What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2020-11-13 compared with 2020-08-04 · 365 added, 385 removed, 598 unchanged (56% of the section changed)

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(In thousands, except share amounts)

2020 December 31,

September 30,

Current assets

Cash and cash equivalents

$ 48,133 $ 61,613

Restricted cash

Accounts receivable, net of allowance for doubtful accounts of $ 3,527 and $ 3,394 at June 30, 2020 and December 31, 2019, respectively

69,003 117,942

57,681 54,259

Accounts receivable, net of allowance for doubtful accounts of $ 4,709 and $ 3,394 at September 30, 2020 and December 31, 2019, respectively

Prepaid expenses and other assets

28,448 21,898

Total current assets

207,820 260,385

Property and equipment

Office furniture and equipment

11,820 11,678

Molds and tooling

94,336 103,335

Leasehold improvements

112,977 121,821

Less accumulated depreciation and amortization

95,998 106,562

Property and equipment, net

16,979 15,259

Operating lease right-of-use assets, net

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Intangible assets, net

35,083 35,083

$ 300,420 $ 365,222

Liabilities, Preferred Stock and Stockholders' Equity (Deficit)

Liabilities, Preferred Stock and Stockholders' Equity

Current liabilities

Accounts payable

$ 53,103 $ 61,196

Accrued expenses

25,192 39,515

Reserve for sales returns and allowances

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5,000,000 shares authorized;

200,000 shares issued and outstanding at June 30, 2020 and December 31, 2019

Stockholders' Equity (Deficit)*

200,000 shares issued and outstanding at September 30, 2020 and December 31, 2019

Stockholders' Equity*

Common stock, $ 0.001 par value;

100,000,000 shares authorized;

4,239,578 and 3,521,037 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively*

4,416,663 and 3,521,037 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively*

Additional paid-in capital *

Accumulated deficit

( 218,463 ) ( 183,149 )

Accumulated other comprehensive loss

( 15,975 ) ( 14,422 )

Total JAKKS Pacific, Inc.

stockholders' equity (deficit) * ( 24,281 ) 2,940

stockholders' equity*

Non-controlling interests

Total stockholders' equity (deficit) * ( 23,152 ) 4,021

Total liabilities, preferred stock and stockholders' equity (deficit) $ 300,420 $ 365,222

Total stockholders' equity*

Total liabilities, preferred stock and stockholders' equity

* After giving effect to a 1 for 10 reverse stock split effective July 9, 2020.

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AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(In thousands, except per share data)

Three Months Ended June 30, (Unaudited) Six Months Ended June 30, (Unaudited)

2020 2019 2020 2019

Net sales $ 78,758 $ 95,182 $ 145,315 $ 166,008

Three Months Ended September 30, (Unaudited)

Nine Months Ended September 30, (Unaudited)

Cost of sales

Gross profit 16,770 17,746 33,120 32,086

Selling, general and administrative expenses

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Acquisition related and other

Loss from operations ( 9,746 ) ( 18,649 ) ( 25,732 ) ( 42,690 )

Income (loss) from operations

Income from joint ventures

Other income (expense), net

Loss on extinguishment of debt

Change in fair value of preferred stock derivative liability

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Interest expense

Loss before provision for income taxes ( 22,996 ) ( 21,896 ) ( 34,718 ) ( 51,268 )

Provision for income taxes 272 589 548 344

Net loss ( 23,268 ) ( 22,485 ) ( 35,266 ) ( 51,612 )

Net income attributable to non-controlling interests 8 57 48 88

Net loss attributable to JAKKS Pacific, Inc.

$ ( 23,276 ) $ ( 22,542 ) $ ( 35,314 ) $ ( 51,700 )

Net loss attributable to common stockholders $ ( 23,588 ) $ ( 22,542 ) $ ( 35,933 ) $ ( 51,700 )

Loss per share - basic and diluted* $ ( 7.70 ) $ ( 9.55 ) $ ( 11.81 ) $ ( 21.93 )

Shares used in loss per share - basic and diluted* 3,064 2,360 3,043 2,358

Comprehensive loss $ ( 23,187 ) $ ( 22,935 ) $ ( 36,819 ) $ ( 50,759 )

Comprehensive loss attributable to JAKKS Pacific, Inc.

$ ( 23,195 ) $ ( 22,992 ) $ ( 36,867 ) $ ( 50,847 )

Income (loss) before provision for (benefit from) income taxes

Provision for (benefit from) income taxes

Net income (loss)

Net income (loss) attributable to non-controlling interests

Net income (loss) attributable to JAKKS Pacific, Inc.

Net income (loss) attributable to common stockholders

Income (loss) per share – basic*

Shares used in income (loss) per share – basic*

Income (loss) per share – diluted*

Shares used in income (loss) per share – diluted*

Comprehensive income (loss)

Comprehensive income (loss) attributable to JAKKS Pacific, Inc.

* After giving effect to a 1 for 10 reverse stock split effective July 9, 2020.

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AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(In thousands)

Three and Six Months Ended June 30, 2020

Common Stock* Treasury

Stock Additional

Capital* Accumulated

Deficit Accumulated

Three and Nine Months Ended September 30, 2020

Comprehensive

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Stockholders’

Equity (Deficit)* Non-

Interests Total Stockholders'

Equity (Deficit)*

Total Stockholders'

Balance, December 31, 2019

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Balance, June 30, 2020

Three and Six Months Ended June 30, 2019

Common Stock* Treasury

Stock Additional

Capital* Accumulated

Deficit Accumulated

Conversion of convertible senior notes

Stock-based compensation expense

Repurchase of common stock for employee tax withholding

Preferred stock accrued dividends

Foreign currency translation adjustment

Balance, September 30, 2020

Three and Nine Months Ended September 30, 2019

Comprehensive

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Stockholders’

Equity (Deficit)* Non-

Interests Total Stockholders'

Equity (Deficit)*

Total Stockholders'

Balance, December 31, 2018

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Balance, June 30, 2019

Stock-based compensation expense

Adjustment to additional paid-in capital

Common stock issuance

Treasury shares retirement

Preferred stock accrued dividends

Net income (loss)

Foreign currency translation adjustment

Balance, September 30, 2019

* After giving effect to a 1 for 10 reverse stock split effective July 9, 2020.

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(In thousands)

Six Months Ended June 30,

Nine Months Ended September 30,

Cash flows from operating activities

$ ( 35,266 ) $ ( 51,612 )

Adjustments to reconcile net loss to net cash used in operating activities:

Adjustments to reconcile net loss to net cash provided by operating activities:

Provision for doubtful accounts

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Gain on disposal of property and equipment

( 115 ) ( 61 )

Loss on extinguishment of debt

Change in fair value of convertible senior notes

2 unchanged sentences

Accounts receivable

48,516 37,407

( 3,422 ) 359

Prepaid expenses and other assets

2,142 ( 12,079 )

Accounts payable

( 9,239 ) 6,785

Accrued expenses

( 14,323 ) 3,714

Reserve for sales returns and allowances

( 6,053 ) ( 4,905 )

Income taxes payable

Other liabilities

( 264 ) ( 58 )

Total adjustments

23,364 42,747

Net cash used in operating activities ( 11,902 ) ( 8,865 )

Net cash provided by operating activities

Cash flows from investing activities

Purchases of property and equipment

( 4,335 ) ( 5,205 )

Proceeds from sale of property and equipment

Net cash used in investing activities

( 4,270 ) ( 5,205 )

Cash flows from financing activities

1 unchanged sentence

Repayment of credit facility borrowings

Debt issuance costs

Term loan prepayment penalty

Proceeds from loan under the Paycheck Protection Program

Repayment of term loan — ( 167 )

Net proceeds from credit facility borrowings

Net proceeds from issuance of long term debt

Repayment of term loan facility

Repurchase of common stock for employee tax withholding

( 174 ) ( 273 )

Net cash provided by (used in) financing activities

Net decrease in cash, cash equivalents and restricted cash ( 12,045 ) ( 22,010 )

Net increase in cash, cash equivalents and restricted cash

Effect of foreign currency translation

( 1,553 ) 853

Cash, cash equivalents and restricted cash, beginning of period

66,286 58,205

Cash, cash equivalents and restricted cash, end of period

$ 52,688 $ 37,048

Cash paid during the period for:

$ 6,720 $ 5,063

As of June 30, 2020, there was $ 3.2 million of property and equipment purchases included in accounts payable.

As of June 30, 2019, there was $ 3.4 million of property and equipment purchases included in accounts payable.

As of September 30, 2020, there was $ 2.9 million of property and equipment purchases included in accounts payable.

As of September 30, 2019, there was $ 2.6 million of property and equipment purchases included in accounts payable.

See Notes 1, 5, 6 and 9 for additional supplemental information to the condensed consolidated statements of cash flows.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

September 30, 2020

Note 1 — Basis of Presentation

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On July 31, 2020, the Company was notified by Nasdaq that it had regained compliance with the Nasdaq listing requirements.

On September 11, 2020, the Company received notice from Nasdaq that during the prior 30 day period the Company had not met a listing requirement to maintain a minimum Market Value of Publicly Held Shares of $15,000,000.

The Company has until March 10, 2021 to cure this deficiency and/or meet any of Nasdaq’s other alternative continuing qualification criteria.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326):

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The adoption of this standard did not have an impact on the Company’s condensed consolidated financial statements.

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

In October 2018, the FASB issued ASU 2018-17, "Consolidation:

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The adoption of this standard did not have an impact on the Company's 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 intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax assets for investments.

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes,” which simplifies the accounting for income taxes related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax assets for investments.

The guidance also reduces complexity in certain areas, including the accounting for transactions that result in a step-up in the tax basis of goodwill and allocating taxes to members of a consolidated group.

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The Company is currently evaluating the impact that the adoption of this new guidance will have on its condensed consolidated financial statements.

Going Concern and Liquidity

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848):

Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The new standard provides optional expedients and exceptions for applying U.S.

GAAP to contracts, hedging relationships, and other transactions, for a limited period of time, to ease the potential burden of recognizing the effects of reference rate reform on financial reporting.

The amendments in ASU 2020-04 apply to contracts, hedging relationships and other transactions that reference the London Inter-Bank Offered Rate ("LIBOR") or another reference rate expected to be discontinued due to the global transition away from LIBOR and certain other interbank offered rates.

An entity may elect to apply ASU 2020-04 beginning March 12, 2020 through December 31, 2022.

The Company is currently evaluating this option as it relates to its contracts that reference LIBOR, as well as the impact of the standard to the Company's condensed consolidated financial statements.

In August 2020, the FASB issued ASU 2020-06, “Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40):

Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.” The new guidance eliminates two of the three models in ASC 470-20, which required entities to account for beneficial conversion features and cash conversion features in equity, separately from the host convertible debt or preferred stock.

As a result, only conversion features accounted for under the substantial premium model in ASC 470-20 and those that require bifurcation in accordance with ASC 815-15 will be accounted for separately.

In addition, the amendments in ASU 2020-06 eliminates some of the requirements in ASC 815-40 related to equity classification.

The amendments in ASU 2020-06 further revised the guidance in ASC 260, Earnings Per Share (“EPS”), to address how convertible instruments are accounted for in calculating diluted EPS, and requires enhanced disclosures about the terms of convertible instruments and contracts in an entity’s own equity.

The new standard is effective for the Company for fiscal years beginning after December 15, 2023, including interim periods within these fiscal years, with early adaption permitted.

The Company is currently evaluating the impact of the adoption of ASU 2020-06 on its condensed consolidated financial statements.

On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China (the “COVID-19 outbreak”) and the risks to the international community as the virus spreads globally beyond its point of origin.

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Management is actively monitoring the global situation and the resulting impact on its financial condition, liquidity, operations, suppliers, industry, and workforce.

Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, it is extremely challenging for the Company to estimate the effects of the COVID-19 outbreak on its results of operations, financial condition, and liquidity for fiscal years 2020 and 2021.

The first half of fiscal year 2020 has seen the full spectrum of stay-at-home orders and retail closures to reduced retailer hours and focus on “essential” items to some markets trying to take a business-as-usual approach.

Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, the Company is unable to estimate the effects of the COVID-19 outbreak on its results of operations, financial condition, and liquidity for fiscal years 2020 and 2021.

Beginning in China and moving throughout the world, 2020 has seen the full spectrum of stay-at-home orders and retail closures to reduced retailer hours and focus on “essential” items to some markets trying to take a business-as-usual approach.

In addition, published data has indicated a similar wide range in some toy categories significantly outperforming last year’s comparable period sales while others lag behind, which is at least partly due to drastic changes in purchase occasions (e.g., staying at home with family in the backyard vs.

attending a school acquaintance’s birthday party).

Although the Company cannot estimate the length or gravity of the impact of the COVID-19 outbreak at this time, it is likely the pandemic will have a material adverse effect on the Company’s sales expectations for fiscal year 2020.

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

In mid-March 2020, the Company began migrating to a work-from-home model in compliance with local guidance.

In early April 2020, the Company began to reassess its revenue and expense projections for the year in an attempt to anticipate decreases in customer and consumer demand based on the uncertainty associated with the economic impact of the pandemic.

In parallel, the Company began a review of worldwide spending to identify both short-term and long-term cost savings measures to preserve both profitability and liquidity in light of the potential for decreased product demand.

By late April 2020, the Company had identified new revenue and spending objectives for the year 2020 and synchronized those expectations across the senior leadership team.

It is the Company’s intention to carefully monitor the pandemic’s impact across markets, channels and customers and strike the right balance of pursuing opportunity while minimizing risk to the Company’s long-term health.

In parallel, the Company began a review of its worldwide spending to identify both short-term and long-term cost savings opportunities to preserve both profitability and liquidity.

By late April 2020, the Company had identified new revenue and spending objectives for the full-year 2020 and synchronized those expectations across the senior leadership team.

It is the Company’s intention to continue monitoring the pandemic’s impact across markets, channels and customers and strike the right balance of pursuing opportunity while minimizing risk to the Company’s long-term health.

On March 27, 2020, President Trump signed into law the “Coronavirus Aid, Relief and Economic Security Act (“CARES Act”).

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The Company continues to monitor and explore any relevant government assistance programs that could support either cash liquidity or operating results in the short-medium term.

As of the filing of this document, the Company continues to have no draw down on its credit facility with Wells Fargo.

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

On June 12, 2020, the Company received a $ 6.2 million loan (the “PPP Loan”) under the Paycheck Protection Program (the “PPP”) within the CARES Act.

As of the filing of this document, the Company continues to have no draw down on its credit facility with Wells Fargo Bank, National Association (“Wells Fargo”).

On June 12, 2020, the Company received a $ 6.2 million loan under the Paycheck Protection Program (the “PPP Loan”) within the Coronavirus Aid Relief and Economic Security Act (the “CARES Act”).

The PPP Loan matures on June 2, 2022 and is subject to the CARES Act terms which include, among other terms, an interest rate of 1.00 % per annum and monthly installment payments of $ 261,275 commencing on December 1, 2020.

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The forgiveness of the loan is also dependent on the Company having initially qualified for the loan.

It is the Company’s intention to use the proceeds of the PPP loan to support payroll and rent expenses over the six months following the receipt of the loan in accordance with the guidelines of the program, and to apply for forgiveness for a portion of the loan at the end of this time period.

It is unknown whether any forgiveness will be granted.

As a result, the Company is taking the approach that a portion of this loan is short-term and a portion is long-term, and has reflected that borrowing on the balance sheet, as appropriate.

On April 23, 2020, the Small Business Administration issued new guidance that questioned whether a public company with substantial market value and access to capital markets would qualify to participate in the PPP.

By the end of the third quarter, the Company had exhausted the $6.2 million in funds received under the Paycheck Protection Program.

The Company spent $ 8.3 million in eligible forgivable expenses through September 17, 2020.

It remains the Company’s intention to file for forgiveness of this loan.

In the absence of knowing whether any funds will be forgiven and how the program may change as the year continues, the Company accounts for the note as debt under ASC 470 and has reflected $ 2.5 million as short term debt and $ 3.7 million as long term debt on its balance sheet related to this loan.

Subsequently, on April 28, 2020 the Secretary of the Treasury and Small Business Administrator announced that the government will review all PPP loans of more than $2.0 million for which the borrower applies for forgiveness.

If the Company were to be audited and receive an adverse finding in such audit, the Company could be required to return the full amount of the PPP loan, which could reduce its liquidity, and potentially subject itself to fines and penalties.

As of June 30, 2020 and December 31, 2019, the Company held cash and cash equivalents, including restricted cash, of $ 52.7 million and $ 66.3 million, respectively.

Cash, and cash equivalents, including restricted cash held outside of the United States in various foreign subsidiaries totaled $ 24.7 million and $ 27.0 million as of June 30, 2020 and December 31, 2019, respectively.

If the Company were to be audited and receive an adverse finding in such audit, the Company could be required to return the full amount of the PPP Loan, which could reduce its liquidity, and potentially subject it to fines and penalties.

As of September 30, 2020 and December 31, 2019, the Company held cash and cash equivalents, including restricted cash, of $ 79.8 million and $ 66.3 million, respectively.

Cash, and cash equivalents, including restricted cash held outside of the United States in various foreign subsidiaries totaled $ 56.9 million and $ 27.0 million as of September 30, 2020 and December 31, 2019, respectively.

The cash and cash equivalents, including restricted cash balances in the Company's foreign subsidiaries have either been fully taxed in the U.S.

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tax should such amounts be repatriated in the form of dividends or deemed distributions.

Any such repatriation may result in foreign withholding taxes, which the Company expects would not be significant as of June 30, 2020.

Any such repatriation may result in foreign withholding taxes, which the Company expects would not be significant as of September 30, 2020.

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

The Company’s primary sources of working capital are cash flows from operations and borrowings under its credit facility (see Note 6 - Credit Facilities).

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The loss of a key vendor, or material changes in support by them, or a significant variance in actual demand compared to the forecast, can have a material adverse impact on the Company’s cash flows and business.

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 the Company’s liquidity.

As of June 30, 2020, the Company has substantial indebtedness including $ 134.8 million of outstanding indebtedness under a First Lien Term Loan Facility Credit Agreement (the “New Term Loan Agreement”).

As of June 30, 2020, the Company has no outstanding indebtedness under an amended and extended Credit Agreement (the “Amended ABL Credit Agreement” or “Amended Wells Fargo Credit Agreement”) with Wells Fargo Bank, National Association (“Wells Fargo”).

The Company also has the aforementioned PPP loan of $ 6.2 million secured under the CARES Act program.

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

The New Term Loan Agreement and Amended ABL each contain negative covenants that, subject to certain exceptions, limit the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, make restricted payments, pledge their assets as security, make investments, loans, advances, guarantees and acquisitions, undergo fundamental changes and enter into transactions with affiliates, as well as cross-default provisions.

As of September 30, 2020, the Company had $ 138.8 million (including $ 4.0 million in payment-in-kind interest) of outstanding indebtedness under a First Lien Term Loan Facility Credit Agreement (the “New Term Loan Agreement”), and no outstanding indebtedness under its amended and extended Credit Agreement (the “Amended ABL Credit Agreement” or “Amended Wells Fargo Credit Agreement”) with Wells Fargo.

The Company also had the aforementioned PPP Loan of $6.2 million secured under the CARES Act program.

The New Term Loan Agreement and Amended ABL Credit Agreement each contain negative covenants that, subject to certain exceptions, limit the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, make restricted payments, pledge their assets as security, make investments, loans, advances, guarantees and acquisitions, undergo fundamental changes and enter into transactions with affiliates, as well as cross-default provisions.

The Company secured the appropriate waivers from both parties before receiving the proceeds of the PPP Loan.

Commencing with the fiscal quarter ending September 30, 2020, the Company is also required to maintain a minimum Earnings Before Interest Tax Depreciation and Amortization (“EBITDA") of not less than $ 34.0 million over the previous twelve months and a minimum liquidity of not less than $ 10.0 million.

The original terms of the New Term Loan Agreement required the Company to maintain a trailing 12-month Earnings Before Interest Tax Depreciation and Amortization (“EBITDA”) (as defined and adjusted therein) of not less than $ 34.0 million and a minimum liquidity of not less than $ 10.0 million commencing with the fiscal quarter ending September 30, 2020.

On October 16, 2020, the Company reached an agreement (the “Amendment”) with holders of its term loan and Wells Fargo, holder of its revolving credit facility, to amend the New Term Loan Agreement and defer its EBITDA covenant calculation until March 31, 2022.

Under the Amendment, the trailing 12-month EBITDA requirement has been reduced to $ 25.0 million, which will not be calculated earlier than March 31, 2022.

The Amendment also requires the Company to pre-pay $ 15.0 million of the New Term Loan immediately and, under certain conditions, pre-pay up to an additional $ 5.0 million no later than the third quarter of fiscal year 2021.

As a result, the Company reclassified $20.0 million from long term debt to short term debt as of September 30, 2020.

The New Term Loan Agreement contains events of default that are customary for a facility of this nature, including nonpayment of principal, nonpayment of interest, fees or other amounts, material inaccuracy of representations and warranties, violation of covenants, cross-default to other material indebtedness, bankruptcy or insolvency events, material judgment defaults and a change of control as specified in the New Term Loan Agreement, and cross-default provisions with the Amended Wells Fargo Credit Agreement.

If an event of default occurs under either Agreement, the maturity of the amounts owed under the New Term Loan Agreement and the Amended Wells Fargo Credit Agreement may be accelerated.

The Company was in compliance with the financial covenants under the New Term Loan Agreement as of June 30, 2020.

However, given the current uncertainties created by the COVID-19 pandemic, it is probable that the Company will not achieve the minimum EBITDA threshold required under the New Term Loan Agreement at September 30, 2020.

Failure to satisfy such requirement would constitute an event of default under the New Term Loan Agreement and Amended ABL Credit Agreement unless the lenders agree to waive compliance with such requirement.

The Company’s ability to fund operations and retire debt when due is dependent on a number of factors, some of which are beyond the Company's control and/or inherently difficult to estimate, including the Company's future operating performance and the factors mentioned above, among other risks and uncertainties.

To the extent the Company is unable to fund its operations or retire debt when due, no assurances can be given that the Company will have the financial resources required to obtain, or that the conditions of the capital markets will support, any future debt or equity financings, which could have a material adverse impact on the Company’s business, results of operations and financial condition.

These conditions raise substantial doubt about the Company’s ability to continue as a going concern for a period of one year from the date the financial statements are issued.

The Company plans to negotiate waivers or obtain other accommodations to the satisfaction of its existing lenders, inclusive of Wells Fargo, the Term Loan group and the Company’s unsecured creditors.

Although the lenders under the existing credit facilities may waive such covenants or provide other accommodations in event of default, they are not obligated to do so.

The Company cannot make any assurances regarding the likelihood or certainty in being successful in obtaining these waivers in the event the Company is unable to achieve the minimum EBITDA threshold.

Failure to obtain such a waiver would have a material adverse effect on the Company’s liquidity, financial condition and results of operations.

The Company’s Condensed Consolidated Financial Statements as of June 30, 2020 are being prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business.

They do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from uncertainty related to its ability to continue as a going concern.

The Company’s unaudited interim condensed consolidated financial statements for the three and nine months ended September 30, 2020 have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business.

Cash and cash equivalents, including restricted cash, projected cash flow from operations, and borrowings under the Company’s credit facility are sufficient to meet the Company’s working capital and capital expenditure requirements for the next 12 months.

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

Note 2 — Business Segments, Geographic Data, and Sales by Major Customers

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Prior year’s segment reporting has been restated to reflect this change.

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

The Toys/Consumer Products segment includes action figures, vehicles, play sets, plush products, dolls, electronic products, construction toys, infant and pre-school toys, role play and everyday costume play, foot to floor ride-on vehicles, wagons, novelty toys, seasonal and outdoor products, kids’ indoor and outdoor furniture, and related products, and makeup and skincare products under the C'est Moi name.

The Toys/Consumer Products segment includes action figures, vehicles, play sets, plush products, dolls, electronic products, construction toys, infant and pre-school toys, child-sized and hand-held role play toys and everyday costume play, foot- to-floor ride-on vehicles, wagons, novelty toys, seasonal and outdoor products, kids’ indoor and outdoor furniture, and related products, and makeup and skincare products under the C'est Moi brand.

Within the Halloween segment, the Company markets and sells Halloween costumes and accessories and everyday costume play products, primarily in the U.S.

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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 six months ended June 30, 2020 and 2019 and as of June 30, 2020 and December 31, 2019 are as follows (in thousands):

Information by segment and a reconciliation to reported amounts for the three and nine months ended September 30, 2020 and 2019 and as of September 30, 2020 and December 31, 2019 are as follows (in thousands):

Three Months Ended

June 30, Six Months Ended

2020 2019 2020 2019

September 30,

Nine Months Ended

September 30,

Toys/Consumer Products

$ 56,214 $ 58,795 $ 118,779 $ 125,981

Halloween 22,544 36,387 26,536 40,027

$ 78,758 $ 95,182 $ 145,315 $ 166,008

Three Months Ended

June 30, Six Months Ended

2020 2019 2020 2019

Loss from Operations

September 30,

Nine Months Ended

September 30,

Income (Loss) from Operations

Toys/Consumer Products

$ ( 5,611 ) $ ( 13,604 ) $ ( 18,350 ) $ ( 33,481 )

Halloween ( 4,135 ) ( 5,045 ) ( 7,382 ) ( 9,209 )

$ ( 9,746 ) $ ( 18,649 ) $ ( 25,732 ) $ ( 42,690 )

Three Months Ended

June 30, Six Months Ended

2020 2019 2020 2019

September 30,

Nine Months Ended

September 30,

Depreciation and Amortization Expense

Toys/Consumer Products

$ 2,292 $ 3,191 $ 4,116 $ 6,328

Halloween 287 1,048 345 1,145

$ 2,579 $ 4,239 $ 4,461 $ 7,473

2020 December 31,

Toys/Consumer Products

$ 263,364 $ 356,584

Halloween 37,056 8,638

$ 300,420 $ 365,222

JAKKS PACIFIC, INC.

1 unchanged sentence

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

The following tables present information about the Company by geographic area as of June 30, 2020 and December 31, 2019 and for the three and six months ended June 30, 2020 and 2019 (in thousands):

2020 December 31,

September 30, 2020

September 30,

Toys/Consumer Products

The following tables present information about the Company by geographic area as of September 30, 2020 and December 31, 2019 and for the three and nine months ended September 30, 2020 and 2019 (in thousands):

September 30,

Long-lived Assets

United States

China 13,869 11,461

Hong Kong 2,428 2,937

United Kingdom

Canada 109 134

$ 44,623 $ 47,340

Three Months Ended

June 30, Six Months Ended

2020 2019 2020 2019

September 30,

Nine Months Ended

September 30,

Net Sales by Customer Area

United States

Europe 5,761 6,546 13,379 13,737

Canada 2,684 2,182 5,032 4,742

Asia 1,462 1,876 3,232 3,467

Australia & New Zealand

1 unchanged sentence

Middle East & Africa

$ 78,758 $ 95,182 $ 145,315 $ 166,008

Major Customers

Net sales to major customers for the three and six months ended June 30, 2020 and 2019 were as follows (in thousands, except for percentages):

Three Months Ended June 30, Six Months Ended June 30,

2020 2019 2020 2019

Amount Percentage

of Net Sales Amount Percentage

Wal-Mart $ 22,208 28.2 % $ 29,709 31.2 % $ 40,718 28.0 % $ 51,818 31.2 %

Target 18,929 24.0 14,016 14.7 33,544 23.1 26,195 15.8

$ 41,137 52.2 % $ 43,725 45.9 % $ 74,262 51.1 % $ 78,013 47.0 %

Net sales to major customers for the three and nine months ended September 30, 2020 and 2019 were as follows (in thousands, except for percentages):

Three Months Ended September 30,

Nine Months Ended September 30,

No other customer accounted for more than 10% of the Company's total net sales.

As of June 30, 2020 and December 31, 2019, the Company’s three largest customers accounted for approximately 52.0 % and 56.9 %, respectively, of the Company’s gross accounts receivable.

The concentration of the Company’s business with a relatively small number of customers may expose the Company to material adverse effects if one or more of its large customers were to experience financial difficulty.

The Company performs ongoing credit evaluations of its top customers and maintains an allowance for potential credit losses.

JAKKS PACIFIC, INC.

1 unchanged sentence

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

September 30, 2020

The Company performs ongoing credit evaluations of its top customers and maintains an allowance for potential credit losses.

Note 3 — Inventory

Inventory, which includes the ex-factory cost of goods, in-bound freight, duty and capitalized warehouse costs, is valued at the lower of cost (first-in, first-out) or net realizable value, net of inventory obsolescence reserve, and consists of the following (in thousands):

2020 December 31,

September 30,

Raw materials

Finished goods

$ 57,681 $ 54,259

Note 4 — Revenue Recognition and Reserve for Sales Returns and Allowances

22 unchanged sentences

As a result, these costs are recorded as direct selling expenses, as incurred.

Shipping and handling activities are considered part of the Company’s obligation to transfer the products and therefore are recorded as direct selling expenses, as incurred.

The Company’s reserve for sales returns and allowances amounted to $ 32.3 million as of June 30, 2020, compared to $ 38.4 million as of December 31, 2019.

JAKKS PACIFIC, INC.

1 unchanged sentence

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

September 30, 2020

Shipping and handling activities are considered part of the Company’s obligation to transfer the products and therefore are recorded as direct selling expenses, as incurred.

The Company’s reserve for sales returns and allowances amounted to $ 44.2 million as of September 30, 2020, compared to $ 38.4 million as of December 31, 2019.

Note 5 — Debt

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Convertible senior notes consist of the following (in thousands):

June 30, 2020 December 31, 2019

September 30, 2020

December 31, 2019

4.875 % convertible senior notes due 2020

3.25 % convertible senior notes due 2023*

42,257 50,753

Total convertible senior notes

* The amounts presented for the 3.25 % convertible senior notes due 2023 within the table represent the fair value as of June 30, 2020 and December 31, 2019 (see Note 16 - Fair Value Measurements).

The principal amount of these notes totaled $ 30.7 million and $ 37.6 million as of June 30, 2020 and December 31, 2019, respectively.

* The amounts presented for the 3.25 % convertible senior notes due 2023 within the table represent the fair value as of September 30, 2020 and December 31, 2019 (see Note 16 - Fair Value Measurements).

The principal amount of these notes totaled $ 29.6 million and $ 37.6 million as of September 30, 2020 and December 31, 2019, respectively.

The accrued, but unpaid, payment-in-kind interest is $ 1.0 million and $ 0.4 million as of September 30, 2020 and December 31, 2019, respectively.

Effective July 9, 2020, the Company completed a 1 for 10 reverse stock split of its $ 0.001 par value common stock reducing the issued and outstanding shares of common stock from 42,395,782 to 4,239,578 (“Reverse Stock Split”).

1 unchanged sentence

All share and per share amounts in the financial statements and notes thereto have been retroactively adjusted for all periods presented to give effect to this Reverse Stock Split.

The primary reason for implementing the Reverse Stock Split was to regain compliance with the minimum bid price requirement of Nasdaq.

The primary reason for implementing the Reverse Stock Split was to regain compliance with the minimum bid price requirement of The NASDAQ Stock Market LLC (“Nasdaq”).

On July 31, 2020, the Company was notified by Nasdaq that it had regained compliance with the Nasdaq listing requirements.

9 unchanged sentences

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

September 30, 2020

In August 2017, the Company agreed with Oasis Management and Oasis Investments II Master Fund Ltd., (collectively, “Oasis”) the holder of approximately $ 21.6 million face amount of its 2018 Notes, to extend the maturity date of these notes to November 1, 2020.

21 unchanged sentences

In connection with the issuance of the New Oasis Notes, the Company recognized a loss on extinguishment of the Existing Oasis Notes of approximately $ 10.4 million.

Excluding the impact of the 1 for 10 reverse stock split, the conversion price of the new Oasis Notes reset on February 9, 2020 to $ 1.00 per share.

In June 2020, $ 7.1 million of the New Oasis Notes (including $ 0.2 million in payment-in-kind interest) were converted for 710,100 shares of common stock.

As a result, the Company recorded an increase to additional paid-in capital of $ 9.5 million.

On February 9, 2020, excluding the impact of the 1 for 10 reverse stock split, the conversion price of the New Oasis Notes reset to $ 1.00 per share ($ 10.00 per share after reverse stock split).

On August 9, 2020, the conversion price of the New Oasis Notes reset to $ 5.647 .

JAKKS PACIFIC, INC.

1 unchanged sentence

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

September 30, 2020

In June 2020, $ 7.1 million of the New Oasis Notes (including $ 0.2 million in payment-in-kind interest) were converted for 710,100 shares of common stock.

As a result, the Company recorded an increase to additional paid-in capital of $ 9.5 million.

In August 2020, $ 1.0 million of the New Oasis Notes (including $ 27,288 in payment-in-kind interest) were converted for 177,085 shares of common stock.

As a result, the Company recorded an increase to additional paid-in capital of $ 1.3 million.

A director of the Company is a portfolio manager at Oasis Management.

The Company has elected to measure and present the debt held by Oasis at fair value using Level 3 inputs and as a result, recognized a loss of $ 7.7 million (net of payment-in-kind interest of $ 0.3 million) for the three months ended June 30, 2020, related to changes in the fair value of the New Oasis Notes.

At June 30, 2020 and December 31, 2019, the debt held by Oasis had a fair value of approximately $ 42.3 million and $ 50.8 million, respectively (Note 16 — Fair Value Measurements).

The Company evaluated its credit risk as of June 30, 2020, and determined that there was no change from December 31, 2019.

The Company has elected to measure and present the debt held by Oasis at fair value using Level 3 inputs and as a result, recognized a gain of $ 2.8 million (net of payment-in-kind interest of $ 0.2 million) and a gain of $ 2.8 million (net of payment-in-kind interest of $ 0.7 million) for the three and nine months ended September 30, 2020, respectively, related to changes in the fair value of the New Oasis Notes.

At September 30, 2020 and December 31, 2019, the debt held by Oasis had a fair value of approximately $ 38.4 million and $ 50.8 million, respectively (see Note 16 - Fair Value Measurements).

The Company evaluated its credit risk as of September 30, 2020, and determined that there was no change from December 31, 2019.

In June 2014, the Company sold an aggregate of $ 115.0 million principal amount of 4.875 % convertible senior notes due 2020 (the “2020 Notes”).

14 unchanged sentences

The fair value of the convertible senior notes is considered to be Level 3 measurements on the fair value hierarchy.

Amortization expense classified as interest expense related to debt issuance costs of the Company's convertible senior notes was nil and $ 0.2 million for the three months ended June 30, 2020 and 2019, respectively.

Amortization expense classified as interest expense related to debt issuance costs of the Company's convertible senior notes was nil and $ 0.4 million for the six months ended June 30, 2020 and 2019, respectively.

Amortization expense classified as interest expense related to debt issuance costs of the Company's convertible senior notes was nil and $ 0.1 million for the three months ended September 30, 2020 and 2019, respectively.

Amortization expense classified as interest expense related to debt issuance costs of the Company's convertible senior notes was nil and $ 0.5 million for the nine months ended September 30, 2020 and 2019, respectively.

JAKKS PACIFIC, INC.

1 unchanged sentence

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

September 30, 2020

Term loan consists of the following (in thousands):

June 30, 2020 December 31, 2019

Principal Amount** Debt Discount/

Amount Principal Amount** Debt Discount/

Term Loan $ 134,801 $ ( 10,407 ) $ 124,394 $ 134,801 $ ( 12,319 ) $ 122,482

September 30, 2020

December 31, 2019

Principal Amount**

Debt Discount/

Principal Amount**

Debt Discount/

* The term loan was valued using the discounted cash flow method to determine the implied debt discount.

The debt discount and issuance costs are being amortized over the life of the term loan.

** The amount presented excludes accrued, but unpaid, payment-in-kind interest of $ 3.1 million and $ 1.3 million as of June 30, 2020 and December 31, 2019, respectively.

** The amount presented excludes accrued, but unpaid, payment-in-kind interest of $ 4.0 million and $ 1.3 million as of September 30, 2020 and December 31, 2019, respectively.

In August 2019, in connection with the Recapitalization Transaction, the Company entered into a First Lien Term Loan Facility Credit Agreement (the “New Term Loan Agreement”), with certain of the Investor Parties, and Cortland Capital Market Services LLC, as agent, for a $ 134.8 million first-lien secured term loan (the “New Term Loan”).

3 unchanged sentences

The New Term Loan Agreement contains negative covenants that, subject to certain exceptions, limit the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, make restricted payments, pledge their assets as security, make investments, loans, advances, guarantees and acquisitions, undergo fundamental changes and enter into transactions with affiliates.

Commencing with the fiscal quarter ending September 30, 2020, the Company is also required to maintain a minimum EBITDA of not less than $ 34.0 million and a minimum liquidity of not less than $ 10.0 million.

The original terms of the New Term Loan Agreement required the Company to maintain a trailing 12-month EBITDA (as defined and adjusted therein) of not less than $ 34.0 million and a minimum liquidity of not less than $ 10.0 million commencing with the fiscal quarter ending September 30, 2020.

On October 16, 2020, the Company reached an agreement (the “Amendment”) with holders of its term loan and Wells Fargo, holder of its revolving credit facility, to amend its New Term Loan Agreement and defer its EBITDA covenant calculation until March 31, 2022.

Under the Amendment, the trailing 12-month EBITDA requirement has been reduced to $ 25.0 million, which will not be calculated earlier than March 31, 2022.

The Amendment also requires the Company to pre-pay $ 15.0 million of the term loan immediately and, under certain conditions, pre-pay up to an additional $ 5.0 million no later than the third quarter of fiscal year 2021.

As a result, the Company reclassified $ 20.0 million from long term debt to short term debt as of September 30, 2020.

As of September 30, 2020, the Company had $ 138.8 million (including $ 4.0 million in payment-in-kind interest) outstanding under the New Term Loan Agreement.

1 unchanged sentence

The obligations under the New Term Loan Agreement are guaranteed by the Company, the subsidiary borrowers thereunder and certain of the other existing and future direct and indirect subsidiaries of the Company and are secured by substantially all of the assets of the Company, the subsidiary borrowers thereunder and such other subsidiary guarantors, in each case, subject to certain exceptions and permitted liens.

Amortization expense classified as interest expense related to the $ 3.8 million of debt issuance costs associated with the issuance of the New Term Loan was $ 0.3 million and $ 0.5 million for the three and six months ended June 30, 2020, respectively.

Amortization expense classified as interest expense related to the $ 10.1 million debt discount associated with the issuance of the New Term Loan was $ 0.7 million and $ 1.4 million for the three and six months ended June 30, 2020, respectively.

The fair value of the New Term Loan as of June 30, 2020 and December 31, 2019 was $ 126.8 million and $ 123.4 million, respectively.

The estimated fair value was calculated using a discounted cash flow method and is classified as Level 3 within the fair value hierarchy.

JAKKS PACIFIC, INC.

1 unchanged sentence

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

September 30, 2020

Amortization expense classified as interest expense related to the $ 3.8 million of debt issuance costs associated with the issuance of the New Term Loan was $ 0.3 million and $ 0.8 million for the three and nine months ended September 30, 2020, respectively.

Amortization expense classified as interest expense related to the $ 10.1 million debt discount associated with the issuance of the New Term Loan was $ 0.7 million and $ 2.1 million for the three and nine months ended September 30, 2020, respectively.

The fair value of the New Term Loan as of September 30, 2020 and December 31, 2019 was $ 131.0 million and $ 123.4 million, respectively.

The estimated fair value was calculated using a discounted cash flow method and is classified as Level 3 within the fair value hierarchy.

Loan under Paycheck Protection Program

4 unchanged sentences

The PPP Loan may be forgiven, partially or in full, if certain conditions are met, principally based on having been disbursed for permissible purposes and maintaining certain average levels of employment and payroll as required by the CARES Act.

As of June 30, 2020, the Company has recorded the PPP loan as a liability and classified $ 1.8 million as a current liability and $ 4.4 million as a non-current liability on the condensed consolidated balance sheet.

As of September 30, 2020, the Company has recorded the PPP Loan as a liability and classified $ 2.5 million as a current liability and $ 3.7 million as a non-current liability on the condensed consolidated balance sheet.

The Company intends to apply for forgiveness of amounts received under the PPP in accordance with the requirements of the CARES Act, as amended.

Any loan amounts forgiven will be removed from liabilities recorded.

While the Company intends to use the proceeds of the PPP Loan only for permissible purposes, there can be no assurance that it will be eligible for forgiveness of the PPP Loan, in full or in part.

While the Company used the proceeds of the PPP Loan only for permissible purposes, there can be no assurance that it will be eligible for forgiveness of the PPP Loan, in full or in part.

The carrying value of the PPP Loan is a reasonable approximation of fair value.

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

Note 6 — Credit Facilities

In March 2014, the Company and its domestic subsidiaries entered into a secured credit facility with General Electric Capital Corporation (“GECC”).

The credit facility, as amended and subsequently assigned to Wells Fargo pursuant to its acquisition of GECC, provides for a $ 75.0 million revolving credit facility subject to availability based on prescribed advance rates on certain domestic accounts receivable and inventory amounts used to compute the borrowing base (the “Credit Facility”).

The credit facility, as amended and subsequently assigned to Wells Fargo Bank pursuant to its acquisition of GECC, provides for a $ 75.0 million revolving credit facility subject to availability based on prescribed advance rates on certain domestic accounts receivable and inventory amounts used to compute the borrowing base (the “Credit Facility”).

The Credit Facility includes a sub-limit of up to $ 35.0 million for the issuance of letters of credit.

4 unchanged sentences

Any additional borrowings under the Credit Facility will be used for general working capital purposes.

In August 2019, in connection with the Recapitalization Transaction (see Note 5 - Debt), the Company entered into the Amended ABL Credit Agreement.

The Amended ABL Credit Agreement, or Amended ABL facility, amends and restates the Company’s existing Credit Facility, dated as of March 27, 2014, as amended, with GECC and subsequently assigned to Wells Fargo, to, among other things, decrease the borrowing capacity from $ 75.0 million to $ 60.0 million and extend the maturity to August 9, 2022.

In August 2019, in connection with the Recapitalization Transaction (see Note 5 - Debt), the Company entered into an amended and extended revolving credit facility with Wells Fargo (the “Amended ABL Credit Agreement” or “Amended ABL Facility”).

The Amended ABL Credit Agreement amends and restates the Company’s existing Credit Facility, dated as of March 27, 2014, as amended, with GECC and subsequently assigned to Wells Fargo, to, among other things, decrease the borrowing capacity from $ 75.0 million to $ 60.0 million and extend the maturity to August 9, 2022.

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

The obligations under the Amended ABL Credit Agreement are guaranteed by the Company, the subsidiary borrowers thereunder and certain of the other existing and future direct and indirect subsidiaries of the Company and are secured by substantially all of the assets of the Company, the subsidiary borrowers thereunder and such other subsidiary guarantors, in each case, subject to certain exceptions and permitted liens.

As of June 30, 2020, the amount of outstanding borrowings was nil , the amount of outstanding stand-by letters of credit totaled $ 10.4 million and the total excess borrowing capacity was $ 23.6 million.

As of September 30, 2020, the amount of outstanding borrowings was nil , the amount of outstanding stand-by letters of credit totaled $ 10.4 million and the total excess borrowing capacity was $ 36.6 million.

As of December 31, 2019, the amount of outstanding borrowings was nil , the amount of outstanding stand-by letters of credit totaled $ 9.2 million and the total excess borrowing capacity was $ 41.8 million.

1 unchanged sentence

The Company is also required to maintain a fixed charge coverage ratio of not less than 1.1 to 1.0 under certain circumstances, and a minimum liquidity of $ 25.0 million and a minimum availability of at least $ 9.0 million.

As of June 30, 2020 and December 31, 2019, the Company was in compliance with the financial covenants under the Amended ABL Facility and the previous Credit Facility, as applicable.

As of September 30, 2020 and December 31, 2019, the Company was in compliance with the financial covenants under the Amended ABL Facility and the previous Credit Facility, as applicable.

Any amounts borrowed under the Amended ABL Facility accrue interest, at either (i) LIBOR plus 1.50 %- 2.00 % (determined by reference to a fixed charge coverage ratio-based pricing grid) or (ii) base rate plus 0.50 %- 1.00 % (determined by reference to a fixed charge coverage ratio-based pricing grid).

As of June 30, 2020, the weighted average interest rate on the credit facility with Wells Fargo was 0 %.

As of September 30, 2020, the weighted average interest rate on the credit facility with Wells Fargo was 0 %.

As of December 31, 2019, the weighted average interest rate on the credit facility with Wells Fargo was 4.53 %.

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

The Amended ABL Facility also contains customary events of default, including a cross default provision and a change of control provision.

In the event of a default, all of the obligations of the Company and its subsidiaries under the Amended ABL Facility may be declared immediately due and payable.

For certain events of default relating to insolvency, all outstanding obligations become due and payable.

As of June 30, 2020, off-balance sheet arrangements include letters of credit issued by Wells Fargo of $ 10.4 million.

As described in Note 5 – Debt, on October 16, 2020, the Company amended its New Term Loan to reduce the amount and defer the calculation of its EBITDA covenant, with Wells Fargo as party to the agreement.

As of September 30, 2020, off-balance sheet arrangements include letters of credit issued by Wells Fargo of $ 10.4 million.

Great American Capital Partners

5 unchanged sentences

The Company was permitted to prepay the Term Loan, which would have required a prepayment fee (i) in year one of up to any unearned and unpaid interest that would have become due and payable in year one had the prepayment not occurred plus 2 % of the initial amount of the Term Loan (i.e., $ 20.0 million), (ii) in year two of 2 % of the initial amount of the Term Loan and (iii) in year three of 1 % of the initial amount of the Term Loan.

In August 2019, in connection with the Recapitalization Transaction (see Note 5 - Debt), the Company repaid in full and terminated the Term Loan Agreement.

Amortization expense classified as interest expense related to the $ 1.3 million of debt issuance costs associated with the transactions that closed on June 14, 2018 (i.e., the amendment of the Wells Fargo Credit Facility and the GACP Term Loan) and $ 1.1 million of debt issuance costs associated with the transaction that closed on August 9, 2019 (i.e., Amended ABL Facility) was $ 0.1 million and $ 0.2 million for the three and six months ended June 30, 2020, respectively.

Amortization expense classified as interest expense related to the $ 1.3 million debt issuance costs associated with the transactions that closed on June 14, 2018 (i.e., the amendment of the Wells Fargo Credit Facility and the GACP Term Loan) was nil and $ 0.4 million for the three and six months ended June 30, 2019, respectively.

Note 7 — Income Taxes

The Company’s income tax expense of $ 0.3 million for the three months ended June 30, 2020 reflects an effective tax rate of ( 1.2 )%.

The Company’s income tax expense of $ 0.6 million for the three months ended June 30, 2019 reflects an effective tax rate of ( 2.7 )%.

The tax expense for the three months ended June 30, 2020 relates to foreign income taxes partially offset by discrete items.

The majority of the tax expense for the three months ended June 30, 2019 relates to foreign income taxes and discrete items.

The Company’s income tax expense of $ 0.5 million for the six months ended June 30, 2020 reflects an effective tax rate of ( 1.6 )%.

The Company’s income tax expense of $ 0.3 million for the six months ended June 30, 2019 reflects an effective tax rate of ( 0.7 )%.

The majority of the tax expense for the six months ended June 30, 2020 and 2019 relates to foreign income taxes and discrete items.

JAKKS PACIFIC, INC.

1 unchanged sentence

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

September 30, 2020

In August 2019, in connection with the Recapitalization Transaction (see Note 5 - Debt), the Company repaid in full and terminated the Term Loan Agreement.

Amortization expense classified as interest expense related to the $ 1.3 million of debt issuance costs associated with the transactions that closed on June 14, 2018 (i.e., the amendment of the Wells Fargo Credit Facility and the GACP Term Loan) and $ 1.1 million of debt issuance costs associated with the transaction that closed on August 9, 2019 (i.e., Amended ABL Facility) was $ 0.1 million and $ 0.3 million for the three and nine months ended September 30, 2020, respectively, and $ 0.1 million and $ 0.5 million for the three and nine months ended September 30, 2019, respectively.

Note 7 — Income Taxes

The Company’s income tax benefit of $ 0.3 million for the three months ended September 30, 2020 reflects an effective tax rate of ( 0.8 %).

The Company’s income tax expense of $ 1.0 million for the three months ended September 30, 2019 reflects an effective tax rate of 5.8 %.

The tax benefit for the three months ended September 30, 2020 relates to foreign income taxes and discrete items.

The majority of the tax expense for the three months ended September 30, 2019 relates to foreign income taxes and discrete items.

The Company’s income tax expense of $ 0.3 million for the nine months ended September 30, 2020 reflects an effective tax rate of ( 11.0 %).

The Company’s income tax expense of $ 1.4 million for the nine months ended September 30, 2019 reflects an effective tax rate of ( 4.0 %).

The majority of the tax expense for the nine months ended September 30, 2020 and 2019 relates to foreign income taxes and discrete items.

The CARES Act was signed into federal law on March 27, 2020.

2 unchanged sentences

However, the Company does not anticipate these benefits will have a material financial impact.

Note 8 — Loss Per Share

Note 8 — Income (Loss) Per Share

The following table is a reconciliation of the weighted average shares used in the computation of income (loss) per share for the periods presented (in thousands, except per share data):

Three Months Ended

June 30, Six Months Ended

2020 2019 2020 2019

Net loss $ ( 23,268 ) $ ( 22,485 ) $ ( 35,266 ) $ ( 51,612 )

Net income attributable to non-controlling interests 8 57 48 88

Net loss attributable to JAKKS Pacific, Inc.

( 23,276 ) ( 22,542 ) ( 35,314 ) ( 51,700 )

Preferred stock dividend 312 — 619 —

Net loss attributable to common stockholders $ ( 23,588 ) $ ( 22,542 ) $ ( 35,933 ) $ ( 51,700 )

Weighted average common shares outstanding - basic and diluted 3,064 2,360 3,043 2,358

Loss per share available to common stockholders - basic and diluted $ ( 7.70 ) $ ( 9.55 ) $ ( 11.81 ) $ ( 21.93 )

Basic earnings per share is calculated using the weighted average number of common shares outstanding during the period.

Diluted earnings per share is calculated using the weighted average number of common shares and common share equivalents outstanding during the period (which consist of warrants, options, restricted stock awards, restricted stock units and convertible debt to the extent they are dilutive).

The weighted average number of common shares outstanding for the three and six months ended June 30, 2019 excludes 311,284 shares repurchased pursuant to a prepaid forward share repurchase agreement associated with the issuance of the convertible senior notes due 2020.

These shares were retired on September 13, 2019.

Common share equivalents that could potentially dilute basic earnings per share in the future, which were excluded from the computation of diluted earnings per share due to being anti-dilutive, totaled 4,355,969 and 4,320,833 for the three and six months ended June 30, 2020, respectively.

Common share equivalents that could potentially dilute basic earnings per share in the future, which were excluded from the computation of diluted earnings per share due to being anti-dilutive, totaled 2,767,554 for the three and six months ended June 30, 2019.

Three Months Ended September 30,

Income (loss) per share – basic

Income (Loss)

Weighted Average Shares

Income (Loss)

Weighted Average Shares

Net income (loss) attributable to common stockholders

Effect of dilutive securities:

Convertible senior notes

Unvested performance stock grants

Unvested restricted stock grants

Income (loss) per share - diluted

Net income (loss) attributable to common stockholders plus assumed exercises and conversion

JAKKS PACIFIC, INC.

1 unchanged sentence

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

September 30, 2020

Nine Months Ended September 30,

Income (loss) per share – basic

Income (Loss)

Weighted Average Shares

Income (Loss)

Weighted Average Shares

Net income (loss) attributable to common stockholders

Effect of dilutive securities:

Convertible senior notes

Unvested performance stock grants

Unvested restricted stock grants

Income (loss) per share - diluted

Net income (loss) attributable to common stockholders plus assumed exercises and conversion

* Net income (loss) attributable to common stockholders was computed by deducting preferred dividends of $316,000 and $ 935,000 for the three and nine months ended September 30, 2020, respectively, and $ 180,000 for the three and nine months ended September 30, 2019.

Basic earnings per share is calculated using the weighted average number of common shares outstanding during the period.

Diluted earnings per share is calculated using the weighted average number of common shares and common share equivalents outstanding during the period (which consist of restricted stock awards, restricted stock units and convertible debt to the extent they are dilutive).

The convertible debt shares included in the diluted earnings per share computation are calculated using the “if-converted method” utilizing the conversion rate on the last day of the reporting period.

Common share equivalents that could potentially dilute basic earnings per share in the future, which were excluded from the computation of diluted earnings per share due to being anti-dilutive, totaled 389,879 and 6,754,069 for the three and nine months ended September 30, 2020, respectively.

Common share equivalents that could potentially dilute basic earnings per share in the future, which were excluded from the computation of diluted earnings per share due to being anti-dilutive, totaled 546,087 and 3,134,139 for the three and nine months ended September 30, 2019, respectively.

Note 9 — Common Stock and Preferred Stock

5 unchanged sentences

On July 31, 2020, the Company was notified by Nasdaq that it had regained compliance with the Nasdaq listing requirements.

The Company has until March 10, 2021 to cure this deficiency and/or meet any of Nasdaq’s other alternative continuing qualification criteria.

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

In June 2014, the Company effectively repurchased 311,284 shares of its common stock at an average cost of $ 77.10 per share for an aggregate amount of $ 24.0 million pursuant to a prepaid forward share repurchase agreement entered into with Merrill Lynch International (“ML”).

13 unchanged sentences

During the second quarter of 2019, an executive officer surrendered an aggregate of 2,428 shares of restricted stock for approximately $ 25,000 to cover income taxes due on the vesting of restricted stock units.

On August 9, 2019, in connection with the Recapitalization Transaction (see Note 5 - Debt), the Company issued to the Investor Parties, in the aggregate, 585,300 shares of Common Stock valued at $ 4.2 million on the date of issuance.

(the "New Common Equity").

In January 2020, the Company issued an aggregate of 70,421 shares of restricted stock at a value of approximately $ 0.7 million to two executive officers, which vest, in four equal annual installments over four years .

3 unchanged sentences

Additionally, an aggregate of 26,214 shares of restricted stock granted in 2017 with a value of approximately $ 163,000 was forfeited during the second quarter of 2020.

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

In June 2020, $ 7.1 million of the New Oasis Notes (including $ 0.2 million in payment-in-kind interest) were converted for 710,100 shares of common stock.

As a result, the Company recorded an increase to additional paid-in capital of $ 9.5 million.

In August 2020, $ 1.0 million of the New Oasis Notes (including $ 27,288 in payment-in-kind interest) were converted for 177,085 shares of common stock.

As a result, the Company recorded an increase to additional paid-in capital of $ 1.3 million.

All issuances of common stock, including those issued pursuant to stock option and warrant exercises, restricted stock grants and acquisitions, are issued from the Company’s authorized but not issued and outstanding shares.

No dividend was declared or paid in the three and six months ended June 30, 2020 or 2019.

No dividend was declared or paid in the three and nine months ended September 30, 2020 or 2019.

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

Preferred Stock

On August 9, 2019, in connection with the Recapitalization Transaction (see Note 5 - Debt), the Company issued 200,000 shares of Series A Senior Preferred Stock (the “Series A Preferred Stock”), $ 0.001 par value per share, to the Investor Parties (the “New Preferred Equity”).

As of June 30, 2020 and December 31, 2019, 200,000 shares of Series A Preferred Stock were outstanding.

As of September 30, 2020 and December 31, 2019, 200,000 shares of Series A Preferred Stock were outstanding.

Each share of Series A Preferred Stock has an initial value of $ 100 per share, which is automatically increased for any accrued and unpaid dividends (the “Accreted Value”).

1 unchanged sentence

No dividends have been declared or paid.

For the three and six months ended June 30, 2020, the Company recorded $ 312,000 and $ 619,000 of preferred stock dividends as an increase in the value of the Series A Preferred Stock, respectively.

For the three and nine months ended September 30, 2020, the Company recorded $ 316,000 and $ 935,000 of preferred stock dividends as an increase in the value of the Series A Preferred Stock, respectively.

For the three and nine months ended September 30, 2019, the Company recorded $ 180,000 of preferred stock dividends as an increase in the value of the Series A Preferred Stock.

The Series A Preferred Stock has no stated maturity, however, the Company has the right to redeem all or a portion of the Series A Preferred Stock at its Liquidation Preference (as defined below) at any time after payment in full of the New Term Loan.

In addition, upon the occurrence of certain change of control type events, holders of the Series A Preferred Stock are entitled to receive an amount (the “Liquidation Preference”), in preference to holders of Common Stock or other junior stock, equal to (i) 20 % of the Accreted Value in the case of a certain specified transaction, or (ii) otherwise, 150 % of the Accreted value, plus any accrued and unpaid dividends.

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

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).

The Company has the right, but is not required, to repurchase all or a portion of the Series A Preferred Stock at its Liquidation Preference at any time after payment in full of the New Term Loan (see Note 5 - Debt).The Series A Preferred Stock does not have any voting rights, except to the extent required by the Delaware General Corporation Law, except for the exclusive right to elect the Series A Preferred Directors (as described below) and except for certain approval rights over certain transactions (as described below).

These approval rights require the prior consent of specified percentages of holders (or in certain cases, all holders) of the Series A Preferred Stock in order for the Company to take certain actions, including the issuance of additional shares of Series A Preferred Stock or parity stock, the issuance of senior stock, certain amendments to the Amended and Restated Certificate of Incorporation, the Certificate of Designations of the Series A Preferred Stock (the “Certificate of Designations”), the Second Amended and Restated By-laws or the Amended and Restated Nominating and Corporate Governance Committee Charter, material changes in the Company’s line of business and certain change of control type transactions.

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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

September 30, 2020

In addition, the Certificate of Designations provides the holders of Series A Preferred Stock certain board representation rights.

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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.

The redemption provision specifies if certain events that constitute a change of control occur, the Company may be required to settle the Series A Preferred Stock at 150% of its accreted amount.

Accordingly, the redemption provision meets the definition of a derivative, and its economic characteristics are not considered clearly and closely related to the economic characteristics of the Series A Preferred Stock, which is considered more akin to a debt instrument than equity.

JAKKS PACIFIC, INC.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

Accordingly, these two embedded derivatives are required to be bundled into a single derivative instrument and accounted for separately from the Series A Preferred Stock at fair value.

4 unchanged sentences

The probability of a triggering event was based on management’s estimates of the probability of a change of control event occurring.

As of June 30, 2020, the Series A Preferred Stock is recorded in temporary equity at the amount of accrued, but unpaid dividends of $ 1.1 million, and the redemption provision, as a bifurcated derivative, is recorded as a long term liability with an estimated value of $ 3.2 million.

As of September 30, 2020, the Series A Preferred Stock is recorded in temporary equity at the amount of accrued, but unpaid dividends of $ 1.4 million, and the redemption provision, as a bifurcated derivative, is recorded as a long term liability with an estimated value of $ 5.9 million.

As of September 30, 2019, the Series A Preferred Stock is recorded in temporary equity at the amount of accrued but unpaid dividends of $180,000, and the redemption provision, as a bifurcated derivative, is recorded as a long term liability with an estimated value of $ 4.9 million.

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

The following table provides a reconciliation of the beginning and ending balances of the Series A Preferred Stock, which is recorded in temporary equity:

4 unchanged sentences

Balance, June 30,

Preferred stock accrued dividends

Balance, September 30,

Note 10 — Joint Ventures

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The joint venture completed and delivered 65 episodes of the show, which began airing in February 2012, and has since ceased production of the television show.

For the three and six months ended June 30, 2020, the Company recognized income from the joint venture of nil and $ 2,000 , respectively.

For the three and six months ended June 30, 2019, the Company recognized income from the joint venture of nil .

As of June 30, 2020 and December 31, 2019, the balance of the investment in the Pacific Animation Partners joint venture is nil .

For the three and nine months ended September 30, 2020, the Company recognized income from the joint venture of nil and $ 2,000 , respectively.

For the three and nine months ended September 30, 2019, the Company recognized income from the joint venture of nil .

As of September 30, 2020 and December 31, 2019, the balance of the investment in the Pacific Animation Partners joint venture is nil .

In September 2012, the Company entered into a joint venture (“DreamPlay Toys”) with NantWorks LLC (“NantWorks”) in which it owns a fifty percent interest.

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The results of operations of the joint venture are consolidated with the Company’s results.

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

In addition, in 2012, the Company invested $ 7.0 million in cash in exchange for a five percent economic interest in a related entity, DreamPlay, LLC, that was expected to monetize the exploitation of the recognition technologies in non-toy consumer product categories.

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Accordingly, the Company recorded an impairment charge of $ 7.0 million during the quarter ended September 30, 2017.

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

In November 2014, the Company entered into a joint venture with Meisheng Culture & Creative Corp., for the purpose of providing certain JAKKS licensed and non-licensed toys and consumer products to agreed-upon territories of the People’s Republic of China.

1 unchanged sentence

The Company owns fifty-one percent of the joint venture and consolidates the joint venture since control rests with the Company.

The non-controlling interest’s share of the income was $ 8,000 and $ 57,000 for the three months ended June 30, 2020 and 2019, respectively, and $ 48,000 and $ 88,000 for the six months ended June 30, 2020 and 2019, respectively.

The non-controlling interest’s share of the income (loss) was $ 49,000 and ($ 31,000 ) for the three months ended September 30, 2020 and 2019, respectively, and $ 97,000 and $ 57,000 for the nine months ended September 30, 2020 and 2019, respectively.

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.

3 unchanged sentences

The results of operations of the joint venture are consolidated with the Company's results.

The non-controlling interest’s share of the income from the joint venture for the three and six months ended June 30, 2020 and 2019 was nil .

As of June 30, 2020, Meisheng beneficially owns more than 10 % of the Company’s outstanding common stock.

The non-controlling interest’s share of the income from the joint venture for the three and nine months ended September 30, 2020 and 2019 was nil .

As of September 30, 2020, Meisheng beneficially owns more than 10 % of the Company’s outstanding common stock.

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.

2 unchanged sentences

In the first quarter of 2019, Meisheng acquired New Time Group, which was a third-party manufacturer of the Company.

For the three and six months ended June 30, 2020, the Company made inventory-related payments to Meisheng of approximately $ 14.0 million and $ 23.0 million, respectively.

For the three and six months ended June 30, 2019, the Company made inventory-related payments to Meisheng of approximately $ 23.0 million and $ 25.2 million, respectively.

As of June 30, 2020 and December 31, 2019, amounts due to Meisheng for inventory received by the Company, but not paid totaled $ 14.4 million and $ 18.1 million, respectively.

For the three and nine months ended September 30, 2020, the Company made inventory-related payments to Meisheng of approximately $ 31.4 million and $ 54.4 million, respectively.

For the three and nine months ended September 30, 2019, the Company made inventory-related payments to Meisheng of approximately $ 49.6 million and $ 74.8 million, respectively.

As of September 30, 2020 and December 31, 2019, amounts due to Meisheng for inventory received by the Company, but not paid totaled $ 22.1 million and $ 18.1 million, respectively.

Note 11 — Goodwill

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Based on the Company's April 1 annual assessment, it determined that the fair values of its reporting units were not less than the carrying amounts.

No goodwill impairment was determined to have occurred for the six months ended June 30, 2020.

As of June 30, 2020, $ 35.1 million of goodwill was allocated to the Toys/Consumer Products reporting unit, which had a negative carrying value.

No goodwill impairment was determined to have occurred for the nine months ended September 30, 2020.

As of September 30, 2020, $ 35.1 million of goodwill was allocated to the Toys/Consumer Products reporting unit, which had a negative carrying value.

JAKKS PACIFIC, INC.

1 unchanged sentence

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

September 30, 2020

Note 12 — Intangible Assets Other Than Goodwill

2 unchanged sentences

Trademarks are disclosed separately in the accompanying condensed consolidated balance sheets.

Intangible assets as of June 30, 2020 and December 31, 2019 include the following (in thousands, except for weighted useful lives):

June 30, 2020 December 31, 2019

Amount Accumulated

Amortization Net

Amount Accumulated

Amortization Net

Intangible assets as of September 30, 2020 and December 31, 2019 include the following (in thousands, except for weighted useful lives):

September 30, 2020

December 31, 2019

Amortized Intangible Assets:

Licenses 5.81 $ 20,130 $ ( 20,130 ) $ — $ 20,130 $ ( 19,988 ) $ 142

Product lines

Customer relationships

Trade names 5.00 3,000 ( 3,000 ) — 3,000 ( 3,000 ) —

Non-compete agreements

1 unchanged sentence

Unamortized Intangible Assets:

Trademarks $ 300 $ — $ 300 $ 300 $ — $ 300

Note 13 — Comprehensive Loss

The table below presents the components of the Company’s comprehensive loss for the three and six months ended June 30, 2020 and 2019 (in thousands):

Three Months Ended

June 30, Six Months Ended

2020 2019 2020 2019

Net Loss $ ( 23,268 ) $ ( 22,485 ) $ ( 35,266 ) $ ( 51,612 )

Note 13 — Comprehensive Income (Loss)

The table below presents the components of the Company’s comprehensive income (loss) for the three and nine months ended September 30, 2020 and 2019 (in thousands):

Three Months Ended September 30,

Nine Months Ended September 30,

Net Income (Loss)

Other comprehensive income (loss):

Foreign currency translation adjustment

Comprehensive loss ( 23,187 ) ( 22,935 ) ( 36,819 ) ( 50,759 )

Comprehensive income attributable to non-controlling interests 8 57 48 88

Comprehensive loss attributable to JAKKS Pacific, Inc.

$ ( 23,195 ) $ ( 22,992 ) $ ( 36,867 ) $ ( 50,847 )

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

Comprehensive income (loss)

Comprehensive income (loss) attributable to non-controlling interests

Comprehensive income (loss) attributable to JAKKS Pacific, Inc.

Note 14 — Litigation and Contingencies

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As additional information becomes available, the Company assesses the potential liability related to its pending litigation and revises its estimates.

JAKKS PACIFIC, INC.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

In the normal course of business, the Company may provide certain indemnifications and/or other commitments of varying scope to a) its licensors, customers and certain other parties, including against third party claims of intellectual property infringement, and b) its officers, directors and employees, including against third party claims regarding the periods in which they serve in such capacities with the Company.

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The Plan is more fully described in Notes 15 and 18 to the Consolidated Financial Statements in the Company’s 2019 Annual Report on Form 10-K.

The following table summarizes the total share-based compensation expense recognized for the three and six months ended June 30, 2020 and 2019 (in thousands):

Three Months Ended

June 30, Six Months Ended

2020 2019 2020 2019

The following table summarizes the total share-based compensation expense recognized for the three and nine months ended September 30, 2020 and 2019 (in thousands):

Three Months Ended September 30,

Nine Months Ended September 30,

Share-based compensation expense

Restricted Stock Awards

Restricted stock award activity (including those with performance-based vesting criteria) for the six months ended June 30, 2020 is summarized as follows:

Restricted stock award activity (including those with performance-based vesting criteria) for the nine months ended September 30, 2020 is summarized as follows:

Restricted Stock Awards

Number of Shares Weighted Average

Grant Date Fair Value

Weighted Average

Outstanding, December 31, 2019

Awarded 70,421 10.30

Vested ( 69,440 ) 21.76

Forfeited ( 52,427 ) 32.20

Outstanding, June 30, 2020 507,861 12.75

As of June 30, 2020, there was $ 3.1 million of total unrecognized compensation cost related to non-vested restricted stock awards, which is expected to be recognized over a weighted-average period of 2.17 years.

Outstanding, September 30, 2020

As of September 30, 2020, there was $ 2.6 million of total unrecognized compensation cost related to non-vested restricted stock awards, which is expected to be recognized over a weighted-average period of 2.05 years.

JAKKS PACIFIC, INC.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

September 30, 2020

Restricted Stock Units

Restricted stock unit activity (including those with performance-based vesting criteria) for the six months ended June 30, 2020 is summarized as follows:

Restricted stock unit activity (including those with performance-based vesting criteria) for the nine months ended September 30, 2020 is summarized as follows:

Restricted Stock Units

Number of Shares Weighted Average

Grant Date Fair Value

Weighted Average

Outstanding, December 31, 2019

Vested ( 7,960 ) 51.50

Forfeited ( 29,410 ) 42.79

Outstanding, June 30, 2020 65,348 11.25

As of June 30, 2020, there was $ 0.4 million of total unrecognized compensation cost related to non-vested restricted stock units, which is expected to be recognized over a weighted-average period of 0.98 years.

Outstanding, September 30, 2020

As of September 30, 2020, there was $ 0.2 million of total unrecognized compensation cost related to non-vested restricted stock units, which is expected to be recognized over a weighted-average period of 0.96 years.

Note 16 — Fair Value Measurements

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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 June 30, 2020 and December 31, 2019 (in thousands):

Carrying Amount as of June 30, 2020 Fair Value Measurements

as of June 30, 2020

Level 1 Level 2 Level 3

3.25% convertible senior notes due in 2023 $ 42,257 $ — $ — $ 42,257

Preferred stock derivative liability

3,164 — — 3,164

JAKKS PACIFIC, INC.

1 unchanged sentence

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

Carrying Amount as of December 31, 2019 Fair Value Measurements

September 30, 2020

The following tables summarize the Company's financial liabilities measured at fair value on a recurring basis as of September 30, 2020 and December 31, 2019 (in thousands):

Carrying Amount as

of September 30, 2020

Fair Value Measurements

as of September 30, 2020

3.25% convertible senior notes due in 2023

Preferred stock derivative liability

Carrying Amount as

of December 31, 2019

Fair Value Measurements

as of December 31, 2019

Level 1 Level 2 Level 3

3.25% convertible senior notes due in 2023

Preferred stock derivative liability

5,247 — — 5,247

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):

1 unchanged sentence

Balance, January 1,

New issuance ($ 29.6 million face value)

New issuance ($ 8.0 million face value)

Conversion of convertible senior notes

1 unchanged sentence

Payment-in-kind interest

Balance, June 30, $ 42,257

Balance, September 30,

Preferred stock derivative liability

Balance, January 1,

New issuance of Series A Preferred Stock

Change in fair value

Balance, June 30, $ 3,164

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.

3 unchanged sentences

The carrying value of these financial instruments is a reasonable approximation of fair value.

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

Note 17 — Related Party Transactions

A former director of the Company, who resigned on August 9, 2019 is a partner in a law firm that acts as counsel to the Company.

The Company incurred legal fees and expenses to the law firm in the amount of approximately $ 0.3 million and $ 0.6 million for the three and six months ended June 30, 2019, respectively.

The Company incurred legal fees and expenses to the law firm in the amount of approximately $ 0.7 million and $ 1.3 million for the three and nine months ended September 30, 2019, respectively.

As of December 31, 2019, legal fees and reimbursable expenses of $ 0.1 million were payable to this law firm.

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

The owner of NantWorks, the Company’s DreamPlay Toys joint venture partner, beneficially owned more than 5.0 % of the Company’s outstanding common stock.

3 unchanged sentences

For the year ended December 31, 2019, preferred returns earned and payable to NantWorks was nil .

Pursuant to the amended Toy Services Agreement, NantWorks is entitled to receive a renewal fee in the amount $ 1.2 million payable in installments of $ 0.8 million paid on the effective date of the renewal in 2015 and $ 0.2 million on or before each of August 1, 2016 and 2017.

As of June 30, 2020 and December 31, 2019, the Company's receivable balance from NantWorks was nil .

Pursuant to the amended Toy Services Agreement, NantWorks is entitled to receive a renewal fee in the amount of $ 1.2 million payable in installments of $ 0.8 million paid on the effective date of the renewal in 2015 and $ 0.2 million on or before each of August 1, 2016 and 2017.

As of September 30, 2020 and December 31, 2019, the Company's receivable balance from NantWorks was nil .

In addition, the Company previously leased office space from NantWorks.

Rent expense, including common area maintenance and parking, was nil for the three and six months ended June 30, 2020 and 2019.

Rent expense, including common area maintenance and parking, was nil for the three and nine months ended September 30, 2020 and 2019.

In November 2014, the Company entered into a joint venture with Meisheng Cultural & Creative Corp., Ltd., for the purpose of providing certain JAKKS licensed and non-licensed toys and consumer products to agreed-upon territories of the People’s Republic of China.

1 unchanged sentence

The Company owns fifty-one percent of the joint venture and consolidates the joint venture since control rests with the Company.

In October 2016, the Company entered into a joint venture with 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 fifty percent of the joint venture and will jointly own the content.

2 unchanged sentences

The results of operations of the joint venture are consolidated with the Company's results.

The non-controlling interest’s share of the income from the joint venture for the three and six months ended June 30, 2020 and 2019 was nil .

As of June 30, 2020, Meisheng beneficially owns more than 10 % of the Company’s outstanding common stock.

The non-controlling interest’s share of the income from the joint venture for the three and nine months ended September 30, 2020 and 2019 was nil .

As of September 30, 2020, Meisheng beneficially owns more than 10 % of the Company’s outstanding common stock.

In March 2017, the Company entered into an agreement to issue 366,089 shares of its common stock at an aggregate price of $ 19.3 million to a Hong Kong affiliate of its China joint venture partner.

5 unchanged sentences

In the first quarter of 2019, Meisheng acquired New Time Group, which was a third-party manufacturer of the Company.

For the three and six months ended June 30, 2020, the Company made inventory-related payments to Meisheng of approximately $ 14.0 million and $ 23.0 million, respectively.

For the three and six months ended June 30, 2019, the Company made inventory-related payments to Meisheng of approximately $ 23.0 million and $ 25.2 million, respectively.

As of June 30, 2020 and December 31, 2019, amounts due to Meisheng for inventory received by the Company, but not paid totaled $ 14.4 million and $ 18.1 million, respectively.

For the three and nine months ended September 30, 2020, the Company made inventory-related payments to Meisheng of approximately $ 31.4 million and $ 54.4 million, respectively.

For the three and nine months ended September 30, 2019, the Company made inventory-related payments to Meisheng of approximately $ 49.6 million and $ 74.8 million, respectively.

As of September 30, 2020 and December 31, 2019, amounts due to Meisheng for inventory received by the Company, but not paid totaled $ 22.1 million and $ 18.1 million, respectively.

JAKKS PACIFIC, INC.

1 unchanged sentence

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

September 30, 2020

A director of the Company is a portfolio manager at Oasis Management.

7 unchanged sentences

A director of the Company is a director at Benefit Street Partners.

Benefit Street Partners funded $ 25.8 million of the New Term Loan issued in connection with the Recapitalization Transaction (see Note 5 - Debt).

Amounts outstanding under the New Term Loan accrue interest at 10.50 % per annum, payable semi-annually (with 8 % per annum payable in cash and 2.5 % per annum payable in kind).

The New Term Loan matures on February 9, 2023.

As of September 30, 2020, Benefit Street Partners held $ 68.0 million in principal amount (including $ 1.9 million in payment-in-kind interest) of the New Term Loan.

A director of the Company is the managing Partner and portfolio manager at Axar Capital Management.

Axar Capital Management funded $ 26.3 million of the New Term Loan issued in connection with the Recapitalization Transaction (see Note 5 - Debt).

Amounts outstanding under the New Term Loan accrue interest at 10.50 % per annum, payable semi-annually (with 8 % per annum payable in cash and 2.5 % per annum payable in kind).

The New Term Loan matures on February 9, 2023.

As of September 30, 2020, Axar Capital Management held $ 27.1 million in principal amount (including $ 0.8 million in payment-in-kind interest) of the New Term Loan.

Note 18 — Subsequent Events

On October 12, 2020, $ 2.0 million of the New Oasis Notes (including $ 63,225 in payment-in-kind interest) were converted for 354,170 shares of common stock.

On November 5, 2020, $ 1.0 million of the New Oasis Notes (including $ 33,291 in payment-in-kind interest) were converted for 177,085 shares of common stock.

Under the Amendment, the trailing 12-month EBITDA requirement has been reduced to $ 25.0 million, which will not be calculated earlier than March 31, 2022.

In connection with the Amendment on October 20, 2020, the Company paid $ 15.0 million of its outstanding principal amount and $ 0.3 million in related interest and PIK interest.

A purported class action lawsuit was filed on November 10, 2020 in the United States District Court for the District of Delaware (Brown v.

JAKKS Pacific, Inc.

et al) alleging that the Proxy Statement issued in connection with the shareholder meeting held in June 2020 contained misstatements regarding the manner in which broker votes would be counted and that such votes were improperly included in approving the Company’s reverse stock split at the meeting.

The Class Period is July 9, 2020.

The purported class action seeks damages in an unspecified amount, alleging breach of fiduciary duties by the Company’s directors.

The Company intends to vigorously defend the lawsuit.

Since the action was just commenced, however, we cannot assure you of its outcome and cannot estimate the range of any potential damage award.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements