’Bankruptcy’ Possible As Peekay’s Losses Rise

Peekay Boutiques, Inc. posted a huge loss for 2015, following smaller losses in 2014 and 2013. While much of last year’s loss was due to a massive goodwill impairment charge, the company’s annual report also included mentions of the possibility of a bankruptcy filing as well as the recent closing of one of its stores.

Peekay, a public company which operates shops selling adult products and lingerie, has also apparently lost the services of the underwriter which it had hoped would be able to raise tens of millions in a public stock offering.

The store that was closed at the end of February, reducing the chain to 47, had been located in Santa Monica.

In the annual report Peekay admitted, “At December 31, 2015, we recorded a $40.6 million goodwill impairment charge, resulting from our inability to raise additional capital or refinance our senior loan facility, which matured on February 15, 2016.” During much of 2015 the company had said it was hoping to raise as much as $50 million (an amount it eventually lowered to at least $25 million) from the offering. And late last fall reported it had found an underwriter to accomplish the task, Lake Street Capital Markets. However, when BODY contacted Lake Street in March an unidentified person who answered the phone stated, after consulting with others in the office, “it does not appear that we are engaged by that firm” (Peekay) any longer. And in the annual report, released in April, no mention is made of Lake Street. And little is said of the likelihood of a successful stock offering.

For the year, Peekay’s sales rose to $41.417 million, up from $39.625 million in 2014, while its net loss rose to $46.691 million, up from a loss of $4.182 million the year before. Cost of goods sold rose to $14.825 million from $13.740 million in 2014.

In 2013 and 2014 the company had net losses of $2,577,263 and $4,181,890, respectively.

The annual report notes in the “risk factors” segment “We are currently operating under a Forbearance Agreement with our lenders, but we may be forced to file for bankruptcy and/or liquidate our assets if we are unable to meet the terms of the agreement.” In recent years Peekay has struggled with interest expenses on loans taken on as the chain of stores was assembled. The company had interested expense of $6.9 million and $6.6 million in 2015 and 2014 respectively. Over the past several months its lenders have been patient, allowing various forbearances and extensions on the loans, but their patience seems to be running out.

In the annual report, Peekay noted “On February 26, 2016, we and certain of the Company’s senior secured lenders, who we refer to as the Consenting Term A Lenders, entered into the Forbearance and Ninth Amendment Agreement, which we refer to as the Ninth Amendment. The Ninth Amendment further amends the financing agreement as described below.”

“Under the Ninth Amendment, among other things, we and our subsidiaries, who we refer to as the Loan Parties, agreed (a) that on or before February 29, 2016, we would grant to the Consenting Term A Lenders warrants to purchase up to an aggregate of 2.5% of the common shares of our company on a fully diluted basis and (b) to enter into a non-binding term sheet with respect to a Step Two Restructuring Transaction by March 15, 2016, which we refer to as the Step Two Restructuring Term Sheet. A Step Two Restructuring Transaction is generally defined in the Ninth Amendment as an out-of-court restructuring on terms and conditions acceptable to the Consenting Term A Lenders or a per-arranged Chapter 11 bankruptcy on terms and conditions acceptable to the Consenting Term A Lenders.”

There has been no bankruptcy filing as of yet, and Peekay’s lenders have continued to extend deadlines and terms to give the company more time to solve its problems. While the lenders seem to want to avoid a bankruptcy, the are definitely pushing harder for Peekay to either repay the loans in full, find a buyer for the company at an acceptable price or complete the public stock offering. The latter possibility seems far less likely than it did several months ago.

The annual report noted unless the loans have been repaid or restructured “in a manner acceptable to the Consenting Term A Lenders” by the “outside date of July 31, 2016, the company must deliver the membership interests of Christals Acquisition, LLC to the collateral agent of for further distribution to the Term A Lenders and Term B Lenders in a manner consistent with the Financing Agreement.” The report stated Peekay “expects” to come up with a satisfactory restructuring but will “comply with this requirement” if it does not. Some of the lenders “provided partial seller financing associated with the acquisition of the Peekay and Christals stores” when the chain was assembled.

In discussing 2015, Peekay noted problems with its private label line of Sutera adult products, a troubling sign for a company that purports to be an expert in sexual “wellness.” “Due to supply chain issues, we made a decision to sell our remaining inventory of Sutera products and not replenish our assortment, until we find a more reliable manufacturer. Our sales during 2015 have been impacted by that decision.” Sutera sales dropped to $1,429,548 last year from $2,762,817 in 2014. The company stated “We expect to have a new private label assortment ready for market in 2017.”

Explaining another area of decline, Peekay reported “As part of our change in merchandising strategy to a “wellness” focus, we have minimized our visual category, which constitutes DVD/video sales (products not targeted at our key demographic).” DVD sales dropped to $432,480 in 2015 from $868,576 in 2014.