Item 1A. Risk Factors.
RISK
FACTORS
An investment in our securities
involves a high degree of risk. You should consider carefully all of the risks described below, together with the other information contained
in this Annual Report, before making a decision to invest in our securities. If any of the following events occur, our business, financial
condition and operating results may be materially adversely affected. In that event, the trading price of our securities could decline,
and you could lose all or part of your investment. The risks and uncertainties described below are not the only ones we face. Additional
risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that
adversely affect our business, financial condition and operating results. Unless the context otherwise requires, all references in this
subsection to the “Company,” “we”, “us” or “our” refer to PLBY Group, Inc. and its
consolidated subsidiaries following the Business Combination, which was completed on February 10, 2021, other than certain historical
information which refers to the business of Playboy prior to the consummation of the Business Combination.
Summary of Risk Factors
We have in the past been
adversely affected by certain of, and may in the future be materially and adversely affected by, the following risks:
· our ability to maintain the value and reputation of the Playboy brand;
· operating in highly competitive industries;
· various taxation related risks in multiple jurisdictions;
· potential systems failures in our digital operations;
· our exposure to data security and privacy risks;
· compliance with government regulations;
· challenges relating to operations and expansion outside of the U.S.;
· adverse results in litigation;
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· integration risks from significant future acquisitions;
· our debt and other financial obligations;
· the demand for our products;
· the COVID-19 (as defined below) pandemic;
· global economic conditions;
· the benefits from the Business Combination; and
General Risks Related to Our Business and Industry
Our success depends on our ability to maintain the value and
reputation of the Playboy brand.
Our success depends on the
value and reputation of the Playboy brand. The Playboy name is integral to our business as well as to the implementation of our strategies
for expanding our business. Maintaining, promoting, and positioning our brand will depend largely on the success of our marketing and
merchandising efforts and our ability to provide a consistent, high quality product, and customer experience.
We rely on social media,
as one of our marketing strategies, to have a positive impact on both our brand value and reputation. Our brand and reputation could be
adversely affected if we fail to achieve these objectives, if our public image was to be tarnished by negative publicity, which could
be amplified by social media, if we fail to deliver innovative and high-quality products and experiences acceptable to our customers,
or if we face or mishandle a product recall.
We license our brand to third
parties to use in connection with various goods and services, subject to our approval. Our financial condition could be negatively impacted
if any such third parties use our brand in a manner that adversely reflects on Playboy or our brand.
Additionally, while we devote
considerable efforts and resources to protecting our intellectual property, if these efforts are not successful, the value of our brand
may be harmed. Any harm to our brand and reputation could have a material adverse effect on our financial condition.
Our businesses operate in highly competitive industries.
The sexual wellness, lifestyle
experiences, apparel and accessories, and beauty and grooming industries in which we operate are highly competitive. The ability of our
businesses to compete in each of these industries successfully depends on a number of factors, including our ability to consistently supply
high quality and popular content and products, adapt to new technologies and distribution platforms, maintain our brand reputation and
produce new and successful products and content. There can be no assurance that we will be able to compete successfully in the future
against existing or new competitors, or that increasing competition will not result in price reductions, reduced margins or loss of market
share, any of which could have a material adverse effect on our business, financial condition or results of operations.
Additionally, many of our
competitors, including large entertainment and media enterprises and apparel and beauty retailers, have greater financial and human resources
than we do. We cannot assure you that we can remain competitive with companies that have greater resources or that offer alternative entertainment
or product offerings.
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The market for our adult oriented products
is changing rapidly, and unless we are able to anticipate these changes and rapidly adapt, we will lose market share.
Online usage is changing
rapidly as technological advancements allow the deployment of more advanced and interactive multimedia product offerings and the Internet
and mobile device usage have resulted in new digital distribution channels. As a result, we have to rapidly develop new business models,
products and distribution models that will allow us to otherwise capitalize on our large library of titles that we own and license as
well as our product offerings.
Unless we are able to effectively
modify our business model to compete with the products offered digitally on the Internet or elsewhere, our market share, revenues and
profits from our product offerings could decrease. Although we are currently developing new products and seeking potential acquisition
targets, no assurance can be given that we will remain competitive in the rapidly changing adult entertainment marketplace or the other
industries we compete in. Our future success will depend, in part, on our ability to adapt to rapidly changing technologies, to enhance
existing product offerings and to develop and introduce a variety of new products to address changing demands of our consumers.
If we are unable to obtain, maintain and
protect our intellectual property rights, in particular trademarks and copyrights, our ability to compete could be negatively impacted.
Our intellectual property
rights, particularly our trademarks in the Playboy name and Rabbit Head Design, are valuable assets of our business and are critical to
our success, growth potential and competitive position. Although certain of the intellectual property we use is registered in the U.S.
and in many of the foreign countries in which we operate, there can be no assurances with respect to the continuation of such intellectual
property rights, including our ability to further register, use or defend key current or future trademarks. Further, applicable law may
provide only limited and uncertain protection, particularly in emerging markets, such as China.
Furthermore, we may not apply
for, or be unable to obtain, intellectual property protection for certain aspects of our business. Third parties have in the past, and
could in the future, bring infringement, invalidity, co-inventorship, re-examination, opposition or similar claims with respect to our
current or future intellectual property. Any such claims, whether or not successful, could be costly to defend, may not be sufficiently
covered by any indemnification provisions to which we are party, divert management’s attention and resources, damage our reputation
and brands, and substantially harm our business, prospects, financial condition, results of operations, cash flows, as well as the trading
price of our securities.
In addition, third parties
may distribute and sell counterfeit (or grey market) versions of our products, which may be inferior or pose safety risks and could confuse
consumers or customers, which could cause them to refrain from purchasing our brands in the future or otherwise damage our reputation.
The presence of counterfeit versions of our products in the market and of prestige products in mass distribution channels could also dilute
the value of our brands, force us and our distributors to compete with heavily discounted products, cause us to be in breach of contract
(including license agreements), impact our compliance with distribution and competition laws in jurisdictions including the E.U. and China,
or otherwise have a negative impact on our reputation and business, prospects, financial condition or results of operations.
In order to protect or enforce
our intellectual property and other proprietary rights, we may initiate litigation or other proceedings against third parties, such as
infringement suits, opposition proceedings or interference proceedings. Any lawsuits or proceedings that we initiate could be expensive,
take significant time and divert management’s attention from other business concerns, adversely impact customer relations and we
may not be successful. Litigation and other proceedings may also put our intellectual property at risk of being invalidated or interpreted
narrowly. The occurrence of any of these events may have a material adverse effect on our business, prospects, financial condition, results
of operations, cash flows, as well as the trading price of our securities.
Our success depends on our ability to operate
our business without infringing, misappropriating or otherwise violating the intellectual property of third parties.
Our commercial success depends
in part on our ability to operate without infringing, misappropriating or otherwise violating the trademarks, patents, copyrights and
other proprietary rights of third parties. However, we cannot be certain that the conduct of our business does not and will not infringe,
misappropriate or otherwise violate such rights. Moreover, our acquisition targets and other businesses in which we may make strategic
investments are often smaller or younger companies with less robust intellectual property clearance practices, and we may face challenges
on the use of their trademarks and other proprietary rights.
If we are found to be infringing,
misappropriating or otherwise violating a third-party trademark, patent, copyright or other proprietary rights, we may need to obtain
a license, which may not be available in a timely manner on commercially reasonable terms or at all, or redesign or rebrand our products,
which may not be possible or result in a significant delay to market or otherwise have an adverse commercial impact. We may also be required
to pay substantial damages or be subject to a court order prohibiting us and our customers from selling certain products or engaging in
certain activities, which could therefore have a material adverse effect on our business, prospects, financial condition, results of operations
and cash flows, as well as the trading price of our securities.
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Any inability to identify, fund investment
in and commercially exploit new technology could have a material adverse impact on our business, financial condition or results of operations.
We are engaged in businesses
that have experienced significant technological changes over the past several years and are continuing to undergo technological changes.
Our ability to implement our business plan and to achieve the results projected by management will depend on management’s ability
to anticipate technological advances and implement strategies to take advantage of future technological changes. Any inability to identify,
fund investment in and commercially exploit new technology or the commercial failure of any technology that we pursue, such as Internet
and mobile, could result in our businesses becoming burdened by obsolete technology and could have a material adverse impact on our business,
financial condition or results of operations.
Our business involves the provision of sexually
explicit content which can create negative publicity, lawsuits and boycotts.
We are engaged in the business
of providing adult-oriented, sexually explicit products worldwide. Many people regard our primary business as unwholesome. Various national
and local governments, along with religious and children’s advocacy groups, consistently propose and enact legislation to restrict
the provision of, access to, and content of such entertainment. These groups also often file lawsuits against providers of adult entertainment,
encourage boycotts against such providers and mount negative publicity campaigns. In this regard, some of our distribution outlets and
advertisers, have from time-to-time been the target of groups who seek to limit the availability of our products because of their content.
We expect to continue to be subject to these activities.
The adult-oriented content
of our websites may also subject us to obscenity or other legal claims by third parties. We may also be subject to claims based upon the
content that is available on our websites through links to other sites and in jurisdictions that we have not previously distributed content
in. Implementing measures to reduce our exposure to this liability may require us to take steps that would substantially limit the attractiveness
of our websites and other distribution channels and/or their availability in various geographic areas, which could negatively impact their
ability to generate revenue.
In addition, some investors,
investment banks, market makers, lenders and others in the investment community may refuse to participate in the market for our common
stock, financings or other activities due to the nature of our adult business. These refusals may negatively impact the value of our common
stock and our opportunities to attract market support.
Companies providing products and services
on which we rely may refuse to do business with us because some of our products contain adult content.
Some companies that provide
products and services we need may be concerned that associating with us could lead to their becoming the target of negative publicity
campaigns by public interest groups and boycotts of their products and services. As a result of these concerns, these companies may be
reluctant to enter into or continue business relationships with us. There can be no assurance that we will be able to maintain our existing
business relationships with the companies, domestic or international, that currently provide us with services and products. Our inability
to maintain such business relationships, or to find replacement service providers, would materially adversely affect our business, financial
condition and results of operations. We could be forced to enter into business arrangements on terms less favorable to us than we might
otherwise obtain, which could lead to our doing business with less competitive terms, higher transaction costs and more inefficient operations
than if we were able to maintain such business relationships or find replacement service providers.
If we are unable to advertise on certain
platforms because of our brand or products, our business would be harmed.
Some companies that operate
websites and offline media, including search engines and social media platforms, on which we would like to advertise our products, and
provide direct purchasing capabilities, may be reluctant or refuse to allow such advertising due to the adult nature of certain of our
products and the history of our brand. Our inability to advertise on such platforms would make it more difficult for us to reach a broad
audience, which could limit sales of our products, and the reduce the value of our brand. Our existing competitors, as well as potential
new competitors, may not face such obstacles and be able to undertake more extensive marketing campaigns and reach a broader consumer
base, making it more difficult for Playboy to compete with them with similar products.
If we are unable to generate revenues from
advertising and sponsorships our future growth may be harmed.
If companies perceive Playboy.com or
any of our other free websites to be limited or ineffective advertising mediums, they may be reluctant to advertise in our products or
to be our sponsors. Our ability to generate significant advertising and sponsorship revenues depends upon several factors, including,
among others, the following:
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· our ability to offer attractive advertising rates;
· our ability to attract advertisers and sponsors; and
· our ability to provide effective advertising delivery and measurement systems.
Our potential advertising
revenues are also dependent on the level of spending by advertisers, which is impacted by a number of factors beyond our control, including
general economic conditions, changes in consumer purchasing and viewing habits and changes in the retail sales environment. Our existing
competitors, as well as potential new competitors, may have significantly greater financial, technical and marketing resources than we
do. These companies may be able to undertake more extensive marketing campaigns, adopt aggressive advertising pricing policies and devote
substantially more resources to attracting advertising customers.
We have experienced seasonality in our revenues,
which may result in volatility in our earnings.
While we receive revenue
throughout the year, our businesses do experience seasonality. For example, our consumer brand licensing business under our consumer business
experiences higher receipts in its first and third fiscal quarters due to the licensing fee structure in its licensing agreements which
typically require advance payment of such fees during these quarters, and our direct-to-consumer business typically experiences higher
sales in the fourth quarter due to the U.S. holiday season, including Halloween. To the extent that we continue to experience seasonality
after the Business Combination, this may result in volatility in our earnings.
We will have a significant amount of intangible
assets, including our trademarks, recorded on our consolidated balance sheet following the Business Combination. As a result of changes
in market conditions and declines in the estimated fair value of these assets, we may be required to record impairments of our intangible
assets in the future which could adversely affect our results of operations.
As of December 31, 2020,
Playboy’s indefinite-lived intangible assets and goodwill represented $337.2 million, or 81.8% of its total consolidated
assets. As a result of the Business Combination, such intangible assets and goodwill will be recorded on our consolidated balance sheets
going forward. Under accounting principles generally accepted in the United States, indefinite-lived intangible assets are not amortized,
but instead are subject to impairment evaluation based on related estimated fair values, with such testing to be done at least annually.
We will review our trademarks for impairment whenever events or changes in circumstances indicate that the carrying amount may not be
recoverable. Any write-down of intangible assets resulting from future periodic evaluations would, as applicable, either decrease our
net income or increase our net loss, and those decreases or increases could be material.
Our use of certain tax attributes may be
limited.
We have significant net
operating losses (“NOLs”). A valuation allowance has been provided as of December 31, 2020 which primarily relates to
state net operating losses and capital loss carryforwards. As of December 31, 2020, we had federal NOLs available to carryforward
to future periods of $180.2 million, which begin expiring in 2027 and we had state and local NOLs available to carryforward to
future periods of $99.3 million, which begin expiring in 2021. We have foreign tax credits available to carryforward to future periods
of $2.8 million as of December 31, 2020, which expire by 2021. The statute of limitations for tax years 2015 and
forward remains open to examination by the major U.S. taxing jurisdictions to which we are subject. In addition, due to the NOL carryforward
provision, tax authorities continue to have the ability to adjust the amount of our carryforward. The limitations on the use of the NOLs
under Section 382 could affect our ability to offset future taxable income.
We are subject to taxation related risks
in multiple jurisdictions.
We are a U.S.-based multinational
company subject to tax in multiple U.S. and foreign tax jurisdictions. Significant judgment is required in determining our global provision
for income taxes, deferred tax assets or liabilities and in evaluating our tax positions on a worldwide basis. While we believe our tax
positions are consistent with the tax laws in the jurisdictions in which we conduct our business, it is possible that these positions
may be challenged by jurisdictional tax authorities, which may have a significant impact on our global provision for income taxes.
Tax laws are being re-examined
and evaluated globally. New laws and interpretations of the law are taken into account for financial statement purposes in the quarter
or year that they become applicable. Tax authorities are increasingly scrutinizing the tax positions of companies. Many countries in the
European Union, as well as a number of other countries and organizations such as the Organization for Economic Cooperation and Development,
are actively considering changes to existing tax laws that, if enacted, could increase our tax obligations in countries where we do business.
If U.S. or other foreign tax authorities change applicable tax laws, our overall taxes could increase, and our business, financial condition
or results of operations may be adversely impacted.
Our digital operations are subject to systems
failures.
The uninterrupted performance
of our computer systems is critical to the operations of our websites. Our computer systems are located at external third-party sites,
and, as such, may be vulnerable to fire, loss of power, telecommunications failures and other similar catastrophes. In addition, we may
have to restrict access to our websites to solve problems caused by computer viruses or other system failures. Our customers may become
dissatisfied by any disruption or failure of our computer systems that interrupts our ability to provide our content. Repeated system
failures could substantially reduce the attractiveness of our websites and/or interfere with commercial transactions, negatively affecting
our ability to generate revenues. Our websites must accommodate a high volume of traffic and deliver regularly-updated content. Our sites
have, on occasion, experienced slow response times and network failures. These types of occurrences in the future could cause users to
perceive our websites as not functioning properly and therefore induce them to frequent websites other than ours. We are also subject
to risks from failures in computer systems other than our own because our customers depend on their own Internet service providers for
access to our sites. Our revenues could be negatively affected by outages or other difficulties customers experience in accessing our
websites due to Internet service providers’ system disruptions or similar failures unrelated to our systems. Our insurance policies
may not adequately compensate us for any losses that may occur due to any failures in our Internet systems or the systems of our customers’
Internet service providers.
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Changes in how network operators handle
and charge for access to data that travel across their networks could adversely impact our business.
We rely significantly upon
the ability of consumers to access our products through the internet. If network operators block, restrict or otherwise impair access
to our products over their networks, our business could be negatively affected. To the extent that network operators implement usage-based
pricing, including meaningful bandwidth caps, or otherwise try to monetize access to their networks by data providers, we could incur
greater operating expenses and our membership acquisition and retention could be negatively impacted. Furthermore, to the extent network
operators create tiers of internet access service and either charge us for or prohibit us from being available through these tiers, our
business could be negatively impacted.
Most network operators that
provide consumers with access to the internet also provide these consumers with multichannel video programming. As such, many network
operators have an incentive to use their network infrastructure in a manner adverse to our continued growth and success. While we believe
that consumer demand, regulatory oversight and competition will help check these incentives, to the extent that network operators are
able to provide preferential treatment to their data as opposed to ours or otherwise implement discriminatory network management practices,
our business could be negatively impacted. The extent to which these incentives limit operator behavior differs across markets.
We are subject to data security and privacy
risks that could negatively affect our results, operations or reputation.
Online security breaches
could materially adversely affect our business, financial condition or results of operations. Any well-publicized compromise of security
could deter use of the Internet in general or use of the Internet to conduct transactions that involve transmitting confidential information
or downloading sensitive materials in particular. In addition to our own sensitive and proprietary business information, we handle transactional
and personal information about our consumers and users of our digital experiences, which include online distribution channels and product
engagement. In offering products via online payment, we may increasingly rely on technology licensed from third parties to provide the
security and authentication necessary to effect secure transmission of confidential information such as customer credit card numbers.
Advances in computer capabilities, new discoveries in the field of cryptography or other developments could compromise or breach the algorithms
that we use to protect our customers’ transaction data. If third parties are able to penetrate our network security or otherwise
misappropriate confidential information, we could be subject to liability, which could result in litigation. In addition, experienced
programmers or “hackers” may attempt to misappropriate proprietary information or cause interruptions in our product offerings
that could require us to expend significant capital and resources to protect against or remediate these problems. Increased scrutiny by
regulatory agencies, such as the Federal Trade Commission and state agencies, of the use of customer information could also result in
additional expenses if we are obligated to reengineer systems to comply with new regulations or to defend investigations of our privacy
practices.
In addition, we must comply
with increasingly complex and rigorous, and sometimes conflicting, regulatory standards enacted to protect business and personal data
in the United States, Europe and elsewhere. For example, the European Union adopted the General Data Protection Regulation (the “GDPR”),
which became effective on May 25, 2018; and California passed the California Consumer Privacy Act (the “CCPA”) which
became effective on January 1, 2020. The U.S. Children’s Online Privacy Protection Act (COPPA) also regulates the collection,
use and disclosure of personal information from children under 13 years of age. While none of our content is directed at children
under 13 years of age, if COPPA were to apply to us, failure to comply with COPPA may increase our costs, subject us to expensive
and distracting government investigations and could result in substantial fines. These laws impose additional obligations on companies
regarding the handling of personal data and provide certain individual privacy rights to persons whose data is stored. Compliance with
existing, proposed and recently enacted laws (including implementation of the privacy and process enhancements called for under GDPR and
CCPA) and regulations can be costly and time consuming, and any failure to comply with these regulatory standards could subject us to
legal and reputational risks.
Customer interaction with
our content is subject to our privacy policy and terms of service. If we fail to comply with our posted privacy policy or terms of service
or if we fail to comply with existing privacy-related or data protection laws and regulations, it could result in proceedings or litigation
against us by governmental authorities or others, which could result in fines or judgments against us, damage our reputation, impact our
financial condition and harm our business. If regulators, the media or consumers raise any concerns about our privacy and data protection
or consumer protection practices, even if unfounded, this could also result in fines or judgments against us, damage our reputation, and
negatively impact our financial condition and damage our business.
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We are subject to payment processing risk.
Our customers pay for our
products using a variety of different payment methods, including credit and debit cards, gift cards, prepaid cards, direct debit, online
wallets and direct carrier and partner billing. We rely on internal systems as well as those of third parties to process payment. Acceptance
and processing of these payment methods are subject to certain rules and regulations, including additional authentication requirements
for certain payment methods, and require payment of interchange and other fees. To the extent there are increases in payment processing
fees, material changes in the payment ecosystem, such as large re-issuances of payment cards, delays in receiving payments from payment
processors, changes to rules or regulations concerning payments, loss of payment partners and/or disruptions or failures in our payment
processing systems, partner systems or payment products, including products we use to update payment information, our revenue, operating
expenses and results of operation could be adversely impacted. In certain instances, we leverage third parties such as our cable and other
partners to bill subscribers on our behalf. If these third parties become unwilling or unable to continue processing payments on our behalf,
we would have to transition subscribers or otherwise find alternative methods of collecting payments, which could adversely impact member
acquisition and retention. In addition, from time to time, we encounter fraudulent use of payment methods, which could impact our results
of operations and if not adequately controlled and managed could create negative consumer perceptions of our products. If we are unable
to maintain our fraud and chargeback rate at acceptable levels, card networks may impose fines, our card approval rate may be impacted
and we may be subject to additional card authentication requirements. The termination of our ability to process payments on any major
payment method would significantly impair our ability to operate our business.
Government regulations could adversely affect
our business, financial condition or results of operations.
Our businesses are regulated
by governmental authorities in the countries in which we operate. Because of our international operations, we must comply with diverse
and evolving regulations. Regulation relates to, among other things, licensing, access to satellite transponders, commercial advertising,
subscription rates, foreign investment, Internet gaming, use of confidential customer information and content, including standards
of decency/obscenity. Changes in the regulation of our operations or changes in interpretations of existing regulations by courts or regulators
or our inability to comply with current or future regulations could adversely affect us by reducing our revenues, increasing our operating
expenses and/or exposing us to significant liabilities. While we are not able to reliably predict particular regulatory developments that
could affect us adversely, those regulations related to adult content, the Internet, consumer products and commercial advertising illustrate
some of the potential difficulties we face.
Adult
content. Regulation of adult content could prevent us from making our content available in various jurisdictions
or otherwise have a material adverse effect on our business, financial condition or results of operations. The governments of some countries,
such as China and India, have sought to limit the influence of other cultures by restricting the distribution of products deemed to represent
foreign or “immoral” influences. Regulation aimed at limiting minors’ access to adult content could also increase our
cost of operations and introduce technological challenges, such as by requiring development and implementation of age verification systems.
U.S. government officials could amend or construe and seek to enforce more broadly or aggressively the adult content recordkeeping and
labeling requirements set forth in 18 U.S.C. Section 2257 and its implementing regulations in a manner that is unfavorable to our
business.
Internet. Various
governmental agencies are considering a number of legislative and regulatory proposals that may lead to laws or regulations concerning
various aspects of the Internet, including online content, intellectual property rights, user privacy, taxation, access charges, liability
for third-party activities and jurisdiction. Regulation of the Internet could materially adversely affect our business, financial condition
or results of operations by reducing the overall use of the Internet, reducing the demand for our products or increasing our cost of doing
business.
Consumer
products. Any attempts to limit or otherwise regulate the sale or distribution of certain consumer products
sold by our licensees could materially adversely affect our business, financial condition or results of operations.
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We are subject to risks resulting from our
operations outside the U.S., and we face additional risks and challenges as we continue to expand internationally.
The international scope
of our operations may contribute to volatile financial results and difficulties in managing our business. For the years ended December 31,
2020 and 2019, we derived approximately 52% and 77% of our consolidated revenues from countries outside the U.S., respectively.
Our international operations expose us to numerous challenges and risks, including, but not limited to, the following:
· costs of complying with varying governmental regulations;
· fluctuations in currency exchange rates;
· scarcity of attractive licensing and joint venture partners;
· the potential need for opening and managing distribution centers abroad; and
· difficulties in protecting intellectual property rights in foreign countries.
In addition, important elements
of our business strategy, including capitalizing on advances in technology, expanding distribution of our products and content and leveraging
cross-promotional marketing capabilities, involve a continued commitment to expanding our business internationally. This international
expansion will require considerable management and financial resources.
We cannot assure you that
one or more of these factors or the demands on our management and financial resources would not harm any current or future international
operations and our business as a whole.
We are subject to periodic claims and litigation
that could result in unexpected expenses and could ultimately be resolved against us.
From time to time, we are
involved in litigation and other proceedings and litigation arising in the ordinary course of business, such as the matters described
in “Item 3—Legal Proceedings” of this Annual Report on Form 10-K. Defending these claims, even those without
merit, could cause us to incur significant legal expenses and divert financial and management resources. These claims could also result
in significant settlement amounts, damages, fine or other penalties. An unfavorable outcome of any particular proceeding could exceed
the limits of our insurance policies or the carriers may decline to fund such final settlements and/or judgments and could have an adverse
impact on our business, financial condition, and results of operations. In addition, an adverse resolution of any lawsuit or claim against
us could negatively impact our reputation and our brand image and could have a material adverse effect on our business.
In addition, we rely on our
employees, consultants and sub-contractors to conduct our operations in compliance with applicable laws and standards. Any violation of
such laws or standards by these individuals, whether through negligence, harassment, discrimination or other misconduct, could result
in significant liability for us and adversely affect our business. For example, negligent operations by employees could result in serious
injury or property damage, and sexual harassment or racial and gender discrimination could result in legal claims and reputational harm.
If we are unable to attract and retain key
employees and hire qualified management and personnel our ability to compete could be harmed.
We believe that our ability
to successfully implement our business strategy and to operate profitably depends, in part, on our ability to retain our key personnel.
If key personnel become unable or unwilling to continue in their present positions, our business, financial condition or results of operations
could be materially adversely affected. Our success also depends, in part, on our continuing ability to identify, hire, attract, train
and develop other highly qualified personnel.
Competition for these employees
can be intense, and our ability to hire, attract and retain them depends on our ability to provide competitive compensation. We may not
be able to attract, assimilate, develop or retain qualified personnel in the future, and our failure to do so could adversely affect our
business, including the execution of our global business strategy. Any failure by our management team to perform as expected may have
a material adverse effect on our business, prospects, financial condition and results of operations.
Past performance by our management team
and their affiliates may not be indicative of future performance of an investment in us.
Information regarding performance
by, or businesses associated with, our management team or businesses associated with them is presented for informational purposes only.
Past performance by our management team is not a guarantee the success with respect to any acquisition we may consummate. You should not
rely on the historical record of the performance of our management team’s or businesses associated with them as indicative of our
future performance of an investment in us or the returns we will, or is likely to, generate going forward.
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Our management has limited experience in
operating a public company.
Our executive officers have
limited experience in the management of a publicly traded company. Our management team may not successfully or effectively manage the
Company, which will be subject to significant regulatory oversight and reporting obligations under federal securities laws. Their limited
experience in dealing with the increasingly complex laws pertaining to public companies could be a significant disadvantage in that it
is likely that an increasing amount of their time may be devoted to these activities which will result in less time being devoted to the
management and growth of the Company. We may not have adequate personnel with the appropriate level of knowledge, experience, and training
in the accounting policies, practices or internal controls over financial reporting required of public companies in the United States.
The development and implementation of the standards and controls necessary for the Company to achieve the level of accounting standards
required of a public company in the United States may require costs greater than expected. It is possible that the Company will be required
to expand its employee base and hire additional employees to support its operations as a public company which will increase its operating
costs in future periods.
Our expansion into new products, technologies,
and geographic regions subjects us to additional risks.
We may have limited or no
experience in our newer market segments, and our customers may not adopt our product or content offerings. These offerings, which can
present new and difficult technology and regulatory challenges, may subject us to claims if customers of these offerings experience service
disruptions or failures or other quality issues. In addition, profitability, if any, in our newer activities may not meet our expectations,
and we may not be successful enough in these newer activities to recoup our investments in them. Failure to realize the benefits of amounts
we invest in new technologies, products, or content could result in the value of those investments being written down or written off.
We expect to incur transaction costs in
connection with our acquisitions.
We have incurred and expect
to continue to incur significant costs and expenses in connection with past and future acquisitions, including financial advisory, legal,
accounting, consulting and other advisory fees and expenses, reorganization and restructuring costs, litigation defense costs, severance/employee
benefit-related expenses, filing fees, printing expenses and other related charges. There are also a large number of processes, policies,
procedures, operations, technologies and systems that must be integrated in connection with our acquisitions. There are many factors beyond
our control that could affect the total amount or timing of the integration and implementation expenses. These costs and expenses could
reduce the benefits and income we expect to achieve from our acquisitions.
We may, in the future, require
additional capital to help fund all or part of potential acquisitions. If, at the time required, we do not have sufficient cash to finance
those additional capital needs, we will need to raise additional funds through equity and/or debt financing. We cannot guarantee that,
if and when needed, additional financing will be available to us on acceptable terms or at all. If additional capital is needed and is
either unavailable or cost prohibitive, our growth may be limited as we may need to change our business strategy to slow the rate of,
or eliminate, our expansion plans. In addition, any additional financing we undertake could impose additional covenants upon us that restrict
our operating flexibility, and, if we issue equity securities to raise capital, our existing stockholders may experience dilution or the
new securities may have rights senior to those of our common stock.
The officers, directors or other key personnel
of an acquisition candidate may resign upon completion of such an acquisition. The loss of a target’s key personnel could negatively
impact the operations and profitability of our post-acquisition business.
The role of an acquisition
candidate’s key personnel upon the completion of an acquisition cannot be ascertained at this time. Although we contemplate that
certain members of an acquisition candidate’s management team will remain associated with the acquisition candidate following an
acquisition, it is possible that members of the management of an acquisition candidate will not wish to remain in place.
We may seek acquisition opportunities in
industries or sectors that may be outside of our management’s areas of expertise.
We will consider an acquisition
outside of our management’s areas of expertise if an acquisition candidate is presented to us and we determine that such candidate
offers an attractive acquisition opportunity for our company. Although our management will endeavor to evaluate the risks inherent in
any particular acquisition candidate, we cannot assure you that we will adequately ascertain or assess all of the significant risk factors.
We also cannot assure you that an investment in our securities will not ultimately prove to be less favorable to investors than a direct
investment, if an opportunity were available, in an acquisition candidate.
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In pursuing selective acquisitions, we may
incur various costs and liabilities and we may never realize the anticipated benefits of the acquisitions.
If appropriate opportunities
become available, we may acquire businesses, products or technologies that we believe are strategically advantageous to us. Transactions
of this sort could involve numerous risks, including:
· dilution of existing stockholders’ ownership interest in us;
· incurrence of additional debt;
· loss of key employees of any acquired companies;
· adverse effects on our relationships with suppliers and customers; and
Furthermore, we may not be
successful in identifying appropriate acquisition candidates or consummating acquisitions on terms favorable or acceptable to us or at
all.
When we acquire businesses,
products or technologies, our due diligence reviews are subject to inherent uncertainties and may not reveal all potential risks. We may
therefore fail to discover or inaccurately assess undisclosed or contingent liabilities, including liabilities for which we may have responsibility
as a successor to the seller or the target company. As a successor, we may be responsible for any past or continuing violations of law
by the seller or the target company, including violations of decency laws. Although we generally attempt to seek contractual protections,
such as representations and warranties and indemnities, we cannot be sure that we will obtain such provisions in our acquisitions or that
such provisions will fully protect us from all unknown, contingent or other liabilities or costs. Finally, claims against us relating
to any acquisition may necessitate our seeking claims against the seller for which the seller may not indemnify us or that may exceed
the scope, duration or amount of the seller’s indemnification obligations.
Our acquisitions may result in disruptions
in our business and diversion of management’s attention.
Any acquisitions will require
the integration of the operations, products and personnel of the acquired businesses and the training and motivation of these individuals.
Such acquisitions may disrupt our operations and divert management’s attention from day-to-day operations, which could impair our
relationships with current employees, customers and partners. We may also incur debt or issue equity securities to pay for any future
acquisitions. These issuances could be substantially dilutive to our stockholders. In addition, our profitability may suffer because of
acquisition-related costs or amortization, or impairment costs for acquired goodwill and other intangible assets. If management is unable
to fully integrate acquired business, products or persons with existing operations, we may not receive the benefits of the acquisitions,
and our revenues and stock trading price may decrease.
We may not realize all of the anticipated
benefits of our acquisitions or those benefits may take longer to realize than expected.
Our ability to realize the
anticipated benefits of our acquisitions depends, to a large extent, on our ability to implement changes to acquired businesses in a manner
that facilitates growth opportunities and realizes anticipated synergies. We will be required to devote significant management attention,
resources and costs to realigning the business practices and operations of acquired businesses to our brand management model. We generally
expect to benefit from operational synergies from our acquisitions resulting from the consolidation of capabilities and elimination of
redundancies, as well as greater efficiencies from increased scale and market integration. However, this process may preclude or impede
realization of the benefits expected from acquisitions and could adversely affect current revenues and investments in future growth, which
could adversely affect our results of operations. We cannot be certain that we will not be required to implement further realignment activities,
make additions or other changes to our workforce based on other cost reduction measures or changes in the markets and industry in which
we compete. In addition, future business conditions and events may impact our ability to continue to realize any benefits of these initiatives.
If we are not able to successfully achieve these objectives, the anticipated benefits of our acquisitions may not be realized fully or
at all or may take longer to realize than expected.
Any future acquisition may not be accretive,
and may be dilutive, to our earnings per share, which may negatively affect the market price of our common stock.
Future acquisitions may not
be accretive to our earnings per share. Our expectations regarding the timeframe in which a potential acquisition may become accretive
to our earnings per share may not be realized. In addition, we could fail to realize all of the benefits anticipated in a potential acquisition
or experience delays or inefficiencies in realizing such benefits. Such factors could, combined with the potential issuance of shares
of our common stock in connection with a potential acquisition, result in such acquisition being dilutive to our earnings per share, which
could negatively affect the market price of our common stock.
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The terms of our credit facility impose
restrictions on us that may affect our ability to successfully operate our business.
Our credit facility contains
covenants that limit our actions. These covenants could materially and adversely affect our ability to finance our future operations or
capital needs or to engage in other business activities that may be in our best interests. The covenants restrict our ability to, among
other things:
· incur or guarantee additional indebtedness;
· make loans and investments;
· create liens;
· sell or otherwise dispose of assets;
· enter new lines of business;
· merge or consolidate with other entities; and
· engage in transactions with affiliates.
The credit facility also
contains financial covenants requiring us to maintain specified minimum net worth and interest coverage ratios.
Our ability to comply with
these covenants and requirements may be affected by events beyond our control, such as prevailing economic conditions and changes in regulations,
and if such events occur, we cannot be sure that we will be able to comply.
A variety of uncontrollable events may reduce
demand for our products, impair our ability to provide our products or increase the cost of providing our products.
Demand for our products can
be significantly adversely affected in the U.S., globally or in specific regions as a result of a variety of factors beyond our control,
including: adverse weather conditions arising from short-term weather patterns or long-term change, catastrophic events or natural disasters
(such as excessive heat or rain, hurricanes, typhoons, floods, tsunamis and earthquakes); health concerns, such as pandemics; international,
political or military developments; and terrorist attacks. These events and others, such as fluctuations in travel and energy costs and
computer virus attacks, intrusions or other widespread computing or telecommunications failures, may also damage our ability to provide
our products or to obtain insurance coverage with respect to these events. An incident that affected our property directly would have
a direct impact on our ability to provide products and content. Moreover, the costs of protecting against such incidents reduces the profitability
of our operations.
In addition, we derive affiliate
fees and royalties from the distribution of our programming, sales of our licensed goods and services by third parties, and the management
of businesses operated under brands licensed from us, and we are therefore dependent on the successes of those third parties for that
portion of our revenue. A wide variety of factors could influence the success of those third parties and if negative factors significantly
impacted a sufficient number of those third parties, the profitability of one or more of our businesses could be adversely affected.
We obtain insurance against
the risk of losses relating to some of these events, generally including physical damage to our property and resulting business interruption,
certain injuries occurring on our property and some liabilities for alleged breach of legal responsibilities. When insurance is obtained
it is subject to deductibles, exclusions, terms, conditions and limits of liability. The types and levels of coverage we obtain vary from
time to time depending on our view of the likelihood of specific types and levels of loss in relation to the cost of obtaining coverage
for such types and levels of loss and we may experience material losses not covered by our insurance.
Our financial condition and results of operations
have been and are expected to continue to be adversely affected by the coronavirus pandemic.
A novel strain of coronavirus
(“COVID-19”) was first identified in China in December 2019, and subsequently declared a pandemic by the World Health
Organization. To date, this pandemic and preventative measures taken to contain or mitigate the pandemic have caused, and are expected
to continue to cause, business slowdown or shutdown in affected areas and significant disruption in the financial markets, both globally
and in the United States. These events have led to and could continue to lead to a decline in discretionary spending by consumers, and
in turn materially impact, our business, sales, financial condition and results of operations. We may experience a negative impact on
our sales, operations and financial results, and we cannot predict the degree to, or the time period over, which our sales, operations
and financial results will continue to be subject to risk by the pandemic and preventative measures. Risks presented by the COVID-19 pandemic
include, but are not limited to:
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We continue to monitor the
latest developments regarding the pandemic and have made certain assumptions regarding the pandemic for purposes of our operating, financial
and tax planning projections, including assumptions regarding the duration and severity of the pandemic and the global macroeconomic impacts
of the pandemic. However, we are unable to accurately predict the extent of the impact of the pandemic on our business, operations and
financial condition due to the uncertainty of future developments. In particular, we believe the ultimate impacts on our business, results
of operations, cash flows and financial condition will depend on, among other things, the further spread and duration of COVID-19, third
party or governmental actions taken to contain its spread and mitigate its public health effects the requirements to take action to help
limit the spread of the illness, the availability, safety and efficacy of a vaccine and treatments for COVID-19 and the economic impacts
of the pandemic. Even in those regions where we are beginning to experience business recovery, should those regions fail to fully contain
COVID-19 or suffer a COVID-19 relapse, those markets may not recover as quickly or at all, which could have a material adverse effect
on our business and results of operations. The pandemic may also affect our business, operations or financial condition in a manner that
is not presently known to us or that we currently do not consider to present significant risks.
In addition, the impact of
COVID-19 may also exacerbate other risks discussed in this “Risk Factors” section, which could have a material effect
on us.
Global economic conditions could have a
material adverse effect on our business, operating results and financial condition.
The uncertain state of the
global economy continues to impact businesses around the world. If global economic and financial market conditions further deteriorate
or do not improve, the following factors could have a material adverse effect on our business, operating results and financial condition:
13
If contract manufacturers
of our products or other participants in our supply chain experience difficulty obtaining financing in the capital and credit markets
to purchase raw materials or to finance capital equipment and other general working capital needs, it may result in delays or non-delivery
of shipments of our products.
In particular, since we
derived in 2019 and 2020, and expect to continue to derive, a significant portion of our revenue from China, our business development
plans, results of operations and financial condition may be materially adversely affected by significant political, social and
economic developments in China. A slowdown in economic growth in China, such as due to the outbreak of the COVID-19 pandemic could
adversely impact our licensees in China, prospective customers, suppliers, distributors and partners of our licensees in China,
which could have a material adverse effect on our results of operations and financial condition. In addition, a deterioration in
trade relations between the U.S. and China or other countries, or the negative perception of U.S. brands by Chinese or other
international consumers, could have a material adverse effect on our results of operations and financial condition. There is no
guarantee that economic downturns, any further decrease in economic growth rates or an otherwise uncertain economic outlook in China
will not persist in the future, that they will not be protracted or that governments will respond adequately to control and reverse
such conditions, any of which could materially and adversely affect our business, financial condition and results of operations.
Additional Risks Related to Our Licensing
and Direct-to-Consumer Businesses
We utilize various licensing and selling
models in our operations, and our success is dependent on our ability to manage these different models.
In addition to the licensing
model, we operate online and brick-and-mortar retail stores and we produce and sell directly to customers. Although we believe these various