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 |
| or | |
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to ______ |
| Commission file number: | |
| (Exact Name of Registrant as Specified in Its Charter) |
| | |
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
| (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 |
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 |
| | | |
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, 2021
ITEMS IN FORM 10-Q
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Part I |
FINANCIAL INFORMATION |
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Item 1. |
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3 |
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Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) |
4 |
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Condensed Consolidated Statements of Stockholders' Equity (Deficit) |
5 |
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6 |
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7 |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
35 |
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Item 3. |
45 |
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Item 4. |
45 |
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Part II |
OTHER INFORMATION |
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Item 1. |
46 |
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Item 1A. |
46 |
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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. |
47 |
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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, 2021 |
December 31, 2020 |
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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 |
( |
) | ( |
) | ||||
|
Accumulated other comprehensive loss |
( |
) | ( |
) | ||||
|
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)
|
Three Months Ended September 30, (Unaudited) |
Nine Months Ended September 30, (Unaudited) |
|||||||||||||||
|
2021 |
2020 |
2021 |
2020 |
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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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Income from operations |
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Income from joint ventures |
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Other income (expense), net |
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|
Change in fair value of preferred stock derivative liability |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
|
Change in fair value of convertible senior notes |
( |
) | ( |
) | ||||||||||||
|
Gain on loan forgiveness |
||||||||||||||||
|
Loss on debt extinguishment |
( |
) | ||||||||||||||
|
Interest income |
||||||||||||||||
|
Interest expense |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
|
Income (loss) before provision for (benefit from) income taxes |
( |
) | ( |
) | ||||||||||||
|
Provision for (benefit from) income taxes |
( |
) | ||||||||||||||
|
Net income (loss) |
( |
) | ( |
) | ||||||||||||
|
Net income attributable to non-controlling interests |
||||||||||||||||
|
Net income (loss) attributable to Jakks Pacific, Inc. |
$ | $ | $ | ( |
) | $ | ( |
) | ||||||||
|
Net income (loss) attributable to common stockholders |
$ | $ | $ | ( |
) | $ | ( |
) | ||||||||
|
Income (loss) per share - basic* |
$ | $ | $ | ( |
) | $ | ( |
) | ||||||||
|
Shares used in income (loss) per share - basic* |
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Income (loss) per share – diluted* |
$ | $ | $ | ( |
) | $ | ( |
) | ||||||||
|
Shares used in income (loss) per share – diluted* |
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|
Comprehensive income (loss) |
$ | $ | $ | ( |
) | $ | ( |
) | ||||||||
|
Comprehensive income (loss) attributable to JAKKS Pacific, Inc. |
$ | $ | $ | ( |
) | $ | ( |
) | ||||||||
* After giving effect to a 1 for 10 reverse stock split effective July 9, 2020.
See accompanying notes to condensed consolidated financial statements.
JAKKS PACIFIC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands)
|
Three and Nine Months Ended September 30, 2021 |
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|
(Unaudited) |
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|
JAKKS |
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|
Accumulated |
Pacific, Inc. |
Total |
||||||||||||||||||||||||||
|
Additional |
Other |
Stockholders' |
Non- |
Stockholders' |
||||||||||||||||||||||||
|
Common |
Paid-in |
Accumulated |
Comprehensive |
Equity |
Controlling |
Equity |
||||||||||||||||||||||
|
Stock* |
Capital* |
Deficit |
Loss |
(Deficit)* |
Interests |
(Deficit)* |
||||||||||||||||||||||
|
Balance, December 31, 2020 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | $ | $ | |||||||||||||||||
|
Stock-based compensation expense |
— | |||||||||||||||||||||||||||
|
Repurchase of common stock for employee tax withholding |
( |
) | — | ( |
) | ( |
) | |||||||||||||||||||||
|
Conversion of convertible senior notes |
— | — | — | — | ||||||||||||||||||||||||
|
Preferred stock accrued dividends |
( |
) | — | ( |
) | ( |
) | |||||||||||||||||||||
|
Net income (loss) |
— | ( |
) | — | ( |
) | ( |
) | ||||||||||||||||||||
|
Foreign currency translation adjustment |
— | ( |
) | ( |
) | ( |
) | |||||||||||||||||||||
|
Balance, March 31, 2021 |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||
|
Stock-based compensation expense |
— | — | — | — | ||||||||||||||||||||||||
|
Conversion of convertible senior notes |
— | — | — | |||||||||||||||||||||||||
|
Preferred stock accrued dividends |
— | ( |
) | — | — | ( |
) | — | ( |
) | ||||||||||||||||||
|
Net income (loss) |
— | — | ( |
) | — | ( |
) | ( |
) | |||||||||||||||||||
|
Foreign currency translation adjustment |
— | — | — | — | ||||||||||||||||||||||||
|
Balance, June 30, 2021 |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||
|
Stock-based compensation expense |
— | — | — | — | ||||||||||||||||||||||||
|
Conversion of convertible senior notes |
— | — | — | |||||||||||||||||||||||||
|
Preferred stock accrued dividends |
— | ( |
) | — | — | ( |
) | — | ( |
) | ||||||||||||||||||
|
Net income |
— | — | — | |||||||||||||||||||||||||
|
Foreign currency translation adjustment |
— | — | — | ( |
) | ( |
) | — | ( |
) | ||||||||||||||||||
|
Balance, September 30, 2021 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | $ | $ | |||||||||||||||||
|
Three and Nine Months Ended September 30, 2020 |
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|
(Unaudited) |
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|
JAKKS |
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|
Accumulated |
Pacific, Inc. |
Total |
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|
Additional |
Other |
Stockholders' |
Non- |
Stockholders' |
||||||||||||||||||||||||
|
Common |
Paid-in |
Accumulated |
Comprehensive |
Equity |
Controlling |
Equity |
||||||||||||||||||||||
|
Stock* |
Capital* |
Deficit |
Loss |
(Deficit)* |
Interests |
(Deficit)* |
||||||||||||||||||||||
|
Balance, December 31, 2019 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | $ | $ | |||||||||||||||||
|
Stock-based compensation expense |
— | |||||||||||||||||||||||||||
|
Repurchase of common stock for employee tax withholding |
( |
) | — | ( |
) | ( |
) | |||||||||||||||||||||
|
Preferred stock accrued dividends |
— | ( |
) | — | — | ( |
) | — | ( |
) | ||||||||||||||||||
|
Net income (loss) |
— | ( |
) | — | ( |
) | ( |
) | ||||||||||||||||||||
|
Foreign currency translation adjustment |
— | — | — | ( |
) | ( |
) | — | ( |
) | ||||||||||||||||||
|
Balance, March 31, 2020 |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||
|
Conversion of convertible senior notes |
— | — | — | |||||||||||||||||||||||||
|
Stock-based compensation expense |
— | — | — | — | ||||||||||||||||||||||||
|
Repurchase of common stock for employee tax withholding |
— | ( |
) | — | — | ( |
) | — | ( |
) | ||||||||||||||||||
|
Preferred stock accrued dividends |
— | ( |
) | — | — | ( |
) | — | ( |
) | ||||||||||||||||||
|
Net income (loss) |
— | — | ( |
) | — | ( |
) | ( |
) | |||||||||||||||||||
|
Foreign currency translation adjustment |
— | — | — | — | ||||||||||||||||||||||||
|
Balance, June 30, 2020 |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||
|
Conversion of convertible senior notes |
— | — | — | — | ||||||||||||||||||||||||
|
Stock-based compensation expense |
— | — | — | — | ||||||||||||||||||||||||
|
Preferred stock accrued dividends |
— | ( |
) | — | — | ( |
) | — | ( |
) | ||||||||||||||||||
|
Net income |
— | — | — | |||||||||||||||||||||||||
|
Foreign currency translation adjustment |
— | — | — | — | ||||||||||||||||||||||||
|
Balance, September 30, 2020 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | $ | $ | |||||||||||||||||
*
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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|
(Unaudited) |
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|
2021 |
2020 |
|||||||
|
Cash flows from operating activities |
||||||||
|
Net loss |
$ | ( |
) | $ | ( |
) | ||
|
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |
||||||||
|
Provision for (recovery of) doubtful accounts |
( |
) | ||||||
|
Depreciation and amortization |
||||||||
|
Payment-in-kind interest |
||||||||
|
Amortization of debt discount |
||||||||
|
Amortization of debt issuance costs |
||||||||
|
Share-based compensation expense |
||||||||
|
Gain on disposal of property and equipment |
( |
) | ( |
) | ||||
|
Gain on loan forgiveness |
( |
) | ||||||
|
Loss on debt extinguishment |
||||||||
|
Change in fair value of convertible senior notes |
( |
) | ||||||
|
Change in fair value of preferred stock derivative liability |
||||||||
|
Changes in operating assets and liabilities: |
||||||||
|
Accounts receivable |
( |
) | ( |
) | ||||
|
Inventory |
( |
) | ( |
) | ||||
|
Prepaid expenses and other assets |
||||||||
|
Accounts payable |
||||||||
|
Accrued expenses |
||||||||
|
Reserve for sales returns and allowances |
||||||||
|
Income taxes payable |
( |
) | ( |
) | ||||
|
Other liabilities |
( |
) | ( |
) | ||||
|
Total adjustments |
( |
) | ||||||
|
Net cash provided by (used in) operating activities |
( |
) | ||||||
|
Cash flows from investing activities |
||||||||
|
Purchases of property and equipment |
( |
) | ( |
) | ||||
|
Proceeds from sale of property and equipment |
||||||||
|
Net cash used in investing activities |
( |
) | ( |
) | ||||
|
Cash flows from financing activities |
||||||||
|
Retirement of convertible senior notes |
( |
) | ||||||
|
Proceeds from loan under the Paycheck Protection Program |
||||||||
|
Repurchase of common stock for employee tax withholding |
( |
) | ( |
) | ||||
|
Net proceeds from issuance of long term debt |
||||||||
|
Deferred issuance costs |
( |
) | ||||||
|
Repayment of 2019 Recap Term Loan |
( |
) | ||||||
|
Repayment of 2021 BSP Term Loan |
( |
) | ||||||
|
Net cash provided by (used in) financing activities |
( |
) | ||||||
|
Net decrease in cash, cash equivalents and restricted cash |
( |
) | ||||||
|
Effect of foreign currency translation |
( |
) | ( |
) | ||||
|
Cash, cash equivalents and restricted cash, beginning of period |
||||||||
|
Cash, cash equivalents and restricted cash, end of period |
$ | $ | ||||||
|
Supplemental disclosures of non-cash financing activities: |
||||||||
|
Forgiveness of Paycheck Protection Program Loan |
$ | $ | ||||||
|
Supplemental disclosures of cash flow information: |
||||||||
|
Cash paid for income taxes |
$ | $ | ||||||
|
Cash paid for interest |
$ | $ | ||||||
As of September 30, 2021, 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, 2021
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, 2020.
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 Accounting Standards Update (“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 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 adoption of this standard did not have a material impact on the Company’s 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.” In January 2021, the FASB issued ASU 2021-01, “Reference Rate Reform (Topic 848): Scope.” The ASUs provide temporary 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. The new standard is effective for the Company for fiscal years beginning after December 15, 2022, including interim periods within these fiscal years, 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.
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2021
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 eliminate 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 require 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 adoption permitted. The Company is currently evaluating the impact that the adoption of this new guidance will have 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 2021 and 2022.
In mid-March 2020, the Company began migrating to a work-from-home model in compliance with local guidance. The Company continues to operate under that model as of the date of this filing.
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. On December 27, 2020, President Trump signed into law the Consolidated Appropriations Act of 2021 (“CAA”), which includes many tax and health components, as well as CARES Act extensions and modifications. 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.
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.
On June 12, 2020, the Company received a $
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2021
In June 2021, the Company filed its application for forgiveness of the entirety of its PPP loan. On September 10, 2021, the full amount of the PPP Loan was forgiven. Income from the forgiveness of the PPP Loan is recognized as a $
The CARES Act also provided an employee retention credit (“ERC”) which was a refundable tax credit against certain employment taxes of up to $5,000 per employee for eligible employers. The credit is equal to 50% of qualified wages paid to employees during a quarter, capped at $10,000 of qualified wages through year end. The Company became eligible for the credit beginning on March 16, 2020.
As of September 30, 2021 and December 31, 2020, the Company held cash and cash equivalents, including restricted cash, of $
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 in motivating consumer purchase of related merchandise, (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.
On June 2, 2021, the Company and certain of its subsidiaries, as borrowers, entered into a Credit Agreement (the “JPMorgan ABL Credit Agreement”), with JPMorgan Chase Bank, N.A., as agent and lender for a $
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2021
The JPMorgan 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. Under certain circumstances the Company is also subject to a springing fixed charge coverage ratio covenant of not less than
The JPMorgan ABL Credit Agreement contains events of default that are customary for a facility of this nature, including (subject in certain cases to grace periods and thresholds) nonpayment of principal, interest, fees or other amounts, material inaccuracy of representations and warranties, violation of covenants, cross-default to certain other existing indebtedness, bankruptcy or insolvency events, certain judgment defaults, loss of liens or guarantees and a change of control as specified in the JPMorgan ABL Credit Agreement. If an event of default occurs, the commitments of the lenders to lend under the JPMorgan ABL Credit Agreement may be terminated and the maturity of the amounts owed may be accelerated.
The obligations under the JPMorgan 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.
On June 2, 2021, the Company and certain of its subsidiaries, as borrowers, entered into a First Lien Term Loan Facility Credit Agreement (the “2021 BSP Term Loan Agreement”) with Benefit Street Partners L.L.C., as Sole Lead Arranger, and BSP Agency, LLC, as agent, for a $
Amounts outstanding under the 2021 BSP Term Loan will bear interest at either (i) LIBOR plus
The 2021 BSP 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 its assets as security, make investments, loans, advances, guarantees and acquisitions, undergo fundamental changes and enter into transactions with affiliates. Commencing with the fiscal quarter ending June 30, 2021, the Company is required to maintain a Net Leverage Ratio of 4:00x, with step-downs occurring each fiscal year starting with the quarter ending March 31, 2022 through the quarter ending September 30, 2024 in which the Company is required to maintain a Net Leverage Ratio of 3:00x. As of the Closing Date,
The 2021 BSP Term Loan Agreement contains events of default that are customary for a facility of this nature, including (subject in certain cases to grace periods and thresholds) nonpayment of principal, nonpayment of interest, fees or other amounts, material inaccuracy of representations and warranties, violation of covenants, cross-default to certain other existing indebtedness, bankruptcy or insolvency events, certain judgment defaults and a change of control as specified in the 2021 BSP Term Loan Agreement. If an event of default occurs, the maturity of the amounts owed under the 2021 BSP Term Loan Agreement may be accelerated.
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2021
The obligations under the 2021 BSP 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 and subject to the priority lien granted under the JPMorgan ABL Credit Agreement.
The agent and Sole Lead Arranger under the 2021 BSP Term Loan are affiliates of an affiliate of the Company, which affiliate owned common stock and the
As of September 30, 2021, the Company had $
On June 2, 2021, the Company repaid in full and terminated the First Lien Term Loan Facility Credit Agreement (the “2019 Recap Term Loan Agreement,” formerly known as the “New Term Loan Agreement” in prior filings), dated as of August 9, 2019, with Cortland Capital Market Services LLC, as agent. The Wells Fargo ABL Credit Facility Agreement was also terminated as of June 2, 2021.
The Company was in compliance with the financial covenants under the 2021 BSP Term Loan Agreement and the JPMorgan ABL Agreement as of September 30, 2021.
The Company’s unaudited interim condensed consolidated financial statements for the three and nine months ended September 30, 2021 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. The Company believes that 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.
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’s segments are (i) Toys/Consumer Products and (ii) Costumes (formerly known as “Halloween”).
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.
The Costumes segment, under its Disguise branding, has been bringing innovative and trend-setting product to market since its inception in 1987. This business designs, develops, markets and sells a wide range of every-day and special occasion dress-up costumes and related accessories in support of Halloween, Carnival, Children’s Day, Book Day/Week, and every-day/any-day costume play.
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. Certain assets which are not tracked by operating segment and/or that benefit multiple operating segments have been allocated on the same basis.
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2021
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, 2021 and 2020 and as of September 30, 2021 and December 31, 2020 are as follows (in thousands):
|
Three Months Ended |
Nine Months Ended |
|||||||||||||||
|
September 30, |
September 30, |
|||||||||||||||
|
2021 |
2020 |
2021 |
2020 |
|||||||||||||
|
Net Sales |
||||||||||||||||
|
Toys/Consumer Products |
$ | $ | $ | $ | ||||||||||||
|
Costumes |
||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
|
Three Months Ended |
Nine Months Ended |
|||||||||||||||
|
September 30, |
September 30, |
|||||||||||||||
|
2021 |
2020 |
2021 |
2020 |
|||||||||||||
|
Income from Operations |
||||||||||||||||
|
Toys/Consumer Products |
$ | $ | $ | $ | ||||||||||||
|
Costumes |
( |
) | ||||||||||||||
| $ | $ | $ | $ | |||||||||||||
|
Three Months Ended |
Nine Months Ended |
|||||||||||||||
|
September 30, |
September 30, |
|||||||||||||||
|
2021 |
2020 |
2021 |
2020 |
|||||||||||||
|
Depreciation and Amortization Expense |
||||||||||||||||
|
Toys/Consumer Products |
$ | $ | $ | $ | ||||||||||||
|
Costumes |
||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
|
September 30, |
December 31, |
|||||||
|
2021 |
2020 |
|||||||
|
Assets |
||||||||
|
Toys/Consumer Products |
$ | $ | ||||||
|
Costumes |
||||||||
| $ | $ | |||||||
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2021
Net revenues are categorized based upon location of the customer, while long-lived assets are categorized based upon the location of the Company’s assets. The following tables present information about the Company by geographic area as of September 30, 2021 and December 31, 2020 and for the three and nine months ended September 30, 2021 and 2020 (in thousands):
|
September 30, |
December 31, |
|||||||
|
2021 |
2020 |
|||||||
|
Long-lived Assets |
||||||||
|
United States |
$ | $ | ||||||
|
China |
||||||||
|
United Kingdom |
||||||||
|
Hong Kong |
||||||||
|
Mexico |
||||||||
|
Canada |
||||||||
| $ | $ | |||||||
|
Three Months Ended |
Nine Months Ended |
|||||||||||||||
|
September 30, |
September 30, |
|||||||||||||||
|
2021 |
2020 |
2021 |
2020 |
|||||||||||||
|
Net Sales by Customer Area |
||||||||||||||||
|
United States |
$ | $ | $ | $ | ||||||||||||
|
Europe |
||||||||||||||||
|
Canada |
||||||||||||||||
|
Latin America |
||||||||||||||||
|
Asia |
||||||||||||||||
|
Australia & New Zealand |
||||||||||||||||
|
Middle East & Africa |
||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
Major Customers
Net sales to major customers for the three and nine months ended September 30, 2021 and 2020 were as follows (in thousands, except for percentages):
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||||||||||||||||||
|
2021 |
2020 |
2021 |
2020 |
|||||||||||||||||||||||||||||
|
Percentage |
Percentage |
Percentage |
Percentage |
|||||||||||||||||||||||||||||
|
Amount |
of Net Sales |
Amount |
of Net Sales |
Amount |
of Net Sales |
Amount |
of Net Sales |
|||||||||||||||||||||||||
|
Target |
$ |
% |
$ |
% |
$ |
% |
$ |
% |
||||||||||||||||||||||||
|
Wal-Mart |
||||||||||||||||||||||||||||||||
|
Amazon |
||||||||||||||||||||||||||||||||
| $ |
% |
$ |
% |
$ |
% |
$ |
% |
|||||||||||||||||||||||||
No other customer accounted for more than 10% of the Company's total net sales.
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.
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2021
Note 3 — Inventory
Inventory, which includes the ex-factory cost of goods, capitalized warehouse costs, and in-bound freight and duty, 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, |
|||||||
|
2021 |
2020 |
|||||||
|
Raw materials |
$ | $ | ||||||
|
Finished goods |
||||||||
| $ | $ | |||||||
As of September 30, 2021 and December 31, 2020, the inventory obsolescence reserve was $
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 Costumes. The Company further disaggregates revenues by major geographic regions (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.
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 $
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2021
Note 5 — Debt
Convertible senior notes
Convertible senior notes consist of the following (in thousands):
|
September 30, 2021 |
December 31, 2020 |
|||||||
| |
$ | $ | ||||||
*
In July 2013, the Company sold an aggregate of $
In August 2017, the Company agreed with Oasis Management and Oasis Investments II Master Fund Ltd., (collectively, “Oasis”) the holder of approximately $
The remaining $
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2021
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 Reverse Stock Split, the New Oasis Notes provide, among other things, that the initial conversion price is $
In June 2020, $
A director of the Company is a portfolio manager at Oasis Management.
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2021
The Company has elected to measure and present the New Oasis Notes at fair value using Level 3 inputs and as a result, recognized a loss of $
The Company evaluated its credit risk as of September 30, 2021 and determined that there was no change from December 31, 2020.
In June 2014, the Company sold an aggregate of $
In connection with the Recapitalization Transaction, the 2020 Notes with a face amount of $
The remaining $1.9 million principal amount of the 2020 Notes was redeemed at par at maturity on June 1, 2020.
On February 5, 2021, Benefit Street Partners and Oasis Investment II Master Funds Ltd, both related parties, entered into a purchase and sale agreement wherein Benefit Street Partners purchased $
Term Loan
Term loan consists of the following (in thousands):
|
September 30, 2021 |
December 31, 2020 |
|||||||||||||||||||||||
| Debt Discount/ | Debt Discount/ | |||||||||||||||||||||||
| Principal |
Issuance |
Net |
Principal |
Issuance |
Net |
|||||||||||||||||||
| Amount |
Costs* |
Amount | Amount** |
Costs* |
Amount |
|||||||||||||||||||
|
2019 Recap Term Loan |
$ | $ | $ | — | $ | $ | ( |
) | $ | |||||||||||||||
|
2021 BSP Term Loan |
( |
) | ||||||||||||||||||||||
*
**
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2021
In August 2019, in connection with the Recapitalization Transaction, the Company entered into the 2019 Recap Term Loan Agreement, with certain of the Investor Parties, and Cortland Capital Market Services LLC, as agent, for a $
Amounts outstanding under the 2019 Recap Term Loan accrue interest at
The 2019 Recap 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 assets as security, make investments, loans, advances, guarantees and acquisitions, undergo fundamental changes and enter into transactions with affiliates. The original terms of the 2019 Recap 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 2019 Recap Term Loan and Wells Fargo, holder of its revolving credit facility, to amend its 2019 Recap Term Loan Agreement and defer its EBITDA covenant calculation until March 31, 2022. Under the Amendment, the trailing 12-month EBITDA requirement was reduced to $
The 2019 Recap 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 2019 Recap Term Loan Agreement. If an event of default occurs, the maturity of the amounts owed under the 2019 Recap Term Loan Agreement may be accelerated.
The obligations under the 2019 Recap 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.
Amortization expense classified as interest expense related to the $
Amortization expense classified as interest expense related to the $
The fair value of the 2019 Recap Term Loan as of September 30, 2021 and December 31, 2020 was and $
On June 2, 2021, the Company repaid in full and terminated the 2019 Recap Term Loan Agreement, dated as of August 9, 2019, with Cortland Capital Market Services LLC, as agent.
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2021
On June 2, 2021, the Company and certain of its subsidiaries, as borrowers, entered into the 2021 BSP Term Loan Agreement with Benefit Street Partners L.L.C., as Sole Lead Arranger, and BSP Agency, LLC, as agent, for a $
Amounts outstanding under the 2021 BSP Term Loan will bear interest at either (i) LIBOR plus
The 2021 BSP 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 its assets as security, make investments, loans, advances, guarantees and acquisitions, undergo fundamental changes and enter into transactions with affiliates. Commencing with the fiscal quarter ending June 30, 2021, the Company is required to maintain a Net Leverage Ratio of 4:00x, with step-downs occurring each fiscal year starting with the quarter ending March 31, 2022 through the quarter ending September 30, 2024 in which the Company is required to maintain a Net Leverage Ratio of 3:00x. As of the Closing Date,
The 2021 BSP Term Loan Agreement contains events of default that are customary for a facility of this nature, including (subject in certain cases to grace periods and thresholds) nonpayment of principal, nonpayment of interest, fees or other amounts, material inaccuracy of representations and warranties, violation of covenants, cross-default to certain other existing indebtedness, bankruptcy or insolvency events, certain judgment defaults and a change of control as specified in the 2021 BSP Term Loan Agreement. If an event of default occurs, the maturity of the amounts owed under the 2021 BSP Term Loan Agreement may be accelerated.
The obligations under the 2021 BSP 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 and subject to the priority lien granted under the JPMorgan ABL Credit Agreement.
The agent and Sole Lead Arranger under the 2021 BSP Term Loan are affiliates of an affiliate of the Company, which affiliate, at the time of refinancing, owned common stock and the
Amortization expense classified as interest expense related to the $
Amortization expense classified as interest expense related to the $
The fair value of the 2021 BSP Term Loan as of September 30, 2021 was $
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2021
Loan under Paycheck Protection Program
On June 12, 2020, the Company received a $
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 $
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 December 31, 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 assets as security, make investments, loans, advances, guarantees and acquisitions, undergo fundamental changes and enter into transactions with affiliates. The Company was 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
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2021
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. For certain events of default relating to insolvency, all outstanding obligations become due and payable.
As described in Note 5 – Debt, on October 16, 2020, the Company amended its 2019 Recap Term Loan to reduce the amount and defer the calculation of its EBITDA covenant, with Wells Fargo as party to the agreement.
Amortization expense classified as interest expense related to the $
On June 2, 2021, the Company terminated the Wells Fargo ABL Credit Facility Agreement.
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 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 was a secured obligation, second only to the Credit Facility with Wells Fargo, except with respect to certain of the Company’s inventory in which GACP has a priority secured position.
The Term Loan required the repayment of principal in the amount of
In August 2019, in connection with the Recapitalization Transaction (see Note 5 - Debt), the Company repaid in full and terminated the Term Loan Agreement.
JPMorgan Chase
On June 2, 2021, the Company and certain of its subsidiaries, as borrowers, entered into the JPMorgan ABL Credit Agreement with JPMorgan Chase Bank, N.A., as agent and lender for a $
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2021
The JPMorgan 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. Under certain circumstances the Company is also subject to a springing fixed charge coverage ratio covenant of not less than
The JPMorgan ABL Credit Agreement contains events of default that are customary for a facility of this nature, including (subject in certain cases to grace periods and thresholds) nonpayment of principal, interest, fees or other amounts, material inaccuracy of representations and warranties, violation of covenants, cross-default to certain other existing indebtedness, bankruptcy or insolvency events, certain judgment defaults, loss of liens or guarantees and a change of control as specified in the JPMorgan ABL Credit Agreement. If an event of default occurs, the commitments of the lenders to lend under the JPMorgan ABL Credit Agreement may be terminated and the maturity of the amounts owed may be accelerated.
The obligations under the JPMorgan 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, 2021, the amount of outstanding borrowings was and the total excess borrowing availability was $
As of September 30, 2021, off-balance sheet arrangements include letters of credit issued by JPMorgan of $
Amortization expense classified as interest expense related to the $
Note 7 — Income Taxes
The Company’s income tax expense of $
The Company’s income tax expense of $
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2021
Note 8 — Income (Loss) Per Share
|
Three Months Ended September 30, |
||||||||||||||||||||||||
|
2021 |
2020 |
|||||||||||||||||||||||
|
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 |
$ | $ | $ | $ | ||||||||||||||||||||
|
Nine Months Ended September 30, |
||||||||||||||||||||||||
|
2021 |
2020 |
|||||||||||||||||||||||
|
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 |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||||||||||
*
Basic income (loss) per share is calculated using the weighted average number of common shares outstanding during the period. Diluted income (loss) 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). For the three and nine months ended September 30, 2021, the convertible senior notes interest and related weighted common share equivalent of
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2021
Note 9 — Common Stock and Preferred Stock
Common Stock
Effective July 9, 2020, the Company completed a Reverse Stock Split of its $
In January 2020, the Company issued an aggregate of
During 2020, certain employees, including
In June 2020, $
In August 2020, $
In October 2020, $
In November 2020, $
In December 2020, $
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2021
In January 2021, the Company issued an aggregate of
During the first quarter of 2021, certain employees, including
In March 2021, $
In May 2021, $
In June 2021, $
In July 2021, $
In August 2021, $
No dividend was declared or paid in the three and nine months ended September 30, 2021 and 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 2019 Recap 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)
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2021
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 2019 Recap 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.
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.
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2021
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, 2021, the Series A Preferred Stock is recorded in temporary equity at the amount of accrued, but unpaid dividends of $
The following table provides a reconciliation of the beginning and ending balances of the Series A Preferred Stock, which is recorded in temporary equity:
|
2021 |
2020 |
|||||||
|
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
On December 16, 2009, the Company entered into a joint venture agreement with the U.S. entertainment subsidiary of a leading Japanese advertising and animation production company in which it owned
As of September 30, 2021 and December 31, 2020, the balance of the investment in Pacific Animation Partners is .
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 top entertainment licenses and JAKKS’ own proprietary brands. The Company owns
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2021
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, 2021, 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, 2021.
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, 2021 and December 31, 2020 include the following (in thousands, except for weighted useful lives):
|
September 30, 2021 |
December 31, 2020 |
|||||||||||||||||||||||||||
|
Weighted |
Gross |
Gross |
||||||||||||||||||||||||||
|
Useful |
Carrying |
Accumulated |
Net |
Carrying |
Accumulated |
Net |
||||||||||||||||||||||
|
Lives |
Amount |
Amortization |
Amount |
Amount |
Amortization |
Amount |
||||||||||||||||||||||
|
(Years) |
||||||||||||||||||||||||||||
|
Amortized Intangible Assets: |
||||||||||||||||||||||||||||
|
Licenses |
$ | $ | ( |
) | $ | — | $ | $ | ( |
) | $ | — | ||||||||||||||||
|
Product lines |
( |
) | ( |
) | ||||||||||||||||||||||||
|
Customer relationships |
( |
) | — | ( |
) | — | ||||||||||||||||||||||
|
Trade names |
( |
) | — | ( |
) | — | ||||||||||||||||||||||
|
Non-compete agreements |
( |
) | — | ( |
) | — | ||||||||||||||||||||||
|
Total amortized intangible assets |
$ | $ | ( |
) | $ | $ | $ | ( |
) | $ | ||||||||||||||||||
|
Unamortized Intangible Assets: |
||||||||||||||||||||||||||||
|
Trademarks |
$ | $ | — | $ | $ | $ | — | $ | ||||||||||||||||||||
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2021
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, 2021 and 2020 (in thousands):
|
Three Months Ended |
Nine Months Ended |
|||||||||||||||
|
September 30, |
September 30, |
|||||||||||||||
|
2021 |
2020 |
2021 |
2020 |
|||||||||||||
|
Net Income (Loss) |
$ | $ | $ | ( |
) | $ | ( |
) | ||||||||
|
Other comprehensive income (loss): |
||||||||||||||||
|
Foreign currency translation adjustment |
( |
) | ( |
) | ( |
) | ||||||||||
|
Comprehensive income (loss) |
( |
) | ( |
) | ||||||||||||
|
Less: Comprehensive income 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.
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 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 recently commenced, however, we cannot assure you of its outcome and cannot estimate the range of any potential damage award. On April 30, 2021, the Company held a Special Meeting of the Shareholders to obtain shareholder ratification of the filing of the Certificate of Amendment to its Certificate of Incorporation effecting the Reverse Stock Split, in accordance with ratification procedures under Delaware law, which approval was obtained. The Company intends to seek settlement and dismissal of the lawsuit.
A putative class action lawsuit was filed on May 18, 2021 in the Superior Court of the State of California for the County of Los Angeles (Isaiah Villarica v. Jakks Pacific, Inc.). Plaintiff formerly worked in one of the Company’s warehouses and was retained via Workforce Enterprises, a provider of temporary employees. The lawsuit alleges that the Company violated various California Labor Code provisions governing wage and hour requirements, including that the Company failed to pay all minimum and overtime wages owed, provide legally compliant meal and rest periods, or reimburse business expenses. The lawsuit further alleges derivative wage and hour claims for failure to timely pay all wages owed at separation of employment, failure to provide accurate wage statements, and unfair business practices. Plaintiff seeks to represent a class consisting of all individuals who have worked for the Company—either directly or through a staffing agency—in California since November 19, 2016 and who were classified as non-exempt. Plaintiff seeks unpaid wages, meal and rest period premiums, interest, various statutory penalties, attorneys’ fees, and costs, all in unspecified amounts. The Company intends to vigorously defend the lawsuit. Since the action was recently commenced, however, the Company cannot be assured of its outcome and cannot estimate the range of any potential damage award.
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 to the Company's licensors, no liabilities have been recorded for indemnifications and/or other commitments.
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2021
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, 2021 and 2020 (in thousands):
|
Three Months Ended |
Nine Months Ended |
|||||||||||||||
|
September 30, |
September 30, |
|||||||||||||||
|
2021 |
2020 |
2021 |
2020 |
|||||||||||||
|
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, 2021 is summarized as follows:
|
Restricted Stock Awards |
||||||||
|
Number of Shares |
Weighted Average Grant Date Fair Value |
|||||||
|
Outstanding, December 31, 2020 |
$ | |||||||
|
Awarded |
||||||||
|
Vested |
( |
) | ||||||
|
Forfeited |
( |
) | ||||||
|
Converted to RSU |
( |
) | ||||||
|
Outstanding, September 30, 2021 |
||||||||
As of September 30, 2021, there was unrecognized compensation cost related to non-vested restricted stock awards.
Restricted Stock Units
Restricted stock unit activity (including those with performance-based vesting criteria) for the nine months ended September 30, 2021 is summarized as follows:
|
Restricted Stock Units |
||||||||
|
Number of Shares |
Weighted Average Grant Date Fair Value |
|||||||
|
Outstanding, December 31, 2020 |
$ | |||||||
|
Awarded |
||||||||
|
Vested |
( |
) | ||||||
|
Forfeited |
||||||||
|
Converted from RSA |
||||||||
|
Outstanding, September 30, 2021 |
||||||||
As of September 30, 2021, there was $
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2021
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.
The following tables summarize the Company's financial liabilities measured at fair value on a recurring basis as of September 30, 2021 and December 31, 2020 (in thousands):
|
Fair Value Measurements |
||||||||||||||||
|
as of September 30, 2021 |
||||||||||||||||
|
Carrying Amount as of September 30, 2021 |
Level 1 |
Level 2 |
Level 3 |
|||||||||||||
|
3.25% convertible senior notes due in 2023 |
$ | $ | $ | $ | ||||||||||||
|
Preferred stock derivative liability |
||||||||||||||||
|
Fair Value Measurements |
||||||||||||||||
|
as of December 31, 2020 |
||||||||||||||||
|
Carrying Amount as of December 31, 2020 |
Level 1 |
Level 2 |
Level 3 |
|||||||||||||
|
3.25% convertible senior notes due in 2023 |
$ | $ | $ | $ | ||||||||||||
|
Preferred stock derivative liability |
||||||||||||||||
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2021
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 |
2021 |
2020 |
||||||
|
Balance, January 1, |
$ | $ | ||||||
|
Conversion of convertible senior notes |
( |
) | ( |
) | ||||
|
Change in fair value |
( |
) | ||||||
|
PIK interest |
||||||||
|
Balance, September 30, |
$ | $ | ||||||
|
Preferred stock derivative liability |
2021 |
2020 |
||||||
|
Balance, January 1, |
$ | $ | ||||||
|
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
In November 2014, the Company entered into a joint venture with Meisheng Cultural & Creative Corp., Ltd., (“MC&C”) 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
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2021
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, 2021, the Company made inventory-related payments to Meisheng of approximately $
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. On February 5, 2021, Benefit Street Partners and Oasis Investment II Master Funds Ltd, both related parties, entered into a purchase and sale agreement wherein Benefit Street Partners purchased $
Amounts outstanding under the 2021 BSP Term Loan will bear interest at either (i) LIBOR plus
The 2021 BSP Term Loan Agreement contains negative covenants, events of default, and the obligations under the 2021 BSP Term Loan Agreement are guaranteed by the Company. The terms, covenants, events of default, and Company obligations are described in more detail in Note 5 – Debt, as well as in the 2021 BSP Term Loan Agreement. As of September 30, 2021, Benefit Street Partners held $
Beginning August 9, 2019 and continuing until September 27, 2021, the managing Partner and portfolio manager at Axar Capital Management was a director at the Company. As of September 30, 2021, Axar Capital Management held in principal amount of the 2019 Recap Term Loan. As of December 31, 2020, Axar Capital Management held $
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2021
Note 18 — Prepaid Expenses and Other Assets
Prepaid expenses and other assets as of September 30, 2021 and December 31, 2020 consist of the following (in thousands):
|
September 30, 2021 |
December 31, 2020 |
|||||||
|
Royalty advances |
$ | $ | ||||||
|
Prepaid expenses |
||||||||
|
Employee retention credit |
||||||||
|
Income taxes receivable |
||||||||
|
Other assets |
||||||||
|
Prepaid expenses and other assets |
$ | $ | ||||||
Note 19 — Subsequent Events
As of November 10, 2021 the amount of outstanding borrowings under the JPMorgan ABL Facility was $
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”). All common stock and price per share amounts in this report have been restated to reflect the 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.
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:
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• |
On March 23, 2020, we encouraged our staff to begin working from home. In the US, we began to return to an in-office working model in July 2021, but have paused that transition in consideration of the rise in cases attributable to the Delta-variant of COVID-19. We plan to monitor infection and transmission rates on a weekly basis, while remaining cognizant of federal, state and local guidelines. We anticipate returning to a more traditional, work-from-office model some time in Q1 2022, but those plans are, of course, subject to change; |
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• |
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; |
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• |
We have reduced non-essential travel for our employees; and |
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• |
Our employee attendance at industry events and in-person work-related meetings remain below pre-pandemic levels. |
Each of the remedial measures taken by us 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 us. 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, 2020. 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/Consumer Products and Costumes. 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 $47.7 million as of September 30, 2021 and $42.1 million as of December 31, 2020.
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:
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Level 1: |
Valuations for assets and liabilities traded in active markets from readily available pricing sources for market transactions involving identical assets or liabilities. |
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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. |
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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 that 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, 2021.
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, 2021 is $0.3 million which is primarily related to the change in uncertain tax positions offset by state income taxes, foreign return-to-provision adjustments, and excess tax deficiencies fully offset by valuation allowance. For the comparable period in 2020, a discrete tax benefit of $0.4 million was recorded 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.
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, 2021, and December 31, 2020, our income tax reserves were approximately $0.2 million and $1.0 million, respectively. The $0.2 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, (Unaudited) |
Nine Months Ended September 30, (Unaudited) |
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2021 |
2020 |
2021 |
2020 |
|||||||||||||
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Net sales |
100.0 |
% |
100.0 |
% |
100.0 |
% |
100.0 |
% |
||||||||
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Cost of sales |
68.4 | 69.2 | 69.3 | 72.2 | ||||||||||||
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Gross profit |
31.6 | 30.8 | 30.7 | 27.8 | ||||||||||||
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Selling, general and administrative expenses |
16.1 | 15.3 | 22.4 | 24.2 | ||||||||||||
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Restructuring charge |
— | — | — | 0.5 | ||||||||||||
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Pandemic related charges |
— | — | — | 0.1 | ||||||||||||
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Income from operations |
15.5 | 15.5 | 8.3 | 3.0 | ||||||||||||
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Income from joint ventures |
— | — | — | — | ||||||||||||
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Other income (expense), net |
— | — | — | — | ||||||||||||
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Change in fair value of preferred stock derivative liability |
— | (1.1 | ) | (2.1 | ) | (0.1 | ) | |||||||||
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Change in fair value of convertible senior notes |
(1.5 | ) | 1.2 | (3.8 | ) | 0.7 | ||||||||||
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Gain on loan forgiveness |
2.6 | — | 1.4 | — | ||||||||||||
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Loss on debt extinguishment |
— | — | (1.7 | ) | — | |||||||||||
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Interest income |
— | — | — | — | ||||||||||||
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Interest expense |
(1.1 | ) | (2.3 | ) | (2.7 | ) | (4.3 | ) | ||||||||
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Income (loss) before provision for (benefit from) income taxes |
15.5 | 13.3 | (0.6 | ) | (0.7 | ) | ||||||||||
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Provision for (benefit from) income taxes |
0.1 | (0.1 | ) | 0.1 | 0.1 | |||||||||||
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Net income (loss) |
15.4 | 13.4 | (0.7 | ) | (0.8 | ) | ||||||||||
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Net income attributable to non-controlling interests |
— | — | — | — | ||||||||||||
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Net income (loss) attributable to JAKKS Pacific, Inc. |
15.4 |
% |
13.4 |
% |
(0.7 |
)% |
(0.8 |
)% |
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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, (Unaudited) |
Nine Months Ended September 30, (Unaudited) |
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2021 |
2020 | 2021 | 2020 | |||||||||||||
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Net Sales |
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Toys/Consumer Products |
$ | 172,952 | $ | 187,309 | $ | 334,365 | $ | 306,088 | ||||||||
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Costumes |
64,005 | 54,981 | 98,787 | 81,517 | ||||||||||||
| 236,957 | 242,290 | 433,152 | 387,605 | |||||||||||||
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Cost of Sales |
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Toys/Consumer Products |
115,107 | 125,143 | 225,276 | 215,521 | ||||||||||||
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Costumes |
46,926 | 42,531 | 74,961 | 64,348 | ||||||||||||
| 162,033 | 167,674 | 300,237 | 279,869 | |||||||||||||
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Gross Profit |
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Toys/Consumer Products |
57,845 | 62,166 | 109,089 | 90,567 | ||||||||||||
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Costumes |
17,079 | 12,450 | 23,826 | 17,169 | ||||||||||||
| $ | 74,924 | $ | 74,616 | $ | 132,915 | $ | 107,736 | |||||||||
Comparison of the Three Months Ended September 30, 2021 and 2020
Net Sales
Toys/Consumer Products. Net sales of our Toys/Consumer Products segment were $173.0 million for the three months ended September 30, 2021 compared to $187.3 million for the prior year period, representing a decrease of $14.3 million, or 7.6%. The Doll/Dress-Up/Nurturing Play and Seasonal/Outdoor divisions declined, while the Action Play and Collectibles division showed double-digit sales growth. Video game related toys like Nintendo® and Sonic the Hedgehog® in the Action Play and Collectables division led the sales growth, year over year. Increases in Disney Princess® from the Doll/Dress-Up/Nurturing Play division were offset by lower sales from Frozen over the prior-year period.
Costumes. Net sales of our Costumes segment were $64.0 million for the three months ended September 30, 2021 compared to $55.0 million for the prior year period, representing an increase of $9.0 million, or 16.4%. Sales for the quarter increased as retailers planned for a stronger Halloween than prior year.
Cost of Sales
Toys/Consumer Products. Cost of sales of our Toys/Consumer Products segment was $115.1 million, or 66.5% of related net sales for the three months ended September 30, 2021 compared to $125.1 million, or 66.8% of related net sales for the prior year period, representing a decrease of $10.0 million, or 8.0%. The decrease in dollars is due to lower overall sales in 2021. The decrease as a percentage of net sales, year over year, is due to a lower average royalty rate, slightly offset by higher freight related costs.
Costumes. Cost of sales of our Costumes segment was $46.9 million, or 73.3% of related net sales for the three months ended September 30, 2021 compared to $42.5 million, or 77.3% of related net sales for the prior year period, representing an increase in dollars of $4.4 million, or 10.4%. The increase in dollars is due to higher sales, while the decrease in percentage of net sales, year over year, is due to a focused effort to design and develop our product lines for greater margin as well as a lower average royalty rate.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $38.2 million for the three months ended September 30, 2021 compared to $37.0 million for the prior year period constituting 16.1% and 15.3% of net sales, respectively. Selling, general and administrative expenses increased by $1.2 million from the prior year period due to an increase in product development and temporary labor expenses, but also due to austerity-related cost reductions in place due to the pandemic in the comparable period in 2020.
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.
Gain on Loan Forgiveness
During the three months ended September 30, 2021, we recognized a $6.2 million gain as a result of the forgiveness of the PPP Loan.
Interest Expense
Interest expense was $2.7 million for the three months ended September 30, 2021, as compared to $5.6 million in the prior year period. During the three months ended September 30, 2021, we booked interest expense of $2.4 million related to our 2021 BSP Term Loan, $0.2 million related to our revolving credit facility and $0.1 million related to our convertible senior notes due in 2023. 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 2019 Recap Term Loan, $18,873 related to our PPP Loan and $0.4 million related to our revolving credit facility.
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 0.8%, for the three months ended September 30, 2021. During the comparable period in 2020, our income tax benefit was $0.3 million, or an effective tax rate of (0.8%).
Comparison of the Nine Months Ended September 30, 2021 and 2020
Net Sales
Toys/Consumer Products. Net sales of our Toys/Consumer Products segment were $334.4 million for the nine months ended September 30, 2021 compared to $306.1 million for the prior year period, representing an increase of $28.3 million, or 9.2%. The increase in net sales is primarily driven by strong performance across the Action Play and Collectibles, and Seasonal/Outdoor divisions.
Costumes. Net sales of our Costumes segment were $98.8 million for the nine months ended September 30, 2021 compared to $81.5 million for the prior year period, representing an increase of $17.3 million, or 21.2%. Sales were higher due to retailers’ plans for a more robust Halloween in 2021 due to a lower impact from the ongoing pandemic compared to 2020.
Cost of Sales
Toys/Consumer Products. Cost of sales of our Toys/Consumer Products segment was $225.3 million, or 67.4% of related net sales for the nine months ended September 30, 2021 compared to $215.5 million, or 70.4% of related net sales for the prior year period, representing an increase of $9.8 million, or 4.5%. The increase in dollars is due to higher overall sales in 2021. The decrease as a percentage of net sales, year over year, is due to a lower average royalty rate, in part driven by the mix of products sold during the nine-month period.
Costumes. Cost of sales of our Costumes segment was $75.0 million, or 75.9% of related net sales for the nine months ended September 30, 2021 compared to $64.3 million, or 78.9% of related net sales for the prior year period, representing an increase in dollars of $10.7 million, or 16.6%. The increase in dollars is due to higher overall sales in 2021. The decrease as a percentage of net sales is due to a focused effort to design and develop our product lines for greater margin as well as a lower average royalty rate versus the prior nine-month period.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $97.1 million for the nine months ended September 30, 2021 compared to $94.0 million for the prior year period constituting 22.4% and 24.2% of net sales, respectively. Selling, general and administrative expenses increased by $3.1 million from the prior year period due to slightly higher direct selling, and product development and testing expenses, as well as an increase in temporary labor expenses, but also due to austerity-related cost reductions in place due to the pandemic in 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.
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.
Gain on Loan Forgiveness
During the nine months ended September 30, 2021, we recognized a $6.2 million gain as a result of the forgiveness of the PPP Loan.
Interest Expense
Interest expense was $11.9 million for the nine months ended September 30, 2021, as compared to $16.7 million in the prior year period. During the nine months ended September 30, 2021, we booked interest expense of $7.3 million related to our 2019 Recap Term Loan, $3.3 million related to our 2021 BSP Term Loan, $0.7 million related to our convertible senior notes due in 2023 and $0.6 million related to our revolving credit facility. 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 2019 Recap Term Loan, $18,873 related to our PPP Loan, and $1.0 million related to our revolving credit facility.
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 (11.7 %), for the nine months ended September 30, 2021. During the comparable period in 2020, our income tax expense was $0.3 million, or an effective tax rate of (11.0%).
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 as we make royalty advance payments for some of our licenses and buy and sell inventory subject to customer payment terms.
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 costume 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, 2021, we had working capital (inclusive of cash, cash equivalents and restricted cash) of $114.0 million, compared to $112.6 million as of December 31, 2020, representing an increase in working capital of $1.4 million during the nine-month period ended September 30, 2021.
Operating activities used net cash of $26.9 million during the nine months ended September 30, 2021, as compared to providing net cash of $15.9 million in the prior year period. The decrease in net cash during the nine months ended September 30, 2021 was primarily impacted by an increase in accounts receivable and inventory, partially offset by the net loss, excluding the impact of non-cash charges, an increase in accounts payable, accrued expenses and reserve for sales returns and allowances, and a decrease in prepaid expenses and other assets. Net cash during the nine months ended September 30, 2020 was primarily impacted by the net loss, excluding the impact of non-cash charges, an increase in accounts payable and reserve for sales returns and allowances, partially offset by an increase in accounts receivable. 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 character and product licenses with royalties/obligations generally ranging from 1% to 23% payable on net sales of such products. As of September 30, 2021, these agreements required future aggregate minimum royalty guarantees of $23.5 million exclusive of $4.6 million in advances already paid. Of this $23.5 million future minimum royalty guarantee, $18.6 million is due over the next twelve months.
Our investing activities used net cash of $6.3 million in the nine months ended September 30, 2021, as compared to using net cash of $6.1 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 used cash of $32.5 million for the nine months ended September 30, 2021, consisting of the repayment of our 2019 Recap Term Loan of $125.8 million, as well as, debt issuance costs of $2.6 million incurred in connection with the refinancing of our debt (see Note 5 - Debt), partially offset by the net proceeds from the issuance of our 2021 BSP Term Loan of $96.3 million. 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, partially offset by the retirement of convertible senior notes.
As of September 30, 2021, we have $98.8 million of outstanding indebtedness under our first-lien secured term loan (the “2021 BSP Term Loan Agreement”) and we have no outstanding indebtedness under our senior secured revolving credit facility (the “JPMorgan ABL Facility”), aside from utilizing $9.7 million in letters of credit. We also have $0.1 million of outstanding indebtedness under the New Oasis Notes due to residual interest owed.
The First Lien Term Loan Facility Credit Agreement (the “2021 BSP Term Loan Agreement”) and the Credit Agreement with JPMorgan Chase Bank, N.A., as agent and lender (the “JPMorgan ABL Credit Agreement”) each contain negative covenants that, subject to certain exceptions, limit our ability and our subsidiaries 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. The terms of the 2021 BSP Term Loan Agreement also require us to maintain a Net Leverage Ratio of 4:00x, with step-downs occurring each fiscal year starting with the quarter ending March 31, 2022 through the quarter ending September 30, 2024 in which we are required to maintain a Net Leverage Ratio of 3:00x. As of the Closing Date, we must maintain a minimum cash balance of not less than $20.0 million. The minimum cash balance can be reduced to $15.0 million in increments of $1.0 million for every $5.0 million in principal repayment of the 2021 BSP Term Loan. The terms of the JPMorgan ABL Credit Agreement also subject us to a springing fixed charge coverage ratio covenant of not less than 1.1 to 1.0 under certain circumstances. The terms of both Agreements are described in more detail in their respective Agreements.
The 2021 BSP Term Loan Agreement and the JPMorgan ABL Agreement contain events of default that are customary for a facility of this nature, including (subject in certain cases to grace periods and thresholds) nonpayment of principal, nonpayment of interest, fees or other amounts, material inaccuracy of representations and warranties, violation of covenants, cross-default to certain other existing indebtedness, bankruptcy or insolvency events, certain judgment defaults and a change of control as specified in each Agreement. If an event of default occurs under either Agreement, the maturity of the amounts owed under the 2021 BSP Term Loan Agreement and the JPMorgan ABL Agreement may be accelerated.
We were in compliance with the financial covenants under the 2021 BSP Term Loan Agreement and the JPMorgan ABL Agreement as of September 30, 2021.
See Note 5 – Debt and Note 6 – Credit Facilities for additional information pertaining to our Debt and Credit Facilities.
As of September 30, 2021 and December 31, 2020, we held cash and cash equivalents, including restricted cash, of $26.7 million and $92.7 million, respectively. Cash, and cash equivalents, including restricted cash held outside of the United States in various foreign subsidiaries totaled $20.6 million and $48.7 million as of September 30, 2021 and December 31, 2020, 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, 2021.
Our primary sources of working capital are cash flows from operations and borrowings under our JPMorgan ABL Facility (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 in motivating consumer purchase of related merchandise, (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, 2021, off-balance sheet arrangements include letters of credit issued by JPMorgan of $9.7 million.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
Our exposure to market risk includes interest rate fluctuations in connection with our BSP Term Loan (see Note 5 – Debt) and our 2021 JPMorgan ABL Facility (see Note 6 – Credit Facilities). As of September 30, 2021, we have $98.8 million of outstanding indebtedness under our BSP Term Loan which is due June 2027 with interest at either (I) LIBOR plus 6.50% - 7.00% (determined by reference to a net leverage pricing grid), subject to a 1.00% LIBOR floor, or (ii) base rate plus 5.50% - 6.00% (determined by reference to a net leverage pricing grid), subject to a 2.00% base rate floor. Borrowings under our JPMorgan ABL Facility bear interest at either (i) Eurodollar spread plus 1.50% - 2.00% (determined by reference to an excess availability pricing grid) or (ii) Alternate Base Rate plus 0.50% - 1.00% (determined by reference an excess availability pricing grid and base rate subject to a 1.00% floor). Borrowings under the BSP Term Loan and 2021 JPMorgan ABL 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-month period ended September 30, 2021, the maximum amount borrowed under the revolving credit facility was nil and the average amount of borrowings outstanding was nil. As of September 30, 2021, 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.
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 our Reverse Stock Split at the meeting. The purported class action seeks damages in an unspecified amount, alleging breach of fiduciary duties by our directors. We intend to vigorously defend the lawsuit. Since the action was recently commenced, however, we cannot assure you of its outcome and cannot estimate the range of any potential damage award. On April 30, 2021, we held a Special Meeting of the Shareholders to obtain shareholder ratification of the filing of the Certificate of Amendment to our Certificate of Incorporation effecting the Reverse Stock Split, in accordance with ratification procedures under Delaware law, which approval was obtained. We intend to seek settlement and dismissal of the lawsuit.
A putative class action lawsuit was filed on May 18, 2021 in the Superior Court of the State of California for the County of Los Angeles (Isaiah Villarica v. Jakks Pacific, Inc.). Plaintiff formerly worked in one of our warehouses and was retained via Workforce Enterprises, a provider of temporary employees. The lawsuit alleges that we violated various California Labor Code provisions governing wage and hour requirements, including that we failed to pay all minimum and overtime wages owed, provide legally compliant meal and rest periods, or reimburse business expenses. The lawsuit further alleges derivative wage and hour claims for failure to timely pay all wages owed at separation of employment, failure to provide accurate wage statements, and unfair business practices. Plaintiff seeks to represent a class consisting of all individuals who have worked for us—either directly or through a staffing agency—in California since November 19, 2016 and who were classified as non-exempt. Plaintiff seeks unpaid wages, meal and rest period premiums, interest, various statutory penalties, attorneys’ fees, and costs, all in unspecified amounts. We intend to vigorously defend the lawsuit. Since the action was recently commenced, however, we cannot assure you of its outcome and cannot estimate the range of any potential damage award.
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, 2020. 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 |
Description |
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10.1 |
Amendment No. 6 to the Second Amended and Restated Employment Agreement of Stephen G. Berman (1) |
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10.2 |
Amendment No. 8 to the Employment Agreement of John a/k/a Jack McGrath (1) |
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10.3 |
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10.4 |
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31.1 |
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer (2) |
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31.2 |
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 |
Inline XBRL Instance Document |
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101.SCH |
Inline XBRL Taxonomy Extension Schema Document |
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101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB |
Inline XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
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104 |
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
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(1) |
Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed October 1, 2021 and incorporated herein by reference. |
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(2) |
Filed herewith. |
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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 10, 2021 |
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 |
Date: November 10, 2021
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 |
Date: November 10, 2021
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, 2021 (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 |
Date: November 10, 2021
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, 2021 (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 |
Date: November 10, 2021