UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
| (Mark one) | |
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended |
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| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to ______ |
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(Exact Name of Registrant as Specified in Its Charter)
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| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
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| (Address of Principal Executive Offices) | (Zip Code) |
Registrant’s Telephone Number, Including Area Code: (
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “non-accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| | Smaller reporting company |
| Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
Securities registered pursuant to Section 12(g) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
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The number of shares outstanding of the issuer’s common stock is
JAKKS PACIFIC, INC. AND SUBSIDIARIES
TABLE OF CONTENTS TO QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2020
ITEMS IN FORM 10-Q
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Part I |
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Item 1. |
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Condensed Consolidated Balance Sheets - September 30, 2020 and December 31, 2019 (Unaudited) |
3 |
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4 |
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5 |
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6 |
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Notes to Condensed Consolidated Financial Statements (Unaudited) |
7 |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
33 |
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Item 3. |
47 |
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Item 4. |
47 |
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Part II |
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Item 1. |
48 |
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Item 1A. |
48 |
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Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds |
None |
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Item 3. |
Defaults Upon Senior Securities |
None |
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Item 4. |
Mine Safety Disclosures |
None |
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Item 5. |
Other Information |
None |
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Item 6. |
48 |
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49 |
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PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
JAKKS PACIFIC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
| Assets |
September 30, |
December 31, |
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| (Unaudited) | ||||||||
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Current assets |
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Cash and cash equivalents |
$ | $ | ||||||
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Restricted cash |
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| Accounts receivable, net of allowance for doubtful accounts of $ |
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Inventory |
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Prepaid expenses and other assets |
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Total current assets |
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Property and equipment |
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Office furniture and equipment |
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Molds and tooling |
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Leasehold improvements |
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Total |
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Less accumulated depreciation and amortization |
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Property and equipment, net |
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Operating lease right-of-use assets, net |
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Other long term assets |
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Intangible assets, net |
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Goodwill |
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Trademarks |
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Total assets |
$ | $ | ||||||
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Liabilities, Preferred Stock and Stockholders' Equity |
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Current liabilities |
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Accounts payable |
$ | $ | ||||||
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Accrued expenses |
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Reserve for sales returns and allowances |
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Income taxes payable |
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Short term operating lease liabilities |
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Short term debt, net |
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Total current liabilities |
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Long term operating lease liabilities |
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Debt, non-current portion, net of issuance costs and debt discounts |
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Other liabilities |
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Income taxes payable |
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Deferred income taxes, net |
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Total liabilities |
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| Preferred stock, $ |
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Stockholders' Equity* |
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| Common stock, $ |
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Additional paid-in capital * |
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Accumulated deficit |
( |
) | ( |
) | ||||
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Accumulated other comprehensive loss |
( |
) | ( |
) | ||||
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Total JAKKS Pacific, Inc. stockholders' equity* |
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Non-controlling interests |
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Total stockholders' equity* |
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Total liabilities, preferred stock and stockholders' equity |
$ | $ | ||||||
*
See accompanying notes to condensed consolidated financial statements.
JAKKS PACIFIC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share data)
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Three Months Ended September 30, (Unaudited) |
Nine Months Ended September 30, (Unaudited) |
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2020 |
2019 |
2020 |
2019 |
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Net sales |
$ | $ | $ | $ | ||||||||||||
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Cost of sales |
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Gross profit |
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Selling, general and administrative expenses |
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Restructuring charge |
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Pandemic related charges |
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Acquisition related and other |
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Income (loss) from operations |
( |
) | ||||||||||||||
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Income from joint ventures |
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Other income (expense), net |
( |
) | ||||||||||||||
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Loss on extinguishment of debt |
( |
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) | ||||||||||||
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Change in fair value of preferred stock derivative liability |
( |
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) | ||||||||||||
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Change in fair value of convertible senior notes |
( |
) | ( |
) | ||||||||||||
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Interest income |
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Interest expense |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
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Income (loss) before provision for (benefit from) income taxes |
( |
) | ( |
) | ||||||||||||
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Provision for (benefit from) income taxes |
( |
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Net income (loss) |
( |
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Net income (loss) attributable to non-controlling interests |
( |
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Net income (loss) attributable to JAKKS Pacific, Inc. |
$ | $ | $ | ( |
) | $ | ( |
) | ||||||||
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Net income (loss) attributable to common stockholders |
$ | $ | $ | ( |
) | $ | ( |
) | ||||||||
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Income (loss) per share – basic* |
$ | $ | $ | ( |
) | $ | ( |
) | ||||||||
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Shares used in income (loss) per share – basic* |
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Income (loss) per share – diluted* |
$ | $ | $ | ( |
) | $ | ( |
) | ||||||||
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Shares used in income (loss) per share – diluted* |
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Comprehensive income (loss) |
$ | $ | $ | ( |
) | $ | ( |
) | ||||||||
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Comprehensive income (loss) attributable to JAKKS Pacific, Inc. |
$ | $ | $ | ( |
) | $ | ( |
) | ||||||||
*
See accompanying notes to condensed consolidated financial statements.
JAKKS PACIFIC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
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Three and Nine Months Ended September 30, 2020 |
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(Unaudited) |
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Common Stock* |
Treasury |
Additional |
Accumulated |
Accumulated |
JAKKS |
Non- |
Total Stockholders' |
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Balance, December 31, 2019 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | $ | $ | ||||||||||||||||||||
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Stock-based compensation expense |
— | — | — | — | ||||||||||||||||||||||||||||
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Repurchase of common stock for employee tax withholding |
— | ( |
) | — | — | ( |
) | — | ( |
) | ||||||||||||||||||||||
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Preferred stock accrued dividends |
— | ( |
) | — | — | ( |
) | — | ( |
) | ||||||||||||||||||||||
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Net income (loss) |
— | ( |
) | — | ( |
) | ( |
) | ||||||||||||||||||||||||
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Foreign currency translation adjustment |
— | — | ( |
) | ( |
) | — | ( |
) | |||||||||||||||||||||||
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Balance, March 31, 2020 |
— | ( |
) | ( |
) | ( |
) | ( |
) | |||||||||||||||||||||||
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Conversion of convertible senior notes |
— | — | — | — | ||||||||||||||||||||||||||||
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Stock-based compensation expense |
— | — | — | — | ||||||||||||||||||||||||||||
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Repurchase of common stock for employee tax withholding |
— | ( |
) | — | — | ( |
) | — | ( |
) | ||||||||||||||||||||||
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Preferred stock accrued dividends |
— | ( |
) | — | — | ( |
) | — | ( |
) | ||||||||||||||||||||||
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Net income (loss) |
— | ( |
) | — | ( |
) | ( |
) | ||||||||||||||||||||||||
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Foreign currency translation adjustment |
— | — | — | |||||||||||||||||||||||||||||
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Balance, June 30, 2020 |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||
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Conversion of convertible senior notes |
— | — | — | — | — | |||||||||||||||||||||||||||
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Stock-based compensation expense |
— | — | — | — | — | |||||||||||||||||||||||||||
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Repurchase of common stock for employee tax withholding |
— | — | — | — | — | — | — | — | ||||||||||||||||||||||||
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Preferred stock accrued dividends |
— | — | ( |
) | — | — | ( |
) | — | ( |
) | |||||||||||||||||||||
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Net income |
— | — | — | — | ||||||||||||||||||||||||||||
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Foreign currency translation adjustment |
— | — | — | — | — | |||||||||||||||||||||||||||
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Balance, September 30, 2020 |
$ | $ | — | $ | $ | ( |
) | $ | ( |
) | $ | $ | $ | |||||||||||||||||||
|
Three and Nine Months Ended September 30, 2019 |
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(Unaudited) |
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Common Stock* |
Treasury |
Additional |
Accumulated |
Accumulated |
JAKKS |
Non- |
Total Stockholders' |
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Balance, December 31, 2018 |
$ | $ | ( |
) | $ | $ | ( |
) | $ | ( |
) | $ | $ | $ | ||||||||||||||||||
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Stock-based compensation expense |
— | — | — | — | ||||||||||||||||||||||||||||
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Repurchase of common stock for employee tax withholding |
— | ( |
) | — | — | ( |
) | — | ( |
) | ||||||||||||||||||||||
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Net income (loss) |
— | ( |
) | — | ( |
) | ( |
) | ||||||||||||||||||||||||
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Foreign currency translation adjustment |
— | — | — | |||||||||||||||||||||||||||||
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Balance, March 31, 2019 |
( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||
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Stock-based compensation expense |
— | — | — | — | ||||||||||||||||||||||||||||
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Repurchase of common stock for employee tax withholding |
— | ( |
) | — | — | ( |
) | — | ( |
) | ||||||||||||||||||||||
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Net income (loss) |
— | ( |
) | — | ( |
) | ( |
) | ||||||||||||||||||||||||
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Foreign currency translation adjustment |
— | — | ( |
) | ( |
) | — | ( |
) | |||||||||||||||||||||||
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Balance, June 30, 2019 |
( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||
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Stock-based compensation expense |
— | — | — | — | — | |||||||||||||||||||||||||||
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Adjustment to additional paid-in capital |
— | — | — | — | — | |||||||||||||||||||||||||||
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Common stock issuance |
— | — | — | — | ||||||||||||||||||||||||||||
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Treasury shares retirement |
— | ( |
) | — | — | — | ||||||||||||||||||||||||||
|
Preferred stock accrued dividends |
— | — | ( |
) | — | — | ( |
) | — | ( |
) | |||||||||||||||||||||
|
Net income (loss) |
— | — | — | — | ( |
) | ||||||||||||||||||||||||||
|
Foreign currency translation adjustment |
— | — | — | — | ( |
) | ( |
) | — | ( |
) | |||||||||||||||||||||
|
Balance, September 30, 2019 |
$ | $ | — | $ | $ | ( |
) | $ | ( |
) | $ | $ | $ | |||||||||||||||||||
*
See accompanying notes to condensed consolidated financial statements.
JAKKS PACIFIC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
Nine Months Ended September 30, |
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2020 |
2019 |
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Cash flows from operating activities |
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Net loss |
$ | ( |
) | $ | ( |
) | ||
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Adjustments to reconcile net loss to net cash provided by operating activities: |
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Provision for doubtful accounts |
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Depreciation and amortization |
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Payment-in-kind interest |
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Amortization of debt discount |
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Write-off and amortization of debt issuance costs |
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Share-based compensation expense |
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Gain on disposal of property and equipment |
( |
) | ( |
) | ||||
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Loss on extinguishment of debt |
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Change in fair value of convertible senior notes |
( |
) | ||||||
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Change in fair value of preferred stock derivative liability |
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Changes in operating assets and liabilities: |
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Accounts receivable |
( |
) | ( |
) | ||||
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Inventory |
( |
) | ( |
) | ||||
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Prepaid expenses and other assets |
( |
) | ||||||
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Accounts payable |
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Accrued expenses |
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Reserve for sales returns and allowances |
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Income taxes payable |
( |
) | ||||||
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Other liabilities |
( |
) | ||||||
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Total adjustments |
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Net cash provided by operating activities |
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Cash flows from investing activities |
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Purchases of property and equipment |
( |
) | ( |
) | ||||
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Proceeds from sale of property and equipment |
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Net cash used in investing activities |
( |
) | ( |
) | ||||
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Cash flows from financing activities |
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Retirement of convertible senior notes |
( |
) | ||||||
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Repayment of credit facility borrowings |
( |
) | ||||||
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Debt issuance costs |
( |
) | ||||||
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Term loan prepayment penalty |
( |
) | ||||||
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Proceeds from loan under the Paycheck Protection Program |
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Net proceeds from credit facility borrowings |
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Net proceeds from issuance of long term debt |
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Repayment of term loan facility |
( |
) | ||||||
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Repurchase of common stock for employee tax withholding |
( |
) | ( |
) | ||||
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Net cash provided by (used in) financing activities |
( |
) | ||||||
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Net increase in cash, cash equivalents and restricted cash |
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Effect of foreign currency translation |
( |
) | ( |
) | ||||
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Cash, cash equivalents and restricted cash, beginning of period |
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Cash, cash equivalents and restricted cash, end of period |
$ | $ | ||||||
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Cash paid during the period for: |
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Income taxes |
$ | $ | ||||||
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Interest |
$ | $ | ||||||
As of September 30, 2020, there was $
See Notes 1, 5, 6 and 9 for additional supplemental information to the condensed consolidated statements of cash flows.
See accompanying notes to condensed consolidated financial statements.
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2020
Note 1 — Basis of Presentation
The accompanying unaudited interim condensed consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to prevent the information presented from being misleading. These financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K, which contains audited financial information for the three years in the period ended December 31, 2019.
The information provided in this report reflects all adjustments (consisting solely of normal recurring items) that are, in the opinion of management, necessary to present fairly the financial position and the results of operations for the periods presented. Interim results are not necessarily, especially given seasonality, indicative of results to be expected for a full year.
The condensed consolidated financial statements include the accounts of JAKKS Pacific, Inc. and its wholly-owned subsidiaries (collectively, “the Company”). The condensed consolidated financial statements also include the accounts of DreamPlay Toys, LLC, a joint venture with NantWorks LLC, JAKKS Meisheng Trading (Shanghai) Limited, a joint venture with Meisheng Cultural & Creative Corp., Ltd., and JAKKS Meisheng Animation (HK) Limited, a joint venture with Hong Kong Meisheng Cultural Company Limited.
Effective July 9, 2020, the Company completed a
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The new standard was initially effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. In November 2019, the FASB issued ASU 2019-10 which deferred the effective date of ASU 2016-13 by three years for Smaller Reporting Companies. As a result, the effective date for the standard is fiscal years beginning after December 15, 2022, and interim periods therein, and early adoption is permitted. The Company is currently evaluating the impact of the adoption of ASU 2016-13 on its condensed consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, “Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement,” which improves the effectiveness of the disclosures required under ASC 820 and modifies the disclosure requirements on fair value measurements, including the consideration of costs and benefits. The new standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and early adoption is permitted. The adoption of this standard did not have an impact on the Company’s condensed consolidated financial statements.
In October 2018, the FASB issued ASU 2018-17, "Consolidation: Targeted Improvements to Related Party Guidance for Variable Interest Entities," which improves the accounting for variable interest entities by considering indirect interests held through related parties under common control for determining whether fees paid to decision makers and service providers are variable interests. This new standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The amendments are required to be applied retrospectively with a cumulative-effect adjustment to retained earnings at the beginning of the earliest period presented. Early adoption is permitted. The adoption of this standard did not have an impact on the Company's condensed consolidated financial statements.
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2020
In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes,” which simplifies the accounting for income taxes related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax assets for investments. The guidance also reduces complexity in certain areas, including the accounting for transactions that result in a step-up in the tax basis of goodwill and allocating taxes to members of a consolidated group. This new standard is effective for the Company for fiscal years beginning January 1, 2021, with early adoption permitted. The Company is currently evaluating the impact that the adoption of this new guidance will have on its condensed consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The new standard provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions, for a limited period of time, to ease the potential burden of recognizing the effects of reference rate reform on financial reporting. The amendments in ASU 2020-04 apply to contracts, hedging relationships and other transactions that reference the London Inter-Bank Offered Rate ("LIBOR") or another reference rate expected to be discontinued due to the global transition away from LIBOR and certain other interbank offered rates. An entity may elect to apply ASU 2020-04 beginning March 12, 2020 through December 31, 2022. The Company is currently evaluating this option as it relates to its contracts that reference LIBOR, as well as the impact of the standard to the Company's condensed consolidated financial statements.
In August 2020, the FASB issued ASU 2020-06, “Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.” The new guidance eliminates two of the three models in ASC 470-20, which required entities to account for beneficial conversion features and cash conversion features in equity, separately from the host convertible debt or preferred stock. As a result, only conversion features accounted for under the substantial premium model in ASC 470-20 and those that require bifurcation in accordance with ASC 815-15 will be accounted for separately. In addition, the amendments in ASU 2020-06 eliminates some of the requirements in ASC 815-40 related to equity classification. The amendments in ASU 2020-06 further revised the guidance in ASC 260, Earnings Per Share (“EPS”), to address how convertible instruments are accounted for in calculating diluted EPS, and requires enhanced disclosures about the terms of convertible instruments and contracts in an entity’s own equity. The new standard is effective for the Company for fiscal years beginning after December 15, 2023, including interim periods within these fiscal years, with early adaption permitted. The Company is currently evaluating the impact of the adoption of ASU 2020-06 on its condensed consolidated financial statements.
Liquidity
On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China (the “COVID-19 outbreak”) and the risks to the international community as the virus spreads globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally.
The full impact of the COVID-19 outbreak continues to evolve as of the date of this report. As such, it is uncertain as to the full magnitude that the pandemic will have on the Company’s financial condition, liquidity, and future results of operations. Management is actively monitoring the global situation and the resulting impact on its financial condition, liquidity, operations, suppliers, industry, and workforce. Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, the Company is unable to estimate the effects of the COVID-19 outbreak on its results of operations, financial condition, and liquidity for fiscal years 2020 and 2021. Beginning in China and moving throughout the world, 2020 has seen the full spectrum of stay-at-home orders and retail closures to reduced retailer hours and focus on “essential” items to some markets trying to take a business-as-usual approach. In addition, published data has indicated a similar wide range in some toy categories significantly outperforming last year’s comparable period sales while others lag behind, which is at least partly due to drastic changes in purchase occasions (e.g., staying at home with family in the backyard vs. attending a school acquaintance’s birthday party).
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2020
In mid-March 2020, the Company began migrating to a work-from-home model in compliance with local guidance. In early April 2020, the Company began to reassess its revenue and expense projections for the year in an attempt to anticipate decreases in customer and consumer demand based on the uncertainty associated with the economic impact of the pandemic. In parallel, the Company began a review of its worldwide spending to identify both short-term and long-term cost savings opportunities to preserve both profitability and liquidity. By late April 2020, the Company had identified new revenue and spending objectives for the full-year 2020 and synchronized those expectations across the senior leadership team. It is the Company’s intention to continue monitoring the pandemic’s impact across markets, channels and customers and strike the right balance of pursuing opportunity while minimizing risk to the Company’s long-term health.
On March 27, 2020, President Trump signed into law the “Coronavirus Aid, Relief and Economic Security Act (“CARES Act”). The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer-side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. The Company continues to monitor and explore any relevant government assistance programs that could support either cash liquidity or operating results in the short-medium term. As of the filing of this document, the Company continues to have no draw down on its credit facility with Wells Fargo Bank, National Association (“Wells Fargo”).
On June 12, 2020, the Company received a $
By the end of the third quarter, the Company had exhausted the $6.2 million in funds received under the Paycheck Protection Program. The Company spent $
On April 23, 2020, the Small Business Administration issued new guidance that questioned whether a public company with substantial market value and access to capital markets would qualify to participate in the Paycheck Protection Program. Subsequently, on April 28, 2020 the Secretary of the Treasury and Small Business Administrator announced that the government will review all PPP loans of more than $2.0 million for which the borrower applies for forgiveness. If the Company were to be audited and receive an adverse finding in such audit, the Company could be required to return the full amount of the PPP Loan, which could reduce its liquidity, and potentially subject it to fines and penalties.
As of September 30, 2020 and December 31, 2019, the Company held cash and cash equivalents, including restricted cash, of $
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2020
The Company’s primary sources of working capital are cash flows from operations and borrowings under its credit facility (see Note 6 - Credit Facilities).
Typically, cash flows from operations are impacted by the effect on sales of (1) the appeal of the Company’s products, (2) the success of its licensed brands, (3) the highly competitive conditions existing in the toy industry and in securing commercially-attractive licenses, (4) dependency on a limited set of large customers, and (5) general economic conditions. A downturn in any single factor or a combination of factors could have a material adverse impact upon the Company’s ability to generate sufficient cash flows to operate the business. In addition, the Company’s business and liquidity are dependent to a significant degree on its vendors and their financial health, as well as the ability to accurately forecast the demand for products. The loss of a key vendor, or material changes in support by them, or a significant variance in actual demand compared to the forecast, can have a material adverse impact on the Company’s cash flows and business.
As of September 30, 2020, the Company had $
The New Term Loan Agreement and Amended ABL Credit Agreement each contain negative covenants that, subject to certain exceptions, limit the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, make restricted payments, pledge their assets as security, make investments, loans, advances, guarantees and acquisitions, undergo fundamental changes and enter into transactions with affiliates, as well as cross-default provisions. The Company secured the appropriate waivers from both parties before receiving the proceeds of the PPP Loan. The original terms of the New Term Loan Agreement required the Company to maintain a trailing 12-month Earnings Before Interest Tax Depreciation and Amortization (“EBITDA”) (as defined and adjusted therein) of not less than $
On October 16, 2020, the Company reached an agreement (the “Amendment”) with holders of its term loan and Wells Fargo, holder of its revolving credit facility, to amend the New Term Loan Agreement and defer its EBITDA covenant calculation until March 31, 2022. Under the Amendment, the trailing 12-month EBITDA requirement has been reduced to $
The New Term Loan Agreement contains events of default that are customary for a facility of this nature, including nonpayment of principal, nonpayment of interest, fees or other amounts, material inaccuracy of representations and warranties, violation of covenants, cross-default to other material indebtedness, bankruptcy or insolvency events, material judgment defaults and a change of control as specified in the New Term Loan Agreement, and cross-default provisions with the Amended Wells Fargo Credit Agreement. If an event of default occurs under either Agreement, the maturity of the amounts owed under the New Term Loan Agreement and the Amended Wells Fargo Credit Agreement may be accelerated.
The Company’s unaudited interim condensed consolidated financial statements for the three and nine months ended September 30, 2020 have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. Cash and cash equivalents, including restricted cash, projected cash flow from operations, and borrowings under the Company’s credit facility are sufficient to meet the Company’s working capital and capital expenditure requirements for the next 12 months.
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2020
Note 2 — Business Segments, Geographic Data, and Sales by Major Customers
The Company is a worldwide producer and marketer of children’s toys and other consumer products, principally engaged in the design, development, production, marketing and distribution of its diverse portfolio of products. The Company recently re-aligned its products into
The Toys/Consumer Products segment includes action figures, vehicles, play sets, plush products, dolls, electronic products, construction toys, infant and pre-school toys, child-sized and hand-held role play toys and everyday costume play, foot- to-floor ride-on vehicles, wagons, novelty toys, seasonal and outdoor products, kids’ indoor and outdoor furniture, and related products, and makeup and skincare products under the C'est Moi brand.
Within the Halloween segment, the Company markets and sells Halloween costumes and accessories and everyday costume play products, primarily in the U.S. and Canada.
Segment performance is measured at the operating income (loss) level. All sales are made to external customers and general corporate expenses have been attributed to the segments based upon relative sales volumes. Segment assets are primarily comprised of accounts receivable and inventories, net of applicable reserves and allowances, goodwill and other assets.
Results are not necessarily those which would be achieved if each segment was an unaffiliated business enterprise. Information by segment and a reconciliation to reported amounts for the three and nine months ended September 30, 2020 and 2019 and as of September 30, 2020 and December 31, 2019 are as follows (in thousands):
|
Three Months Ended |
Nine Months Ended |
|||||||||||||||
|
2020 |
2019 |
2020 |
2019 |
|||||||||||||
|
Net Sales |
||||||||||||||||
|
Toys/Consumer Products |
$ | $ | $ | $ | ||||||||||||
|
Halloween |
||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
|
Three Months Ended |
Nine Months Ended |
|||||||||||||||
|
2020 |
2019 |
2020 |
2019 |
|||||||||||||
|
Income (Loss) from Operations |
||||||||||||||||
|
Toys/Consumer Products |
$ | $ | $ | $ | ( |
) | ||||||||||
|
Halloween |
( |
) | ( |
) | ||||||||||||
| $ | $ | $ | $ | ( |
) | |||||||||||
|
Three Months Ended |
Nine Months Ended |
|||||||||||||||
|
2020 |
2019 |
2020 |
2019 |
|||||||||||||
|
Depreciation and Amortization Expense |
||||||||||||||||
|
Toys/Consumer Products |
$ | $ | $ | $ | ||||||||||||
|
Halloween |
||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2020
|
September 30, |
December 31, |
|||||||
|
Assets |
||||||||
|
Toys/Consumer Products |
$ | $ | ||||||
|
Halloween |
||||||||
| $ | $ | |||||||
The following tables present information about the Company by geographic area as of September 30, 2020 and December 31, 2019 and for the three and nine months ended September 30, 2020 and 2019 (in thousands):
|
September 30, |
December 31, |
|||||||
|
Long-lived Assets |
||||||||
|
United States |
$ | $ | ||||||
|
China |
||||||||
|
Hong Kong |
||||||||
|
United Kingdom |
||||||||
|
Canada |
||||||||
|
Mexico |
||||||||
| $ | $ | |||||||
|
Three Months Ended |
Nine Months Ended September 30, |
|||||||||||||||
|
2020 |
2019 |
2020 |
2019 |
|||||||||||||
|
Net Sales by Customer Area |
||||||||||||||||
|
United States |
$ | $ | $ | $ | ||||||||||||
|
Europe |
||||||||||||||||
|
Canada |
||||||||||||||||
|
Asia |
||||||||||||||||
|
Australia & New Zealand |
||||||||||||||||
|
Latin America |
||||||||||||||||
|
Middle East & Africa |
||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
Major Customers
Net sales to major customers for the three and nine months ended September 30, 2020 and 2019 were as follows (in thousands, except for percentages):
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||||||||||||||||||
|
2020 |
2019 |
2020 |
2019 |
|||||||||||||||||||||||||||||
|
Amount |
Percentage |
Amount |
Percentage |
Amount |
Percentage |
Amount |
Percentage |
|||||||||||||||||||||||||
|
Wal-Mart |
$ |
% |
$ |
% |
$ |
% |
$ | % | ||||||||||||||||||||||||
|
Target |
||||||||||||||||||||||||||||||||
| $ |
% |
$ |
% |
$ |
% |
$ | % | |||||||||||||||||||||||||
No other customer accounted for more than 10% of the Company's total net sales.
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2020
The concentration of the Company’s business with a relatively small number of customers may expose the Company to material adverse effects if one or more of its large customers were to experience financial difficulty. The Company performs ongoing credit evaluations of its top customers and maintains an allowance for potential credit losses.
Note 3 — Inventory
Inventory, which includes the ex-factory cost of goods, in-bound freight, duty and capitalized warehouse costs, is valued at the lower of cost (first-in, first-out) or net realizable value, net of inventory obsolescence reserve, and consists of the following (in thousands):
|
September 30, |
December 31, |
|||||||
|
Raw materials |
$ | $ | ||||||
|
Finished goods |
||||||||
| $ | $ | |||||||
Note 4 — Revenue Recognition and Reserve for Sales Returns and Allowances
The Company’s contracts with customers only include one performance obligation (i.e., sale of the Company’s products). Revenue is recognized in the gross amount at a point in time when delivery is completed and control of the promised goods is transferred to the customers. Revenue is measured as the amount of consideration the Company expects to be entitled to in exchange for those goods. The Company’s contracts do not involve financing elements as payment terms with customers are less than one year. Further, because revenue is recognized at the point in time goods are sold to customers, there are no contract assets or contract liability balances.
The Company disaggregates its revenues from contracts with customers by reporting segment: Toys/Consumer Products and Halloween. The Company further disaggregates revenues by major geographic region. See Note 2 - Business Segments, Geographic Data, and Sales by Major Customers, for further information.
The Company offers various discounts, pricing concessions, and other allowances to customers, all of which are considered in determining the transaction price. Certain discounts and allowances are fixed and determinable at the time of sale and are recorded at the time of sale as a reduction to revenue. Other discounts and allowances can vary and are determined at management’s discretion (variable consideration). Specifically, the Company occasionally grants discretionary credits to facilitate markdowns and sales of slow moving merchandise, and consequently accrues an allowance based on historic credits and management estimates. Further, while the Company generally does not allow product returns, the Company does make occasional exceptions to this policy, and consequently records a sales return allowance based upon historic return amounts and management estimates. These allowances (variable consideration) are estimated using the expected value method and are recorded at the time of sale as a reduction to revenue. The Company adjusts its estimate of variable consideration at least quarterly or when facts and circumstances used in the estimation process may change. The variable consideration is not constrained as the Company has sufficient history on the related estimates and does not believe there is a risk of significant revenue reversal.
The Company also participates in cooperative advertising arrangements with some customers, whereby it allows a discount from invoiced product amounts in exchange for customer purchased advertising that features the Company’s products. Generally, these allowances range from
Sales commissions are expensed when incurred as the related revenue is recognized at a point in time and therefore the amortization period is less than one year. As a result, these costs are recorded as direct selling expenses, as incurred.
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2020
Shipping and handling activities are considered part of the Company’s obligation to transfer the products and therefore are recorded as direct selling expenses, as incurred.
The Company’s reserve for sales returns and allowances amounted to $
Note 5 — Debt
Convertible senior notes
Convertible senior notes consist of the following (in thousands):
|
September 30, 2020 |
December 31, 2019 |
|||||||
| |
$ | $ | ||||||
| |
||||||||
|
Total convertible senior notes |
$ | $ | ||||||
*
Effective July 9, 2020, the Company completed a
In July 2013, the Company sold an aggregate of $
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2020
In August 2017, the Company agreed with Oasis Management and Oasis Investments II Master Fund Ltd., (collectively, “Oasis”) the holder of approximately $
The remaining $
In August 2019, the Company entered into and consummated multiple, binding definitive agreements (collectively, the “Recapitalization Transaction”) among Wells Fargo, Oasis Investments II Master Fund Ltd. and an ad hoc group of holders of the
In connection with the Recapitalization Transaction, the Company issued (i) amended and restated notes with respect to the $
Excluding the impact of the 1 for 10 reverse stock split, the New Oasis Notes provide, among other things, that the initial conversion price is $
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2020
In June 2020, $
A director of the Company is a portfolio manager at Oasis Management.
The Company has elected to measure and present the debt held by Oasis at fair value using Level 3 inputs and as a result, recognized a gain of $
In June 2014, the Company sold an aggregate of $
In connection with the Recapitalization Transaction, the 2020 Notes with a face amount of $
The Company classified the remaining $
The fair value of the
Amortization expense classified as interest expense related to debt issuance costs of the Company's convertible senior notes was and $
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2020
Term Loan
Term loan consists of the following (in thousands):
|
September 30, 2020 |
December 31, 2019 |
|||||||||||||||||||||||
|
Principal Amount** |
Debt Discount/ |
Net |
Principal Amount** |
Debt Discount/ |
Net |
|||||||||||||||||||
|
Term Loan |
$ | $ | ( |
) | $ | $ | $ | ( |
) | $ | ||||||||||||||
*
**
In August 2019, in connection with the Recapitalization Transaction, the Company entered into a First Lien Term Loan Facility Credit Agreement (the “New Term Loan Agreement”), with certain of the Investor Parties, and Cortland Capital Market Services LLC, as agent, for a $
Amounts outstanding under the New Term Loan accrue interest at
The New Term Loan Agreement contains negative covenants that, subject to certain exceptions, limit the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, make restricted payments, pledge their assets as security, make investments, loans, advances, guarantees and acquisitions, undergo fundamental changes and enter into transactions with affiliates. The original terms of the New Term Loan Agreement required the Company to maintain a trailing 12-month EBITDA (as defined and adjusted therein) of not less than $
On October 16, 2020, the Company reached an agreement (the “Amendment”) with holders of its term loan and Wells Fargo, holder of its revolving credit facility, to amend its New Term Loan Agreement and defer its EBITDA covenant calculation until March 31, 2022. Under the Amendment, the trailing 12-month EBITDA requirement has been reduced to $
The New Term Loan Agreement contains events of default that are customary for a facility of this nature, including nonpayment of principal, nonpayment of interest, fees or other amounts, material inaccuracy of representations and warranties, violation of covenants, cross-default to other material indebtedness, bankruptcy or insolvency events, material judgment defaults and a change of control as specified in the New Term Loan Agreement. If an event of default occurs, the maturity of the amounts owed under the New Term Loan Agreement may be accelerated.
The obligations under the New Term Loan Agreement are guaranteed by the Company, the subsidiary borrowers thereunder and certain of the other existing and future direct and indirect subsidiaries of the Company and are secured by substantially all of the assets of the Company, the subsidiary borrowers thereunder and such other subsidiary guarantors, in each case, subject to certain exceptions and permitted liens.
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2020
Amortization expense classified as interest expense related to the $
Amortization expense classified as interest expense related to the $
The fair value of the New Term Loan as of September 30, 2020 and December 31, 2019 was $
Loan under Paycheck Protection Program
On June 12, 2020, the Company received a $
The carrying value of the PPP Loan is a reasonable approximation of fair value.
Note 6 — Credit Facilities
Wells Fargo
In March 2014, the Company and its domestic subsidiaries entered into a secured credit facility with General Electric Capital Corporation (“GECC”). The credit facility, as amended and subsequently assigned to Wells Fargo Bank pursuant to its acquisition of GECC, provides for a $
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2020
The obligations under the Amended ABL Credit Agreement are guaranteed by the Company, the subsidiary borrowers thereunder and certain of the other existing and future direct and indirect subsidiaries of the Company and are secured by substantially all of the assets of the Company, the subsidiary borrowers thereunder and such other subsidiary guarantors, in each case, subject to certain exceptions and permitted liens. As of September 30, 2020, the amount of outstanding borrowings was , the amount of outstanding stand-by letters of credit totaled $
The Amended ABL Credit Agreement contains negative covenants that, subject to certain exceptions, limit the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, make restricted payments, pledge their assets as security, make investments, loans, advances, guarantees and acquisitions, undergo fundamental changes and enter into transactions with affiliates. The Company is also required to maintain a fixed charge coverage ratio of not less than
Any amounts borrowed under the Amended ABL Facility accrue interest, at either (i) LIBOR plus
The Amended ABL Facility also contains customary events of default, including a cross default provision and a change of control provision. In the event of a default, all of the obligations of the Company and its subsidiaries under the Amended ABL Facility may be declared immediately due and payable.
As described in Note 5 – Debt, on October 16, 2020, the Company amended its New Term Loan to reduce the amount and defer the calculation of its EBITDA covenant, with Wells Fargo as party to the agreement.
As of September 30, 2020, off-balance sheet arrangements include letters of credit issued by Wells Fargo of $
Great American Capital Partners
On June 14, 2018, the Company entered into a Term Loan Agreement, Term Note, Guaranty and Security Agreement and other ancillary documents and agreements (the “Term Loan”) with Great American Capital Partners Finance Co., LLC (“GACP”), for itself as a Lender (as defined below) and as the Agent (in such capacity, “Agent”) for the Lenders from time to time party to the Term Loan (collectively, “Lenders”) and the other “Secured Parties” under and as defined therein, with respect to the issuance to the Company by Lenders of a $
The Term Loan required the repayment of principal in the amount of
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2020
In August 2019, in connection with the Recapitalization Transaction (see Note 5 - Debt), the Company repaid in full and terminated the Term Loan Agreement.
Amortization expense classified as interest expense related to the $
Note 7 — Income Taxes
The Company’s income tax benefit of $
The Company’s income tax expense of $
The CARES Act was signed into federal law on March 27, 2020. The CARES Act is an emergency economic stimulus package in response to the Coronavirus outbreak, which among other things contains numerous income tax provisions. Some of these tax provisions are expected to be effective retroactively for years ending before the date of enactment. However, the Company does not anticipate these benefits will have a material financial impact.
Note 8 — Income (Loss) Per Share
The following table is a reconciliation of the weighted average shares used in the computation of income (loss) per share for the periods presented (in thousands, except per share data):
|
Three Months Ended September 30, |
||||||||||||||||||||||||
|
2020 |
2019 |
|||||||||||||||||||||||
|
Income (loss) per share – basic |
Income (Loss) |
Weighted Average Shares |
Per-Share |
Income (Loss) |
Weighted Average Shares |
Per-Share |
||||||||||||||||||
|
Net income (loss) attributable to common stockholders |
$ |
* |
$ | $ |
* |
$ | ||||||||||||||||||
|
Effect of dilutive securities: |
||||||||||||||||||||||||
|
Convertible senior notes |
( |
) | — | — | ||||||||||||||||||||
|
Unvested performance stock grants |
— | — | — | — | ||||||||||||||||||||
|
Unvested restricted stock grants |
— | — | — | — | ||||||||||||||||||||
|
Income (loss) per share - diluted |
||||||||||||||||||||||||
|
Net income (loss) attributable to common stockholders plus assumed exercises and conversion |
$ | $ | $ | $ | ||||||||||||||||||||
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2020
|
Nine Months Ended September 30, |
||||||||||||||||||||||||
|
2020 |
2019 |
|||||||||||||||||||||||
|
Income (loss) per share – basic |
Income (Loss) |
Weighted Average Shares |
Per-Share |
Income (Loss) |
Weighted Average Shares |
Per-Share |
||||||||||||||||||
|
Net income (loss) attributable to common stockholders |
$ | ( |
) * |
$ | ( |
) | $ | ( |
) * |
$ | ( |
) | ||||||||||||
|
Effect of dilutive securities: |
||||||||||||||||||||||||
|
Convertible senior notes |
— | — | — | — | — | — | ||||||||||||||||||
|
Unvested performance stock grants |
— | — | — | — | — | — | ||||||||||||||||||
|
Unvested restricted stock grants |
— | — | — | — | — | — | ||||||||||||||||||
|
Income (loss) per share - diluted |
||||||||||||||||||||||||
|
Net income (loss) attributable to common stockholders plus assumed exercises and conversion |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||||||||||
* Net income (loss) attributable to common stockholders was computed by deducting preferred dividends of $316,000 and $
Basic earnings per share is calculated using the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated using the weighted average number of common shares and common share equivalents outstanding during the period (which consist of restricted stock awards, restricted stock units and convertible debt to the extent they are dilutive). The convertible debt shares included in the diluted earnings per share computation are calculated using the “if-converted method” utilizing the conversion rate on the last day of the reporting period. Common share equivalents that could potentially dilute basic earnings per share in the future, which were excluded from the computation of diluted earnings per share due to being anti-dilutive, totaled
Note 9 — Common Stock and Preferred Stock
Common Stock
Effective July 9, 2020, the Company completed a
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2020
In June 2014, the Company effectively repurchased
In January 2019, the Company was obligated to issue an aggregate of
During the first quarter of 2019, certain employees, including
During the second quarter of 2019, an executive officer surrendered an aggregate of
On August 9, 2019, in connection with the Recapitalization Transaction (see Note 5 - Debt), the Company issued to the Investor Parties, in the aggregate,
In January 2020, the Company issued an aggregate of
During the first quarter of 2020, certain employees, including
During the second quarter of 2020, certain employees surrendered an aggregate of
In June 2020, $
In August 2020, $
All issuances of common stock, including those issued pursuant to stock option and warrant exercises, restricted stock grants and acquisitions, are issued from the Company’s authorized but not issued and outstanding shares.
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2020
Preferred Stock
On August 9, 2019, in connection with the Recapitalization Transaction (see Note 5 - Debt), the Company issued
Each share of Series A Preferred Stock has an initial value of $
The Series A Preferred Stock has the right to receive dividends on a quarterly basis equal to
The Series A Preferred Stock has no stated maturity, however, the Company has the right to redeem all or a portion of the Series A Preferred Stock at its Liquidation Preference (as defined below) at any time after payment in full of the New Term Loan. In addition, upon the occurrence of certain change of control type events, holders of the Series A Preferred Stock are entitled to receive an amount (the “Liquidation Preference”), in preference to holders of Common Stock or other junior stock, equal to (i)
The Company has the right, but is not required, to repurchase all or a portion of the Series A Preferred Stock at its Liquidation Preference at any time after payment in full of the New Term Loan (see Note 5 - Debt).The Series A Preferred Stock does not have any voting rights, except to the extent required by the Delaware General Corporation Law, except for the exclusive right to elect the Series A Preferred Directors (as described below) and except for certain approval rights over certain transactions (as described below). These approval rights require the prior consent of specified percentages of holders (or in certain cases, all holders) of the Series A Preferred Stock in order for the Company to take certain actions, including the issuance of additional shares of Series A Preferred Stock or parity stock, the issuance of senior stock, certain amendments to the Amended and Restated Certificate of Incorporation, the Certificate of Designations of the Series A Preferred Stock (the “Certificate of Designations”), the Second Amended and Restated By-laws or the Amended and Restated Nominating and Corporate Governance Committee Charter, material changes in the Company’s line of business and certain change of control type transactions. In addition, the Certificate of Designations provides that the approval of at least six directors is required for any related person transaction within the meaning of Item 404 of Regulation S-K under the Securities Act of 1933, as amended, including, without limitation, the adoption of, or any amendment, modification or waiver of, any agreement or arrangement related to any such transaction. The Certificate of Designations also includes restrictions on the ability of the Company to pay dividends on or make distributions with respect to, or redeem or repurchase, shares of Common Stock or other junior stock. In addition, holders of the Series A Preferred Stock have preemptive rights regarding future issuance of Series A Preferred Stock or parity stock.
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2020
In addition, the Certificate of Designations provides the holders of Series A Preferred Stock certain board representation rights. The Certificate of Designations provides, among other things, that, for so long as at least
The Series A Preferred Stock redemption amount is contingent upon certain events with no stated redemption date as of the reporting date, although may become redeemable in the future. In accordance with the SEC guidance within ASC Topic 480, Distinguishing Liabilities from Equity: Classification and Measurement of Redeemable Securities, the Company classified the Series A Preferred Stock as temporary equity as the Series A Preferred Stock contains a redemption feature which is contingent upon certain deemed liquidation events, the occurrence of which may not solely be within the control of the Company.
Under ASC 815, Derivatives and Hedging, certain contractual terms that meet the accounting definition of a derivative must be accounted for separately from the financial instrument in which they are embedded. The Company has concluded that the redemption upon a change of control and the repurchase option by the Company constitute embedded derivatives.
The embedded redemption upon a change of control must be accounted for separately from the Series A Preferred Stock. The redemption provision specifies if certain events that constitute a change of control occur, the Company may be required to settle the Series A Preferred Stock at 150% of its accreted amount. Accordingly, the redemption provision meets the definition of a derivative, and its economic characteristics are not considered clearly and closely related to the economic characteristics of the Series A Preferred Stock, which is considered more akin to a debt instrument than equity.
Accordingly, these two embedded derivatives are required to be bundled into a single derivative instrument and accounted for separately from the Series A Preferred Stock at fair value.
The Company considers the repurchase option to have no value as the likelihood is remote that this event, within the Company’s control, would ever occur. On August 9, 2019 the Company determined that the fair value of the redemption provision upon a change of control was $
As of September 30, 2020, the Series A Preferred Stock is recorded in temporary equity at the amount of accrued, but unpaid dividends of $
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2020
The following table provides a reconciliation of the beginning and ending balances of the Series A Preferred Stock, which is recorded in temporary equity:
|
2020 |
2019 |
|||||||
|
Balance, January 1, |
$ | $ | ||||||
|
Preferred stock accrued dividends |
||||||||
|
Balance, March 31, |
||||||||
|
Preferred stock accrued dividends |
||||||||
|
Balance, June 30, |
||||||||
|
Preferred stock accrued dividends |
||||||||
|
Balance, September 30, |
$ | $ | ||||||
Note 10 — Joint Ventures
The Company owns a
As of September 30, 2020 and December 31, 2019, the balance of the investment in the Pacific Animation Partners joint venture is .
In September 2012, the Company entered into a joint venture (“DreamPlay Toys”) with NantWorks LLC (“NantWorks”) in which it owns a
In addition, in 2012, the Company invested $
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2020
In November 2014, the Company entered into a joint venture with Meisheng Culture & Creative Corp., for the purpose of providing certain JAKKS licensed and non-licensed toys and consumer products to agreed-upon territories of the People’s Republic of China. The joint venture includes a subsidiary in the Shanghai Free Trade Zone that sells, distributes and markets these products, which include dolls, plush, role play products, action figures, costumes, seasonal items, technology and app-enhanced toys, based on entertainment licenses and JAKKS’ own proprietary brands. The Company owns
In October 2016, the Company entered into a joint venture with Hong Kong Meisheng Cultural Company Limited ("Meisheng"), a Hong Kong-based subsidiary of Meisheng Culture & Creative Corp., for the purpose of creating and developing original, multiplatform content for children including new short-form series and original shows. JAKKS and Meisheng each own
In March 2017, the Company entered into an equity purchase agreement with Meisheng which provided, among other things, that as long as Meisheng and its affiliates hold
Meisheng also serves as a significant manufacturer of the Company. In the first quarter of 2019, Meisheng acquired New Time Group, which was a third-party manufacturer of the Company. For the three and nine months ended September 30, 2020, the Company made inventory-related payments to Meisheng of approximately $
Note 11 — Goodwill
The Company applies a fair value-based impairment test to the carrying value of goodwill and indefinite-lived intangible assets on an annual basis and, on an interim basis, if certain events or circumstances indicate that an impairment loss may have been incurred. Goodwill impairment exists when the estimated fair value of goodwill is less than its carrying value. Based on the Company's April 1 annual assessment, it determined that the fair values of its reporting units were not less than the carrying amounts. No goodwill impairment was determined to have occurred for the nine months ended September 30, 2020.
As of September 30, 2020, $
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2020
Note 12 — Intangible Assets Other Than Goodwill
Intangible assets other than goodwill consist primarily of licenses, product lines, customer relationships and trademarks. Amortized intangible assets are included in intangibles in the accompanying condensed consolidated balance sheets. Trademarks are disclosed separately in the accompanying condensed consolidated balance sheets. Intangible assets as of September 30, 2020 and December 31, 2019 include the following (in thousands, except for weighted useful lives):
|
September 30, 2020 |
December 31, 2019 |
|||||||||||||||||||||||||||
|
Weighted |
Gross |
Accumulated |
Net |
Gross |
Accumulated |
Net |
||||||||||||||||||||||
|
(Years) |
||||||||||||||||||||||||||||
|
Amortized Intangible Assets: |
||||||||||||||||||||||||||||
|
Licenses |
$ | $ | ( |
) | $ | $ | $ | ( |
) | $ | ||||||||||||||||||
|
Product lines |
( |
) | ( |
) | ||||||||||||||||||||||||
|
Customer relationships |
( |
) | ( |
) | ||||||||||||||||||||||||
|
Trade names |
( |
) | ( |
) | ||||||||||||||||||||||||
|
Non-compete agreements |
( |
) | ( |
) | ||||||||||||||||||||||||
|
Total amortized intangible assets |
$ | $ | ( |
) | $ | $ | $ | ( |
) | $ | ||||||||||||||||||
|
Unamortized Intangible Assets: |
||||||||||||||||||||||||||||
|
Trademarks |
$ | $ | — | $ | $ | $ | — | $ | ||||||||||||||||||||
Note 13 — Comprehensive Income (Loss)
The table below presents the components of the Company’s comprehensive income (loss) for the three and nine months ended September 30, 2020 and 2019 (in thousands):
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
|
2020 |
2019 |
2020 |
2019 |
|||||||||||||
|
Net Income (Loss) |
$ | $ | $ | ( |
) | $ | ( |
) | ||||||||
|
Other comprehensive income (loss): |
||||||||||||||||
|
Foreign currency translation adjustment |
( |
) | ( |
) | ( |
) | ||||||||||
|
Comprehensive income (loss) |
( |
) | ( |
) | ||||||||||||
|
Less: Comprehensive income (loss) attributable to non-controlling interests |
( |
) | ||||||||||||||
|
Comprehensive income (loss) attributable to JAKKS Pacific, Inc. |
$ | $ | $ | ( |
) | $ | ( |
) | ||||||||
Note 14 — Litigation and Contingencies
The Company is a party to, and certain of its property is the subject of, various pending claims and legal proceedings that routinely arise in the ordinary course of its business. The Company accrues for losses when the loss is deemed probable and the liability can reasonably be estimated. Where a liability is probable and there is a range of estimated loss with no best estimate in the range, the Company records the minimum estimated liability related to the claim. As additional information becomes available, the Company assesses the potential liability related to its pending litigation and revises its estimates.
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2020
In the normal course of business, the Company may provide certain indemnifications and/or other commitments of varying scope to a) its licensors, customers and certain other parties, including against third party claims of intellectual property infringement, and b) its officers, directors and employees, including against third party claims regarding the periods in which they serve in such capacities with the Company. The duration and amount of such obligations is, in certain cases, indefinite. The Company's director’s and officer’s liability insurance policy may, however, enable it to recover a portion of any future payments related to its officer, director or employee indemnifications. For the past five years, costs related to director and officer indemnifications have not been significant. Other than certain liabilities recorded in the normal course of business related to royalty payments due the Company's licensors, no liabilities have been recorded for indemnifications and/or other commitments.
Note 15 — Share-Based Payments
The Company’s 2002 Stock Award and Incentive Plan (the “Plan”), as amended, provides for the awarding of stock options, restricted stock and restricted stock units to certain key employees, executive officers and non-employee directors. Current awards under the Plan include grants to directors, executive officers and certain key employees of restricted stock awards and units, with vesting contingent upon (a) the completion of specified service periods ranging from
The following table summarizes the total share-based compensation expense recognized for the three and nine months ended September 30, 2020 and 2019 (in thousands):
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
|
2020 |
2019 |
2020 |
2019 |
|||||||||||||
|
Share-based compensation expense |
$ | $ | $ | $ | ||||||||||||
Restricted Stock Awards
Restricted stock award activity (including those with performance-based vesting criteria) for the nine months ended September 30, 2020 is summarized as follows:
|
Restricted Stock Awards |
||||||||
|
Number of Shares |
Weighted Average Fair Value |
|||||||
|
Outstanding, December 31, 2019 |
$ | |||||||
|
Awarded |
||||||||
|
Vested |
( |
) | ||||||
|
Forfeited |
( |
) | ||||||
|
Outstanding, September 30, 2020 |
||||||||
As of September 30, 2020, there was $
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2020
Restricted Stock Units
Restricted stock unit activity (including those with performance-based vesting criteria) for the nine months ended September 30, 2020 is summarized as follows:
|
Restricted Stock Units |
||||||||
|
Number of Shares |
Weighted Average Fair Value |
|||||||
|
Outstanding, December 31, 2019 |
$ | |||||||
|
Awarded |
||||||||
|
Vested |
( |
) | ||||||
|
Forfeited |
( |
) | ||||||
|
Outstanding, September 30, 2020 |
||||||||
As of September 30, 2020, there was $
Note 16 — Fair Value Measurements
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various methods including market, income and cost approaches. Based upon these approaches, the Company often utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market-corroborated, or unobservable inputs. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based upon observable inputs used in the valuation techniques, the Company is required to provide information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values into three broad levels as follows:
|
Level 1: |
Valuations for assets and liabilities traded in active markets from readily available pricing sources for market transactions involving identical assets or liabilities. |
|
Level 2: |
Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third-party pricing services for identical or similar assets or liabilities. |
|
Level 3: |
Valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities. |
In instances where the determination of the fair value measurement is based upon inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based upon the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2020
The following tables summarize the Company's financial liabilities measured at fair value on a recurring basis as of September 30, 2020 and December 31, 2019 (in thousands):
|
Carrying Amount as of September 30, 2020 |
Fair Value Measurements |
|||||||||||||||
|
Level 1 |
Level 2 |
Level 3 |
||||||||||||||
|
3.25% convertible senior notes due in 2023 |
$ | $ | $ | $ | ||||||||||||
|
Preferred stock derivative liability |
||||||||||||||||
|
Carrying Amount as of December 31, 2019 |
Fair Value Measurements |
|||||||||||||||
|
Level 1 |
Level 2 |
Level 3 |
||||||||||||||
|
3.25% convertible senior notes due in 2023 |
$ | $ | $ | $ | ||||||||||||
|
Preferred stock derivative liability |
||||||||||||||||
The following tables provide a reconciliation of the beginning and ending balances of liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) (in thousands):
|
3.25% convertible senior notes due in 2023 |
2020 |
2019 |
||||||
|
Balance, January 1, |
$ | $ | — | |||||
| New issuance ($ |
— | |||||||
| New issuance ($ |
— | |||||||
|
Conversion of convertible senior notes |
( |
) | — | |||||
|
Change in fair value |
( |
) | ||||||
|
Payment-in-kind interest |
— | |||||||
|
Balance, September 30, |
$ | $ | ||||||
|
Preferred stock derivative liability |
2020 |
2019 |
||||||
|
Balance, January 1, |
$ | $ | — | |||||
|
New issuance of Series A Preferred Stock |
— | |||||||
|
Change in fair value |
— | |||||||
|
Balance, September 30, |
$ | $ | ||||||
The Company’s derivative liability is classified within Level 3 of the fair value hierarchy because unobservable inputs were used in estimating the fair value. The fair value of the redemption provision embedded in the Series A Preferred Stock is estimated based on a discounted cash flow model and probability assumptions based on management’s estimates of a change of control event occurring. In subsequent periods, the derivative liability is accounted for at fair value, with changes in fair value recognized as other income (expense) on the Company's condensed consolidated statements of operations.
The Company’s accounts receivable, accounts payable, and accrued expenses represent financial instruments. The carrying value of these financial instruments is a reasonable approximation of fair value.
Note 17 — Related Party Transactions
A former director of the Company, who resigned on August 9, 2019 is a partner in a law firm that acts as counsel to the Company. The Company incurred legal fees and expenses to the law firm in the amount of approximately $
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2020
The owner of NantWorks, the Company’s DreamPlay Toys joint venture partner, beneficially owned more than
For the year ended December 31, 2019, preferred returns earned and payable to NantWorks was . Pursuant to the amended Toy Services Agreement, NantWorks is entitled to receive a renewal fee in the amount of $
In November 2014, the Company entered into a joint venture with Meisheng Cultural & Creative Corp., Ltd., for the purpose of providing certain JAKKS licensed and non-licensed toys and consumer products to agreed-upon territories of the People’s Republic of China. The joint venture includes a subsidiary in the Shanghai Free Trade Zone that sells, distributes and markets these products, which include dolls, plush, role play products, action figures, costumes, seasonal items, technology and app-enhanced toys, based on top entertainment licenses and JAKKS’ own proprietary brands. The Company owns
In October 2016, the Company entered into a joint venture with Hong Kong Meisheng Cultural Company Limited ("Meisheng"), a Hong Kong-based subsidiary of Meisheng Culture & Creative Corp., for the purpose of creating and developing original, multiplatform content for children including new short-form series and original shows. JAKKS and Meisheng each own
In March 2017, the Company entered into an agreement to issue
Meisheng also serves as a significant manufacturer of the Company. In the first quarter of 2019, Meisheng acquired New Time Group, which was a third-party manufacturer of the Company. For the three and nine months ended September 30, 2020, the Company made inventory-related payments to Meisheng of approximately $
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2020
A director of the Company is a portfolio manager at Oasis Management. In August 2017, the Company agreed with Oasis Management and Oasis Investments II Master Fund Ltd., the holder of approximately $
A director of the Company is a director at Benefit Street Partners. As of September 30, 2020, Benefit Street Partners held $
A director of the Company is the managing Partner and portfolio manager at Axar Capital Management. As of September 30, 2020, Axar Capital Management held $
Note 18 — Subsequent Events
On October 12, 2020, $
On October 16, 2020, the Company reached an agreement (the “Amendment”) with holders of its term loan and Wells Fargo, holder of its revolving credit facility, to amend the New Term Loan Agreement and defer its EBITDA covenant calculation until March 31, 2022. Under the Amendment, the trailing 12-month EBITDA requirement has been reduced to $
A purported class action lawsuit was filed on November 10, 2020 in the United States District Court for the District of Delaware (Brown v. JAKKS Pacific, Inc. et al) alleging that the Proxy Statement issued in connection with the shareholder meeting held in June 2020 contained misstatements regarding the manner in which broker votes would be counted and that such votes were improperly included in approving the Company’s reverse stock split at the meeting. The Class Period is July 9, 2020. The purported class action seeks damages in an unspecified amount, alleging breach of fiduciary duties by the Company’s directors. The Company intends to vigorously defend the lawsuit. Since the action was just commenced, however, we cannot assure you of its outcome and cannot estimate the range of any potential damage award.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of financial condition and results of operations should be read together with our Condensed Consolidated Financial Statements and Notes thereto, which appear elsewhere herein.
Effective July 9, 2020, we completed a 1 for 10 reverse stock split of our $0.001 par value common stock reducing the issued and outstanding shares of common stock from 42,395,782 to 4,239,578 (“Reverse Stock Split”). The Reverse Stock Split did not cause an adjustment to the par value or the authorized shares of the common stock. All share and per share amounts in the financial statements and notes thereto have been retroactively adjusted for all periods presented to give effect to this Reverse Stock Split, including reclassifying an amount equal to the reduction in par value of common stock to additional paid-in capital. The primary reason for implementing the reverse stock split was to regain compliance with the minimum bid price requirement of The NASDAQ Stock Market LLC (“Nasdaq”). On July 31, 2020 we were notified by Nasdaq that we had regained compliance with the Nasdaq listing requirements. On September 11, 2020, we received notice from Nasdaq that during the prior 30 day period we had not met a listing requirement to maintain a minimum Market Value of Publicly Held Shares of $15,000,000. We have until March 10, 2021 to cure this deficiency and/or meet any of Nasdaq’s other alternative continuing qualification criteria.
Explanatory Note
As of the date of filing of this Quarterly Report on Form 10-Q (this “Report”), there are many uncertainties regarding the current Novel Coronavirus (“COVID-19”) pandemic, including the scope of health issues, the possible duration of the pandemic, and the extent of local and worldwide social, political, and economic disruption it may cause. To date, the COVID-19 pandemic has had far-reaching impacts on many aspects of the operations of JAKKS Pacific, Inc. (the “Company,” “we,” “our” or “us”), including on consumer behavior, customer store traffic, production capabilities, timing of product availability, our employees’ personal and business lives, and the market generally. The scope and nature of these impacts continue to evolve each day. The COVID-19 pandemic has resulted in, and may continue to result in, regional and local quarantines, labor stoppages and shortages, changes in consumer purchasing patterns, mandatory or elective shut-downs of retail locations, disruptions to supply chains, including the inability of our suppliers and service providers to deliver materials and services on a timely basis, or at all, severe market volatility, liquidity disruptions, and overall economic instability, which, in many cases, have had, and we expect will continue to have, adverse impacts on our business, financial condition and results of operations. This situation is changing rapidly, and additional impacts may arise that we are not aware of currently.
In light of the uncertain and rapidly evolving situation relating to the COVID-19 pandemic, we have taken certain precautionary measures intended to help minimize the risk to our Company, employees and customers, including the following:
|
|
• |
On March 23, 2020, we encouraged our staff to begin working from home. We expect that to be our operating model for an undetermined period of time, and to the extent permitted by federal, state and local instructions to reopen; |
|
|
• |
We identified expense reductions that we intend to implement throughout the remainder of fiscal 2020, as necessary; |
|
|
• |
Although our distribution center in City of Industry, California currently continues to operate, we continue to evaluate its operations, and may elect, or be required, to shut down its operations temporarily at any time in the future; |
|
|
• |
We have suspended all non-essential travel for our employees; and |
|
|
• |
We are discouraging employee attendance at industry events and in-person work-related meetings. |
Each of the remedial measures taken by the Company has had, and we expect will continue to have, adverse impacts on our current business, financial condition and results of operations, and may create additional risks for our Company. While we anticipate that the foregoing measures are temporary, we cannot predict the specific duration for which these precautionary measures will stay in effect, and we may elect or need to take additional measures as the information available to us continues to develop, including with respect to our employees, inventory receipts, and relationships with our licensors. We expect to continue to assess the evolving impact of the COVID-19 pandemic on our customers, consumers, employees, supply chain, and operations, and intend to make adjustments to our responses accordingly. However, the extent to which the COVID-19 pandemic and our precautionary measures in response thereto may impact our business, financial condition, and results of operations will depend on how the COVID-19 pandemic and its impact continues to develop in the United States and elsewhere in the world, which remains highly uncertain and cannot be predicted at this time.
In light of these uncertainties, for purposes of this report, except where otherwise indicated, the descriptions of our business, our strategies, our risk factors, and any other forward-looking statements, including regarding us, our business and the market generally, do not reflect the potential impact of the COVID-19 pandemic or our responses thereto. In addition, the disclosures contained in this report are made only as of the date hereof, and we undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law. For further information, see “Disclosure Regarding Forward-Looking Statements” and “Risk Factors.”
Disclosure Regarding Forward-Looking Statements
This Report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. For example, statements included in this Report regarding our financial position, business strategy and other plans and objectives for future operations, and assumptions and predictions about future product demand, supply, manufacturing, costs, marketing and pricing factors are all forward-looking statements. When we use words like “intend,” “anticipate,” “believe,” “estimate,” “plan” or “expect,” or other words of a similar import, we are making forward-looking statements. We believe that the assumptions and expectations reflected in such forward-looking statements are reasonable, based upon information available to us on the date hereof (but excluding the impact of COVID-19, as described above in “Explanatory Note”), but we cannot assure you that these assumptions and expectations will prove to have been correct or that we will take any action that we may presently be planning. We have disclosed certain important factors (e.g., see “Explanatory Note” and “Risk Factors”) that could cause our actual results to differ materially from our current expectations elsewhere in this Report. You should understand that forward-looking statements made in this Report are necessarily qualified by these factors. We are not undertaking to publicly update or revise any forward-looking statement if we obtain new information or upon the occurrence of future events or otherwise.
Critical Accounting Policies and Estimates
The accompanying condensed consolidated financial statements and supplementary information were prepared in accordance with accounting principles generally accepted in the United States of America. Significant accounting policies are discussed in Note 2 to the Consolidated Financial Statements set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019. Inherent in the application of many of these accounting policies is the need for management to make estimates and judgments in the determination of certain revenues, expenses, assets and liabilities. As such, materially different financial results can occur as circumstances change and additional information becomes known. The policies with the greatest potential effect on our results of operations and financial position include:
Allowance for Doubtful Accounts. Our allowance for doubtful accounts is based upon management’s assessment of the business environment, customers’ financial condition, historical collection experience, accounts receivable aging, customer disputes and the collectability of specific customer accounts. If there were a deterioration of a major customer’s creditworthiness, or actual defaults were higher than our historical experience, our estimates of the recoverability of amounts due to us could be overstated, which could have an adverse impact on our operating results. Our allowance for doubtful accounts is also affected by the time at which uncollectible accounts receivable balances are actually written off.
Major customers’ accounts are monitored on an ongoing basis; more in-depth reviews are performed based upon changes in a customer’s financial condition and/or the level of credit being extended. When a significant event occurs, such as a bankruptcy filing by a specific customer, and on a quarterly basis, the allowance is reviewed for adequacy and the balance or accrual rate is adjusted to reflect current risk prospects. When certain shocks to the market occur, customers are unilaterally reviewed to assess the potential impact of that shock on their financial stability. Many retailers have been operating under financial duress for several years. Ultimately, we assess the risk of liquidation and/or bankruptcy by a customer and the associated risk that we will not be paid for product shipped. To that end, it is not only outstanding accounts receivable balances but decisions to design and develop account-specific product and ultimately ship product that plays into our goal to maximize profitability while minimizing uncollectable accounts receivable.
Revenue Recognition. Our contracts with customers only include one performance obligation (i.e., sale of our products). Revenue is recognized in the gross amount at a point in time when delivery is completed and control of the promised goods is transferred to the customers. Revenue is measured as the amount of consideration we expect to be entitled to in exchange for those goods. Our contracts do not involve financing elements as payment terms with customers are less than one year. Further, because revenue is recognized at the point in time goods are sold to customers, there are no contract assets or contract liability balances.
We disaggregate our revenues from contracts with customers by reporting segment: Toys/Customer Products and Halloween. We further disaggregate revenues by major geographic region. See Note 2 to the Condensed Consolidated Financial Statements for further information.
We offer various discounts, pricing concessions, and other allowances to customers, all of which are considered in determining the transaction price. Certain discounts and allowances are fixed and determinable at the time of sale and are recorded at the time of sale as a reduction to revenue. Other discounts and allowances can vary and are determined at management’s discretion (variable consideration). Specifically, we occasionally grant discretionary credits to facilitate markdowns and sales of slow moving merchandise, and consequently accrue an allowance based on historic credits and management estimates. Further, while we generally do not allow product returns, we do make occasional exceptions to this policy, and consequently record a sales return allowance based upon historic return amounts and management estimates. These allowances (variable consideration) are estimated using the expected value method and are recorded at the time of sale as a reduction to revenue. We adjust our estimate of variable consideration at least quarterly or when facts and circumstances used in the estimation process may change. The variable consideration is not constrained as we have sufficient history on the related estimates and do not believe there is a risk of significant revenue reversal.
We also participate in cooperative advertising arrangements with some customers, whereby we allow a discount from invoiced product amounts in exchange for customer purchased advertising that features our products. Generally, these allowances range from 1% to 20% of gross sales, and are generally based upon product purchases or specific advertising campaigns. Such allowances are accrued when the related revenue is recognized. These cooperative advertising arrangements provide a distinct benefit at fair value, and are accounted for as direct selling expenses.
Sales commissions are expensed when incurred as the related revenue is recognized at a point in time and therefore the amortization period is less than one year. As a result, these costs are recorded as direct selling expenses, as incurred.
Shipping and handling activities are considered part of our obligation to transfer the products and therefore are recorded as direct selling expenses, as incurred.
Our reserve for sales returns and allowances amounted to $44.2 million as of September 30, 2020 and $38.4 million as of December 31, 2019.
Fair value measurements. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, we use various methods including market, income and cost approaches. Based upon these approaches, we often utilize certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market-corroborated, or unobservable inputs. We utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based upon observable inputs used in the valuation techniques, we are required to provide information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values into three broad levels as follows:
|
Level 1: |
Valuations for assets and liabilities traded in active markets from readily available pricing sources for market transactions involving identical assets or liabilities. |
|
Level 2: |
Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third-party pricing services for identical or similar assets or liabilities. |
|
Level 3: |
Valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities. |
In instances where the determination of the fair value measurement is based upon inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based upon the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability. See Note 16 to the Condensed Consolidated Financial Statements included within for further information.
Goodwill and other indefinite-lived intangible assets. Goodwill and indefinite-lived intangible assets are not amortized, but are tested for impairment at least annually at the reporting unit level.
Factors we consider important that could trigger an impairment review include the following:
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significant underperformance relative to expected historical or projected future operating results; |
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significant changes in the manner of our use of the acquired assets or the strategy for our overall business; and |
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significant negative industry or economic trends. |
Due to the subjective nature of the impairment analysis, significant changes in the assumptions used to develop the estimate could materially affect the conclusion regarding the future cash flows necessary to support the valuation of long-lived assets, including goodwill. The valuation of goodwill involves a high degree of judgment and uncertainty related to our key assumptions. Any changes in our key projections or estimates could result in a reporting unit either passing or failing the first step of the impairment model, which could significantly change the amount of any impairment ultimately recorded.
Based upon the assumptions underlying the valuation, impairment is determined by estimating the fair value of a reporting unit and comparing that value to the reporting unit’s book value. Goodwill is tested for impairment annually, and on an interim basis if certain events or circumstances indicate that an impairment loss may have been incurred. If the fair value is more than the carrying value of the reporting unit, an impairment loss is not indicated. If a reporting unit's carrying value exceeds its fair value, an impairment charge would be recognized for the excess amount, not to exceed the carrying amount of goodwill.
Based on our April 1 annual assessment, we determined the fair values of our reporting units were not less than the carrying amounts. No goodwill impairment was determined to have occurred for the nine months ended September 30, 2020.
Impairment of Long-Lived Assets. When facts and circumstances indicate that the carrying values of long-lived assets, including buildings, equipment and amortizable intangible assets, may be impaired, we perform an evaluation of recoverability by comparing the carrying values of the net assets to their related projected undiscounted future cash flows, in addition to other quantitative and qualitative analysis. Our estimates are subject to uncertainties and may be impacted by various external factors such as economic conditions and market competition. While we believe the inputs and assumptions utilized in our analysis of future cash flows are reasonable, events or circumstances may change, which could cause us to revise these estimates.
Reserve for Inventory Obsolescence. We value our inventory at the lower of cost or net realizable value. Based upon a consideration of quantities on hand, actual and projected sales volume, anticipated product selling prices and product lines planned to be discontinued, slow-moving and obsolete inventory is written down to its net realizable value.
Failure to accurately predict and respond to consumer demand could result in us under-producing popular items or over-producing less popular items. Furthermore, significant changes in demand for our products would impact management’s estimates in establishing our inventory provision.
Management’s estimates are monitored on a quarterly basis, and a further adjustment to reduce inventory to its net realizable value is recorded as an increase to cost of sales when deemed necessary under the lower of cost or net realizable value standard.
When unexpected shocks to market demand occur (such as the COVID-19 pandemic market shock), we review whether that shock might materially impact the value of our owned inventory. In some cases, where customers have cancelled orders, accommodation can be reached that the product will be reordered when the customer has restarted operations (in the event of store closures) or the customer agrees to minimize/eliminate requests for product line refreshment (such as in the event of Halloween order cancellations) which allows the inventory and in some cases raw materials to be held through to the following calendar year without incurring any additional obsolescence.
Discrete Items for Income Taxes. The discrete benefit recorded in the nine months ended September 30, 2020 is $0.4 million which is primarily related to change in uncertain tax positions, excess tax deficiencies fully offset by valuation allowance, state income taxes, and foreign return-to-provision adjustments. For the comparable period in 2019, a discrete tax expense of $0.1 million was recorded related to excess tax deficiencies fully offset by valuation allowance, return-to-provision adjustments for foreign jurisdictions, state income taxes, and change in uncertain tax positions.
Income taxes and interest and penalties related to income tax payable. We do not file a consolidated return for our foreign subsidiaries. We file federal and state returns and our foreign subsidiaries each file returns as required. Deferred taxes are provided on an asset and liability method, whereby deferred tax assets are recognized as deductible temporary differences and operating loss and tax credit carry-forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Management employs a threshold and measurement process for recording in the financial statements uncertain tax positions taken or expected to be taken in a tax return. Tax benefits that are subject to challenge by tax authorities are analyzed and accounted for in the income tax provision.
We accrue a tax reserve for additional income taxes, which may become payable in future years as a result of audit adjustments by tax authorities. The reserve is based upon management’s assessment of all relevant information and is periodically reviewed and adjusted as circumstances warrant. As of September 30, 2020 and December 31, 2019, our income tax reserves were approximately $0.9 million and $1.6 million, respectively. The $0.9 million balance primarily relates to the potential tax settlements in Hong Kong. Our income tax reserves are included in income tax payable on the Condensed Consolidated Balance Sheets and within provision for (benefit from) income taxes on the Condensed Consolidated Statements of Operations and Comprehensive Loss.
Share-Based Compensation. We grant restricted stock units and awards to our employees (including officers) and to non-employee directors under our 2002 Stock Award and Incentive Plan (the “Plan”), as amended. The benefits provided under the Plan are share-based payments. We amortize over a requisite service period, the net total deferred restricted stock expense based upon the fair value of the underlying common stock on the date of the grants. In certain instances, the service period may differ from the period in which each award will vest. Additionally, certain groups of grants are subject to performance criteria and/or an expected forfeiture rate calculation.
New Accounting Pronouncements
See Note 1 to the Condensed Consolidated Financial Statements.
Results of Operations
The following unaudited table sets forth, for the periods indicated, certain statement of income data as a percentage of net sales.
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Three Months Ended September 30, |
Nine Months Ended September 30, |
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2020 |
2019 |
2020 |
2019 |
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Net sales |
100.0 |
% |
100.0 |
% |
100.0 |
% |
100.0 |
% |
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Cost of sales |
69.2 | 71.1 | 72.2 | 74.7 | ||||||||||||
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Gross profit |
30.8 | 28.9 | 27.8 | 25.3 | ||||||||||||
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Selling, general and administrative expenses |
15.3 | 16.0 | 24.2 | 25.5 | ||||||||||||
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Restructuring charge |
— | — | 0.5 | 0.1 | ||||||||||||
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Pandemic related charges |
— | — | 0.1 | — | ||||||||||||
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Acquisition related and other |
— | 0.2 | — | 1.3 | ||||||||||||
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Income (loss) from operations |
15.5 | 12.7 | 3.0 | (1.6 | ) | |||||||||||
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Income from joint ventures |
— | — | — | — | ||||||||||||
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Other income (expense), net |
— | — | — | — | ||||||||||||
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Loss on extinguishment of debt |
— | (4.7 | ) | — | (3.0 | ) | ||||||||||
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Change in fair value of preferred stock derivative liability |
(1.1 | ) | — | (0.1 | ) | — | ||||||||||
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Change in fair value of convertible senior notes |
1.2 | (0.1 | ) | 0.7 | (0.6 | ) | ||||||||||
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Interest income |
— | — | — | — | ||||||||||||
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Interest expense |
(2.3 | ) | (1.6 | ) | (4.3 | ) | (2.4 | ) | ||||||||
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Income (loss) before provision for (benefit from) income taxes |
13.3 | 6.3 | (0.7 | ) | (7.6 | ) | ||||||||||
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Provision for (benefit from) income taxes |
(0.1 | ) | 0.3 | 0.1 | 0.3 | |||||||||||
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Net income (loss) |
13.4 | 6.0 | (0.8 | ) | (7.9 | ) | ||||||||||
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Net income (loss) attributable to non-controlling interests |
— | — | — | — | ||||||||||||
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Net income (loss) attributable to JAKKS Pacific, Inc. |
13.4 |
% |
6.0 |
% |
(0.8 |
)% |
(7.9 |
)% |
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The following unaudited table summarizes, for the periods indicated, certain statements of operations data by segment (in thousands):
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Three Months Ended September 30, |
Nine Months Ended September 30, |
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2020 |
2019 |
2020 |
2019 |
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Net Sales |
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Toys/Consumer Products |
$ | 187,309 | $ | 204,338 | $ | 306,088 | $ | 330,319 | ||||||||
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Halloween |
54,981 | 75,792 | 81,517 | 115,819 | ||||||||||||
| 242,290 | 280,130 | 387,605 | 446,138 | |||||||||||||
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Cost of Sales |
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Toys/Consumer Products |
125,143 | 138,717 | 215,521 | 240,834 | ||||||||||||
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Halloween |
42,531 | 60,554 | 64,348 | 92,359 | ||||||||||||
| 167,674 | 199,271 | 279,869 | 333,193 | |||||||||||||
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Gross Profit |
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Toys/Consumer Products |
62,166 | 65,621 | 90,567 | 89,485 | ||||||||||||
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Halloween |
12,450 | 15,238 | 17,169 | 23,460 | ||||||||||||
| $ | 74,616 | $ | 80,859 | $ | 107,736 | $ | 112,945 | |||||||||
Comparison of the Three Months Ended September 30, 2020 and 2019
Net Sales
Toys/Consumer Products. Net sales of our Toys/Consumer Products segment were $187.3 million for the three months ended September 30, 2020 compared to $204.3 million for the prior year period, representing a decrease of $17.0 million, or 8.3%. Sales were negatively impacted by the closure of many of the stores operated by the Company’s retail customers during the stay-at-home mandates, both in the U.S. and Europe. Sales from Boys’ toys increased in the quarter led by Nintendo and Sonic, while offset by declines in Girls’ toys and Seasonal products. Both Girls’ and Seasonal saw a decline due to unusually strong sales in the third quarter of last year powered by the release of Frozen 2.
Halloween. Net sales of our Halloween segment were $55.0 million for the three months ended September 2020 compared to $75.8 million for the prior year period, representing a decrease of $20.8 million, or 27.4%. Sales for the quarter were lower due to retailers reducing orders due to concerns about the impact of the COVID-19 pandemic on traditional Halloween celebrations. Last year also saw unusually strong sales in the third quarter powered by a stronger entertainment calendar, including the releases of Toy Story 4 and Frozen 2.
Cost of Sales
Toys/Consumer Products. Cost of sales of our Toys/Consumer Products segment was $125.1 million, or 66.8% of related net sales for the three months ended September 30, 2020 compared to $138.7 million, or 67.9% of related net sales for the prior year period, representing a decrease of $13.6 million, or 9.8%. The decrease in dollars is due to lower overall sales in 2020. The decrease as a percentage of net sales, year over year, is due to lower average manufacturing costs resulting from a focused effort to design and develop our product lines for greater product margins. This decrease is partially offset by a higher average royalty rate, in part driven by the mix of products sold in the quarter.
Halloween. Cost of sales of our Halloween segment was $42.5 million, or 77.3% of related net sales for the three months ended September 30, 2020 compared to $60.6 million, or 79.9% of related net sales for the prior year period, representing a decrease in dollars of $18.1 million, or 29.9%. The decrease in dollars is due to lower overall sales in 2020. The decrease as a percentage of net sales, year over year, is due to a lower product costs, driven by a focused effort to design and develop our product lines for greater product margins.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $37.0 million for the three months ended September 30, 2020 compared to $44.6 million for the prior year period constituting 15.3% and 16.0% of net sales, respectively. Selling, general and administrative expenses decreased by $7.6 million from the prior year period primarily driven by company-wide cost savings initiatives begun in 2019 as well as other pandemic-driven cost mitigation programs.
Pandemic Related Charges
During the three months ended September 30, 2020, we recognized $0.1 million spending directly attributable to making necessary accommodations related to the COVID-19 pandemic.
Acquisition Related and Other
During the three months ended September 30, 2019, we recognized $0.6 million in acquisition related and other charges related to strategic and/or refinancing transactions, including the Recapitalization Transaction closed in August 2019.
Interest Expense
Interest expense was $5.6 million for the three months ended September 30, 2020, as compared to $4.6 million in the prior year period. During the three months ended September 30, 2020, we booked interest expense of $0.5 million related to our convertible senior notes due in 2023, $4.6 million related to our Term Loan, $18,873 related to our Paycheck Protection Program Loan (the “PPP Loan”) and $0.4 million related to our revolving credit facility. During the three months ended September 30, 2019, we booked interest expense of $1.1 million related to our convertible senior notes due in 2020, and $3.5 million related to our revolving credit and term loan facilities.
Provision for (Benefit from) Income Taxes
Our income tax benefit, which includes federal, state and foreign income taxes and discrete items, was $0.3 million, or an effective tax rate of (0.8%) for the three months ended September 30, 2020. During the comparable period in 2019, our income tax expense was $1.0 million, or an effective tax rate of 5.8%.
Comparison of the Nine Months Ended September 30, 2020 and 2019
Net Sales
Toys/Consumer Products. Net sales of our Toys/Consumer Products segment were $306.1 million for the nine months ended September 30, 2020 compared to $330.3 million for the prior year period, representing a decrease of $24.2 million, or 7.3%. The decrease in net sales is primarily driven by the discontinuation of our low-growth, low-margin Funnoodle business within our Seasonal division at the end of calendar year 2019 as well as last year’s stronger entertainment calendar which included the releases of Toy Story 4 and Frozen 2.
Halloween. Net sales of our Halloween segment were $81.5 million for the nine months ended September 30, 2020 compared to $115.8 million for the prior year period, representing a decrease of $34.3 million, or 29.6%. Sales were lower due to retailers reducing orders due to concerns about the impact of the COVID-19 pandemic on traditional Halloween celebrations. Last year also saw unusually strong sales powered by a stronger entertainment calendar, including the releases of Toy Story 4 and Frozen 2.
Cost of Sales
Toys/Consumer Products. Cost of sales of our Toys/Consumer Products segment was $215.5 million, or 70.4% of related net sales for the nine months ended September 30, 2020 compared to $240.8 million, or 72.9% of related net sales for the prior year period, representing a decrease of $25.3 million, or 10.5%. The decrease in dollars is due to lower overall sales in 2020. The decrease as a percentage of net sales, year over year, is due to lower average manufacturing costs resulting from a focused effort to design and develop our product lines for greater product margins. This decrease is partially offset by a higher average royalty rate, in part driven by the mix of products sold during the nine-month period.
Halloween. Cost of sales of our Halloween segment was $64.3 million, or 78.9% of related net sales for the nine months ended September 30, 2020 compared to $92.4 million, or 79.8% of related net sales for the prior year period, representing a decrease in dollars of $28.1 million, or 30.4%. For the nine-month period, the decrease in dollars is due to lower overall sales in 2020, while the cost of sales as a percentage of net sales has remained relatively flat.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $94.0 million for the nine months ended September 30, 2020 compared to $113.7 million for the prior year period constituting 24.2% and 25.5% of net sales, respectively. Selling, general and administrative expenses decreased by $19.7 million from the prior year period primarily driven by company-wide cost savings initiatives begun in 2019 as well as other COVID-19 pandemic-driven cost mitigation programs. In addition, the write-down of the Maui intangible asset during the fourth quarter of 2019 results in a year-over-year reduction of amortization expense of $2.7 million during the nine months ended September 30, 2020.
Restructuring Charge
During the nine months ended September 30, 2020, we recognized $1.6 million of restructuring charges as a result of a company-wide restructuring initiative. The restructuring charges primarily related to employee severance costs. During the nine months ended September 30, 2019, we recognized $0.3 million of restructuring charges as a result of a Company-wide restructuring initiative in 2018 fourth quarter. The restructuring charges are primarily related to employee severance costs.
Pandemic Related Charges
During the nine months ended September 30, 2020, we recognized $0.4 million spending directly attributable to making necessary accommodations related to the COVID-19 pandemic.
Acquisition Related and Other
During the nine months ended September 30, 2019, we recognized $6.0 million in acquisition related and other charges related to strategic and/or refinancing transactions, including the Recapitalization Transaction closed in August 2019.
Interest Expense
Interest expense was $16.7 million for the nine months ended September 30, 2020, as compared to $10.6 million in the prior year period. During the nine months ended September 30, 2020, we booked interest expense of $1.7 million related to our convertible senior notes due in 2020 and 2023, $14.0 million related to our Term Loan, $18,873 related to our PPP Loan, and $1.0 million related to our revolving credit facility. During the nine months ended September 30, 2019, we booked interest expense of $4.7 million related to our convertible senior notes, and $5.9 million related to our revolving credit and term loan facilities.
Provision for (Benefit from) Income Taxes
Our income tax expense, which includes federal, state and foreign income taxes and discrete items, was $0.3 million, or an effective tax rate of (11.0%) for the nine months ended September 30, 2020. During the comparable period in 2019, our income tax expense was $1.4 million, or an effective tax rate of (4.0%).
Seasonality and Backlog
The retail toy industry is inherently seasonal. Generally, our sales have been highest during the third and fourth quarters, and collections for those sales have been highest during the succeeding fourth and first quarters. Our working capital needs have been highest during the second and third quarters.
While we have taken steps to level sales over the entire year, sales are expected to remain heavily influenced by the seasonality of our toy and Halloween products. The result of these seasonal patterns is that operating results and the demand for working capital may vary significantly by quarter. Orders placed with us are generally cancelable until the date of shipment. The combination of seasonal demand and the potential for order cancellation makes accurate forecasting of future sales difficult and causes us to believe that backlog may not be an accurate indicator of our future sales. Similarly, financial results for a particular quarter may not be indicative of results for the entire year.
Liquidity and Capital Resources
As of September 30, 2020, we had working capital of $105.9 million, compared to $107.5 million as of December 31, 2019.
Operating activities provided net cash of $15.9 million in the nine months ended September 30, 2020, as compared to $26.1 million in the prior year period. The decrease in net cash provided by operating activities was primarily due to higher working capital usage, partially offset by lower net loss, excluding the impact of non-cash charges. Other than open purchase orders issued in the normal course of business related to shipped product, we have no obligations to purchase inventory from our manufacturers. However, we may incur costs or other losses as a result of not placing orders consistent with our forecasts for product manufactured by our suppliers or manufacturers for a variety of reasons including customer order cancellations or a decline in demand. As part of our strategy to develop and market new products, we have entered into various characters and product licenses with royalties/obligations generally ranging from 1% to 25% payable on net sales of such products. As of September 30, 2020, these agreements required future aggregate minimum royalty guarantees of $34.0 million, exclusive of $18.3 million in advances already paid. Of this $34.0 million future minimum royalty guarantee, $27.6 million is due over the next twelve months.
Our investing activities used net cash of $6.1 million in the nine months ended September 30, 2020, as compared to using net cash of $7.6 million in the prior year period, and consisted primarily of cash paid for the purchase of molds and tooling used in the manufacture of our products.
Our financing activities provided net cash of $4.1 million for the nine months ended September 30, 2020, primarily consisting of proceeds from the loan under the Paycheck Protection Program (the “PPP Loan”) under the Paycheck Protection Program (the “PPP”) secured under the Coronavirus Aid Relief and Economic Security Act (the “CARES Act”), partially offset by the retirement of convertible senior notes. Our financing activities used net cash of $0.8 million for the nine months ended September 30, 2019, primarily consisting of the repayment of our GACP term loan and net credit facility payments as well as debt issuance costs incurred in connection with the Recapitalization Transaction (see Note 5 - Debt), partially offset by the net proceeds included as part of our New Term Loan Agreement.
As of September 30, 2020, we have $138.8 million (including $4.0 million in payment-in-kind interest) of outstanding indebtedness under a First Lien Term Loan Facility Credit Agreement (the “New Term Loan Agreement) and we have no outstanding indebtedness under an amended and extended Credit Agreement (the “Amended ABL Credit Agreement” or “Amended Wells Fargo Credit Agreement”) with Wells Fargo Bank, National Association (“Wells Fargo”). We also have a $6.2 million PPP Loan under the PPP secured under the CARES Act.
The New Term Loan Agreement and Amended ABL Credit Agreement each contain negative covenants that, subject to certain exceptions, limit the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, make restricted payments, pledge their assets as security, make investments, loans, advances, guarantees and acquisitions, undergo fundamental changes and enter into transactions with affiliates, as well as cross-default provisions. The original terms of the New Term Loan Agreement required us to maintain a trailing 12-month Earnings Before Interest Tax Depreciation and Amortization (“EBITDA”) (as defined and adjusted therein) of not less than $34.0 million and a minimum liquidity of not less than $10.0 million commencing with the fiscal quarter ending September 30, 2020.
On October 16, 2020, we reached an agreement (the “Amendment”) with holders of our term loan and Wells Fargo, holder of our revolving credit facility, to amend the New Term Loan Agreement and defer the EBITDA covenant calculation until March 31, 2022. Under the Amendment, the trailing 12-month EBITDA requirement has been reduced to $25.0 million, which will not be calculated earlier than March 31, 2022. The Amendment also requires us to pre-pay $15.0 million of the New Term Loan immediately and, under certain conditions, pre-pay up to an additional $5.0 million no later than the third quarter of fiscal year 2021. As a result, we reclassified $20.0 million from long term debt to short term debt as of September 30, 2020.
The New Term Loan Agreement contains events of default that are customary for a facility of this nature, including nonpayment of principal, nonpayment of interest, fees or other amounts, material inaccuracy of representations and warranties, violation of covenants, cross-default to other material indebtedness, bankruptcy or insolvency events, material judgment defaults and a change of control as specified in the New Term Loan Agreement, and cross-default provisions with the Amended Wells Fargo Credit Agreement. If an event of default occurs under either Agreement, the maturity of the amounts owed under the New Term Loan Agreement and the Amended Wells Fargo Credit Agreement may be accelerated.
We were in compliance with the financial covenants under the New Term Loan Agreement as of September 30, 2020.
Debt and Credit Facilities
Convertible Senior Notes
In July 2013, we sold an aggregate of $100.0 million principal amount of 4.25% convertible senior notes due 2018 (the “2018 Notes”). The 2018 Notes, which were senior unsecured obligations, paid interest semi-annually in arrears on August 1 and February 1 of each year at a rate of 4.25% per annum and matured on August 1, 2018. Excluding the impact of the 1 for 10 reverse stock split, the initial conversion rate for the 2018 Notes was 114.3674 shares of our common stock per $1,000 principal amount of notes, equivalent to an initial conversion price of approximately $8.74 per share of common stock, subject to adjustment in certain events. In 2016, we repurchased and retired an aggregate of approximately $6.1 million principal amount of the 2018 Notes. During the first quarter of 2017, we exchanged and retired $39.1 million principal amount of the 2018 Notes at par for $24.1 million in cash and approximately 290,000 shares of our common stock. During the second quarter of 2017, we exchanged and retired $12.0 million principal amount of the 2018 Notes at par for $11.6 million in cash and 11,240 shares of our common stock.
In August 2017, we agreed with Oasis Management and Oasis Investments II Master Fund Ltd., (collectively, “Oasis”) the holder of approximately $21.6 million face amount of our 4.25% convertible senior notes due in 2018, to extend the maturity date of these notes to November 1, 2020. In addition, the interest rate was reduced to 3.25% per annum and, excluding the impact of the 1 for 10 reverse stock split, the conversion rate was increased to 328.0302 shares of our common stock per $1,000 principal amount of notes, among other things. After execution of a definitive agreement for the modification and final approval by the other members of our Board of Directors and Oasis’ Investment Committee, the transaction closed on November 7, 2017. On July 26, 2018, we closed a transaction with Oasis to exchange $8.0 million face amount of the 2018 Notes with convertible senior notes similar to those issued to Oasis in November 2017. The July 26, 2018 $8.0 million Oasis notes mature on November 1, 2020, accrue interest at an annual rate of 3.25% and, excluding the impact of the 1 for 10 reverse stock split, are convertible into shares of our common stock at an initial rate of 322.2688 shares per $1,000 principal amount of the new notes. The conversion price for the 3.25% convertible senior notes due 2020 was reset on November 1, 2018 and November 1, 2019 (each, a “reset date”) to a price equal to 105% above the 5-day Volume Weighted Average Price ("VWAP") preceding the reset date; provided, however, among other reset restrictions, that if the conversion price resulting from such reset is lower than 90 percent of the average VWAP during the 90 calendar days preceding the reset date, then the reset price shall be the 30-day VWAP preceding the reset date. Excluding the impact of the 1 for 10 reverse stock split, the conversion price of the 3.25% convertible senior notes due 2020 reset on November 1, 2018 to $2.54 per share and the conversion rate was increased to 393.7008 shares of our common stock per $1,000 principal amount of notes.
The remaining $13.2 million of 2018 Notes were redeemed at par at maturity on August 1, 2018.
In August 2019, we entered into and consummated multiple, binding definitive agreements (collectively, the “Recapitalization Transaction”) among Wells Fargo, Oasis Investments II Master Fund Ltd. and an ad hoc group of holders of the 4.875% convertible senior notes due 2020 ( the "Investor Parties") to recapitalize our balance sheet, including the extension to us of incremental liquidity and at least three-year extensions of substantially all of our outstanding convertible debt obligations and revolving credit facility. Our term loan agreement entered into with Great American Capital Partners was paid in full and terminated in connection with the Recapitalization Transaction.
In connection with the Recapitalization Transaction, we issued (i) amended and restated notes with respect to the $21.6 million Oasis Note issued on November 7, 2017, and the $8.0 million Oasis Note issued on July 26, 2018 (together, the “Existing Oasis Notes”), and (ii) a new $8.0 million convertible senior note having the same terms as such amended and restated notes (the "New $8.0 million Oasis Note" and collectively, the “New Oasis Notes” or the "3.25% convertible senior notes due 2023"). Interest on the New Oasis Notes is payable on each May 1 and November 1 until maturity and accrues at an annual rate of (i) 3.25% if paid in cash or 5.00% if paid in stock plus (ii) 2.75% payable in kind. The New Oasis Notes mature 91 days after the amounts outstanding under the New Term Loan are paid in full, and in no event later than July 3, 2023.
Excluding the impact of the 1 for 10 reverse stock split, the New Oasis Notes provide, among other things, that the initial conversion price is $1.00. The conversion price will be reset on each February 9 and August 9, starting on February 9, 2020 (each, a “reset date”) to a price equal to 105% of the 5-day VWAP preceding the applicable reset date. Under no circumstances shall the reset result in a conversion price be below the greater of (i) the closing price on the trading day immediately preceding the applicable reset date and (ii) 30% of the stock price as of the Transaction Agreement Date, or August 7, 2019, and will not be greater than the conversion price in effect immediately before such reset. We may trigger a mandatory conversion of the New Oasis Notes if the market price exceeds 150% of the conversion price under certain circumstances. We may redeem the New Oasis Notes in cash if a person, entity or group acquires shares of our Common Stock, par value $0.001 per share (the “Common Stock”), and as a result owns at least 49% of our issued and outstanding Common Stock. On February 9, 2020, excluding the impact of the 1 for 10 reverse stock split, the conversion price of the New Oasis Notes reset to $1.00 per share ($10.00 per share after reverse stock split). On August 9, 2020, the conversion price of the New Oasis Notes reset to $5.647.
In June 2020, $7.1 million of the New Oasis Notes (including $0.2 million in payment-in-kind interest) were converted for 710,100 shares of common stock. As a result, we recorded an increase to additional paid-in capital of $9.5 million. In August 2020, $1.0 million of the New Oasis Notes (including $27,288 in payment-in-kind interest) were converted for 177,085 shares of common stock. As a result, we recorded an increase to additional paid-in capital of $1.3 million.
In June 2014, we sold an aggregate of $115.0 million principal amount of 4.875% convertible senior notes due 2020 (the “2020 Notes”). The 2020 Notes are senior unsecured obligations paying interest semi-annually in arrears on June 1 and December 1 of each year at a rate of 4.875% per annum and will mature on June 1, 2020. Excluding the impact of the 1 for 10 reverse stock split, the initial and still current conversion rate for the 2020 Notes is 103.7613 shares of our common stock per $1,000 principal amount of notes, equivalent to an initial conversion price of approximately $9.64 per share of common stock, subject to adjustment in certain events. Upon conversion, the 2020 Notes will be settled in shares of our common stock. Holders of the 2020 Notes may require that we repurchase for cash all or some of their notes upon the occurrence of a fundamental change (as defined in the 2020 Notes). In January 2016, we repurchased and retired an aggregate of $2.0 million principal amount of the 2020 Notes.
In connection with the Recapitalization Transaction, the 2020 Notes with a face amount of $111.1 million of the total $113.0 million that were outstanding at the time of the Recapitalization Transaction were refinanced and the maturity dates were extended. Of the refinanced amount, $103.8 million was refinanced with the Investor Parties through the issuance of the New Common Equity, the New Preferred Equity (see Note 9 - Common Stock and Preferred Stock) and new secured term debt that matures in February 2023 (see Term Loan section below). Additionally, $1.0 million of accrued interest was refinanced with the Investor Parties. The remaining refinanced amount of $7.3 million was exchanged into the New $8.0 million Oasis Note discussed above. The remaining $1.9 million principal amount of 2020 Notes were redeemed at par at maturity on June 1, 2020.
Term Loan
On August 9, 2019, in connection with the Recapitalization Transaction, we entered into a First Lien Term Loan Facility Credit Agreement, (the “New Term Loan Agreement”), with certain holders of the 2020 Notes, or the Investor Parties, and Cortland Capital Market Services LLC, as agent, for a $134.8 million first-lien secured term loan (the “New Term Loan”). We also issued common stock and preferred stock (see Note 9 - Common Stock and Preferred Stock) to the Investor Parties.
Amounts outstanding under the New Term Loan accrue interest at 10.50% per annum, payable semi-annually (with 8% per annum payable in cash and 2.5% per annum payable in kind). The New Term Loan matures on February 9, 2023.
The New Term Loan Agreement contains negative covenants that, subject to certain exceptions, limit our ability and the ability of our subsidiaries to, among other things, incur additional indebtedness, make restricted payments, pledge their assets as security, make investments, loans, advances, guarantees and acquisitions, undergo fundamental changes and enter into transactions with affiliates. The original terms of the New Term Loan Agreement required us to maintain a trailing 12-month EBITDA (as defined and adjusted therein) of not less than $34.0 million and a minimum liquidity of not less than $10.0 million commencing with the fiscal quarter ending September 30, 2020.
On October 16, 2020, we reached an agreement (the “Amendment”) with holders of our term loan and Wells Fargo, holder of our revolving credit facility, to amend the New Term Loan Agreement and defer the EBITDA covenant calculation until March 31, 2022. Under the Amendment, the trailing 12-month EBITDA requirement has been reduced to $25.0 million, which will not be calculated earlier than March 31, 2022. The Amendment also requires us to pre-pay $15.0 million of the New Term Loan immediately and, under certain conditions, pre-pay up to an additional $5.0 million no later than the third quarter of fiscal year 2021. As a result, we reclassified $20.0 million from long term debt to short term debt as of September 30, 2020. As of September 30, 2020, we had $138.8 million (including $4.0 million in payment-in-kind interest) outstanding on the Term Loan.
The New Term Loan Agreement contains events of default that are customary for a facility of this nature, including nonpayment of principal, nonpayment of interest, fees or other amounts, material inaccuracy of representations and warranties, violation of covenants, cross-default to other material indebtedness, bankruptcy or insolvency events, material judgment defaults and a change of control as specified in the New Term Loan Agreement. If an event of default occurs, the maturity of the amounts owed under the New Term Loan Agreement may be accelerated.
The obligations under the New Term Loan Agreement are guaranteed by us, the subsidiary borrowers thereunder and certain of the other existing and future direct and indirect subsidiaries and are secured by substantially all of our assets, the subsidiary borrowers thereunder and such other subsidiary guarantors, in each case, subject to certain exceptions and permitted liens.
Loan under Paycheck Protection Program
On June 12, 2020, we received a $6.2 million PPP Loan under the PPP within the CARES Act. The PPP Loan matures on June 2, 2022 and is subject to the CARES Act terms which include, among other terms, an interest rate of 1.00% per annum and monthly installment payments of $261,275 commencing on December 1, 2020. The PPP Loan may be prepaid at any time prior to maturity with no prepayment penalties. The PPP Loan is subject to events of default and other provisions customary for a loan of this type. The PPP Loan may be forgiven, partially or in full, if certain conditions are met, principally based on having been disbursed for permissible purposes and maintaining certain average levels of employment and payroll as required by the CARES Act. The loan received has been recorded as a liability by the Company as of the date received. We intend to apply for forgiveness of amounts received under the PPP, in accordance with the requirements of the CARES Act, as amended. Any loan amounts forgiven will be removed from liabilities recorded. While we used the proceeds of the PPP Loan only for permissible purposes, there can be no assurance that we will be eligible for forgiveness of the PPP Loan, in full or in part.
Wells Fargo
In March 2014, we and our domestic subsidiaries entered into a secured credit facility with General Electric Capital Corporation (“GECC”). The credit facility, as amended and subsequently assigned to Wells Fargo pursuant to its acquisition of GECC, provides for a $75.0 million revolving credit facility subject to availability based on prescribed advance rates on certain domestic accounts receivable and inventory amounts used to compute the borrowing base (the “Credit Facility”). The Credit Facility includes a sub-limit of up to $35.0 million for the issuance of letters of credit. The amounts outstanding under the Credit Facility, as amended, were payable in full upon maturity of the facility on September 27, 2019, except that the Credit Facility would mature on June 15, 2018 if we did not refinance or extend the maturity of the convertible senior notes that mature in 2018, provided that any such refinancing or extension shall have a maturity date that is no sooner than six months after the stated maturity of the Credit Facility (i.e., on or about September 27, 2019). On June 14, 2018, we entered into a Term Loan Agreement with Great American Capital Partners to provide the necessary capital to refinance the 2018 convertible senior notes (see additional details regarding the Term Loan Agreement below). In addition, on June 14, 2018, we revised certain of the Credit Facility documents (and entered into new ones) so that certain of our Hong Kong based subsidiaries became additional parties to the Credit Facility. As a result, the receivables of these subsidiaries can now be included in the borrowing base computation, subject to certain limitations, thereby effectively increasing the amount of funds we can borrow under the Credit Facility. Any additional borrowings under the Credit Facility will be used for general working capital purposes. In August 2019, in connection with the Recapitalization Transaction (see Note 5 - Debt), we entered into the Amended ABL Credit Agreement with Wells Fargo). The Amended ABL Credit Agreement, amends, extends and restates our existing Credit Facility, dated as of March 27, 2014, as amended, with GECC and subsequently assigned to Wells Fargo, to, among other things, decrease the borrowing capacity from $75.0 million to $60.0 million and extend the maturity to August 9, 2022.
The obligations under the Amended ABL Credit Agreement are guaranteed by us, the subsidiary borrowers thereunder and certain of the other existing and future direct and indirect subsidiaries and are secured by substantially all of our assets, the subsidiary borrowers thereunder and such other subsidiary guarantors, in each case, subject to certain exceptions and permitted liens. As of September 30, 2020, the amount of outstanding borrowings was nil, the amount of outstanding stand-by letters of credit totaled $10.4 million and the total excess borrowing capacity was $36.6 million. As of December 31, 2019, the amount of outstanding borrowings was nil, the amount of outstanding stand-by letters of credit totaled $9.2 million and the total excess borrowing capacity was $41.8 million.
The Amended ABL Credit Agreement contains negative covenants that, subject to certain exceptions, limit our ability to, among other things, incur additional indebtedness, make restricted payments, pledge our assets as security, make investments, loans, advances, guarantees and acquisitions, undergo fundamental changes and enter into transactions with affiliates. We are also required to maintain a fixed charge coverage ratio of not less than 1.1 to 1.0 under certain circumstances, and a minimum liquidity of $25.0 million and a minimum availability of at least $9.0 million. As of September 30, 2020 and December 31, 2019, we are in compliance with the financial covenants under the Amended ABL Credit Agreement and the previous Credit Facility, as applicable.
Any amounts borrowed under the Amended ABL Credit Agreement accrue interest, at either (i) LIBOR plus 1.50%-2.00% (determined by reference to a fixed charge coverage ratio-based pricing grid) or (ii) base rate plus 0.50%-1.00% (determined by reference to a fixed charge coverage ratio-based pricing grid). As of September 30, 2020, the weighted average interest rate on the credit facility with Wells Fargo was 0%. As of December 31 2019, the weighted average interest rate on the credit facility with Wells Fargo was 4.53%.
The Amended ABL Agreement also contains customary events of default, including a cross default provision and a change of control provision. In the event of a default, all of our obligations and our subsidiaries obligations under the Amended ABL Agreement may be declared immediately due and payable. For certain events of default relating to insolvency, all outstanding obligations become due and payable.
As described in the aforementioned Term Loan section, on October 16, 2020, the Company amended the New Term Loan Agreement to reduce the amount and defer the calculation of its EBITDA covenant, with Wells Fargo as party to the agreement.
Great American Capital Partners
On June 14, 2018, we entered into a Term Loan Agreement, Term Note, Guaranty and Security Agreement and other ancillary documents and agreements (the “Term Loan”) with Great American Capital Partners Finance Co., LLC (“GACP”), for itself as a Lender (as defined below) and as the agent (in such capacity, “Agent”) for the Lenders from time to time party to the Term Loan (collectively, “Lenders”) and the other “Secured Parties” under and as defined therein, with respect to the issuance to us by Lenders of a $20.0 million term loan. To secure our obligations under the Term Loan, we granted to Agent, for the benefit of the Secured Parties, a security interest in a substantial amount of our consolidated assets and a pledge of the majority of the capital stock of various of our subsidiaries. The Term Loan was a secured obligation, second only to the Credit Facility with Wells Fargo, except with respect to certain of our inventory in which GACP has a priority secured position.
The Term Loan required the repayment of principal in the amount of 10% of the outstanding Term Loan per year (payable monthly) beginning after the first anniversary. All then-outstanding borrowings under the Term Loan would be due, and the Term Loan would terminate, no later than June 14, 2021, unless sooner terminated in accordance with its terms, which included the date of termination of the Wells Fargo Credit Facility and the date that is 91 days prior to the maturity of our various convertible senior notes due in 2020 (see Note 5 - Debt). We were permitted to prepay the Term Loan, which would have required a prepayment fee (i) in year one of up to any unearned and unpaid interest that would have become due and payable in year one had the prepayment not occurred plus 2% of the initial amount of the Term Loan (i.e., $20.0 million), (ii) in year two of 2% of the initial amount of the Term Loan and (iii) in year three of 1% of the initial amount of the Term Loan.
In August 2019, in connection with the Recapitalization Transaction (see Note 5 - Debt), we repaid in full and terminated the Term Loan Agreement.
We are subject to negative covenants which, during the life of the Amended Wells Fargo Credit Agreement and New Term Loan Agreement, prohibit and/or limit us from, among other things, incurring certain types of other debt, acquiring other companies, making certain expenditures or investments, and changing the character of our business. An outbreak of infectious disease, a pandemic or a similar public health threat, such as the 2019 Novel Coronavirus outbreak, or a fear of any of the foregoing, could adversely impact our ability to comply with such covenants. Our failure to comply with such covenants or any other breach of the Amended Wells Fargo Credit Agreement or New Term Loan Agreement could cause a default and we may then be required to repay borrowings under our Amended Wells Fargo Credit Agreement or New Term Loan Agreement with capital from other sources, or reach some other accommodation with those parties.
As of September 30, 2020 and December 31, 2019, we held cash and cash equivalents, including restricted cash, of $79.8 million and $66.3 million, respectively. Cash, and cash equivalents, including restricted cash held outside of the United States in various foreign subsidiaries totaled $56.9 million and $27.0 million as of September 30, 2020 and December 31, 2019, respectively. The cash and cash equivalents, including restricted cash balances in our foreign subsidiaries have either been fully taxed in the U.S. or tax has been accounted for in connection with the Tax Cuts and Jobs Act, or may be eligible for a full foreign dividends received deduction under such Act, and thus would not be subject to additional U.S. tax should such amounts be repatriated in the form of dividends or deemed distributions. Any such repatriation may result in foreign withholding taxes, which we expect would not be significant as of September 30, 2020.
Our primary sources of working capital are cash flows from operations and borrowings under our Amended Wells Fargo Credit Agreement (see Note 6 - Credit Facilities).
Typically, cash flows from operations are impacted by the effect on sales of (1) the appeal of our products, (2) the success of our licensed brands, (3) the highly competitive conditions existing in the toy industry and in securing commercially-attractive licenses, (4) dependency on a limited set of large customers, and (5) general economic conditions. A downturn in any single factor or a combination of factors could have a material adverse impact upon our ability to generate sufficient cash flows to operate the business. In addition, our business and liquidity are dependent to a significant degree on our vendors and their financial health, as well as the ability to accurately forecast the demand for products. The loss of a key vendor, or material changes in support by them, or a significant variance in actual demand compared to the forecast, can have a material adverse impact on our cash flows and business. Given the conditions in the toy industry environment in general, vendors, including licensors, may seek further assurances or take actions to protect against non-payment of amounts due to them. Changes in this area could have a material adverse impact on our liquidity.
Off-Balance Sheet Arrangements
As of September 30, 2020, off-balance sheet arrangements include letters of credit issued by Wells Fargo of $10.4 million.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
As of September 30, 2020, we have outstanding convertible senior notes payable of $30.6 million (including $1.0 million in payment-in-kind interest) principal amount due July 2023 with a fixed interest rate of (i) 3.25% per annum if paid in cash or 5.00% per annum if paid in stock plus (ii) 2.75% per annum payable in kind, as well as a $138.8 million (including $4.0 million in payment-in-kind interest) term loan due February 2023 with a fixed interest rate of (i) 8.00% per annum plus (ii) 2.5% per annum payable in kind. As the interest rates on the notes and the term loan are at fixed rates, we are not generally subject to any direct risk of loss related to these notes arising from changes in interest rates.
Our exposure to market risk includes interest rate fluctuations in connection with our revolving credit facility (see Note 6 - Credit Facilities in the accompanying notes to the condensed consolidated financial statements for additional information). Borrowings under the revolving credit facility bear interest at either (i) LIBOR plus 1.50%-2.00% (determined by reference to a fixed charge coverage ratio-based pricing grid) or (ii) base rate plus 0.50%-1.00% (determined by reference to a fixed charge coverage ratio-based pricing grid). Borrowings under the revolving credit facility are therefore subject to risk based upon prevailing market interest rates. Interest rate risk may result from many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors that are beyond our control. During the nine months ended September 30, 2020, the maximum amount borrowed under the revolving credit facility was nil and the average amount of borrowings outstanding was nil. As of September 30, 2020, the amount of total borrowings outstanding under the revolving credit facility was nil.
Foreign Currency Risk
We have wholly-owned subsidiaries in Hong Kong, China, the United Kingdom, the Netherlands, Germany, France, Canada and Mexico. Sales are generally made by these operations on FOB China or Hong Kong terms and are denominated in U.S. dollars. However, purchases of inventory and Hong Kong operating expenses are typically denominated in Hong Kong dollars and local operating expenses in the United Kingdom, the Netherlands, Germany, France, Canada, Mexico and China are denominated in local currency, thereby creating exposure to changes in exchange rates. Changes in the U.S. dollar exchange rates may positively or negatively affect our results of operations. The exchange rate of the Hong Kong dollar to the U.S. dollar has been fixed by the Hong Kong government since 1983 at HK$7.80 to US$1.00 and, accordingly, has not represented a currency exchange risk to the U.S. dollar. We do not believe that near-term changes in these exchange rates, if any, will result in a material effect on our future earnings, fair values or cash flows. Therefore, we have chosen not to enter into foreign currency hedging transactions. We cannot assure you that this approach will be successful, especially in the event of a significant and sudden change in the value of these foreign currencies.
Item 4. Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Report, have concluded that as of that date, our disclosure controls and procedures were effective. There has been no change in our internal control over financial reporting identified in connection with the evaluation required by Exchange Act Rule 13a-15(d) that occurred during the period covered by this Report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
We are a party to, and certain of our property is the subject of, various pending claims and legal proceedings that routinely arise in the ordinary course of our business. We accrue for losses when the loss is deemed probable and the liability can reasonably be estimated. Where a liability is probable and there is a range of estimated loss with no best estimate in the range, we record the minimum estimated liability related to the claim. As additional information becomes available, we assess the potential liability related to our pending litigation and revise our estimates.
See Note 18 - Subsequent Events, to the Condensed Consolidated Financial Statements for disclosure with respect to a recently filed purported Class Action.
In the normal course of business, we may provide certain indemnifications and/or other commitments of varying scope to a) our licensors, customers and certain other parties, including against third party claims of intellectual property infringement, and b) our officers, directors and employees, including against third party claims regarding the periods in which they serve in such capacities with us. The duration and amount of such obligations is, in certain cases, indefinite. Our director’s and officer’s liability insurance policy may, however, enable us to recover a portion of any future payments related to our officer, director or employee indemnifications. For the past five years, costs related to director and officer indemnifications have not been significant. Other than certain liabilities recorded in the normal course of business related to royalty payments due our licensors, no liabilities have been recorded for indemnifications and/or other commitments.
Item 1A. Risk Factors
Risk factors with respect to us and our business are contained in "Part I, Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2019. There have been no material changes from the risk factors previously disclosed in such filing. The disclosures made in this Quarterly Report should be reviewed together with the risk factors contained therein.
Item 6. Exhibits
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Number |
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Description |
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10.1 |
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Consent and Amendment No. 3 to Amended and Restated Credit Agreement (1) |
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10.2 |
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Amendment No. 2 to First Lien Term Loan Facility Credit Agreement (1) |
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31.1 |
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Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer (2) |
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31.2 |
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Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer (2) |
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32.1 |
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32.2 |
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101.INS |
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XBRL Instance Document |
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101.SCH |
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XBRL Taxonomy Extension Schema Document |
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101.CAL |
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XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF |
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XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB |
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XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE |
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XBRL Taxonomy Extension Presentation Linkbase Document |
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(1) |
Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed October 19, 2020 and incorporated herein by reference. |
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(2) |
Filed herewith. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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JAKKS PACIFIC, INC. |
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Date: November 13, 2020 |
By: |
/s/ John Kimble |
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John Kimble |
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Executive Vice President and Chief Financial Officer |
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(Duly Authorized Officer and Principal Financial Officer) |
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Exhibit 31.1
CERTIFICATIONS
I, Stephen G. Berman, Chief Executive Officer, certify that:
I have reviewed this quarterly report on Form 10-Q of JAKKS Pacific, Inc. (“Company”);
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this quarterly report;
The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and
d) disclosed in this quarterly report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter (the Company’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the Audit Committee of the Company’s board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.
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By: |
/s/ Stephen G. Berman |
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Stephen G. Berman |
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Chief Executive Officer |
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Date: November 13, 2020
Exhibit 31.2
CERTIFICATIONS
I, John Kimble, Chief Financial Officer, certify that:
I have reviewed this quarterly report on Form 10-Q of JAKKS Pacific, Inc. (“Company”);
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this quarterly report;
The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and
d) disclosed in this quarterly report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter (the Company’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the Audit Committee of the Company’s board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.
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By: |
/s/ John Kimble |
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John Kimble |
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Chief Financial Officer |
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Date: November 13, 2020
Exhibit 32.1
Written Statement of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350
Pursuant to 18 U.S.C. Section 1350, the undersigned officer of JAKKS Pacific, Inc. (“Registrant”) hereby certifies that the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2020 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
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/s/ Stephen G. Berman |
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Stephen G. Berman |
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Chief Executive Officer |
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Date: November 13, 2020
Exhibit 32.2
Written Statement of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350
Pursuant to 18 U.S.C. Section 1350, the undersigned officer of JAKKS Pacific, Inc. (“Registrant”) hereby certifies that the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2020 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
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/s/ John Kimble |
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John Kimble |
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Chief Financial Officer |
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Date: November 13, 2020