What changed in this filing

/stocks — the workspaceLOADING

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2021-03-19 compared with 2020-05-13 · 345 added, 371 removed, 876 unchanged (45% of the section changed)

8 unchanged sentences

Interest Rate Risk

As of December 31, 2019, we have outstanding convertible senior notes payable of $1.9 million principal amount due June 2020 with a fixed interest rate of 4.875% per annum, $37.6 million principal amount due July 2023 with a fixed interest rate of (i) 3.25% per annum if paid in cash or 5.00% per annum if paid in stock plus (ii) 2.75% per annum payable in kind, as well as a $134.8 million term loan due February 2023 with a fixed interest rate of (i) 8.00% per annum plus (ii) 2.5% per annum payable in kind.

As of December 31, 2020, we have outstanding convertible senior notes payable of $23.8 million (including $0.9 million in payment-in-kind interest) principal amount due July 2023 with a fixed interest rate of (i) 3.25% per annum if paid in cash or 5.00% per annum if paid in stock plus (ii) 2.75% per annum payable in kind, as well as a $124.5 million (including $4.7 million in payment-in-kind interest) New Term Loan due February 2023 with a fixed interest rate of (i) 8.00% per annum plus (ii) 2.5% per annum payable in kind.

As the interest rates on the notes and the term loan are at fixed rates, we are not generally subject to any direct risk of loss related to these notes arising from changes in interest rates.

Our exposure to market risk includes interest rate fluctuations in connection with our revolving credit facility under our Amended Wells Fargo Credit Agreement (see Note 11 - Credit Facilities in the accompanying notes to the consolidated financial statements for additional information).

Our exposure to market risk includes interest rate fluctuations in connection with our revolving credit facility (see Item 8 "Consolidated Financial Statements and Supplementary Data Note 11 - Credit Facilities”).

Borrowings under the revolving credit facility bear interest at either (i) LIBOR plus 1.50%-2.00% (determined by reference to a fixed charge coverage ratio-based pricing grid) or (ii) base rate plus 0.50%-1.00% (determined by reference to a fixed charge coverage ratio-based pricing grid).

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Interest rate risk may result from many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors that are beyond our control.

During the year ended December 31, 2019, the maximum amount borrowed under the revolving credit facility was $7.5 million and the average amount of borrowings outstanding was $2.5 million.

During the year ended December 31, 2020, the maximum amount borrowed under the revolving credit facility was nil and the average amount of borrowings outstanding was nil.

As of December 31, 2020, the amount of total borrowings outstanding under the revolving credit facility was nil.

If the prevailing market interest rates relative to the term loan and credit facility borrowings increased by 10%, our interest expense during the period ended December 31, 2019 would have increased by less than $0.1 million.

Foreign Currency Risk

We have wholly-owned subsidiaries in Hong Kong, China, the United Kingdom, Germany, France, Canada and Mexico.

We have wholly-owned subsidiaries in Hong Kong, China, the United Kingdom, Germany, France, Netherlands, Canada and Mexico.

Sales are generally made by these operations on FOB China or Hong Kong terms and are denominated in U.S.

However, purchases of inventory and Hong Kong operating expenses are typically denominated in Hong Kong dollars and local operating expenses in the United Kingdom, Germany, France, Canada, Mexico and China are denominated in local currency, thereby creating exposure to changes in exchange rates.

However, purchases of inventory and Hong Kong operating expenses are typically denominated in Hong Kong dollars and local operating expenses in the United Kingdom, Germany, France, Netherlands, Canada, Mexico and China are denominated in local currency, thereby creating exposure to changes in exchange rates.

Changes in the U.S.

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We have audited the accompanying consolidated balance sheets of JAKKS Pacific, Inc.

(the “Company") as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2019, and the related notes and financial statement schedule listed in the accompanying index (collectively referred to as the “consolidated financial statements”).

(the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and financial statement schedule listed in the accompanying index (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020 , in conformity with accounting principles generally accepted in the United States of America.

Going Concern Uncertainty

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.

As discussed in Note 1 to the consolidated financial statements, due to the uncertainty and disruption caused by the coronavirus pandemic, it is probable that one of the financial covenants may be violated within a year related to the Company’s term loan, which allows the debt holders to demand that the term loan be repaid immediately.

The Company has insufficient cash and cash flows from operations to repay the term loan which raises substantial doubt about the Company’s ability to continue as a going concern.

Management's plans in regard to these matters are also described in Note 1.

The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Change in Accounting Method Related to Leases and Revenue

As discussed in Notes 2 and 14 to the consolidated financial statements, the Company has changed its method of accounting for leases during the year ended December 31, 2019 due to the adoption of Accounting Standards Codification (“ASC”) 842, Leases .

As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for revenue during the year ended December 31, 2018 due to the adoption of ASC 606, Revenue from Contracts with Customers .

Change in Accounting Method Related to Leases

As discussed in Note 14 to the consolidated financial statements, the Company has changed its method of accounting for leases during the year ended December 31, 2019 due to the adoption of Accounting Standards Codification (“ASC”) 842, Leases .

Basis for Opinion

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We believe that our audits provide a reasonable basis for our opinion.

/s/ BDO USA, LLP

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which they relate.

Going Concern

As described in Notes 1 and 11 of the Company’s consolidated financial statements, the Company’s primary sources of working capital are cash flows from operations and borrowings under its credit facility.

The Company’s cash flows from operations are primarily impacted by the Company’s sales, which are seasonal, and any change in timing or amount of sales may impact the Company’s operating cash flows.

The Company owes $124.5 million on its term loan and has borrowing capacity under its credit facility of $37.3 million as of December 31, 2020.

During 2020, the Company reached an agreement with its holders of its term loan and the holder of its revolving credit facility, to amend the New Term Loan Agreement and defer the Company’s EBITDA covenant requirement until March 31, 2022 and reduced the trailing 12-month EBITDA requirement to $25.0 million.

Based on the Company’s operating plan, management believes that the current working capital combined with expected operating and financing cashflows to be sufficient to fund the Company’s operations and satisfy the Company’s obligations as they come due for at least one year from the financial statement issuance date.

We identified management’s assessment of the Company’s ability to continue as a going concern as a critical audit matter.

The going concern assessment requires management judgment to critically evaluate its forecasts and liquidity projections, incorporating the significant and unusual impacts of the COVID-19 pandemic.

Auditing management’s going concern assessment involved especially challenging auditor judgment and audit effort due to the nature and extent of effort required to address these matters.

The primary procedure we performed to address this critical audit matter included:

Evaluating the reasonableness of management’s revised forecasts and liquidity projections, which included:

(i) obtaining an understanding of management’s process for developing cashflow forecasts, (ii) comparing prior period forecasts to actual results, and (iii) assessing the Company’s ability to meet its trailing twelve months EBITDA covenant for the twelve months from the date of issuance.

Assessing management’s projections in the context of other audit evidence obtained during the audit and historical performance to determine whether it was contradictory to the conclusion reached by management.

(Signed BDO USA, LLP)

We have served as the Company's auditor since 2006.

Los Angeles, California

March 19, 2021

JAKKS PACIFIC, INC.

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CONSOLIDATED BALANCE SHEETS

(In thousands, except

(In thousands, except per share data)

Current assets

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Operating lease right-of-use assets, net

Intangible assets, net

Other long term assets

Intangible assets, net

Liabilities, Preferred Stock and Stockholders' Equity

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5,000,000 shares authorized;

nil and 200,000 shares issued and outstanding in 2018 and 2019, respectively

200,000 shares issued and outstanding in 2020 and 2019

Stockholders' Equity*

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5,694,772 and 3,521,037 shares issued and outstanding in 2020 and 2019, respectively*

Treasury stock, at cost;

3,112,840 and nil shares outstanding in 2018 and 2019, respectively

Additional paid-in capital *

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Total liabilities, preferred stock and stockholders' equity

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

See accompanying notes to consolidated financial statements.

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Selling, general and administrative expenses

Goodwill and other intangibles impairment

Intangible asset impairment

Restructuring charge

Pandemic related charges

Acquisition related and other

Loss from operations

Income (loss) from operations

Income from joint ventures

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Change in fair value of convertible senior notes

Write-off of investment in DreamPlay, LLC

Interest income

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Shares used in loss per share - basic and diluted*

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

See accompanying notes to consolidated financial statements.

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CONSOLIDATED STATEMENTS OF STOCKHOLDERS ’ EQUITY

YEARS ENDED DECEMBER 31, 2017, 2018 AND 2019

(In thousands)

Comprehensive

Pacific, Inc.

Comprehensive

Stockholders’

Balance, January 1, 2017

Stock-based compensation expense

Retirement of restricted stock

Shares issued in exchange for convertible senior notes

Repurchase of common stock for employee tax withholding

Issuance of common stock to Hong Kong Meisheng Cultural Company Limited

Adjustment to additional paid-in capital

Net income (loss)

Foreign currency translation adjustment

Balance, December 31, 2017

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Balance, December 31, 2019

Stock-based compensation expense

Conversion of convertible senior notes

Repurchase of common stock for employee tax withholding

Preferred stock accrued dividends

Net income (loss)

Foreign currency translation adjustment

Adjustment to additional paid in capital

Balance, December 31, 2020

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

See accompanying notes to consolidated financial statements.

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Amortization of debt discount

Gain on disposal of property and equipment

(Gain) loss on disposal of property and equipment

Tools and molds disposal

Intangibles impairment

Write-off of investment in DreamPlay, LLC

Goodwill impairment

Loss on extinguishment of debt

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Repurchase of common stock for employee tax withholding

Proceeds from loan under the Paycheck Protection Program

Net proceeds from credit facility borrowings

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Repayment of credit facility borrowings

Repurchase of convertible senior notes

Debt issuance costs

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Term loan prepayment penalty

Proceeds from issuance of common stock

Net proceeds from issuance of long term debt

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The Company was incorporated under the laws of the State of Delaware in January 1995.

Going Concern and Liquidity

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

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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 year 2020.

March year-to-date syndicated market data for the United States shows a number of manufacturers’ sell-through at retail substantially up, and others down, vs.

How long these trends continue, and whether they represent a pulling forward of future sales or a deferment of intended sales remains to be seen.

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.

The Company has embarked upon cost mitigating efforts.

Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, the Company is unable to estimate the effects of the COVID-19 outbreak on its results of operations, financial condition, and liquidity for fiscal years 2021 and 2022.

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

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.

The Company continues to operate under that model as of the date of this filing.

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

The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer-side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property.

On December 27, 2020, President Trump signed into law the Consolidated Appropriations Act of 2021 (“CAA”), which includes many tax and health components, as well as CARES Act extensions and modifications.

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

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

The Company has applied for funds under the Paycheck Protection Program after the period end in the amount of $10.0 million .

The application for these funds requires the Company to, in good faith, certify that the current economic uncertainty made the loan request necessary to support the ongoing operations of the Company.

This certification further requires the Company to take into account its current business activity and its ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the business.

The receipt of these funds, and the forgiveness of the loan attendant to these funds, is dependent on the Company having initially qualified for the loan and qualifying for the forgiveness of such loan based on its future adherence to the forgiveness criteria.

As of December 31, 2018 and December 31, 2019, the Company held cash and cash equivalents, including restricted cash, of $58.2 million and $66.3 million , respectively.

Cash, and cash equivalents, including restricted cash held outside of the United States in various foreign subsidiaries totaled $33.9 million and $27.0 million as of December 31, 2018 and December 31, 2019, respectively.

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”), aside from utilizing $ 10.8 million in Letters of Credit.

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 September 27, 2021.

The PPP Loan may be prepaid at any time prior to maturity with no prepayment penalties.

The PPP Loan is subject to events of default and other provisions customary for a loan of this type.

The application for the loan required the Company to, in good faith, certify that the current economic uncertainty made the loan request necessary to support the ongoing operations of the Company.

This certification further required the Company to take into account its current business activity and its ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the business.

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

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

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 $ 0.9 million as short term debt and $ 5.3 million as long term debt on its balance sheet related to this loan.

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

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

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

As of December 31, 2020 and 2019, the Company held cash and cash equivalents, including restricted cash, of $ 92.7 million and $ 66.3 million, respectively.

Cash, and cash equivalents, including restricted cash held outside of the United States in various foreign subsidiaries totaled $ 48.7 million and $ 27.0 million as of December 31, 2020 and 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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The Company’s primary sources of working capital are cash flows from operations and borrowings under its credit facility (see Note 11 - Credit Facilities).

Typically, cash flows from operations are impacted by the effect on sales of (1) the appeal of the Company’s products, (2) the success of its licensed brands, (3) the highly competitive conditions existing in the toy industry, (4) dependency on a limited set of large customers, and (5) general economic conditions.

Cash flow from operating activities provided net cash of $ 43.6 million in 2020.

Typically, cash flows from operations are impacted by the effect on sales of (1) the appeal of the Company’s products, (2) the success of its licensed brands in motivating consumer purchase of related merchandise, (3) the highly competitive conditions existing in the toy industry and in securing commercially-attractive licenses, (4) dependency on a limited set of large customers, and (5) general economic conditions.

A downturn in any single factor or a combination of factors could have a material adverse impact upon the Company’s ability to generate sufficient cash flows to operate the business.

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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 December 31, 2019, 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 December 31, 2019, 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 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.

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 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.

As of December 31, 2020, the Company had $ 124.5 million (including $ 4.7 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 assets as security, make investments, loans, advances, guarantees and acquisitions, undergo fundamental changes and enter into transactions with affiliates, as well as cross-default provisions.

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

The original terms of the New Term Loan Agreement required the Company to maintain a trailing 12-month Earnings Before Interest, Taxes, 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 New 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 was reduced to $ 25.0 million, which will not be calculated earlier than March 31, 2022.

The Amendment also required 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 of December 31, 2020, the Company has classified $5.0 million as short term debt.

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.

The New Term Loan Agreement contains events of default, 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 December 31, 2019.

Given the current uncertainties created by the COVID-19 pandemic, as discussed further in Note 23 — Subsequent Event, there can be no assurance as to our ability to achieve the minimum EBITDA threshold required under the New Term Loan Agreement.

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 Consolidated Financial Statements as of December 31, 2019 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 consolidated financial statements for the year ended December 31, 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.

Note 2 — Summary of Significant Accounting Policies

Principles of consolidation

Principles of consolidation and basis of preparation

These consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries, and its majority owned joint venture.

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

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”).

The Reverse Stock Split did not cause an adjustment to the par value or the authorized shares of the common stock.

All share and per share amounts in the financial statements and notes thereto have been retroactively adjusted for all periods presented to give effect to the Reverse Stock Split, including reclassifying an amount equal to the reduction in par value of common stock to additional paid-in capital.

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

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

Cash and cash equivalents

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The Company bases its estimates on assumptions, both historical and forward looking, that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.

Revenue recognition for 2018 and 2019

Revenue recognition

The Company’s contracts with customers only include one performance obligation (i.e., sale of the Company’s products).

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The Company disaggregates its revenues from contracts with customers by reporting segment:

and Canada, International, and Halloween.

The Company further disaggregates revenues by major geographic region.

See Note 3 - Business Segments, Geographic Data, and Sales by Major Customers, for further information.

Toys/Consumer Products and Halloween.

The Company further disaggregates revenues by major geographic regions (See Note 3 - Business Segments, Geographic Data, and Sales by Major Customers for further information).

The Company offers various discounts, pricing concessions, and other allowances to customers, all of which are considered in determining the transaction price.

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The Company’s reserve for sales returns and allowances amounted to $ 42.1 million as of December 31, 2020 and $ 38.4 million as of December 31, 2019.

Revenue recognition for 2017

Revenue is recognized upon the shipment of goods to customers or their agents, depending upon terms, provided there are no uncertainties regarding customer acceptance, the sales price is fixed or determinable and collectability is reasonably assured.

Generally, the Company does not allow product returns.

It provides its customers a negotiated allowance for breakage or defects, which is recorded when the related revenue is recognized.

However, the Company does make occasional exceptions to this policy and consequently accrues a return allowance based upon historic return amounts and management estimates.

The Company occasionally grants credits to facilitate markdowns and sales of slow-moving merchandise.

These credits are recorded as a reduction of gross sales at the time of the sale.

Fair Value Measurements

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The carrying value of property and equipment is reviewed when events or changes in circumstances indicate that the carrying value of an asset may not be recoverable.

No impairment charges were recorded for the years ended December 31, 2017 , 2018 and 2019.

For the years ended December 31, 2017 , 2018 and 2019 , the Company’s aggregate depreciation expense related to property and equipment was $13.0 million , $12.2 million and $12.9 million , respectively.

For the years ended December 31, 2017 , 2018 and 2019 , the Company recorded a loss on disposal of tools and molds of nil , nil , and $1.0 million , respectively, which is included in cost of sales in the consolidated statements of operations.

No impairment charges were recorded for the year ended December 31, 2020, 2019 and 2018.

For the year ended December 31, 2020, 2019 and 2018, the Company’s aggregate depreciation expense related to property and equipment was $ 9.8 million, $ 12.9 million and $ 12.2 million, respectively.

For the year ended December 31, 2020, 2019 and 2018, the Company recorded a loss on disposal of tools and molds of $ 0.1 million, $ 1.0 million, and nil, respectively, which is included in cost of sales in the consolidated statements of operations.

Other Comprehensive Income (Loss)

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The costs of other advertising, promotion and marketing programs are charged to operations in the period incurred.

Advertising expense for the years ended December 31, 2017 , 2018 and 2019 , was approximately $10.8 million , $13.7 million and $13.8 million , respectively.

Advertising expense for the year ended December 31, 2020, 2019 and 2018, was approximately $ 10.1 million, $ 13.8 million and $ 13.7 million, respectively.

See also Revenue Recognition regarding cooperative advertising arrangements.

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The Company measures all employee share-based compensation awards using a fair value method and records such expense in its consolidated financial statements.

Earnings per share

A reconciliation of the amounts used to calculate basic and diluted loss per share for the years ended December 31, 2017, 2018, and 2019 follows (in thousands, except per share data):

Earnings (Loss) per share

A reconciliation of the amounts used to calculate basic and diluted loss per share for the year ended December 31, 2020, 2019, and 2018 follows (in thousands, except per share data):

Year Ended December 31,

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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 and convertible debt to the extent they are dilutive).

For the years ended December 31, 2017 , 2018 and 2019 , the convertible senior notes interest and related weighted common share equivalent of 18,272,906 , 21,606,816 and 29,074,975 , respectively, were excluded from the diluted earnings per share calculation since they would have been anti-dilutive.

Potentially dilutive stock options and warrants of 1,062,500 , nil and nil for the years ended December 31, 2017 , 2018 and 2019 , respectively, were excluded from the computation of diluted earnings per share since they would have been anti-dilutive.

Potentially dilutive restricted stock and units of 312,663 , 1,130,233 and 1,423,500 for each of the years ended December 31, 2017 , 2018 and 2019 , respectively, were excluded from the computation of diluted earnings per share since they would have been anti-dilutive.

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).

For the year ended December 31, 2020, 2019 and 2018, the convertible senior notes interest and related weighted common share equivalent of 5,758,365 , 2,907,498 and 2,160,682 , respectively, were excluded from the diluted earnings per share calculation since they would have been anti-dilutive.

Potentially dilutive restricted stock awards and units of 185,455 , 142,350 and 113,023 for each of the year ended December 31, 2020, 2019 and 2018, respectively, were excluded from the computation of diluted earnings per share since they would have been anti-dilutive.

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”) on June 9, 2014.

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Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-02, “Leases.” ASU 2016-02 establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months.

Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the statement of operations.

ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.

Early adoption is permitted.

A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application.

An entity may choose to use either (1) its effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application.

If an entity chooses the second option, the transition requirements for existing leases also apply to leases entered into between the date of initial application and the effective date.

The entity must also recast its comparative period financial statements and provide the disclosures required by the new standard for the comparative periods.

On January 1, 2019, the Company adopted the new standard and uses the effective date as its date of initial application.

Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019.

The new standard provides a number of optional practical expedients in transition.

The Company elected certain practical expedients, which permits the Company not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs.

The Company did not elect the use-of-hindsight or the practical expedient pertaining to land easements;

the latter not being applicable to the Company.

On adoption, the Company recognized operating lease liabilities of approximately $40.8 million with corresponding ROU assets of $37.6 million based on the present value of the remaining minimum rental payments for existing operating leases.

The Company also derecognized deferred rent liabilities of $4.3 million and prepaid rent of $1.1 million upon the recognition of lease liabilities and ROU assets.

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

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

Measurement of Credit Losses on Financial Instruments,” which require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected.

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The new standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and early adoption is permitted.

The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

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

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

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Early adoption is permitted.

The adoption of this standard is not expected to have a material impact on the Company’s 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.

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

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

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

This new standard is effective for the Company for fiscal years beginning January 1, 2021, with early adoption permitted.

The Company does not expect any material impact on its consolidated financial statements from the adoption of this standard.

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.

The new standard is effective for the Company for fiscal years beginning after December 15, 2022, including interim periods within these fiscal years, with early adoption permitted.

The Company is currently evaluating the impact that the adoption of this new guidance will have on its 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 adoption permitted.

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

Note 3 — Business Segments, Geographic Data and Sales by Major Customers

The Company is a worldwide producer and marketer of children’s toys and other consumer products, principally engaged in the design, development, production, marketing and distribution of its diverse portfolio of products.

The Company has aligned its operating segments into three segments that reflect the management and operation of the business.

The Company’s segments are (i) U.S.

and Canada, (ii) International and (iii) Halloween.

and Canada 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, and kids’ indoor and outdoor furniture, and related products.

Within the International segment, the Company markets and sells its toy products in markets outside of the U.S.

and Canada, primarily in the European, Asia Pacific, and Latin American regions.

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

The Company recently re-aligned its products into two reporting segments to better reflect the management and operation of the business.

The Company’s segments are (i) Toys/Consumer Products and (ii) Halloween.

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

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.

Segment performance is measured at the operating income (loss) level.

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Year Ended December 31,

International

Toys/Consumer Products

Year Ended December 31,

Loss from Operations

International

Income (Loss) from Operations

Toys/Consumer Products

Year Ended December 31,

Depreciation and Amortization Expense

International

Toys/Consumer Products

Net revenues are categorized based upon location of the customer, while long-lived assets are categorized based upon the location of the Company’s assets.

Tools, dies and molds represent a substantial portion of the long-lived assets included in the United States with a net book value of $15.8 million in 2018 and $11.4 million in 2019 and substantially all of these assets are located in China.

The following tables present information about the Company by geographic area as of December 31, 2020 and 2019 and for each of the three years in the period ended December 31, 2020 (in thousands):

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United States

United Kingdom

Year Ended December 31,

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Percentage of

* Sales to Toys "R" Us in the applicable periods were less than 10% of total net sales.

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

As of December 31, 2018 and 2019 , the Company’s three largest customers accounted for approximately 61.4% 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.

For the years ended December 31, 2017, 2018 and 2019, the Company recorded bad debt expense (recoveries) of $11.8 million , $9.6 million and ($0.9) million , respectively, primarily due to the bankruptcy and liquidation of Toys "R" Us.

Note 4 — Joint Ventures

The Company owns a fifty percent interest in a joint venture (“Pacific Animation Partners”) with the U.S.

entertainment subsidiary of a leading Japanese advertising and animation production company.

The joint venture was created to develop and produce a boys’ animated television show, which it licensed worldwide for television broadcast as well as consumer products.

On December 16, 2009, the Company entered into a joint venture agreement with the U.S.

entertainment subsidiary of a leading Japanese advertising and animation production company in which it owned fifty percent interest.

The joint venture (“Pacific Animation Partners”) was created to develop and produce a boys’ animated television show, which it licensed worldwide for television broadcast as well as consumer products.

The Company produced toys based upon the television program under a license from the joint venture which also licensed certain other merchandising rights to third parties.

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 years ended December 31, 2017 , 2018 and 2019 , the Company recognized income from the joint venture of $16,000 , $22,000 and nil , respectively.

The joint venture was terminated on December 2, 2020.

For the year ended December 31, 2020, 2019 and 2018, the Company recognized income from the joint venture of $ 2 ,341, nil and $ 22 ,000, respectively.

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

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

The non-controlling interest’s share of the loss from the joint venture for year ended December 31, 2017, 2018 and 2019 was nil .

As of December 31, 2019, Meisheng beneficially owns more than 10% of the Company’s outstanding common stock.

Note 5—Business Combinations

In October 2016, the Company acquired the operating assets of C’est Moi with its performance makeup and youth skincare product lines for $0.3 million to further enhance its existing product lines and to continue diversification into other consumer products categories.

The Company launched a full line of makeup and skincare products branded under the C’est Moi name in the U.S.

to a limited number of retail customers in 2019.

The Company’s investment in C’est Moi is included in trademarks in our consolidated financial statements (See Note 7 - Intangible Assets).

The non-controlling interest’s share of the loss from the joint venture for years ended December 31, 2020, 2019 and 2018 was nil .

As of December 31, 2020, Meisheng beneficially owns 9.2 % 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.

Xiaoqiang Zhao) for election to the Company’s board of directors.

Note 5 — Prepaid Expenses and Other Assets

Prepaid expenses and other assets for the year ended December 31, 2020 and 2019 consist of the following (in thousands):

Royalty advances

Prepaid expenses

Income taxes receivable

Note 6 — Goodwill

The changes in the carrying amount of goodwill by reporting unit for the years ended December 31, 2018 and 2019 are as follows (in thousands):

Carrying Amounts, gross

International

Balance, January 1, 2018

Adjustments to goodwill for foreign currency translation

Balance, December 31, 2018

Adjustments to goodwill for foreign currency translation

Balance, December 31, 2019

Accumulated Impairment Losses

International

Balance, January 1, 2018, December 31, 2018, and December 31, 2019

Carry Amounts, net

International

Balance, January 1, 2018

Balance, December 31, 2018

Balance, December 31, 2019

There were no changes in the carrying amount of goodwill by reporting unit for the year ended December 31, 2020 and 2019.

The Company applies a fair value-based impairment test to the carrying value of goodwill and indefinite-lived intangible assets on an annual basis and, on an interim basis, if certain events or circumstances indicate that an impairment loss may have been incurred.

Goodwill impairment exists when the estimated fair value of goodwill is less than its carrying value.

Based on the Company’s April 1, 2017 annual assessment, it was determined that the fair values of its reporting units were not less than the carrying amounts.

Based on several factors that occurred during the quarter ended September 30, 2017, the Company determined the fair value of its reporting units should be retested for potential impairment.

As a result of the retesting performed, a charge of $8.3 million for goodwill impairment was recorded for the year ended December 31, 2017.

The valuation process included a combination of a guideline public company method and a discounted cash flow method using Level 3 inputs.

Based on several factors that occurred during the quarter ended March 31, 2020, the Company determined the fair value of its reporting units should be retested for potential impairment.

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Also, no goodwill impairment was determined to have occurred for the year ended December 31, 2019.

and Canada reporting unit had a negative carrying value of net asset as of December 31, 2019.

Based on the Company’s April 1, 2018 annual assessment, it was determined that the fair values of its reporting units were not less than the carrying amounts.

Also, no goodwill impairment was determined to have occurred for the year ended December 31, 2018.

In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment,” which removes Step 2 from the goodwill impairment test.

ASU 2017-04 requires that if a reporting unit’s carrying value exceeds its fair value, an impairment charge would be recognized for the excess amount, not to exceed the carrying amount of goodwill.

ASU 2017-04 is effective for interim and annual reporting periods beginning after December 15, 2019.

The Company early adopted ASU 2017-04 in the third quarter of 2017.

Note 7 — Intangible Assets Other Than Goodwill

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Unamortized Intangible Assets:

In 2017, the Company recorded impairment charges of $2.9 million to write off the remaining unamortized technology rights related to DreamPlay, LLC which were included in product lines, and $2.3 million to write down several underutilized trademarks and trade names that were determined to have no value.

In 2019, the Company assessed the recoverability of the Maui product lines and determined that the fair value was less than its carrying amount.

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The fair value determination is categorized as Level 3 in the fair value hierarchy due to its use of internal projections and unobservable measurement inputs.

For the years ended December 31, 2017 , 2018 and 2019 , the Company’s aggregate amortization expense related to intangible assets was $8.0 million , $4.9 million and $4.7 million , respectively.

For the year ended December 31, 2020, 2019 and 2018, the Company’s aggregate amortization expense related to intangible assets was $ 1.2 million, $ 4.7 million and $ 4.9 million, respectively.

The Company currently estimates continuing future amortization expense to be approximately (in thousands):

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Salaries and employee benefits

Professional fees

Goods in transit

Unclaimed property liability

Sales commissions

Professional fees

Unearned revenue

Sales commissions

Unclaimed property liability

In addition to royalties currently payable on the sale of licensed products during the year, the Company records a liability as accrued royalties for the estimated shortfall in achieving minimum royalty guarantees pursuant to certain license agreements (see Note 17 - Commitments).

Note 10 — Debt

Convertible senior notes

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3.25 % convertible senior notes due 2023 *

3.25% convertible senior notes due 2023 **

Total convertible senior notes

* The amounts presented for the 3.25% convertible senior notes due 2020 within the table represent the fair value as of December 31, 2018 (see Note 16 - Fair Value Measurements).

The notes were extinguished on August 9, 2019 in connection with the Recapitalization Transaction (defined below).

The principal amount of these notes was $29.6 million and nil as of December 31, 2018 and 2019, respectively.

** The amounts presented for the 3.25% convertible senior notes due 2023 within the table represent the fair value as of December 31, 2018 and December 31, 2019 (see Note 16 - Fair Value Measurements).

The principal amount of these notes totaled nil and $37.6 million as of December 31, 2018 and 2019, respectively.

Also, the amount presented excludes accrued, but unpaid, payment-in-kind interest of $0.4 million as of December 31, 2019.

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

The principal amount of these notes is $ 22.9 million and $ 37.6 million as of December 31, 2020 and 2019, respectively.

The accrued, but unpaid, payment-in-kind interest is $ 0.9 million and $ 0.4 million as of December 31, 2020 and 2019, respectively.

In July 2013, the Company sold an aggregate of $ 100.0 million principal amount of 4.25% convertible senior notes due 2018 (the “2018 Notes”).

The 2018 Notes, which were senior unsecured obligations of the Company, paid interest semi-annually in arrears on August 1 and February 1 of each year at a rate of 4.25 % per annum and matured on August 1, 2018.

The initial conversion rate for the 2018 Notes was 114.3674 shares of the Company’s common stock per $1,000 principal amount of notes, equivalent to an initial conversion price of approximately $8.74 per share of common stock, subject to adjustment in certain events.

Excluding the impact of the 1 for 10 reverse stock split, the initial conversion rate for the 2018 Notes was 114.3674 shares of the Company’s common stock per $ 1,000 principal amount of notes, equivalent to an initial conversion price of approximately $ 8.74 per share of common stock, subject to adjustment in certain events.

In 2016, the Company repurchased and retired an aggregate of approximately $ 6.1 million principal amount of the 2018 Notes.

In addition, approximately $ 0.1 million of the unamortized debt issuance costs were written off and a nominal gain was recognized in conjunction with the retirement of the 2018 Notes.

During the first quarter of 2017, the Company exchanged and retired $39.1 million principal amount of the 2018 Notes at par for $24.1 million in cash and approximately 2.9 million shares of its common stock.

During the first quarter of 2017, the Company exchanged and retired $ 39.1 million principal amount of the 2018 Notes at par for $ 24.1 million in cash and approximately 290,000 shares of its common stock.

During the second quarter of 2017, the Company exchanged and retired $ 12.0 million principal amount of the 2018 Notes at par for $ 11.6 million in cash and 11,240 shares of its common stock, and approximately $ 0.1 million of the unamortized debt issuance costs were written off and a $ 0.1 million gain was recognized in conjunction with the exchange and retirement of the 2018 Notes.

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.

In addition, the interest rate was reduced to 3.25% per annum and the conversion rate was increased to 328.0302 shares of the Company’s common stock per $1,000 principal amount of notes, among other things.

In addition, the interest rate was reduced to 3.25 % per annum, and excluding the impact of the 1 for 10 reverse stock split, the conversion rate was increased to 328.0302 shares of the Company’s common stock per $ 1,000 principal amount of notes, among other things.

After execution of a definitive agreement for the modification and final approval by the other members of the Company’s Board of Directors and Oasis’ Investment Committee, the transaction closed on November 7, 2017.

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On July 26, 2018, the Company closed a transaction with Oasis to exchange $8.0 million face amount of the 2018 Notes with convertible senior notes similar to those issued to Oasis in November 2017.

The July 26, 2018 $8.0 million Oasis notes mature on November 1, 2020, accrue interest at an annual rate of 3.25% and are convertible into shares of the Company’s common stock at an initial rate of 322.2688 shares per $1,000 principal amount of the new notes.

The July 26, 2018 $ 8.0 million Oasis notes mature on November 1, 2020, accrue interest at an annual rate of 3.25 %, and excluding the impact of the 1 for 10 reverse stock split, are convertible into shares of the Company’s common stock at a rate of 322.2688 shares per $1,000 principal amount of the new notes.

In connection with this transaction, the Company recognized a loss on extinguishment of the debt of approximately $ 0.5 million.

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provided, however, among other reset restrictions, that if the conversion price resulting from such reset is lower than 90 percent of the average VWAP during the 90 calendar days preceding the reset date, then the reset price shall be the 30-day VWAP preceding the reset date.

The conversion price of the 3.25% convertible senior notes due 2020 reset on November 1, 2018 to $2.54 per share and the conversion rate was increased to 393.7008 shares of the Company's common stock per $1,000 principal amount of notes.

Excluding the impact of the 1 for 10 reverse stock split, the conversion price of the 3.25% convertible senior notes due 2020 reset on November 1, 2018 to $ 2.54 per share and the conversion rate was increased to 393.7008 shares of the Company's common stock per $ 1,000 principal amount of notes.

The remaining $ 13.2 million of 2018 Notes were redeemed at par at maturity on August 1, 2018.

In August 2019, the Company entered into and consummated multiple, binding definitive agreements (collectively, the “Recapitalization Transaction”) among Wells Fargo Bank, National Association, Oasis Investments II Master Fund Ltd.

In August 2019, the Company entered into and consummated multiple, binding definitive agreements (collectively, the “Recapitalization Transaction”) among Wells Fargo, Oasis Investments II Master Fund Ltd.

and an ad hoc group of holders of the 4.875 % convertible senior notes due 2020 ( the "Investor Parties") to recapitalize the Company’s balance sheet, including the extension to the Company of incremental liquidity and at least three-year extensions of substantially all of the Company’s outstanding convertible debt obligations and revolving credit facility.

The Company’s term loan agreement entered into with Great American Capital Partners was paid in full and terminated in connection with the Recapitalization Transaction.

The Company’s Term Loan Agreement entered into with Great American Capital Partners (See Note 11 – Credit Facilities) was paid in full and terminated in connection with the Recapitalization Transaction.

In connection with the Recapitalization Transaction, the Company issued (i) amended and restated notes with respect to the $ 21.6 million Oasis Note issued on November 7, 2017, and the $ 8.0 million Oasis Note issued on July 26, 2018 (together, the “Existing Oasis Notes”), and (ii) a new $ 8.0 million convertible senior note having the same terms as such amended and restated notes (the "New $8.0 million Oasis Note" and collectively, the “New Oasis Notes” or the " 3.25 % convertible senior notes due 2023").

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The New Oasis Notes mature 91 days after the amounts outstanding under the New Term Loan are paid in full, and in no event later than July 3, 2023.

The New Oasis Notes provide, among other things, that the initial conversion price is $1.00 .

Excluding the impact of the 1 for 10 reverse stock split, the New Oasis Notes provide, among other things, that the initial conversion price is $ 1.00 .

The conversion price will be reset on each February 9 and August 9, starting on February 9, 2020 (each, a “reset date”) to a price equal to 105 % of the 5-day VWAP preceding the applicable reset date.

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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.

The conversion price of the new Oasis Notes reset on February 9, 2020 to $1.00 per share.

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 (loss) of ($0.3) million , $2.9 million and ($2.5) million for the year ended December 31, 2017, 2018, and 2019, respectively, related to changes in the fair value of the 3.25% convertible senior notes due 2020.

The Company also recognized a loss of $2.6 million for the year ended December 31, 2019 related to changes in the fair value of the 3.25% convertible senior note due 2023.

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 .

On February 9, 2021, the conversion price of the New Oasis Notes recalculated and remained unchanged at $ 5.647 .

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

As a result, 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.

In October 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.

As a result, the Company recorded an increase to additional paid-in capital of $ 2.6 million.

In November 2020, $ 4.0 million of the New Oasis Notes (including $ 138,248 in payment-in-kind interest) were converted for 708,340 shares of common stock.

As a result, the Company recorded an increase to additional paid-in capital of $ 5.4 million.

In December 2020, $ 1.0 million of the New Oasis Notes (including $ 36,528 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 $ 1.4 million.

On March 2, 2021, $ 1.0 million of the New Oasis Notes (including $ 42,009 in payment-in-kind interest) were converted for 177,085 shares of common stock.

On March 9, 2021, $ 1.0 million of the New Oasis Notes (including $ 42,516 in payment-in-kind interest) were converted for 177,085 shares of common stock.

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

The Company has elected to measure and present the debt held by Oasis at fair value using Level 3 inputs and as a result, recognized a gain (loss) of nil , ($ 2.5 ) million and $ 2.9 million for the year ended December 31, 2020, 2019, and 2018, respectively, related to changes in the fair value of the 3.25% convertible senior notes due 2020.

The Company also recognized a loss of $ 2.3 million (net of payment-in-kind interest of $ 1.3 million) and $ 2.6 million for the year ended December 31, 2020 and 2019, respectively, related to changes in the fair value of the 3.25% convertible senior notes due 2023.

At December 31, 2020 and 2019, the debt held by Oasis had a fair value of approximately $ 34.1 million and $ 50.8 million, respectively.

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

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The 2020 Notes are senior unsecured obligations of the Company paying interest semi-annually in arrears on June 1 and December 1 of each year at a rate of 4.875% per annum and will mature on June 1, 2020.

The initial and still current conversion rate for the 2020 Notes is 103.7613 shares of the Company’s common stock per $1,000 principal amount of notes, equivalent to an initial conversion price of approximately $9.64 per share of common stock, subject to adjustment in certain events.

Excluding the impact of the 1 for 10 reverse stock split, the initial and still current conversion rate for the 2020 Notes is 103.7613 shares of the Company’s common stock per $ 1,000 principal amount of notes, equivalent to an initial conversion price of approximately $ 9.64 per share of common stock, subject to adjustment in certain events.

Upon conversion, the 2020 Notes will be settled in shares of the Company’s common stock.

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In addition, approximately $ 0.1 million of the unamortized debt issuance costs were written off and a $ 0.1 million gain was recognized in conjunction with the retirement of the 2020 Notes.

In connection with the Recapitalization Transaction, 2020 Notes outstanding with a face amount of $111.1 million of the total $113.0 million that were outstanding at the time of the Recapitalization Transaction were refinanced and the maturity dates effectively extended.

In connection with the Recapitalization Transaction, the 2020 Notes with a face amount of $ 111.1 million of the total $ 113.0 million that were outstanding at the time of the Recapitalization Transaction were refinanced and the maturity dates were extended.

Of the refinanced amount, $ 103.8 million was refinanced with the Investor Parties through the issuance of the New Common Equity (as defined below), the New Preferred Equity (as defined below) (see Note 15 - Common Stock and Preferred Stock) and new secured term debt that matures in February 2023 (see Term Loan section below).

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In connection with the issuance of the new secured term loan, as well as the New Common Equity and the New Preferred Equity, the Company recognized a loss on extinguishment of the 2020 Notes refinanced with the Investor Parties of approximately $ 2.4 million, and wrote off $ 0.7 million of unamortized debt issuance costs related to the 2020 Notes.

The remaining $1.9 million principal amount of 2020 Notes are due and payable on June 1, 2020 .

The Company classified the remaining $1.9 million of the 2020 Notes, which are due June 2020, as current liabilities on the Consolidated Balance Sheet.

The fair value of the 4.875% convertible senior notes due 2020 as of December 31, 2018 and 2019 was $93.2 million (principal amount $113.0 million ) and $1.7 million (principal amount $1.9 million ), respectively, based upon the most recent quoted market prices.

The remaining $1.9 million principal amount of the 2020 Notes were redeemed at par at maturity on June 1, 2020.

The fair value of the 4.875 % convertible senior notes due 2020 as of December 31, 2020 and 2019 was nil and $ 1.7 million (principal amount $1.9 million), respectively, based upon the most recent quoted market prices.

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

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Contractual interest expense

Amortization of debt issuance costs recognized as interest expense

Key components of the 3.25% convertible senior notes due 2023 consist of the following (in thousands):

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Contractual interest expense

Amortization of debt issuance costs recognized as interest expense

On February 5, 2021, Benefit Street Partners and Oasis Investment II Master Funds Ltd, both related parties, entered into a purchase and sale agreement wherein Benefit Street Partners purchased $ 11.0 million of principal amount, plus all accrued and unpaid interest thereon, of the New Oasis Notes from Oasis Investment II Master Funds Ltd (see Note 12 – Related Party Transactions).

The transaction closed on February 8, 2021.

Term loan consists of the following (in thousands):

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December 31, 2019

Principal Amount**

Debt Discount/

Principal Amount**

Debt Discount/

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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 $1.3 million as of December 31, 2019.

** The amount presented excludes accrued, but unpaid, payment-in-kind interest of $ 4.7 million and $ 1.3 million as of December 31, 2020 and 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”).

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The New Term Loan matures on February 9, 2023.

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 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 assets as security, make investments, loans, advances, guarantees and acquisitions, undergo fundamental changes and enter into transactions with affiliates.

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

On October 16, 2020, the Company reached an agreement (the “Amendment”) with holders of its New 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 was reduced to $ 25.0 million, which will not be calculated earlier than March 31, 2022.

The Amendment also required 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.

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.

As of December 31, 2020, the Company had $ 124.5 million (including $4.7 million in payment-in-kind interest) outstanding under the New Term Loan Agreement, $ 5.0 million of which is recorded as short term debt, and $ 114.8 million is recorded as long term debt on the consolidated balance sheet.

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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 $0.4 million for the year ended December 31, 2019.

Amortization expense classified as interest expense related to the $10.1 million debt discount associated with the issuance of the New Term Loan was $1.1 million for the year ended December 31, 2019.

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 $ 1.0 million and $ 0.4 million for the year ended December 31, 2020 and 2019, 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 $ 2.8 million and $ 1.1 million for the year ended December 31, 2020 and 2019, respectively.

The fair value of the New Term Loan as of December 31, 2020 and 2019 was $ 129.6 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

On June 12, 2020, the Company received a $ 6.2 million PPP Loan under the PPP within the CARES Act.

The PPP Loan matures on June 2, 2022, and is subject to the CARES Act terms which include, among other terms, an interest rate of 1.00 % per annum and monthly installment payments of $ 261,275 commencing on September 27, 2021.

The PPP Loan may be prepaid at any time prior to maturity with no prepayment penalties.

The PPP Loan is subject to events of default and other provisions customary for a loan of this type.

As of December 31, 2020, the Company has recorded the PPP Loan as a liability and classified $ 0.9 million as a current liability and $ 5.3 million as a non-current liability on the 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 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.

Note 11 — Credit Facilities

Credit facilities consist of the following (in thousands):

December 31, 2018

December 31, 2019

Principal Amount

Wells Fargo credit facility

Great American Capital Partners term loan

Total credit facilities, net of debt issuance costs

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

The credit facility, as amended and subsequently assigned to Wells Fargo Bank, N.A.

(“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.

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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 10 - Debt), the Company entered into an amended and extended revolving credit facility with Wells Fargo (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.

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.

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

As of December 31, 2018, the amount of outstanding borrowings under the previous Credit Facility was $7.5 million , outstanding stand-by letters of credit totaled $12.8 million and the total excess borrowing capacity was $40.7 million .

As of December 31, 2020, the amount of outstanding borrowings was nil , the amount of outstanding stand-by letters of credit totaled $ 10.8 million and the total excess borrowing capacity was $ 37.3 million.

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

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 $ 38.4 million.

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

The Company 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 December 31, 2018 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 December 31, 2020 and 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 December 31, 2018 and December 31, 2019, the weighted average interest rate on the credit facilities with Wells Fargo was approximately 5.53% and 4.53% , respectively.

As of December 31, 2020 and 2019, the weighted average interest rate on the credit facilities with Wells Fargo was nil and 4.53 %, respectively.

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

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

As described in Note 10 – 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 December 31, 2020, off-balance sheet arrangements include letters of credit issued by Wells Fargo of $ 10.8 million.

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In August 2019, in connection with the Recapitalization Transaction (See Note 10 - Debt), the Company repaid in full and terminated the Term Loan Agreement.

As of December 31, 2018 and December 31, 2019, the amount outstanding under the Term Loan was $20.0 million and nil, respectively.

Borrowings under the Term Loan accrued interest at LIBOR plus 9.00% per annum.

As of December 31, 2018 and December 31, 2019, the weighted average interest rate on the Term Loan was approximately 11.1% and 11.5% , respectively.

In connection with this transaction, the Company recognized a loss on extinguishment of the debt of approximately $0.4 million .

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 $0.9 million and $0.6 million for the year ended December 31, 2018 and 2019, respectively.

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 $ 0.4 million, $ 0.6 million and $ 0.9 million for the year ended December 31, 2020, 2019 and 2018, respectively.

Note 12 — 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 $2.2 million in 2017 , $1.3 million in 2018 and $1.5 million in 2019 .

As of December 31, 2018 and 2019 , legal fees and reimbursable expenses of $0.2 million and $0.1 million , respectively, were payable to this law firm.

The Company incurred legal fees and expenses to the law firm in the amount of approximately $ 1.5 million in 2019 and $ 1.3 million in 2018.

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

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.

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This agreement expired on September 30, 2018.

All of the Company's shares beneficially owned by the owner of NantWorks were sold on December 30, 2019.

For the years ended December 31, 2017 , 2018 and 2019 , preferred returns earned and payable to NantWorks were 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 December 31, 2018 and 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, for the years ended December 31, 2017 , 2018 and 2019 was nil .

The owner of NantWorks sold all of its holdings of the Company's shares on December 30, 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.

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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 (loss) from the joint venture for the years ended 2017, 2018 and 2019 was $57,000 , ($57,000) and $169,000 , respectively.

The non-controlling interest’s share of the income (loss) from the joint venture for the year ended December 31, 2020, 2019 and 2018 was $ 130 ,000, $ 169 ,000 and ($ 57 ,000), 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.

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will oversee through the Company’s existing distribution joint venture.

The non-controlling interest’s share of the loss from the joint venture for the year ended December 31, 2017, 2018, and 2019 was nil .

As of December 31, 2019, Meisheng beneficially owns more than 10% of the Company’s outstanding common stock.

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

The non-controlling interest’s share of the loss from the joint venture for the years ended December 31, 2020, 2019, and 2018 was nil .

As of December 31, 2020, Meisheng beneficially owns 9.2 % 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.

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

For the years ended December 31, 2018 and 2019, the Company made inventory-related payments to Meisheng of approximately $36.2 million and $94.3 million , respectively.

As of December 31, 2018 and 2019, amounts due Meisheng for inventory received by the Company, but not paid totaled $3.6 million and $18.1 million , respectively.

For the year ended December 31, 2020, 2019 and 2018, the Company made inventory-related payments to Meisheng of approximately $ 64.8 million, $ 94.3 million, and $ 36.2 million respectively.

As of December 31, 2020 and 2019, amounts due to Meisheng for inventory received by the Company, but not paid totaled $ 10.1 million and $ 18.1 million, respectively.

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

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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 10 - 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 December 31, 2020, Benefit Street Partners held $ 61.1 million in principal amount (including $ 2.3 million in payment-in-kind interest) of the New Term Loan.

The transaction closed on February 8, 2021.

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 10 - 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 December 31, 2020, Axar Capital Management held $ 24.3 million in principal amount (including $ 0.9 million in payment-in-kind interest) of the New Term Loan.

Note 13 — Income Taxes

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The Company files federal and state returns and its foreign subsidiaries file returns in their respective jurisdiction.

For the years ended 2017, 2018 and 2019, the provision for income taxes, which included federal, state and foreign income taxes, was an expense of $1.6 million , $3.0 million , and $1.9 million , respectively, reflecting effective tax provision rates of (2.0%) , (7.5%) , and (3.6%) , respectively.

For the years ended 2017 and 2018, provision for income taxes includes federal, state and foreign income taxes at effective tax rates of (2.0%) and (7.5%) .

For the year ended 2020, 2019 and 2018, the provision for income taxes, which included federal, state and foreign income taxes, was an expense of $ 0.7 million, $ 1.9 million and $ 3.0 million, respectively, reflecting effective tax provision rates of ( 5.5 %), ( 3.6 %), and ( 7.5 %), respectively.

The 2020 tax expense of $0.7 million included a discrete tax benefit of ($ 0.3 ) million primarily comprised of return to provision and uncertain tax position adjustments.

Absent these discrete tax benefits, the Company’s effective tax rate for 2020 was ( 7.7 %), primarily due to state taxes and taxes on foreign income.

For the year ended 2019 and 2018, provision for income taxes includes federal, state and foreign income taxes at effective tax rates of (3.6%) and (7.5%).

Exclusive of discrete items, the effective tax provision rate would be ( 3.1 %) in 2019 and ( 9.6 %) in 2018.

The 2019 tax expense of $1.9 million included a discrete tax expense of $0.2 million primarily comprised of return to provision and uncertain tax position adjustments.

Absent these discrete tax expenses, the Company’s effective tax rate for 2019 was (3.1%) , primarily due to state taxes and taxes on foreign income.

As of December 31, 2020 and 2019, the Company had net deferred tax liabilities of approximately $ 0.1 million and $ 14 ,000, respectively, primarily related to foreign jurisdictions.

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Share-based compensation

Undistributed foreign earnings

Interest limitation

Undistributed foreign earnings

Operating lease right-of-use assets

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Total net deferred tax liabilities

*As of December 31, 2018, a deferred tax asset of $438 was reported as other long term assets in the consolidated balance sheets and $1,431 was reported as a deferred income tax liability, net in the consolidated balance sheets.

As of December 31, 2019, a deferred tax asset of $212 was reported as other long term assets in the consolidated balance sheets and $226 was reported as a deferred income tax liability, net in the consolidated balance sheets.

Provision for income taxes varies from the U.S.

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Non-deductible expenses

Foreign tax credit

Undistributed foreign earnings

Effect of change in federal statutory rate

Valuation allowance

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The temporary differences result from costs required to be capitalized for tax purposes by the U.S.

Internal Revenue Code (“IRC”), and certain items accrued for financial reporting purposes in the year incurred but not deductible for tax purposes until paid.

The Company has established a valuation allowance on net deferred tax assets in the United States since, in the opinion of management, it is more likely than not that the U.S.

net deferred tax assets will not be realized.

Internal Revenue Code, and certain items accrued for financial reporting purposes in the year incurred but not deductible for tax purposes until paid.

The Company has established a valuation allowance on net deferred tax assets in the United States since, in the opinion of management, it is not more likely than not that the U.S.

net deferred tax assets will be realized.

The components of income (loss) before provision for income taxes are as follows (in thousands):

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The Company uses a recognition threshold and measurement process for recording in the consolidated financial statements uncertain tax positions (“UTP”) taken or expected to be taken in a tax return.

During 2018, approximately $0.6 million of additional UTP was recognized, and approximately $0.4 million of the liability for UTP was de-recognized.

Approximately $0.1 million of additional UTP related to foreign withholding taxes was recognized in 2019.

Approximately $ 0.6 million of the liability for UTP related to foreign withholding taxes and Hong Kong audit examination was derecognized in 2020.

During 2019, approximately $ 0.1 million of additional UTP related to foreign withholding taxes was recognized.

Current interest on uncertain income tax liabilities is recognized as a component of the income tax provision recognized in the consolidated statements of operations.

During 2020, the Company did not recognize any current year interest expense relating to UTPs.

During 2018, the Company recognized $0.1 million of current interest expense relating to UTPs.

During 2019, the Company recognized an additional $ 40 ,000 of current interest expense relating to UTPs.

During 2018, the Company recognized $ 0.1 million of current interest expense relating to UTPs.

The following table provides further information of UTPs that would affect the effective tax rate, if recognized, as of December 31, 2020 (in millions):

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Current year additions

Current year reduction due to lapse of applicable statute of limitations

Balance, December 31, 2017

Current year additions

Current year reduction due to audit settlement

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Balance, December 31, 2019

The Company does not expect the gross unrecognized tax benefits to significantly change within the next 12 months.

Current year reduction

Balance, December 31, 2020

The Company does not expect its gross unrecognized tax benefits to significantly change within the next 12 months.

Tax years 2017 through 2019 remain subject to examination in the United States.

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deferred tax assets and record a charge to income if Management determines, based upon available evidence at the time the determination is made, that it is more likely than not that some portion or all of the deferred tax assets may not be realized.

Based on the Company's evaluation of all positive and negative evidence, as of December 31, 2019, a valuation allowance of $92.8 million has been recorded against the deferred tax assets that more likely than not will not be realized.

For the year ended December 31, 2019, the valuation allowance increased by $8.7 million from $84.1 million at December 31, 2018 to $92.8 million at December 31, 2019.

The net deferred tax liabilities of $1.0 million in 2018 represent the net deferred tax liabilities in the foreign jurisdiction, where the Company is in a cumulative income position, partially offset by the U.S.

deferred tax assets related to the AMT credit carryforwards.

Based on our evaluation of all positive and negative evidence, as of December 31, 2020, a valuation allowance of $ 92.8 million has been recorded against the deferred tax assets that more likely than not will not be realized.

For the year ended December 31, 2020, the valuation allowance remained consistent with the $92.8 million at December 31, 2019.

The net deferred tax liabilities of $14,000 in 2019 represent the net deferred tax liabilities in the foreign jurisdiction, where the Company is in a cumulative income position, partially offset by the U.S.

deferred tax assets related to the AMT credit carryforwards.

The net deferred tax liabilities of $0.1 million in 2020 represent the net deferred tax liabilities in the foreign jurisdiction, where the Company is in a cumulative income position.

At December 31, 2020, the Company has U.S.

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As of December 31, 2020, the Company’s weighted average remaining lease term is approximately 3 years and the weighted average discount rate used to calculate the Company’s lease liability is approximately 5.21 %.

Rent expense for the years ended December 31, 2017 and 2018 totaled $12.2 million and $12.7 million , respectively.

Operating lease costs are recognized on a straight-line basis over the lease term.

Total operating lease costs for the year ended December 31, 2019 were $12.9 million .

Of the $12.9 million , $2.4 million related to short-term and variable lease costs, including common area maintenance charges, management fees, taxes and storage fees.

The Company adopted ASC 842 effective January 1, 2019.

The Company also elected the practical expedients to exclude right-of-use ("ROU") assets and lease liabilities for leases with an initial term of 12 months or less from the balance sheet.

Under ASC 842, total operating lease costs for the year ended December 31, 2020 and 2019 were $ 11.7 million and $ 12.9 million, respectively.

Of the $11.7 million for the year ended December 31, 2020, $ 2.0 million related to short-term and variable lease costs, including common area maintenance charges, management fees, taxes and storage fees.

Sublease rental income was $ 0.8 million in 2020.

The Company had a cash outflow of $11.8 million related to operating leases for the year ended December 31, 2019.

As of December 31, 2018, future minimum lease payments under long-term non-cancelable leases, as classified under ASC 840 were as follow:

The following table represents a reconciliation of the Company’s undiscounted future minimum lease payments under operating leases to the lease liability as of December 31, 2019 (in thousands):

Of the $12.9 million for the year ended December 31, 2019, $ 2.4 million related to short-term and variable lease costs, including common area maintenance charges, management fees, taxes and storage fees.

Sublease rental income was $ 1.1 million in 2019.

Under ASC 840, rent expense for the year ended December 31, 2018 totaled $ 12.7 million.

The Company had a cash outflow of $ 11.1 million, and $ 11.8 million related to operating leases for the year ended December 31, 2020 and 2019, respectively.

The following table represents a reconciliation of the Company’s undiscounted future minimum lease payments under operating leases to the lease liability excluding minimum lease payments for executed and legally enforceable leases that have not yet commenced as of December 31, 2020 (in thousands):

Year ending December 31,

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Less imputed interest

As of December 31, 2020, the minimum lease payments for executed and legally enforceable leases that have not yet commenced were $ 0.1 million.

Note 15 — Common Stock and Preferred Stock

All common stock and price per share amounts in this report have been restated to reflect the 1 for 10 reverse stock split.

The Reverse Stock Split did not cause an adjustment to the par value or the authorized shares of the common stock.

All share and per share amounts in the financial statements and notes thereto have been retroactively adjusted for all periods presented to give effect to this Reverse Stock Split, including reclassifying an amount equal to the reduction in par value of common stock to additional paid-in capital.

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

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 MVPHS of $15.0 million.

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

On November 18, 2020, the Company received notice from Nasdaq that based on its Form 10-Q for the period ended September 30, 2020 filed with the Securities and Exchange Commission on November 16, 2020, the Company had regained compliance with the Nasdaq listing requirements.

The Company has 105,000,000 authorized shares of stock consisting of 100,000,000 shares of $.001 par value common stock and 5,000,000 shares of $.001 par value preferred stock.

On December 31, 2020 shares issued and outstanding were 5,694,772 , and on December 31, 2019, shares issued and outstanding were 3,521,037 .

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

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

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”).

These repurchased shares are treated as retired for basic and diluted EPS purposes although they remain legally outstanding.

The Company reflects the aggregate purchase price as a reduction to stockholders’ equity classified as Treasury Stock.

The Company reflected the aggregate purchase price of its common shares repurchased as a reduction to stockholders’ equity allocated to treasury stock.

These repurchased shares were treated as retired for basic and diluted EPS purposes although they remained legally outstanding.

The Company reflected the aggregate purchase price as a reduction to stockholders’ equity classified as Treasury Stock.

On September 13, 2019, ML returned the shares to the Company.

The Company subsequently retired the shares which had no impact to the Company’s stockholder’s equity.

In January and February 2017, the Company issued an aggregate of 873,787 shares of restricted stock at a value of approximately $4.5 million to two executive officers, which vest, subject to certain company financial performance criteria and market conditions, over a three-year period.

In addition, an aggregate of 94,102 shares of restricted stock at an aggregate value of approximately $0.5 million were issued to its five non-employee directors, which vested in January 2018.

In January and February 2017, the Company issued an aggregate of 2,865,000 shares of its common stock at a value of $15.1 million to holders of its 2018 convertible senior notes as partial consideration for the exchange at par of $39.1 million principal amount of such notes.

In March 2017, the Company entered into an agreement to issue 3,660,891 shares of its common stock at an aggregate price of $19.3 million to a Hong Kong affiliate of its China joint venture partner.

After their shareholder and China regulatory approval, the transaction closed on April 27, 2017.

Upon the closing, the Company added a representative of Meisheng as a non-employee director and issued 13,319 shares of restricted stock at a value of $0.1 million , which vested in January 2018.

In June 2017, the Company issued an aggregate of 112,400 shares of its common stock at a value of approximately $0.4 million to holders of its 2018 convertible senior notes as partial consideration for the exchange at par of $11.6 million principal amount of such notes.

During 2017, certain employees, including an executive officer, surrendered an aggregate of 29,689 shares of restricted stock for $79,000 to cover income taxes due on the vesting of restricted shares.

In January 2018, the Company issued an aggregate of 191,489 shares of restricted stock at a value of approximately $ 4.5 million to two executive officers, which vest, subject to certain company financial performance criteria and market conditions, over a three year period.

10 unchanged sentences

On August 9, 2019, in connection with the Recapitalization Transaction (see Note 10 - 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").

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.

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 .

During 2020, certain employees, including two executive officers, surrendered an aggregate of 16,886 shares of restricted stock for $ 173,526 to cover income taxes due on the vesting of restricted shares.

Additionally, an aggregate of 52,428 shares of restricted stock granted in 2017 with a value of approximately $ 433,000 was forfeited during 2020.