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, 2022
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 |
25 |
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Item 3. |
32 |
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Item 4. |
32 |
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Part II |
OTHER INFORMATION |
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Item 1. |
33 |
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Item 1A. |
33 |
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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. |
33 |
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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, 2022 |
December 31, 2021 |
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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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Accounts payable – Meisheng (related party) |
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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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Preferred stock derivative liability |
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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 accrued dividends, $ |
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Stockholders' Equity |
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| Common stock, $ |
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Additional paid-in capital |
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Accumulated deficit |
( |
) | ( |
) | ||||
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Accumulated other comprehensive loss |
( |
) | ( |
) | ||||
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Total JAKKS Pacific, Inc. stockholders' equity |
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Non-controlling interests |
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Total stockholders' equity |
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Total liabilities, preferred stock and stockholders' equity |
$ | $ | ||||||
See accompanying notes to condensed consolidated financial statements.
JAKKS PACIFIC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share data)
|
Three Months Ended September 30, (Unaudited) |
Nine Months Ended September 30, (Unaudited) |
|||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
|
Net sales |
$ | $ | $ | $ | ||||||||||||
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Cost of sales: |
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Cost of goods |
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Royalty expense |
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Amortization of tools and molds |
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Cost of sales |
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Gross profit |
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Direct selling expenses |
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General and administrative expenses |
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Depreciation and amortization |
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Selling, general and administrative expenses |
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Intangibles impairment |
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Income from operations |
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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 |
( |
) | ( |
) | ||||||||||||
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Gain on loan forgiveness |
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Loss on debt extinguishment |
( |
) | ||||||||||||||
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Interest income |
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Interest expense |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
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Income (loss) before provision for income taxes |
( |
) | ||||||||||||||
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Provision for income taxes |
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Net income (loss) |
( |
) | ||||||||||||||
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Net income (loss) attributable to non-controlling interests |
( |
) | ( |
) | ||||||||||||
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Net income (loss) attributable to JAKKS Pacific, Inc. |
$ | $ | $ | $ | ( |
) | ||||||||||
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Net income (loss) attributable to common stockholders |
$ | $ | $ | $ | ( |
) | ||||||||||
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Earnings (loss) per share - basic |
$ | $ | $ | $ | ( |
) | ||||||||||
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Shares used in earnings (loss) per share - basic |
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Earnings (loss) per share - diluted |
$ | $ | $ | $ | ( |
) | ||||||||||
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Shares used in earnings (loss) per share - diluted |
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Comprehensive income (loss) |
$ | $ | $ | $ | ( |
) | ||||||||||
|
Comprehensive income (loss) attributable to JAKKS Pacific, Inc. |
$ | $ | $ | $ | ( |
) | ||||||||||
See accompanying notes to condensed consolidated financial statements.
JAKKS PACIFIC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands)
| Three and Nine Months Ended September 30, 2022 | ||||||||||||||||||||||||||||
|
(Unaudited) |
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|
JAKKS |
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Accumulated |
Pacific, Inc. |
Total |
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Additional |
Other |
Stockholders' |
Non- |
Stockholders' |
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|
Common |
Paid-in |
Accumulated |
Comprehensive |
Equity |
Controlling |
Equity |
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|
Stock |
Capital |
Deficit |
Loss |
(Deficit) |
Interests |
(Deficit) |
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|
Balance, December 31, 2021 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | $ | $ | |||||||||||||||||
|
Share-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, 2022 |
( |
) | ( |
) | ||||||||||||||||||||||||
|
Share-based compensation expense |
— | — | — | — | ||||||||||||||||||||||||
|
Preferred stock accrued dividends |
— | ( |
) | — | — | ( |
) | — | ( |
) | ||||||||||||||||||
|
Net income (loss) |
— | — | — | ( |
) | |||||||||||||||||||||||
|
Foreign currency translation adjustment |
— | — | — | ( |
) | ( |
) | — | ( |
) | ||||||||||||||||||
|
Balance, June 30, 2022 |
( |
) | ( |
) | ||||||||||||||||||||||||
|
Share-based compensation expense |
— | — | — | — | ||||||||||||||||||||||||
|
Repurchase of common stock for employee tax withholding |
— | ( |
) | — | — | ( |
) | — | ( |
) | ||||||||||||||||||
|
Preferred stock accrued dividends |
— | ( |
) | — | — | ( |
) | — | ( |
) | ||||||||||||||||||
|
Net income (loss) |
— | — | — | ( |
) | |||||||||||||||||||||||
|
Foreign currency translation adjustment |
— | — | — | ( |
) | ( |
) | — | ( |
) | ||||||||||||||||||
|
Balance, September 30, 2022 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | $ | $ | |||||||||||||||||
|
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 |
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Additional |
Other |
Stockholders' |
Non- |
Stockholders' |
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|
Common |
Paid-in |
Accumulated |
Comprehensive |
Equity |
Controlling |
Equity |
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|
Stock |
Capital |
Deficit |
Loss |
(Deficit) |
Interests |
(Deficit) |
||||||||||||||||||||||
|
Balance, December 31, 2020 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | $ | $ | |||||||||||||||||
|
Share-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 |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||
|
Share-based compensation expense |
— | — | — | — | ||||||||||||||||||||||||
|
Conversion of convertible senior notes |
— | — | — | |||||||||||||||||||||||||
|
Preferred stock accrued dividends |
— | ( |
) | — | — | ( |
) | — | ( |
) | ||||||||||||||||||
|
Net income (loss) |
— | — | ( |
) | — | ( |
) | ( |
) | |||||||||||||||||||
|
Foreign currency translation adjustment |
— | — | — | — | ||||||||||||||||||||||||
|
Balance, June 30, 2021 |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||
|
Share-based compensation expense |
— | — | — | — | ||||||||||||||||||||||||
|
Conversion of convertible senior notes |
— | — | — | |||||||||||||||||||||||||
|
Preferred stock accrued dividends |
— | ( |
) | — | — | ( |
) | — | ( |
) | ||||||||||||||||||
|
Net income |
— | — | — | |||||||||||||||||||||||||
|
Foreign currency translation adjustment |
— | — | — | ( |
) | ( |
) | — | ( |
) | ||||||||||||||||||
|
Balance, September 30, 2021 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | $ | $ | |||||||||||||||||
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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|
2022 |
2021 |
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|
Cash flows from operating activities |
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|
Net income (loss) |
$ | $ | ( |
) | ||||
|
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
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|
Provision for (recovery of) doubtful accounts |
( |
) | ||||||
|
Depreciation and amortization |
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|
Payment-in-kind interest |
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|
Write-off and amortization of debt discount |
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|
Write-off and amortization of debt issuance costs |
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|
Share-based compensation expense |
||||||||
|
Gain on disposal of property and equipment |
( |
) | ( |
) | ||||
|
Gain on loan forgiveness |
( |
) | ||||||
|
Loss on debt extinguishment |
||||||||
|
Intangibles impairment |
||||||||
|
Deferred income taxes |
||||||||
|
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 |
||||||||
|
Accounts payable - Meisheng (related party) |
||||||||
|
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 |
||||||||
|
Repurchase of common stock for employee tax withholding |
( |
) | ( |
) | ||||
|
Repayment of credit facility borrowings |
( |
) | ||||||
|
Proceeds from credit facility borrowings |
||||||||
|
Repayment of 2021 BSP Term Loan |
( |
) | ( |
) | ||||
|
Net proceeds from issuance of long-term debt |
||||||||
|
Deferred issuance costs |
( |
) | ||||||
|
Repayment of 2019 Recap Term Loan |
( |
) | ||||||
|
Net cash used in financing activities |
( |
) | ( |
) | ||||
|
Net increase (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, net |
$ | $ | ||||||
|
Cash paid for interest |
$ | $ | ||||||
As of September 30, 2022, 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, 2022
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, 2021.
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.
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, 2022
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.
In November 2021, the FASB issued ASU 2021-10, “Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance.” ASU 2021-10 requires annual disclosures that are expected to increase the transparency of transactions involving government grants, including (1) the types of transactions, (2) the accounting for those transactions and (3) the effect of those transactions on an entity’s financial statements. The provisions of ASU 2021-10 are effective for fiscal years beginning after December 31, 2021, with early adoption permitted. The Company adopted ASU 2021-10 during the fiscal period December 31, 2021 (see Note 5 – Debt and Note 18 –Prepaid Expenses and Other Assets, for disclosures related to government assistance received by the Company). The adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements.
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.
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.
The Costumes segment, under its Disguise branding, 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, 2022
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, 2022 and 2021 and as of September 30, 2022 and December 31, 2021 are as follows (in thousands):
|
Three Months Ended |
Nine Months Ended |
|||||||||||||||
|
September 30, |
September 30, |
|||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
|
Net Sales |
||||||||||||||||
|
Toys/Consumer Products |
$ | $ | $ | $ | ||||||||||||
|
Costumes |
||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
|
Three Months Ended |
Nine Months Ended |
|||||||||||||||
|
September 30, |
September 30, |
|||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
|
Income from Operations |
||||||||||||||||
|
Toys/Consumer Products |
$ | $ | $ | $ | ||||||||||||
|
Costumes |
||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
|
Three Months Ended |
Nine Months Ended |
|||||||||||||||
|
September 30, |
September 30, |
|||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
|
Depreciation and Amortization Expense |
||||||||||||||||
|
Toys/Consumer Products |
$ | $ | $ | $ | ||||||||||||
|
Costumes |
||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
|
September 30, |
December 31, |
|||||||||||||||
| 2022 | 2021 | |||||||||||||||
|
Assets |
||||||||||||||||
|
Toys/Consumer Products |
$ | $ | ||||||||||||||
|
Costumes |
||||||||||||||||
| $ | $ | |||||||||||||||
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, 2022 and December 31, 2021 and for the three and nine months ended September 30, 2022 and 2021 (in thousands):
|
September 30, |
December 31, |
|||||||
|
2022 |
2021 |
|||||||
|
Long-lived Assets |
||||||||
|
United States |
$ | $ | ||||||
|
China |
||||||||
|
Hong Kong |
||||||||
|
United Kingdom |
||||||||
|
Mexico |
||||||||
|
Canada |
||||||||
| $ | $ | |||||||
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2022
|
Three Months Ended |
Nine Months Ended |
|||||||||||||||
|
September 30, |
September 30, |
|||||||||||||||
|
2022 |
2021 |
2022 |
2021 |
|||||||||||||
|
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, 2022 and 2021 were as follows (in thousands, except for percentages):
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||||||||||||||||||
|
2022 |
2021 |
2022 |
2021 |
|||||||||||||||||||||||||||||
|
Percentage |
Percentage |
Percentage |
Percentage |
|||||||||||||||||||||||||||||
|
Amount |
of Net Sales |
Amount |
of Net Sales |
Amount |
of Net Sales |
Amount |
of Net Sales |
|||||||||||||||||||||||||
|
Wal-Mart |
$ |
% |
$ |
% |
$ |
% |
$ |
% |
||||||||||||||||||||||||
|
Target |
||||||||||||||||||||||||||||||||
|
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.
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 or net realizable value, net of inventory obsolescence reserve, and consists of the following (in thousands):
|
September 30, |
December 31, |
|||||||
|
2022 |
2021 |
|||||||
|
Raw materials |
$ | $ | ||||||
|
Finished goods |
||||||||
| $ | $ | |||||||
As of September 30, 2022 and December 31, 2021, the inventory obsolescence reserve was $
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2022
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. 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. For the three and nine months ended September 30, 2022, shipping and handling costs were $
The Company’s reserve for sales returns and allowances amounted to $
Note 5 — Debt
Convertible senior notes
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 Company’s
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2022
In connection with the Recapitalization Transaction, the Company issued (i) amended and restated notes with respect to the Company’s $
Excluding the impact of the Reverse Stock Split in July of 2020, the New Oasis Notes provide, among other things, that the initial conversion price is $
During 2021, $
The Company accounted for the debt held by Oasis at fair value using Level 3 inputs and as a result, recognized a loss of $
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, 2022 |
December 31, 2021 |
|||||||||||||||||||||||
|
Debt Discount/ |
Debt Discount/ |
|||||||||||||||||||||||
|
Principal |
Issuance |
Net |
Principal |
Issuance |
Net |
|||||||||||||||||||
|
Amount |
Costs* |
Amount |
Amount |
Costs* |
Amount |
|||||||||||||||||||
|
2021 BSP Term Loan |
$ | $ | ( |
) | $ | $ | $ | ( |
) | $ | ||||||||||||||
* The term loan was valued using the discounted cash flow method to determine the implied debt discount. The debt discount and issuance costs are amortized over the life of the term loan on a straight-line basis which approximates the effective interest method.
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2022
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 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. On April 26, 2022,
On June 27, 2022, as permitted by the terms within the 2021 BSP Term Loan Agreement, the Company made a voluntary fee-free $
On September 28, 2022, as permitted by the terms within the 2021 BSP Term Loan Agreement, the Company made a voluntary $
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, 2022
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 (see Note 6 – Credit Facility).
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 Company’s 2021 BSP Term Loan is considered Level 3 fair value (see Note 16 – Fair Value Measurements for further discussion of the fair value hierarchy) and are measured using the discounted future cash flow method. In addition to the debt terms, the valuation methodology includes an assumption of a discount rate that approximates the current yield on a debt security with comparable risk. This assumption is considered an unobservable input in that it reflects the Company’s own assumptions about the inputs that market participants would use in pricing the asset or liability. The Company believes that this is the best information available for use in the fair value measurement. The estimated fair value of the 2021 BSP Term Loan was $
As of September 30, 2022, the Company was in compliance with the financial covenants under the 2021 BSP Term Loan Agreement.
Loan under Paycheck Protection Program
On June 12, 2020, the Company received a $
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2022
Note 6 — Credit Facilities
JPMorgan Chase
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 $
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, 2022, the amount of outstanding borrowings was and the total excess borrowing availability was $
As of September 30, 2022, off-balance sheet arrangements include letters of credit issued by JPMorgan of $
Amortization expense classified as interest expense related to the $
As of September 30, 2022, the Company was in compliance with the financial covenants under the JPMorgan ABL Credit Agreement.
Note 7 — Income Taxes
The Company’s income tax expense of $
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2022
The Company’s income tax expense of $
Note 8 — Earnings (Loss) Per Share
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
|
Earnings (loss) per share - basic and diluted |
2022 |
2021 |
2022 |
2021 |
||||||||||||
|
Net income (loss) |
$ | $ | $ | $ | ( |
) | ||||||||||
|
Net income (loss) attributable to non-controlling interests |
( |
) | ( |
) | ||||||||||||
|
Net income (loss) attributable to JAKKS Pacific, Inc. |
( |
) | ||||||||||||||
|
Preferred stock dividend * |
||||||||||||||||
|
Net income (loss) attributable to common stockholders ** |
$ | $ | $ | $ | ( |
) | ||||||||||
|
Weighted average common shares outstanding - basic |
||||||||||||||||
|
Earnings (loss) per share available to common stockholder- basic |
$ | $ | $ | $ | ( |
) | ||||||||||
|
Weighted average common shares outstanding - diluted |
||||||||||||||||
|
Earnings (loss) per share available to common stockholder- diluted |
$ | $ | $ | $ | ( |
) | ||||||||||
*
**
Basic earnings (loss) per share is calculated using the weighted average number of common shares outstanding during the period. Diluted earnings (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 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
Note 9 — Common Stock and Preferred Stock
Common Stock
All issuances of common stock, including those issued pursuant to restricted stock or unit grants, are issued from the Company’s authorized but not issued and outstanding shares.
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2022
During 2021, certain employees, including
During 2022, certain employees, including
No dividend was declared or paid in the three and nine months ended September 30, 2022 and 2021.
Redeemable 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)
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.
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2022
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, and is more akin to a debt instrument than equity.
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. The 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 (see Note 16 – Fair Value Measurement). The value of the redemption provision explicitly considered the present value of the potential premium that would be paid related to, and the probability of, an event that would trigger its payment. The probability of a triggering event was based on management’s estimates of the probability of a change of control event occurring.
Accordingly, these two embedded derivatives are accounted for separately from the Series A Preferred Stock at fair value.
As of September 30, 2022, the Series A Preferred Stock is recorded in temporary equity at the amount of accrued, but unpaid dividends of $
As of September 30, 2022, the Series A Preferred Stock had a carrying value of $
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2022
The following table provides a reconciliation of the beginning and ending balances of the Series A Preferred Stock, which is recorded in temporary equity:
| 2022 | 2021 | |||||||
| 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
In November 2014, the Company entered into a joint venture with Meisheng Culture & 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
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 Step 1 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, 2022 and September 30, 2021.
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2022
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, 2022 and December 31, 2021 include the following (in thousands, except for weighted useful lives):
|
September 30, 2022 |
December 31, 2021 |
||||||||||||||||||||||||||
|
Weighted |
Gross |
Accumulated |
Gross |
Accumulated |
|||||||||||||||||||||||
|
Useful |
Carrying |
Amortization/ |
Net |
Carrying |
Amortization/ |
Net |
|||||||||||||||||||||
|
Lives |
Amount |
Write-off |
Amount |
Amount |
Write-off |
Amount |
|||||||||||||||||||||
|
(Years) |
|||||||||||||||||||||||||||
|
Amortized Intangible Assets: |
|||||||||||||||||||||||||||
|
Licenses |
$ | $ | ( |
) | $ | — | $ | $ | ( |
) | $ | — | |||||||||||||||
|
Product lines |
( |
) | ( |
) | |||||||||||||||||||||||
|
Customer relationships |
( |
) | — | ( |
) | — | |||||||||||||||||||||
|
Trade names |
( |
) | — | ( |
) | — | |||||||||||||||||||||
|
Non-compete agreements |
( |
) | — | ( |
) | — | |||||||||||||||||||||
|
Total amortized intangible assets |
$ | $ | ( |
) | $ | $ | $ | ( |
) | $ | |||||||||||||||||
|
September 30, 2022 |
December 31, 2021 |
|||||||||||||||||||||||
|
Gross |
Gross |
|||||||||||||||||||||||
|
Carrying |
Impairment |
Net |
Carrying |
Impairment |
Net |
|||||||||||||||||||
|
Amount |
Charge |
Amount |
Amount |
Charge |
Amount |
|||||||||||||||||||
|
Unamortized Intangible Assets: |
||||||||||||||||||||||||
|
Trademarks |
$ | $ | ( |
) | $ | $ | $ | $ | ||||||||||||||||
Note 13 — Comprehensive Income (Loss)
The table below presents the components of the Company’s comprehensive income (loss) for the three and nine months ended September 30, 2022 and 2021 (in thousands):
|
Three Months Ended |
Nine Months Ended |
|||||||||||||||
|
September 30, |
September 30, |
|||||||||||||||
|
2022 |
2021 |
2022 |
2021 |
|||||||||||||
|
Net income (loss) |
$ | $ | $ | $ | ( |
) | ||||||||||
|
Other comprehensive income |
||||||||||||||||
|
Foreign currency translation adjustment |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
|
Comprehensive income (loss) |
( |
) | ||||||||||||||
|
Less: Comprehensive income (loss) attributable to non-controlling interests |
( |
) | ( |
) | ||||||||||||
|
Comprehensive income (loss) attributable to JAKKS Pacific, Inc. |
$ | $ | $ | $ | ( |
) | ||||||||||
Note 14 — Litigation and Contingencies
The Company is a party to, and certain of its property is the subject of, various pending claims and legal proceedings that routinely arise in the ordinary course of its business. The Company accrues for losses when the loss is deemed probable and the liability can reasonably be estimated. Where a liability is probable and there is a range of estimated loss with no best estimate in the range, the Company records the minimum estimated liability related to the claim. As additional information becomes available, the Company assesses the potential liability related to its pending litigation and revises its estimates.
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, 2022
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 executive officers and certain key employees of restricted stock 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, 2022 and 2021 (in thousands)
|
Three Months Ended |
Nine Months Ended |
|||||||||||||||
|
September 30, |
September 30, |
|||||||||||||||
|
2022 |
2021 |
2022 |
2021 |
|||||||||||||
|
Share-based compensation expense |
$ | $ | $ | $ | ||||||||||||
Restricted Stock Units
Restricted stock unit activity (including those with performance-based vesting criteria) for the nine months ended September 30, 2022 is summarized as follows:
|
Restricted Stock Units |
||||||||
|
Number of Shares |
Weighted Average Grant Date Fair Value |
|||||||
|
Outstanding, December 31, 2021 |
$ | |||||||
|
Granted |
||||||||
|
Vested |
( |
) | ||||||
|
Forfeited |
( |
) | ||||||
|
Outstanding, September 30, 2022 |
||||||||
As of September 30, 2022, there was $
Note 16 — Fair Value Measurements
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various methods including market, income and cost approaches. Based upon these approaches, the Company often utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market-corroborated, or unobservable inputs. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based upon observable inputs used in the valuation techniques, the Company is required to provide information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values into three broad levels as follows:
|
Level 1: |
Valuations for assets and liabilities traded in active markets from readily available pricing sources for market transactions involving identical assets or liabilities. |
|
Level 2: |
Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third-party pricing services for identical or similar assets or liabilities. |
|
Level 3: |
Valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities. |
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2022
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, 2022 and December 31, 2021 (in thousands):
|
Fair Value Measurements |
||||||||||||||||
|
as of September 30, 2022 |
||||||||||||||||
|
Carrying Amount as of |
||||||||||||||||
|
September 30, 2022 |
Level 1 | Level 2 | Level 3 | |||||||||||||
|
Preferred stock derivative liability |
$ | $ | $ | $ | ||||||||||||
|
Fair Value Measurements |
||||||||||||||||
|
as of December 31, 2021 |
||||||||||||||||
|
Carrying Amount as of |
||||||||||||||||
|
December 31, 2021 |
Level 1 | Level 2 | Level 3 | |||||||||||||
|
Preferred stock derivative liability |
$ | $ | $ | $ | ||||||||||||
The following tables provide a reconciliation of the beginning and ending balances of liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) (in thousands):
|
Preferred stock derivative liability |
2022 |
2021 |
||||||
|
Balance, January 1, |
$ | $ | ||||||
|
Change in fair value |
||||||||
|
Balance, September 30, |
$ | $ | ||||||
|
3.25% convertible senior notes due in 2023 |
2022 |
2021 |
||||||
|
Balance, January 1, |
$ | $ | ||||||
|
Conversion of convertible senior notes |
( |
) | ||||||
|
Change in fair value |
||||||||
|
PIK interest |
||||||||
|
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.
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2022
The Company has elected the fair value option of measurement for the
The fair value of the Series A Preferred Stock derivative liability is calculated using unobservable inputs (Level 3 fair value measurements). The value of the redemption provision explicitly considered the present value of the potential premium that would be paid related to, and the probability of, an event that would trigger its payment. The probability of a triggering event was based on management’s estimates of the probability of a change of control event occurring.
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 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 (see Note 10 – Joint Ventures).
In October 2016, the Company entered into a joint venture with Hong Kong Meisheng Cultural Company Limited, 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 (see Note 10 – Joint Ventures).
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 10% or more of the issued and outstanding shares of common stock of the Company, Meisheng shall have the right from time to time to designate a nominee (who currently is Mr. Xiaoqiang Zhao) for election to the Company’s board of directors.
Meisheng also serves as a significant manufacturer of the Company. For the three and nine months ended September 30, 2022, the Company made inventory-related payments to Meisheng of approximately $
A director of the Company is a director at Benefit Street Partners, who owns
Note 18 — Prepaid Expenses and Other Assets
Prepaid expenses and other assets as of September 30, 2022 and December 31, 2021 consist of the following (in thousands):
|
September 30, 2022 |
December 31, 2021 |
|||||||
|
Prepaid expenses |
$ | $ | ||||||
|
Government-funded COVID-19 relief |
||||||||
|
Income taxes receivable |
||||||||
|
Royalty advances |
||||||||
|
Other assets |
||||||||
|
Prepaid expenses and other assets |
$ | $ | ||||||
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2022
Note 19 — Subsequent Events
Sales Agreement
On October 26, 2022, the Company entered into an At Market Issuance Sales Agreement (the “Sales Agreement”) with B. Riley Securities, Inc., (the “Agent”), pursuant to which the Company may, from time to time, offer and sell shares of the Company’s common stock having an aggregate offering price of up to $
The Company is not obligated to sell, and the Agent is not obligated to buy or sell, any shares of common stock under the Sales Agreement. No assurance can be given that the Company will sell any shares of common stock under the Sales Agreement, or, if it does, as to the price or amount of shares of common stock that it sells or the dates when such sales will take place. The Company and the Agent may each terminate the Sales Agreement at any time upon specified prior written notice. As of November 14, 2022, the Company has not sold any shares of its common stock under the Sales Agreement.
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.
Explanatory Note
As of the date of filing of this Quarterly Report on Form 10-Q (this “Report”), there continue to be uncertainties regarding the Novel Coronavirus (“COVID-19”) pandemic (“the pandemic”), including the scope of health issues, the duration of the pandemic, and the continuing local and worldwide social, and economic disruption. To date, the 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 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.
We expect to continue to assess the evolving impact of the 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 pandemic and our precautionary measures in response thereto may impact our business, financial condition, and results of operations will depend on how the 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.
The pandemic continues to have a lasting impact on household consumption and wealth. Changes in personal behavior brought on by the pandemic in combination with government spending and stimulus have created an inflationary environment in many countries around the world, the United States included. The war in Ukraine has also been disruptive to the economies of Europe in particular. Global supply chains designed for optimized efficiency with minimal slack have been challenged to react in surges and rapid declines in demand, while also accounting for spikes in factor cost inputs like labor and fuel.
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 pandemic and the follow-on market volatility. 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 & Estimates
Our critical accounting policies and estimates are included in the 2021 Annual Report on Form 10-K and did not materially change during the first nine months of 2022.
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:
|
Three Months Ended September 30, (Unaudited) |
Nine Months Ended September 30, (Unaudited) |
|||||||||||||||
|
2022 |
2021 |
2022 |
2021 |
|||||||||||||
|
Net sales |
100.0 |
% |
100.0 |
% |
100.0 |
% |
100.0 |
% |
||||||||
|
Cost of sales: |
||||||||||||||||
|
Cost of goods |
54.0 | 53.2 | 55.4 | 53.4 | ||||||||||||
|
Royalty expense |
16.3 | 13.6 | 16.0 | 14.3 | ||||||||||||
|
Amortization of tools and molds |
1.2 | 1.6 | 1.1 | 1.6 | ||||||||||||
|
Cost of sales |
71.5 | 68.4 | 72.5 | 69.3 | ||||||||||||
|
Gross profit |
28.5 | 31.6 | 27.5 | 30.7 | ||||||||||||
|
Direct selling expenses |
2.6 | 4.5 | 3.0 | 5.5 | ||||||||||||
|
General and administrative expenses |
9.1 | 11.3 | 12.7 | 16.5 | ||||||||||||
|
Depreciation and amortization |
0.1 | 0.3 | 0.2 | 0.4 | ||||||||||||
|
Selling, general and administrative expenses |
11.8 | 16.1 | 15.9 | 22.4 | ||||||||||||
|
Intangibles impairment |
— | — | — | — | ||||||||||||
|
Income from operations |
16.7 | 15.5 | 11.6 | 8.3 | ||||||||||||
|
Other income (expense), net |
0.1 | — | — | — | ||||||||||||
|
Change in fair value of preferred stock derivative liability |
(2.3 | ) | — | (0.3 | ) | (2.1 | ) | |||||||||
|
Change in fair value of convertible senior notes |
— | (1.5 | ) | — | (3.8 | ) | ||||||||||
|
Gain on loan forgiveness |
— | 2.6 | — | 1.4 | ||||||||||||
|
Loss on debt extinguishment |
— | — | — | (1.7 | ) | |||||||||||
|
Interest income |
— | — | — | — | ||||||||||||
|
Interest expense |
(1.4 | ) | (1.1 | ) | (1.3 | ) | (2.7 | ) | ||||||||
|
Income (loss) before provision for income taxes |
13.1 | 15.5 | 10.0 | (0.6 | ) | |||||||||||
|
Provision for income taxes |
3.6 | 0.1 | 2.0 | 0.1 | ||||||||||||
|
Net income (loss) |
9.5 | 15.4 | 8.0 | (0.7 | ) | |||||||||||
|
Net income (loss) attributable to non-controlling interests |
— | — | — | — | ||||||||||||
|
Net income (loss) attributable to JAKKS Pacific, Inc. |
9.5 |
% |
15.4 |
% |
8.0 |
% |
(0.7 |
)% |
||||||||
The following unaudited table summarizes, for the periods indicated, certain statements of operations data by segment (in thousands):
|
Three Months Ended September 30, (Unaudited) |
Nine Months Ended September 30, (Unaudited) |
|||||||||||||||
|
2022 |
2021 |
2022 |
2021 |
|||||||||||||
|
Net Sales |
||||||||||||||||
|
Toys/Consumer Products |
$ | 269,607 | $ | 172,952 | $ | 529,590 | $ | 334,365 | ||||||||
|
Costumes |
53,391 | 64,005 | 134,711 | 98,787 | ||||||||||||
| 322,998 | 236,957 | 664,301 | 433,152 | |||||||||||||
|
Cost of Sales |
||||||||||||||||
|
Toys/Consumer Products |
186,309 | 115,107 | 375,015 | 225,276 | ||||||||||||
|
Costumes |
44,778 | 46,926 | 106,568 | 74,961 | ||||||||||||
| 231,087 | 162,033 | 481,583 | 300,237 | |||||||||||||
|
Gross Profit |
||||||||||||||||
|
Toys/Consumer Products |
83,298 | 57,845 | 154,575 | 109,089 | ||||||||||||
|
Costumes |
8,613 | 17,079 | 28,143 | 23,826 | ||||||||||||
| $ | 91,911 | $ | 74,924 | $ | 182,718 | $ | 132,915 | |||||||||
Comparison of the Three Months Ended September 30, 2022 and 2021
Net Sales
Toys/Consumer Products. Net sales of our Toys/Consumer Products segment were $269.6 million for the three months ended September 30, 2022 compared to $173.0 million for the prior year period, representing an increase of $96.6 million, or 55.8%. The Doll/Dress-Up/Nurturing Play and Action Play and Collectibles division sales increased, led by Disney Encanto™ and Sonic the Hedgehog®.
Costumes. Net sales of our Costumes segment were $53.4 million for the three months ended September 30, 2022 compared to $64.0 million for the prior year period, representing a decrease of $10.6 million, or 16.6%. The decrease in sales was related to earlier customer shipments in the second quarter to mitigate possible supply chain issues experienced a year ago.
Cost of Sales
Toys/Consumer Products. Cost of sales of our Toys/Consumer Products segment was $186.3 million, or 69.1% of related net sales for the three months ended September 30, 2022 compared to $115.1 million, or 66.5% of related net sales for the prior year period, representing an increase of $71.2 million, or 61.9%. The increase in dollars is related to higher overall sales. The increase as a percentage of net sales, year over year, is due to a higher average royalty rate and higher freight costs, slightly offset by lower product costs.
Costumes. Cost of sales of our Costumes segment was $44.8 million, or 83.9% of related net sales for the three months ended September 30, 2022, compared to $46.9 million, or 73.3% of related net sales for the prior year period, representing a decrease in dollars of $2.1 million, or 4.5%. The decrease in dollars is related to lower overall sales. The increase as a percentage of net sales was driven by higher product cost and a higher average royalty rate.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $38.2 million for the three months ended September 30, 2022 compared to $38.2 million for the prior year period constituting 11.8% and 16.1% of net sales, respectively. Selling, general and administrative expenses were flat versus prior year due to lower selling costs offset by higher general and administrative costs.
Interest Expense
Interest expense was $4.4 million for the three months ended September 30, 2022, as compared to $2.7 million in the prior year period. During the three months ended September 30, 2022, we incurred interest expense of $3.4 million related to our 2021 BSP Term Loan, $0.2 million related to our revolving credit facility and $0.8 million related to other borrowing costs. During the three months ended September 30, 2021, we incurred 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.
Provision For Income Taxes
Our income tax expense, which includes federal, state and foreign income taxes and discrete items, was $11.6 million, or an effective tax rate of 27.4%, for the three months ended September 30, 2022. During the comparable period in 2021, our income tax expense was $0.3 million, or an effective tax rate of 0.8%.
Comparison of the Nine Months Ended September 30, 2022 and 2021
Net Sales
Toys/Consumer Products. Net sales of our Toys/Consumer Products segment were $529.6 million for the nine months ended September 30, 2022 compared to $334.4 million for the prior year period, representing an increase of $195.2 million, or 58.4%. The Doll/Dress-Up/Nurturing Play and Action Play and Collectibles division sales increased, led by Disney Encanto™ and Sonic the Hedgehog®.
Costumes. Net sales of our Costumes segment were $134.7 million for the nine months ended September 30, 2022 compared to $98.8 million for the prior year period, representing an increase of $35.9 million, or 36.3%. The increase in sales was related to increased points of distribution in both the North America and International markets.
Cost of Sales
Toys/Consumer Products. Cost of sales of our Toys/Consumer Products segment was $375.0 million, or 70.8% of related net sales for the nine months ended September 30, 2022 compared to $225.3 million, or 67.4% of related net sales for the prior year period, representing an increase of $149.7 million, or 66.4%. The increase in dollars is related to higher overall sales. The increase as a percentage of net sales, year over year, is due to higher freight costs and a higher average royalty rate.
Costumes. Cost of sales of our Costumes segment was $106.6 million, or 79.1% of related net sales for the nine months ended September 30, 2022, compared to $75.0 million, or 75.9% of related net sales for the prior year period, representing an increase in dollars of $31.6 million, or 42.1%. The increase in dollars is related to higher overall sales. The increase as a percentage of net sales was driven by higher product cost and a higher average royalty rate.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $105.8 million for the nine months ended September 30, 2022 compared to $97.1 million for the prior year period constituting 15.9% and 22.4% of net sales, respectively. Selling, general and administrative expenses increased as a result of higher payroll costs.
Interest Expense
Interest expense was $8.9 million for the nine months ended September 30, 2022, as compared to $11.9 million in the prior year period. During the nine months ended September 30, 2022, we incurred interest expense of $7.4 million related to our 2021 BSP Term Loan, $0.5 million related to our revolving credit facility and $1.0 million related to other borrowing costs. During the nine months ended September 30, 2021, we incurred 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.
Provision For (Benefit From) Income Taxes
Our income tax expense, which includes federal, state and foreign income taxes and discrete items, was $13.3 million, or an effective tax rate of 20.1%, for the nine months ended September 30, 2022. During the comparable period in 2021, our income tax expense was $0.3 million, or an effective tax rate of (11.7%).
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. The pandemic has somewhat disrupted historical industry seasonality. Consumer demand for certain product categories has surged during this time. Surges in consumer demand have also strained the supply-chain, lengthening the amount of time it takes to move products from factory to warehouse to customers. Customers have also had increased challenges in managing their inventory levels, resulting in either out-of-stock or over-supply scenarios, depending on the product category and product line.
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, 2022, we had working capital (inclusive of cash, cash equivalents and restricted cash) of $135.8 million, compared to $114.5 million as of December 31, 2021, representing an increase in working capital of $21.3 million during the nine-month period ended September 30, 2022.
Operating activities provided net cash of $75.3 million during the nine months ended September 30, 2022, as compared to net cash used of $26.9 million in the prior year period. The increase in net cash provided by operating activities year-over-year is primarily due to a higher net income and lower working capital usage, partially offset by lower non-cash charges related to valuation adjustments for our convertible senior notes and preferred stock derivative liability. 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 22% payable on net sales of such products. As of September 30, 2022, these agreements required future aggregate minimum royalty guarantees of $71.4 million exclusive of $1.1 million in advances already paid. Of this $71.4 million future minimum royalty guarantee, $25.4 million is due over the next twelve months.
Investing activities used net cash of $8.1 million and $6.3 million for the nine months ended September 30, 2022 and 2021, respectively, and consisted primarily of cash paid for the purchase of molds and tooling used in the manufacture of our products.
Financing activities used net cash of $30.3 million and $32.5 million for the nine months ended September 30, 2022 and 2021, respectively. The cash used in financing activities during the nine months ended September 30, 2022, primarily consists of the repayment of our 2021 BSP Term Loan of $29.0 million, and the repurchase of common stock for employee tax withholding of $1.3 million. The cash used in financing activities during the nine months ended September 30, 2021 of $32.5 million consists 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.
As of September 30, 2022, we have $69.5 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 $17.2 million in letters of credit.
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. On April 26, 2022, we entered into a First Amendment to the 2021 BSP Term Loan Agreement, to provide, among other things, that we must maintain Qualified Cash of at least: (a) at all times after the Closing Date and prior to the First Amendment Effective Date, $20.0 million; (b) at all times during the period commencing on the First Amendment Effective Date through and including June 30, 2022, $15.0 million; and (c) at all times on and after July 1, 2022, through September 30, 2022, $17.5 million; provided, however, that if the Total Net Leverage Ratio exceeded 1.75:1.00 as of the last day of the most recently ended month for which financial statements were required to have been delivered, then the amount set forth in this clause shall be increased to $20.0 million. Notwithstanding the foregoing, the Applicable Minimum Cash Amount shall be reduced by $1.0 million for every $5.0 million principal prepayment or repayment of the Term Loans following the First Amendment Effective Date; provided however, that, the Applicable Minimum Cash Amount shall in no event be reduced below $15.0 million.
On June 27, 2022, as permitted by the terms within the 2021 BSP Term Loan Agreement, we made a voluntary fee-free $10.0 million prepayment towards the outstanding principal amount of the 2021 BSP Term Loan.
On September 28, 2022, as permitted by the terms within the 2021 BSP Term Loan Agreement, we made a voluntary $17.5 million prepayment towards the outstanding principal amount of the 2021 BSP Term Loan and incurred a $0.5 million prepayment penalty.
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, 2022.
See Note 5 – Debt and Note 6 – Credit Facilities for additional information pertaining to our Debt and Credit Facilities.
As of September 30, 2022 and December 31, 2021, we held cash and cash equivalents, including restricted cash, of $76.6 million and $45.3 million, respectively. Cash, and cash equivalents, including restricted cash held outside of the United States in various foreign subsidiaries totaled $72.3 million and $30.7 million as of September 30, 2022 and December 31, 2021, 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, 2022.
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.
As of September 30, 2022 off-balance sheet arrangements include letters of credit issued by JPMorgan of $17.2 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 2021 BSP Term Loan (see Note 5 – Debt) and our JPMorgan ABL Facility (see Note 6 – Credit Facilities). As of September 30, 2022, we have $69.5 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 to an excess availability pricing grid and base rate subject to a 1.00% floor). Borrowings under the 2021 BSP Term Loan and 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, 2022, the maximum amount borrowed under the revolving credit facility was $13.0 million and the average amount of borrowings outstanding was $0.8 million. As of September 30, 2022, the amount of total borrowings outstanding under the revolving credit facility was nil.
London Interbank Offering Rate (“LIBOR”) is an interest rate benchmark used as a reference rate for our term loan. Borrowings under our term loan will bear interest at a variable rate, primarily based on LIBOR. In July 2017, the United Kingdom’s Financial Conduct Authority (the “FCA”), which regulates LIBOR, announced that it will no longer persuade or compel banks to submit rates for the calculation of LIBOR after 2021. It is unclear whether or not LIBOR will cease to exist at that time (and if so, what reference rate will replace it) or if new methods of calculating LIBOR will be established such that it continues to exist after 2021. On November 30, 2020, ICE Benchmark Administration (“IBA”), the administrator of LIBOR, with the support of the United States Federal Reserve and the United Kingdom’s FCA, announced plans to consult on ceasing publication of USD LIBOR on December 31, 2021 for only the one-week and two-month USD LIBOR tenors, and on June 30, 2023 for all other USD LIBOR tenors. While this announcement extends the transition period to June 2023, the United States Federal Reserve concurrently issued a statement advising banks to stop new USD LIBOR issuances by the end of 2021. In light of these recent announcements, the future of LIBOR at this time is uncertain and any changes in the methods by which LIBOR is determined or regulatory activity related to LIBOR’s phase-out could cause LIBOR to perform differently than in the past or cease to exist.
The Alternative Reference Rates Committee (“ARRC”) has identified the Secured Overnight Financing Rate ("SOFR") as the recommended alternative for use in financial and other derivatives contracts that are currently indexed to U.S. dollar LIBOR. At this time, it is not possible to predict the effect any modification or discontinuation of LIBOR, or the establishment of alternative reference rates such as SOFR, will have on our business and financial condition. Although regulators and IBA have made clear that the recent announcements should not be read to say that LIBOR has ceased or will cease, in the event LIBOR does cease to exist, our term loan and related agreements would transition from LIBOR to SOFR, which may result in interest rates and/or payments that do not correlate over time with the interest rates and/or payments that would have been made on its obligations if LIBOR was available in its current form.
Foreign Currency Risk
We have wholly-owned subsidiaries in Hong Kong, China, the United Kingdom, Germany, France, the Netherlands, 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, Germany, France, the Netherlands, 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 linked to the U.S. dollar by the Hong Kong Monetary Authority at HK$7.75 - HK$7.85 to US$1.00 since 2005 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 the pending litigation and revise our estimates.
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 to 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, 2021. 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 |
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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 August 4, 2022 and incorporated herein by reference. |
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(2) |
Filed herewith. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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JAKKS PACIFIC, INC. |
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Date: November 14, 2022 |
By: |
/s/ John Kimble |
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John Kimble |
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Executive Vice President and Chief Financial Officer |
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(Duly Authorized Officer and Principal Financial Officer) |
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Exhibit 31.1
CERTIFICATIONS
I, Stephen G. Berman, Chief Executive Officer, certify that:
I have reviewed this quarterly report on Form 10-Q of JAKKS Pacific, Inc. (“Company”);
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this quarterly report;
The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and
d) disclosed in this quarterly report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter (the Company’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the Audit Committee of the Company’s board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.
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By: |
/s/ Stephen G. Berman |
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Stephen G. Berman |
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Chief Executive Officer |
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Date: November 14, 2022
Exhibit 31.2
CERTIFICATIONS
I, John Kimble, Chief Financial Officer, certify that:
I have reviewed this quarterly report on Form 10-Q of JAKKS Pacific, Inc. (“Company”);
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this quarterly report;
The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and
d) disclosed in this quarterly report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter (the Company’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the Audit Committee of the Company’s board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.
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By: |
/s/ John Kimble |
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John Kimble |
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Chief Financial Officer |
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Date: November 14, 2022
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, 2022 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
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/s/ Stephen G. Berman |
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Stephen G. Berman |
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Chief Executive Officer |
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Date: November 14, 2022
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, 2022 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
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/s/ John Kimble |
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John Kimble |
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Chief Financial Officer |
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Date: November 14, 2022