. and China deferred tax assets.
Results of Operations
Comparison of Fiscal Years Ended December 31, 2025 and 2024
The following table summarizes key components of our results of operations for the periods indicated (in thousands, except percentages):
|
Year Ended December 31,
|
|||||||||||||||||||||||
| 2025 | 2024 | $ Change | % Change | ||||||||||||||||||||
| Net revenues | $ | 120,928 | $ | 116,135 | $ | 4,793 | 4 | % | |||||||||||||||
| Costs and expenses: | |||||||||||||||||||||||
| Cost of sales | (35,077) | (41,780) | 6,703 | (16) | |||||||||||||||||||
| Selling and administrative expenses | (91,029) | (98,716) | 7,687 | (8) | |||||||||||||||||||
| Impairments | (2,087) | (26,078) | 23,991 | (92) | |||||||||||||||||||
| Other operating expense, net | (763) | (399) | (364) | 91 | |||||||||||||||||||
| Total operating expense | (128,956) | (166,973) | 38,017 | (23) | |||||||||||||||||||
| Operating loss | (8,028) | (50,838) | 42,810 | (84) | |||||||||||||||||||
| Nonoperating (expense) income: | |||||||||||||||||||||||
| Interest expense | (8,225) | (23,689) | 15,464 | (65) | |||||||||||||||||||
| Other income (expense), net | 2,355 | (1,722) | 4,077 | (237) | |||||||||||||||||||
| Total nonoperating expense | (5,870) | (25,411) | 19,541 | (77) | |||||||||||||||||||
| Loss before income taxes | (13,898) | (76,249) | 62,351 | (82) | |||||||||||||||||||
| Benefit (expense) from income taxes | 1,226 | (3,148) | 4,374 | (139) | |||||||||||||||||||
| Net loss | (12,672) | (79,397) | 66,725 | (84) | |||||||||||||||||||
| Net loss attributable to Playboy, Inc. | $ | (12,672) | $ | (79,397) | $ | 66,725 | (84) | % | |||||||||||||||
The following table sets forth our consolidated statements of operations data expressed as a percentage of total revenue for the periods indicated:
|
Year Ended December 31,
|
|||||||||||
| 2025 | 2024 | ||||||||||
| Net revenues | 100 | % | 100 | % | |||||||
| Costs and expenses: | |||||||||||
| Cost of sales | (29) | (36) | |||||||||
| Selling and administrative expenses | (75) | (85) | |||||||||
| Impairments | (2) | (22) | |||||||||
| Other operating expense, net | (1) | - | |||||||||
| Total operating expense | (107) | (143) | |||||||||
| Operating loss | (7) | (43) | |||||||||
| Nonoperating (expense) income: | |||||||||||
| Interest expense | (7) | (20) | |||||||||
| Other income (expense), net | 2 | (1) | |||||||||
| Total nonoperating expense | (5) | (21) | |||||||||
| Loss before income taxes | (12) | (64) | |||||||||
| Benefit (expense) from income taxes | 1 | (3) | |||||||||
| Net loss | (11) | (67) | |||||||||
| Net loss attributable to Playboy, Inc. | (11) | % | (67) | % | |||||||
Net Revenues
The following table sets forth net revenues by reportable segment (in thousands):
|
Year Ended December 31,
|
|||||||||||||||||||||||
| 2025 | 2024 | $ Change | % Change | ||||||||||||||||||||
| Direct-to-consumer | $ | 70,854 | $ | 69,729 | $ | 1,125 | 2 | % | |||||||||||||||
| Licensing | 46,406 | 24,802 | 21,604 | 87 | |||||||||||||||||||
|
Corporate
|
1,315 | 662 | 653 | 99 | |||||||||||||||||||
| All other | 2,353 | 20,942 | (18,589) | (89) | |||||||||||||||||||
| Total | $ | 120,928 | $ | 116,135 | $ | 4,793 | 4 | % | |||||||||||||||
Direct-to-Consumer
The increase in direct-to-consumer net revenues, compared to the prior year comparative period, was primarily due to continued improvement in consumer perception of the Honey Birdette brand, which resulted in increased sales of full-price products, partly offset by lower sales of discounted products.
Licensing
The increase in licensing net revenues, compared to the prior year comparative period, was primarily due to $20.0 million of minimum guaranteed royalties recognized pursuant to the LMA, and a $2.9 million increase in royalties recognized from other licensing partners, out of which $2.2 million pertained to a licensing agreement with one of our Chinese licensees signed in the second quarter of 2024, partly offset by $1.3 million of revenue from an inventory sale to a licensee in the prior year comparative period that did not recur in 2025.
Corporate
The increase in corporate revenues, compared to the prior year comparative period, was primarily due to an increase in corporate branding initiatives, including magazine sales and activities related to promotions for our magazine.
All Other
The decrease in all other net revenues, compared to the prior year comparative period, was primarily due to the licensing of our digital subscriptions and content operations to Byborg pursuant to the LMA, effective as of January 1, 2025. As a result, our previously reported Digital Subscriptions and Content operating and reportable segment was eliminated and its operations in the prior year comparative period were recast to be included in "All Other" for comparative purposes. "All Other" net revenues for the year ended December 31, 2025 related to the amortization of deferred revenue balances that existed as of December 31, 2024 (prior to the LMA effective date of January 1, 2025) that pertain to our previously reported digital subscriptions and content operations.
Cost of Sales and Gross Margin
The following table sets forth cost of sales and gross margin by reportable segment (in thousands):
|
Year Ended December 31,
|
|||||||||||||||||||||||
| 2025 | 2024 | $ Change | % Change | ||||||||||||||||||||
| Direct-to-consumer | $ | (28,461) | $ | (30,345) | $ | 1,884 | (6) | % | |||||||||||||||
| Licensing | (4,536) | (2,310) | (2,226) | 96 | |||||||||||||||||||
|
Corporate
|
(128) | - | (128) | 100 | |||||||||||||||||||
| All other | (1,952) | (9,125) | 7,173 | (79) | |||||||||||||||||||
|
Total cost of sales
|
$ | (35,077) | $ | (41,780) | $ | 6,703 | (16) | % | |||||||||||||||
|
Direct-to-consumer gross profit
|
$ | 42,393 | $ | 39,384 | $ | 3,009 | 8 | % | |||||||||||||||
|
Direct-to-consumer gross margin
|
60 | % | 56 | % | |||||||||||||||||||
|
Licensing gross profit
|
$ | 41,870 | $ | 22,492 | $ | 19,378 | 86 | % | |||||||||||||||
|
Licensing gross margin
|
90 | % | 91 | % | |||||||||||||||||||
| Corporate gross profit | $ | 1,187 | $ | 662 | $ | 525 | 79 | % | |||||||||||||||
| Corporate gross margin | 90 | % | 100 | % | |||||||||||||||||||
|
Other gross profit
|
$ | 401 | $ | 11,817 | $ | (11,416) | (97) | % | |||||||||||||||
|
Other gross margin
|
17 | % | 56 | % | |||||||||||||||||||
|
Total gross profit
|
$ | 85,851 | $ | 74,355 | $ | 11,496 | 15 | % | |||||||||||||||
|
Total gross margin
|
71 | % | 64 | % | |||||||||||||||||||
Direct-to-Consumer
The decrease in direct-to-consumer cost of sales and the increase in gross margin, compared to the prior year comparative period, was primarily due to a $2.3 million decrease in Honey Birdette's product, shipping and fulfillment costs due to lower sales of discounted products. The increase in gross profit and gross margin was due to continued improvement in consumer demand at Honey Birdette, which resulted in increased sales of full-price products at a higher margin.
Licensing
The increase in licensing cost of sales and the decrease in gross margin, compared to the comparable prior year period, was primarily due to a $2.2 million increase in licensing commission expense, net, reflecting a one-time settlement amount of $2.4 million to pay current and future commissions to a licensing agent. Without such settlement, licensing gross margin would have increased to 95%.
Corporate
Corporate gross profit during the years ended December 31, 2025 and 2024 primarily related to brand related initiatives in the fourth quarter of 2025, payments for access to our iPlayboy archives, brand related activities, including for Playboy magazine, events and sponsorships.
All Other
The decrease in all other cost of sales and the increase in gross margin, compared to the prior year comparative period, was primarily related to the licensing of our digital subscriptions and content operations to Byborg pursuant to the LMA, effective as of January 1, 2025.
Selling and Administrative Expenses
The decrease in selling and administrative expenses, compared to the prior year comparative period, was primarily due to a $1.6 million decrease in technology costs, a $1.5 million decrease in depreciation, a decrease in various professional services of $2.0 million, lower rent expense of $1.6 million primarily due to sublease income, lower payroll expense of $4.3 million, due to the transition of our digital operations into a licensing model, and a $1.9 million decrease in stock-based compensation expense, partly offset by $3.0 million of additional legal expenses related to ongoing litigations and an increase in severance compensation and related health insurance benefits of $1.8 million due to the transition of our digital operations into a licensing model.
Impairments
The decrease in impairments, compared to the prior year comparative period, was primarily due to impairment charges recognized in the prior year comparative period of $17.0 million related to our goodwill and $4.7 million related to our internally developed software, as well as a decrease of $3.3 million in impairment charges on our artwork held for sale, partly offset by a $0.9 million increase in impairment charges on our right-of-use assets related to our corporate leases.
Other Operating Expense, Net
The increase in other operating expense, net, compared to the prior year comparative period, was primarily due to the write off of certain property, plant and equipment items in the second quarter of 2025 as a result of our decision to sublease certain of our office space.
Nonoperating (Expense) Income
Interest Expense
The decrease in interest expense, compared to the prior year comparative period, was primarily due to a reduction of our debt balance and amortization of debt premium in connection with the A&R Third Amendment in 2024.
Other Income (Expense), Net
The change in other income (expense), net, from net expense in 2024 to net income in 2025, was primarily due to unrealized foreign exchange income in relation to Honey Birdette's foreign operations as well as certain of our Chinese licenses denominated in foreign currency.
Benefit (Expense) from Income Taxes
The change from expense from income taxes to income tax benefit as compared to the prior year comparative period was primarily driven by a change in valuation allowance due to a reduction in net indefinite-lived deferred tax liabilities in the year ended December 31, 2025.
Non-GAAP Financial Measures
In addition to our results being 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 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 nonoperating expenses and income, such as nonrecurring special projects, including related consulting expenses, transition expenses, settlements, nonrecurring 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 the limitations described above, 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):
|
Year Ended December 31,
|
|||||||||||
| 2025 | 2024 | ||||||||||
| Net loss | $ | (12,672) | $ | (79,397) | |||||||
| Adjusted for: | |||||||||||
| Interest expense | 8,225 | 23,689 | |||||||||
| (Benefit) expense from income taxes | (1,226) | 3,148 | |||||||||
| Depreciation and amortization | 3,038 | 7,007 | |||||||||
| EBITDA | (2,635) | (45,553) | |||||||||
| Adjusted for: | |||||||||||
| Licensing commissions settlement | 2,400 | - | |||||||||
| Transition expenses | 5,000 | - | |||||||||
| Severance | 2,713 | 886 | |||||||||
| Stock-based compensation | 4,715 | 7,311 | |||||||||
| Impairments | 2,087 | 26,078 | |||||||||
| Adjustments | 2,758 | 5,025 | |||||||||
| Adjusted EBITDA | $ | 17,038 | $ | (6,253) | |||||||
•Licensing commissions settlement for the year ended December 31, 2025 represents a one-time settlement amount of $2.4 million to pay current and future commissions to a licensing agent, which were fully paid by the end of 2025.
•Transition expenses for the year ended December 31, 2025 represent costs associated with the digital operations licensed to Byborg, solely during the transition period pursuant to the terms of a related Transition Service Agreement (the "TSA").
•Severance expenses for the year ended December 31, 2025 were primarily due to the reduction of headcount related to the transition of our digital subscriptions and content operations into a licensing model.
•Impairments for the year ended December 31, 2025 relate to impairment charges on our artwork held for sale and our right-of-use assets related to our corporate leases.
•Impairments for the year ended December 31, 2024 relate to impairment charges on our artwork held for sale, right-of-use assets related to our corporate leases and assets related to our former Digital Subscriptions and Content segment.
•Adjustments for the year ended December 31, 2025 are primarily related to non-cash fair value change related to contingent liabilities fair value remeasurement with respect to potential shares issuable for our 2021 acquisition of GlowUp Digital, Inc. that remained unsettled as of December 31, 2025, as well as consulting, advisory and other costs relating to corporate transactions.
•Adjustments for the year ended December 31, 2024 are primarily related to non-cash fair value change related to contingent liabilities fair value remeasurement with respect to potential shares issuable for our 2021 acquisition of GlowUp Digital, Inc. that remained unsettled as of December 31, 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.
Non-GAAP Segment Information
Our Chief Executive Officer is our Chief Operating Decision Maker ("CODM"). Segment information is presented in the same manner that our CODM reviews the operating results in assessing performance and allocating resources. Total asset information is not included in the tables below as it is not provided to and reviewed by our CODM. The "All Other" columns relate to the previously identified operating and reportable segment, Digital Subscriptions and Content, which was eliminated upon its transition into a licensing model under the LMA. The "Corporate" column in the tables below includes certain operating revenues associated with Playboymagazine, events and sponsorships and expenses that are not allocated to the reportable segments presented to our CODM. Such expenses include legal, human resources, information technology and facilities, accounting/finance and brand marketing costs. Expenses associated with Playboymagazine, events and sponsorships are included in brand marketing costs. The accounting policies of the reportable segments are the same as those described in Note 1, Basis of Presentation and Summary of Significant Accounting Policies, of the Notes to our Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.
"Adjusted Operating Income (Loss)" is defined as operating income or loss adjusted for stock-based compensation and other special items determined by management. Adjusted operating income (loss) 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 adjusted operating income (loss) 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 adjusted operating income (loss), 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 operating income (loss) may not be comparable to other similarly titled measures computed by other companies, because not all companies may calculate adjusted operating income (loss) 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, nonrecurring non-cash impairments and asset write-downs, we typically adjust for nonrecurring special projects, including for related consultant expenses, nonrecurring gain 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 the limitations described above, adjusted operating income (loss) 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 adjusted operating income (loss) on a supplemental basis. Investors should review the reconciliation of operating loss to adjusted operating income (loss) below and not rely on any single financial measure to evaluate our business.
The following table reconciles Operating Income (Loss) to Adjusted Operating Income (Loss) by reportable segment (in thousands):
| Year Ended December 31, 2025 | |||||||||||||||||||||||||||||
| Direct-to-Consumer | Licensing | Corporate | All Other | Total | |||||||||||||||||||||||||
| Operating income (loss) | $ | 294 | $ | 31,822 | $ | (35,652) | $ | (4,492) | $ | (8,028) | |||||||||||||||||||
| Adjusted for: | |||||||||||||||||||||||||||||
| Depreciation and amortization | 2,329 | - | 709 | - | 3,038 | ||||||||||||||||||||||||
| Licensing commissions settlement | - | 2,400 | - | - | 2,400 | ||||||||||||||||||||||||
| Transition expenses | - | - | - | 5,000 | 5,000 | ||||||||||||||||||||||||
| Severance | 82 | 147 | 1,296 | 1,188 | 2,713 | ||||||||||||||||||||||||
| Stock-based compensation | - | - | 4,715 | - | 4,715 | ||||||||||||||||||||||||
| Impairments | - | - | 2,087 | - | 2,087 | ||||||||||||||||||||||||
| Adjustments | - | - | 2,434 | 324 | 2,758 | ||||||||||||||||||||||||
| Adjusted operating income (loss) | $ | 2,705 | $ | 34,369 | $ | (24,411) | $ | 2,020 | $ | 14,683 | |||||||||||||||||||
| Year Ended December 31, 2024 | |||||||||||||||||||||||||||||
| Direct-to-Consumer | Licensing | Corporate | All Other | Total | |||||||||||||||||||||||||
| Operating (loss) income | $ | (2,286) | $ | 14,646 | $ | (35,148) | $ | (28,050) | $ | (50,838) | |||||||||||||||||||
| Adjusted for: | |||||||||||||||||||||||||||||
| Depreciation and amortization | 3,583 | - | 719 | 2,705 | 7,007 | ||||||||||||||||||||||||
| Severance | 36 | - | 245 | 605 | 886 | ||||||||||||||||||||||||
| Stock-based compensation | - | - | 3,688 | 3,623 | 7,311 | ||||||||||||||||||||||||
| Impairments | - | - | 4,372 | 21,706 | 26,078 | ||||||||||||||||||||||||
| Adjustments | 1,362 | 152 | 3,396 | 115 | 5,025 | ||||||||||||||||||||||||
|
Adjusted operating income (loss)
|
$ | 2,695 | $ | 14,798 | $ | (22,728) | $ | 704 | $ | (4,531) | |||||||||||||||||||
Refer to "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Non-GAAP Financial Measures" for descriptions of the adjustments to reconcile net income to Adjusted EBITDA, certain of which adjustments are listed in the table above and the descriptions used for the reconciliation of net income to Adjusted EBITDA are also applicable for the table above.
Direct-to-Consumer
Net Revenues and Gross Margin: Refer to "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Results of Operations" for a discussion of changes in net revenues and gross profit in our Direct-to-Consumer segment from 2024 to 2025.
Operating Income (Loss): The change from operating loss to operating income, compared to the prior year comparative period, was primarily due to a $3.0 million increase in Honey Birdette's gross profit as a result of the continued improvement in consumer perception of the Honey Birdette brand, which resulted in increased sales of full-price products.
Adjusted Operating Income:The increase in adjusted operating income, compared to the prior year comparative period, was immaterial.
Licensing
Net Revenues and Gross Margin: Refer to "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Results of Operations" for a discussion of changes in net revenues and gross profit in our Licensing segment from 2024 to 2025.
Operating Income: The increase in operating income, compared to the prior year comparative period, was primarily due to a $19.4 million increase in licensing gross profit, primarily as a result of higher revenues resulting from the LMA, and a $0.5 million decrease in China operating expenses, partly offset by a $3.1 million increase in legal expenses.
Adjusted Operating Income: Adjustments to licensing operating income in 2025 primarily related to a one-time settlement amount of $2.4 million to pay current and future commissions to a licensing agent. Adjustments to licensing operating income in 2024 related to the write-off of receivables resulting from a terminated licensing agreement.
Corporate
The increase in operating loss, compared to the prior year comparative period, was primarily due to an increase in severance and employee benefits expense of $1.1 million related to headcount reductions as a result of shifting to a capital-light business model, a $0.9 million increase in impairment charges on our right-of-use assets related to our corporate leases, a $1.5 million increase in payroll expense, a $1.2 million increase in stock-based compensation expense and brand marketing expenses of $2.1 million, partly offset by a $0.7 million increase in corporate revenue, a $3.3 million decrease in impairment charges on our artwork held for sale, a $1.3 million decrease in rent expense primarily due to sublease income, a $0.9 million decrease in insurance expense and a $0.7 million decrease in technology costs.
The increase in adjusted operating loss, compared to the prior year comparative period, was primarily due to lower insurance costs and a decrease in audit and consulting expenses, reflecting ongoing cost rationalization.
All Other
Net Revenues and Gross Margin: Refer to "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Results of Operations" for a discussion of changes from 2024 to 2025 in net revenues and gross profit classified as All Other.
Operating Loss: The decrease in operating loss, compared to the prior year comparative period, was due to the transition of our digital operations into a licensing model pursuant to the LMA and non-cash impairments charges attributable to goodwill and certain long-lived assets in 2024 that did not recur in 2025.
Adjusted Operating Income:The change from adjusted operating loss to adjusted operating income, compared to the prior year comparative period, was due to lower expenses related to our digital operations as a result of its transition into a licensing model pursuant to the LMA.
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 stock offerings (as described further below), and from investing activities, which included the sale of assets (as described further below). As of December 31, 2025, our principal source of liquidity was unrestricted cash in the amount of $37.8 million, which is primarily held in operating and deposit accounts.
In 2025, we sold shares of our common stock pursuant to our previously registered and announced ATM offering, selling a total of 5,253,769 shares for net proceeds of $10.3 million. As of December 31, 2025, we had $4.2 million of remaining capacity under the ATM. On February 23, 2026, we increased the availability under our ATM to $200,000,000 worth of our common stock.
On November 5, 2024, we issued 14,900,000 unregistered shares of our common stock in a private placement to The Million S.a.r.l. , at a price of $1.50 per share, for total proceeds to us of $22.4 million.
Pursuant to the LMA entered into in December 2024, Byborg agreed to operate our Playboy Plus, Playboy TV (online and linear) and Playboy Club businesses and to license the right to use certain Playboy trademarks and other intellectual property for related businesses and certain other categories. Pursuant to the LMA, Byborg was also granted exclusive rights to use Playboy trademarks for certain new adult content services and digital products to be developed. The LMA has an initial term of 15 years, with the operations and license rights pursuant to the LMA commencing as of January 1, 2025, and the possibility for up to nine renewal terms of 10 years each, subject to the terms and conditions set forth in the LMA. Pursuant to the LMA, starting in 2025, Playboy will receive minimum guaranteed royalties of $20 million per year of the term, to be paid in installments during each year. In addition, Byborg has prepaid the minimum guaranteed amount for the second half of year 15 of the initial term of the LMA. Playboy is also entitled to receive Excess Royalties from the businesses licensed and operated by Byborg, on the terms and conditions set forth in the LMA.
In the fourth quarter of 2023, we began the sale of our art assets, and we continued the sale of our art assets in 2024 and 2025.
Since going public in 2021, we have yet to generate operating income from our core business operations and have incurred significant operating losses, including $8.0 million of operating losses for the year ended December 31, 2025. We expect our capital expenditures and working capital requirements in 2026 to be largely consistent with 2025.
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 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 Annual Report on Form 10-K. We may seek additional equity or debt financing in the future to satisfy capital requirements, respond to adverse changes in our circumstances or unforeseen events, or fund 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 March 27, 2024, we entered into Amendment No. 2 (the "A&R Second Amendment") to our Amended and Restated Credit and Guaranty Agreement, dated as of May 10, 2023 (as amended on November 2, 2023, 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 (the date upon which such prepayment-related conditions are satisfied, the "Financial Covenant Sunset Date");
(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.
On November 11, 2024, we entered into the A&R Third Amendment, which provides for, among other things:
•reducing the outstanding aggregate A&R Term Loan amounts under the A&R Credit Agreement from approximately $218.4 million to approximately $153.1 million in exchange for $28 million of Series B Convertible Preferred Stock, which was issued pursuant to the Exchange Agreement between the Company and the lenders party to the A&R Third Amendment;
•resetting the interest rate margin for both tranche A term loans under the A&R Credit Agreement ("Tranche A") and tranche B term loans under the A&R Credit Agreement ("Tranche B", and together with Tranche A, the "A&R Term Loans") to the same SOFR, plus a 0.10% credit spread adjustment, plus 6.25% (with corresponding changes necessary so that all but 1.00% of the interest rate margin can be paid in-kind); and
•applying amortization of 1% per year to all loans under the A&R Credit Agreement, which is to be paid quarterly starting in the fourth quarter of 2025.
The other terms of the A&R Credit Agreement prior to the A&R Third Amendment remain substantially unchanged, and the new terms were effective as of November 13, 2024 (the date 28,000.00001 shares were issued to the lenders in exchange for the debt reduction pursuant to the closing of the Exchange Agreement). The Series B Convertible Preferred Stock includes a 12% annual dividend rate, which will commence accruing as of May 13, 2025, and which dividends are payable in cash or in-kind, solely at our discretion. We have the right to redeem for cash (at any time) or convert the Series B Convertible Preferred Stock at any time, provided that the five-day volume-weighted average price of PLBY common stock is $1.50 or above, with a conversion price floor of $1.50 and a cap of $4.50. As a result of conversions of the Series B Convertible Preferred Stock in January and August of 2025, all outstanding shares of the Series B Convertible Preferred Stock were converted to common stock, and we no longer had any shares of preferred stock outstanding as of August 22, 2025. Refer to Note 12, Convertible Preferred Stock, of the Notes to our Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for further information on our Series B Convertible Preferred Stock and its conversion resulting in the elimination of all outstanding shares of our Series B Convertible Preferred Stock as of August 22, 2025.
We performed an assessment of the A&R Third Amendment, on a lender-by-lender basis, and determined that the transaction met the criteria for a troubled debt restructuring ("TDR") under ASC 470-60, Troubled Debt Restructurings by Debtors ("ASC 470-60"), as we were experiencing financial constraints and the lenders granted a concession. However, the total future cash payments under the new terms exceeded the carrying amount of our senior secured debt at the date of transaction, therefore, no adjustment to the carrying amount of the debt was made. Instead, we calculated a new effective interest rate ("EIR") based on the revised terms of the debt. The senior secured debt is then amortized over the remaining term of the debt using the new EIR, with interest expense recognized based on such rate in future periods. Third party fees of $0.5 million incurred in connection with the A&R Third Amendment were recorded in Other (expense) income, net in the consolidated statements of operations for the year ended December 31, 2024.
On March 12, 2025, we entered into Amendment No. 4 to the A&R Credit Agreement (the "A&R Fourth Amendment"). The A&R Fourth Amendment sets the total net leverage ratio levels applicable under the A&R Credit Agreement, once net leverage testing is resumed as of the quarter ending June 30, 2026. For the quarter ending June 30, 2026, the total net leverage ratio will be initially set at 9.00:1.00, reducing over time until the ratio reaches 7.75:1.00 for the quarter ending June 30, 2027 and any subsequent quarter. In the event we prepay more than $15 million of the principal debt under the A&R Credit Agreement, the total net leverage ratio levels are reduced such that they would be initially set at 7.75:1.00 for the quarter ending June 30, 2026, and would reduce over time until the ratio reaches 6.50:1.00 for the quarter ending June 30, 2027 and any subsequent quarter.
On August 11, 2025, we entered into Amendment No. 5 to the A&R Credit Agreement (the "A&R Fifth Amendment"). The A&R Fifth Amendment revises the definition of Consolidated EBITDA in the A&R Credit Agreement to allow for $2.4 million of non-cash rent expense related to our Miami Beach office lease to be added back when calculating such Consolidated EBITDA for applicable periods. The other terms of the A&R Credit Agreement prior to the A&R Fifth Amendment remain substantively unchanged.
On November 10, 2025, the Company entered into Amendment No. 6 to the A&R Credit Agreement (the "A&R Sixth Amendment"). The A&R Sixth Amendment, among other things, (i) extended the maturity of the A&R Credit Agreement to May 25, 2028, (ii) provided that the cash interest rate would be reduced by 0.15% or 0.50% in the event of certain prepayments of $25 million and $50 million, respectively, and (iii) provided that upon the first such prepayment made on the terms and conditions set forth in the A&R Sixth Amendment, the total net leverage ratio would have been set at 9.00:1.00 for the quarter ending June 30, 2026, and step down over time until the ratio reaches 7.25:1.00 for the quarter ending December 31, 2027 and any subsequent quarter. Pursuant to the A&R Sixth Amendment, we also paid a fee of $0.4 million to our lenders. The other terms of the A&R Credit Agreement prior to the A&R Sixth Amendment remain substantively unchanged. No prepayments were made in the fourth quarter of 2025 or January 2026.
On February 9, 2026, we entered into Amendment No. 7 of the A&R Credit Agreement ("Amendment No. 7") to, substantially concurrently with the initial closing of the New China JV transaction, amend the terms of the A&R Credit Agreement, to, among other things: (i) permit the New China JV transaction, (ii) permit the contribution of certain intellectual property from us to the New China JV at the second closing pursuant to the Purchase Agreement, and (iii) provide for additional representations, covenants, and mandatory prepayments related to the New China JV transaction (including the entire $45,000,000 purchase price for the New China JV transaction and an additional $6.666 million from us). The other terms of the A&R Credit Agreement prior to Amendment No. 7 remain substantively unchanged.
The stated interest rate of each of Tranche A and Tranche B of the A&R Term Loans as of December 31, 2025 was 10.08%. The stated interest rate of each of Tranche A and Tranche B of the A&R Term Loans as of December 31, 2024 was 11.01%. The effective interest rate of Tranche A and Tranche B A&R Term Loans as of December 31, 2025 was 3.88% and 6.34%, respectively. The effective interest rate of Tranche A and Tranche B A&R Term Loans as of December 31, 2024 was 1.05% and 4.93%, respectively.
We were in compliance with applicable financial covenants under the terms of the A&R Credit Agreement and its amendments as of December 31, 2025 and 2024.
Leases
Our principal lease commitments are for office space and operations under several noncancellable operating leases with contractual terms expiring from 2026 to 2037. Some of these leases contain renewal options and rent escalations. As of December 31, 2025 and 2024, our fixed lease obligations were $22.2 million and $25.5 million, respectively, with $7.4 million and $6.6 million due in the next 12 months, respectively.
On August 11, 2025, through our wholly-owned subsidiary, Playboy Enterprises, Inc., we entered into a triple net lease (the "Lease") with RK Rivani LLC, a Florida limited liability company (the "Landlord"), pursuant to which, among other matters and on the terms and subject to the conditions set forth in the Lease, we leased from the Landlord approximately 20,169 square feet of office space in Miami Beach, Florida, for a term of 11 years, with lease payments commencing in August 2026, following renovations of the office space. As we did not take possession of the office space as of December 31, 2025, the Lease is not reflected in our condensed consolidated financial statements. We expect to account for the Lease as an operating lease under Accounting Standards Codification, Topic 842, Leases. The future undiscounted fixed non-cancelable payment obligation pertaining to the Lease is approximately $27.1 million. For further information on our lease obligations, refer to Note 14, Commitments and Contingencies, of the Notes to our Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.
Cash Flows
The following table summarizes our cash flows for the periods indicated (in thousands):
|
Year Ended December 31,
|
|||||||||||||||||||||||
| 2025 | 2024 | $ Change | % Change | ||||||||||||||||||||
| Net cash provided by (used in): | |||||||||||||||||||||||
| Operating activities | $ | 18 | $ | (19,139) | $ | 19,157 | (100) | % | |||||||||||||||
| Investing activities | 550 | (318) | 868 | (273) | |||||||||||||||||||
| Financing activities | 8,589 | 21,595 | (13,006) | (60) | |||||||||||||||||||
Cash Flows from Operating Activities
The change from net cash used to net cash provided in operating activities for year ended December 31, 2025 over the prior year comparable period was due to a $66.7 million decrease in net loss, partly offset by changes in assets and liabilities that had a current period cash flow impact, such as $1.6 million of net changes in working capital and $49.2 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 $8.0 million change in deferred revenues due to the timing of revenue recognition, a $4.4 million increase in accounts payable due to the timing of payments, a $1.0 million increase in operating lease liabilities, a $1.7 million increase in other liabilities and accrued expenses, and a $0.9 million decrease in accounts receivable due to the timing of royalty collections, partly offset by a $7.6 million lower decrease in inventories, net due to higher inventory turnover in the prior year comparative period as a result of a large sale in March 2024 that did not recur in 2025, an increase of $3.8 million in prepaid expenses primarily due to the timing of payments, a $2.0 million decrease in other assets and liabilities, and a $0.7 million increase in contract assets, primarily due to the nonrecurring impairment, modification or termination of certain trademark licensing contracts in the prior year comparative period. The change in non-cash charges compared to the change in the prior year comparable period was primarily driven by a $24.0 million decrease in non-cash impairment charges, primarily due to impairment charges recognized in the prior year comparative period of $17.0 million related to our goodwill and $4.7 million related to our internally developed software, as well as a decrease of $3.3 million in impairment charges on our artwork held for sale, a $11.5 million decrease in the amortization of debt premium/discount and issuance costs due to the A&R Third Amendment, a $4.9 million decrease in deferred income taxes, a $4.0 million decrease in depreciation and amortization, primarily due to the write-off of our internally developed software in 2024, a $1.7 million decrease in the amortization of right of use assets, and a $2.6 million decrease in stock-based compensation expense.
Cash Flows from Investing Activities
The change from net cash used in investing activities to net cash provided by investing activities for the year ended December 31, 2025 over the prior year comparable period was due to a $1.2 million decrease in purchases of property and equipment, offset by lower proceeds from the sale of our artwork of $0.4 million.
Cash Flows from Financing Activities
The decrease in net cash provided by financing activities for the year ended December 31, 2025 over the prior year comparable period was primarily due to lower proceeds from sale of common stock, offset by higher repayment of long-term debt.
Critical Accounting Estimates
Our consolidated financial statements have been prepared in accordance with GAAP. Preparing consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Critical accounting estimates are those estimates that involve a significant level of estimation uncertainty and could have a material impact on our financial condition or results of operations. Estimates and judgments used in the preparation of our 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, economic conditions and other current and future events, such as the impact of international armed conflicts and geopolitical tensions. 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.
We believe the following accounting estimates to be the most critical in understanding the judgments and estimates we use in preparing our consolidated financial statements.
Licensing Revenue Recognition
We license trademarks under multi-year arrangements with consumer products, online and location-based entertainment businesses. The performance obligation is a license of symbolic IP that provides the customer with a right to access the IP, which represents a stand-ready obligation that is satisfied over time. Under these arrangements, we generally receive an annual nonrefundable minimum guarantee that is recoupable against a sales-based royalty generated during the license year. We recognize Excess Royalties only when the annual minimum guarantee is exceeded. Generally, Excess Royalties are recognized when they are earned. Excess Royalties are payable quarterly. As the sales reports from licensees are typically not received until after the close of the reporting period, we follow the variable consideration framework and constraint guidance to estimate the underlying sales volume to recognize Excess Royalties based on historical experience and general economic trends. Historical adjustments to recorded estimates have not been material. We adjust how we account for revenue pursuant to licenses, if collectability on their related billings becomes improbable.
Goodwill and Other Intangible Assets, Net
Goodwill and certain other intangible assets deemed to have indefinite useful lives are not amortized. Rather, goodwill and indefinite-lived intangible assets are assessed for impairment at least annually. Finite-lived intangible assets are amortized over their respective estimated useful lives and, along with other long-lived assets, are evaluated for impairment periodically whenever events or changes in circumstances indicate that their carrying values may not be fully recoverable.
We perform annual impairment test on goodwill in the fourth quarter of each fiscal year or when events occur or circumstances change that would, more likely than not, reduce the fair value of a reporting unit below its carrying value. We may first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If we determine it is more likely than not that the fair value of the reporting unit is greater than its carrying amount, an impairment test is unnecessary. If an impairment test is necessary, we will estimate the fair value of a related reporting unit.
Impairment of Long-Lived Assets
The carrying amounts of long-lived assets, including property and equipment, acquired intangible assets and right-of-use operating lease assets are periodically reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable or that the useful life is shorter than originally estimated. Recoverability of these assets is measured by a comparison of the carrying amounts to the future undiscounted cash flows the assets are expected to generate over its remaining life. If such review indicates that the carrying amount of intangible assets is not recoverable, the carrying amount of such assets is reduced to the fair value.
Inventory
Inventories consist primarily of finished goods and are stated at the lower of cost or net realizable value. Inventory reserves are recorded for excess and slow-moving inventory. Our analysis includes a review of inventory quantities on hand at period-end in relation to year-to-date sales, existing orders from customers and projections for sales in the foreseeable future. The net realizable value is determined based on historical sales experience on a style-by-style basis. The valuation of inventory could be impacted by changes in public and consumer preferences, demand for product, changes in the buying patterns of both retailers and consumers and inventory management of customers.
Income Taxes
We record income taxes under the asset and liability method, whereby deferred tax assets and liabilities are recognized based on the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and attributable to operating loss and tax credit carryforwards. The carrying amounts of deferred tax assets are reduced by a valuation allowance if, based on available evidence, it is more likely than not that such assets will not be realized. Accordingly, the need to establish valuation allowances for deferred tax assets is assessed periodically based on the more-likely-than-not realization threshold. This assessment considers, among other matters, the nature, frequency, and severity of current and cumulative losses, the duration of statutory carryforward periods, and tax planning alternatives. We use a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals and litigation processes, if any. The second step is to measure the largest amount of tax benefit as the largest amount that is more likely than not to be realized upon settlement. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.
Recent Accounting Pronouncements
Refer to Note 1, Basis of Presentation and Summary of Significant Accounting Policies, of the Notes to our Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K 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.
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