JAKKS PACIFIC INC 10-K

Item 5. Market for Registrant ’ s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market Information Our common stock is traded on the Nasdaq Global Select exchange under the symbol “JAKK.” Security Holders To the best of our knowledge, as of March 10, 2021, there were 136 holders of record of our common stock. We believe there are numerous beneficial owners of our common stock whose shares are held in “street name.” Dividends The payment of dividends on common stock is at the discretion of the Board of Directors and is subject to customary limitations and may be subject to certain restrictions pursuant to the terms of our preferred stock and under our credit facility and term loan. We currently do not anticipate paying any dividends in the foreseeable future. Compensation Plan Information The table below sets forth the following information as of the year ended December 31, 2020 for (i) all compensation plans previously approved by our stockholders and (ii) all compensation plans not previously approved by our stockholders, if any: (a) the number of securities to be issued upon the exercise of outstanding options, warrants and rights; (b) the weighted-average exercise price of such outstanding options, warrants and rights; and (c) other than securities to be issued upon the exercise of such outstanding options, warrants and rights, the number of securities remaining available for future issuance under the plans. Plan Category Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (a) Weighted- Average Exercise Price of Outstanding Options, Warrants and Rights (b) Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans, Excluding Securities Reflected in Column (a) (c) Equity compensation plans approved by security holders — — 1,180,266 Equity compensation plans not approved by security holders — — — Total — — 1,180,266 Equity compensation plans approved by our stockholders consists of the 2002 Stock Award and Incentive Plan. An additional 1.4 million, 2.5 million, and 3.6 million shares were added to the number of total issuable shares under the Plan and approved by the Board in 2013, 2017, and 2019, respectively. Additionally, 507,867 shares of restricted stock awards remained unvested as of December 31, 2020. Disclosures with respect to equity issuable to certain of our executive officers pursuant to the terms of their employment agreements are disclosed below under Item 11. 27 Table of Contents Issuer Purchases of Equity Securities There were no issuer purchases of equity securities in the fourth quarter of 2020. Issuer Unregistered Sale of Equity Securities There were no issuer sales of unregistered equity securities in the fourth quarter of 2020. Item 6. Selected Financial Data The following table presents selected financial data that should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (included in Item 7) and our consolidated financial statements and the related notes (included in Item 8). Year Ended December 31, 2020 2019 2018 2017 2016 (In thousands, except per share data) Consolidated Statements of Operations Data: Net sales $ 515,872 $ 598,649 $ 567,810 $ 613,111 $ 706,603 Cost of sales 366,107 439,304 412,094 457,430 483,582 Gross profit 149,765 159,345 155,716 155,681 223,021 Selling, general and administrative expenses 134,860 161,210 185,142 205,223 205,915 Goodwill and other intangibles impairment — 9,379 — 13,536 — Restructuring charge 1,631 341 1,114 1,080 — Pandemic related charges 366 — — — — Acquisition related and other — 6,204 1,633 — — Income (loss) from operations 12,908 (17,789 ) (32,173 ) (64,158 ) 17,106 Income from joint ventures 2 — 227 105 889 Other income (expense), net 301 (1,158 ) 152 342 305 Loss on extinguishment of debt — (13,205 ) (453 ) (611 ) — Change in fair value of preferred stock derivative liability (2,815 ) (353 ) — — — Change in fair value of convertible senior notes (2,265 ) (5,112 ) 2,948 (308 ) — Write-off of investment in DreamPlay, LLC — — — (7,000 ) — Interest income 22 85 68 37 51 Interest expense (21,562 ) (15,935 ) (10,243 ) (9,829 ) (12,975 ) Income (loss) before provision for income taxes (13,409 ) (53,467 ) (39,474 ) (81,422 ) 5,376 Provision for income taxes 735 1,912 2,951 1,606 4,127 Net income (loss) (14,144 ) (55,379 ) (42,425 ) (83,028 ) 1,249 Net income (loss) attributable to non-controlling interests 130 169 (57 ) 57 6 Net income (loss) attributable to JAKKS Pacific, Inc. $ (14,274 ) $ (55,548 ) $ (42,368 ) $ (83,085 ) $ 1,243 Net income (loss) attributable to common stockholders $ (15,531 ) $ (56,031 ) $ (42,368 ) $ (83,085 ) $ 1,243 Basic earnings (loss) per share $ (4.27 ) $ (21.57 ) $ (18.34 ) $ (38.93 ) $ 0.75 Diluted earnings (loss) per share $ (4.27 ) $ (21.57 ) $ (18.34 ) $ (38.93 ) $ 0.75 Dividends declared per common share $ — $ — $ — $ — $ — 28 Table of Contents Net sales reported during 2018 through 2020 were recognized under ASC 606 and net sales reported during 2016 and 2017 were recognized under ASC 605. During the second quarter of 2020, we incurred restructuring charges of $1.6 million as a result of a Company-wide restructuring initiative. During 2020, we recognized a loss of $2.3 million related to changes in the fair value of the 3.25% convertible senior notes due in 2023 and a loss of $2.8 million related to changes in fair value of the preferred stock derivative liability. During the third quarter of 2019, we recognized a $13.2 million loss related to the extinguishment of debt. During the fourth quarter of 2019, we assessed the recoverability of the Maui product lines and determined that the fair value was less than its carrying amount. As a result, we recorded an intangibles impairment charge of $9.4 million. During 2019, we recognized a $2.5 million loss related to changes in the fair value of the 3.25% convertible senior notes due in 2020, and a loss of $2.6 million related to changes in the fair value of the 3.25% convertible senior notes due in 2023. We also recognized $6.2 million in acquisition related and other charges related to strategic and/or refinancing transactions, including a transaction whereby we entered into, and consummated multiple, binding definitive agreements among Wells Fargo Bank, National Association, Oasis Investments II Master Fund Ltd. and an ad hoc group of holders of the 4.875% convertible senior notes due 2020 that closed in August 2019. See Note 10 to the Consolidated Financial Statements included within Item 8 for further information. During the first quarter of 2018, we recorded a charge of $3.5 million related to the write-down of license advances and minimum guarantees that are not expected to be earned through sales of the licensed products. During the third quarter of 2018, we recognized a $0.5 million loss related to the extinguishment of $8.0 million face amount of our 4.25% convertible senior notes due in 2018. During the fourth quarter of 2018, we incurred restructuring charges of $1.1 million as a result of a Company-wide restructuring initiative. During 2018, we recognized a net bad debt write-off of $8.7 million related to the Toys “R” Us bankruptcy filing, $1.6 million in acquisition related and other charges as a result of the Hong Kong Meisheng Cultural Company Limited’s expression of interest in acquiring additional shares of our common stock, and recorded a $2.9 million gain related to the fair market value adjustment for the 3.25% convertible senior notes due in 2020. During the third quarter of 2017, we recorded impairment charges of $8.3 million to write off goodwill, $2.9 million to write off the remaining unamortized technology rights related to DreamPlay, LLC, and $2.3 million to write down several underutilized trademarks and trade names that were determined to have no value. Additionally, we wrote off our investment in DreamPlay, LLC in the amount of $7.0 million. During the third and fourth quarters of 2017, we recorded a charge of $9.6 million related to the write-down of certain excess and impaired inventory, recognized a bad debt write off of $8.9 million related to the Toys “R” Us bankruptcy filing on September 18, 2017, recorded a charge of $20.5 million related to the write-down of license advances and minimum guarantees that are not expected to be earned through sales of the licensed products and incurred restructuring charges of $1.1 million as a result of a Company-wide restructuring initiative. During the fourth quarter of 2017, we recognized a $0.6 million loss related to the extinguishment of $21.6 million face amount of our 4.25% convertible senior notes due in 2018 and we recognized a $0.3 million loss related to the fair market value adjustment for the 3.25% convertible senior notes due in 2020. During the second quarter of 2016, we recorded income of $0.7 million related to Pacific Animation Partners and $0.2 million for funds received related to our former video game joint venture, which is included in income (loss) from joint ventures. At December 31, 2020 2019 2018 2017 2016 (In thousands) Consolidated Balance Sheet Data: Cash and cash equivalents $ 87,953 $ 61,613 $ 53,282 $ 64,977 $ 86,064 Working capital 112,562 107,461 106,041 146,911 236,569 Total assets 329,369 365,222 342,841 370,349 464,303 Short-term debt 5,950 1,905 27,211 26,075 10,000 Long-term debt 150,410 174,962 139,792 133,497 203,007 Total stockholders' equity 12,938 4,021 51,649 94,513 135,200 29 Table of Contents Item 7. Management ’ s Discussion and Analysis of Financial Condition and Results of Operations The following Management ’ s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors. You should read this section in conjunction with our consolidated financial statements and the related notes included in Item 8 “ Consolidated Financial Statements and Supplementary Data. ” Critical Accounting Policies The accompanying consolidated financial statements and supplementary information were prepared in accordance with accounting principles generally accepted in the United States of America. Significant accounting policies are discussed in Note 2 to the Consolidated Financial Statements, included within Item 8. Inherent in the application of many of these accounting policies is the need for management to make estimates and judgments in the determination of certain revenues, expenses, assets and liabilities. As such, materially different financial results can occur as circumstances change and additional information becomes known. The policies with the greatest potential effect on our results of operations and financial position include: Allowance for Doubtful Accounts. Our allowance for doubtful accounts is based upon management’s assessment of the business environment, customers’ financial condition, historical collection experience, accounts receivable aging, customer disputes and the collectability of specific customer accounts. If there were a deterioration of a major customer’s creditworthiness, or actual defaults were higher than our historical experience, our estimates of the recoverability of amounts due to us could be overstated, which could have an adverse impact on our operating results. Our allowance for doubtful accounts is also affected by the time at which uncollectible accounts receivable balances are actually written off. Major customers’ accounts are monitored on an ongoing basis and more in-depth reviews are performed based upon changes in a customer’s financial condition and/or the level of credit being extended. When a significant event occurs, such as a bankruptcy filing by a specific customer, and on a quarterly basis, the allowance is reviewed for adequacy and the balance or accrual rate is adjusted to reflect current risk prospects. When certain shocks to the market occur, customers are unilaterally reviewed to assess the potential impact of that shock on their financial stability. Many retailers have been operating under financial duress for several years. Ultimately, we assess the risk of liquidation bankruptcy by a customer and the associated likelihood that we will not be paid for product shipped. To that end, it is not only outstanding accounts receivable balances but the decisions to design and develop account-specific product and ultimately ship product on a go-forward basis that plays into our attempts to maximize profitability while minimizing uncollectable accounts receivable. Revenue Recognition. Our contracts with customers only include one performance obligation (i.e., sale of our products). Revenue is recognized in the gross amount at a point in time when delivery is completed and control of the promised goods is transferred to the customers. Revenue is measured as the amount of consideration we expect to be entitled to in exchange for those goods. Our contracts do not involve financing elements as payment terms with customers are less than one year. Further, because revenue is recognized at the point in time goods are sold to customers, there are no contract assets or contract liability balances. We disaggregate our revenues from contracts with customers by reporting segment: Toys/Consumer Products and Halloween. We further disaggregate revenues by major geographic regions (see Item 8 "Consolidated Financial Statements and Supplementary Data Note 3 - Business Segments, Geographic Data, and Sales by Major Customers” for further information). We offer various discounts, pricing concessions, and other allowances to customers, all of which are considered in determining the transaction price. Certain discounts and allowances are fixed and determinable at the time of sale and are recorded at the time of sale as a reduction to revenue. Other discounts and allowances can vary and are determined at management’s discretion (variable consideration). Specifically, we occasionally grant discretionary credits to facilitate markdowns and sales of slow moving merchandise, and consequently accrue an allowance based on historic credits and management estimates. Further, while we generally do not allow product returns, we do make occasional exceptions to this policy, and consequently record a sales return allowance based upon historic return amounts and management estimates. These allowances (variable consideration) are estimated using the expected value method and are recorded at the time of sale as a reduction to revenue. We adjust our estimate of variable consideration at least quarterly or when facts and circumstances used in the estimation process may change. The variable consideration is not constrained as we have sufficient history on the related estimates and do not believe there is a risk of significant revenue reversal. 30 Table of Contents We also participate in cooperative advertising arrangements with some customers, whereby we allow a discount from invoiced product amounts in exchange for customer purchased advertising that features our products. Generally, these allowances range from 1% to 20% of gross sales, and are generally based upon product purchases or specific advertising campaigns. Such allowances are accrued when the related revenue is recognized. These cooperative advertising arrangements provide a distinct benefit at fair value, and are accounted for as direct selling expenses. Sales commissions are expensed when incurred as the related revenue is recognized at a point in time and therefore the amortization period is less than one year. As a result, these costs are recorded as direct selling expenses, as incurred. Shipping and handling activities are considered part of our obligation to transfer the products and therefore are recorded as direct selling expenses, as incurred. Our reserve for sales returns and allowances amounted to $42.1 million as of December 31, 2020 and $38.4 million as of December 31, 2019. Fair value measurements. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, we use various methods including market, income and cost approaches. Based upon these approaches, we often utilize certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market-corroborated, or unobservable inputs. We utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based upon observable inputs used in the valuation techniques, we are required to provide information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values into three broad levels as follows: Level 1: Valuations for assets and liabilities traded in active markets from readily available pricing sources for market transactions involving identical assets or liabilities. Level 2: Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third-party pricing services for identical or similar assets or liabilities. Level 3: Valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities. In instances where the determination of the fair value measurement is based upon inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based upon the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability (see Item 8 "Consolidated Financial Statements and Supplementary Data Note 16 - Fair Value Measurements” for further information). Goodwill and other indefinite-lived intangible assets . Goodwill and indefinite-lived intangible assets are not amortized, but are tested for impairment at least annually at the reporting unit level. Factors we consider important that could trigger an impairment review include the following: ● Significant underperformance relative to expected historical or projected future operating results; ● Significant changes in the manner of our use of the acquired assets or the strategy for our overall business; ● Significant negative industry or economic trends. Due to the subjective nature of the impairment analysis, significant changes in the assumptions used to develop the estimate could materially affect the conclusion regarding the future cash flows necessary to support the valuation of long-lived assets, including goodwill. The valuation of goodwill involves a high degree of judgment and uncertainty related to our key assumptions. Any changes in our key projections or estimates could result in a reporting unit either passing or failing the first step of the impairment model, which could significantly change the amount of any impairment ultimately recorded. Based upon the assumptions underlying the valuation, impairment is determined by estimating the fair value of a reporting unit and comparing that value to the reporting unit’s book value. Goodwill is tested for impairment annually, and on an interim basis if certain events or circumstances indicate that an impairment loss may have been incurred. If the fair value is more than the carrying value of the reporting unit, an impairment loss is not indicated. If a reporting unit's carrying value exceeds its fair value, an impairment charge would be recognized for the excess amount, not to exceed the carrying amount of goodwill. 31 Table of Contents We performed our annual assessment of goodwill for impairment as of our annual testing date, on April 1, 2020, for each of our reporting units by evaluating qualitative factors, including, but not limited to, the performance of each reporting unit, general economic conditions, access to capital, the industry and competitive environment, and the interest rate environment. Based on our assessment, we determined that the fair values of our reporting units were not less than the carrying amounts. No goodwill impairment was determined to have occurred for the year ended December 31, 2020. Impairment of Long-Lived Assets. When facts and circumstances indicate that the carrying values of long-lived assets, including buildings, equipment and amortizable intangible assets, may be impaired, we perform an evaluation of recoverability by comparing the carrying values of the net assets to their related projected undiscounted future cash flows, in addition to other quantitative and qualitative analysis. Our estimates are subject to uncertainties and may be impacted by various external factors such as economic conditions and market competition. While we believe the inputs and assumptions utilized in our analysis of future cash flows are reasonable, events or circumstances may change, which could cause us to revise these estimates. Reserve for Inventory Obsolescence. We value our inventory at the lower of cost or net realizable value. Based upon a consideration of quantities on hand, actual and projected sales volume, anticipated product selling prices and product lines planned to be discontinued, slow-moving and obsolete inventory is written down to its net realizable value. Failure to accurately predict and respond to consumer demand could result in us under-producing popular items or over-producing less popular items. Furthermore, significant changes in demand for our products would impact management’s estimates in establishing our inventory provision. Management’s estimates are monitored on a quarterly basis, and a further adjustment to reduce inventory to its net realizable value is recorded as an increase to cost of sales when deemed necessary under the lower of cost or net realizable value standard. When unexpected shocks to market demand occur, we review whether that shock has materially impacted the value of our owned inventory. In some cases where customers have cancelled orders, accommodation can be reached that the product will be reordered when the customer has restarted operations (in the event of store closures) or the customer agrees to minimize/eliminate requests for product line refreshment (in the event of Halloween order cancellations) which allows the inventory and in some cases raw materials to be held through to the following calendar year without incurring any additional obsolescence. Income Allocation for Income Taxes. Our annual income tax provision and related income tax assets and liabilities are based upon actual income as allocated to the various tax jurisdictions based upon our transfer pricing study, US and foreign statutory income tax rates and tax regulations and planning opportunities in the various jurisdictions in which we operate. Significant judgment is required in interpreting tax regulations in the U.S. and foreign jurisdictions, and in evaluating worldwide uncertain tax positions. Actual results could differ materially from those judgments, and changes from such judgments could materially affect our consolidated financial statements. Income taxes and interest and penalties related to income tax payable. We do not file a consolidated return for our foreign subsidiaries. We file federal and state returns and our foreign subsidiaries each file returns in their respective jurisdictions, as applicable. Deferred taxes are provided on an asset and liability method. Deferred tax assets are recognized as deductible temporary differences, operating losses, or tax credit carry-forwards. Deferred tax liabilities are recognized as taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. We must assess the likelihood that we will be able to recover our deferred tax assets. Deferred tax assets are reduced by a valuation allowance, if, based upon the weight of available evidence, it is more likely than not that we will not realize some portion or all of the deferred tax assets. We consider all available positive and negative evidence when assessing whether it is more likely than not that deferred tax assets are recoverable. We consider evidence such as our past operating results, the existence of cumulative losses in previous periods and our forecast of future taxable income. We believe this to be a critical accounting policy because should there be a change in our ability to recover our deferred tax assets, our tax provision would increase in the period in which we determine that the recovery is not likely, as well as decrease in the period in which the assessment of the recoverability of the deferred tax assets reverses, which could have a material impact on our results of operations. 32 Table of Contents We accrue a tax reserve for additional income taxes and interest, which may become payable in future years as a result of audit adjustments by tax authorities. The reserve is based upon management’s assessment of all relevant information and is periodically reviewed and adjusted as circumstances warrant. As of December 31, 2020, our income tax reserves were approximately $1.0 million and relates to the potential tax settlement in Hong Kong. We recognize current period interest expense and penalties and the reversal of previously recognized interest expense and penalties that has been determined to not be assessable due to the expiration of the related audit period or other compelling factors on the income tax liability for unrecognized tax benefits as a component of the income tax provision recognized in the consolidated statements of operations. Share-Based Compensation . We grant restricted stock units and awards to our employees (including officers) and to non-employee directors under our 2002 Stock Award and Incentive Plan (the “Plan”), as amended. The benefits provided under the Plan are share-based payments. We amortize over a requisite service period, the net total deferred stock expense based upon the fair value of the underlying common stock on the date of the grants. In certain instances, the service period may differ from the period in which each award will vest. Additionally, certain groups of grants are subject to performance criteria or an expected forfeiture rate calculation. Recent Accounting Pronouncements. See Item 8 "Consolidated Financial Statements and Supplementary Data Note 2 - Summary of Significant Accounting Policies.” Results of Operations The following table sets forth, for the periods indicated, certain statement of operations data as a percentage of net sales. Year Ended December 31, 2020 2019 Net sales 100.0 % 100.0 % Cost of sales 71.0 73.4 Gross profit 29.0 26.6 Selling, general and administrative expenses 26.1 26.9 Intangible asset impairment — 1.6 Restructuring charge 0.3 0.1 Pandemic related charges 0.1 — Acquisition related and other — 1.0 Income (loss) from operations 2.5 (3.0 ) Income from joint ventures — — Other income (expense), net — (0.2 ) Loss on extinguishment of debt — (2.2 ) Change in fair value of preferred stock derivative liability (0.5 ) (0.1 ) Change in fair value of convertible senior notes (0.4 ) (0.9 ) Interest income — — Interest expense (4.2 ) (2.6 ) Loss before provision for income taxes (2.6 ) (9.0 ) Provision for income taxes 0.2 0.3 Net loss (2.8 ) (9.3 ) Net income (loss) attributable to non-controlling interests — — Net loss attributable to JAKKS Pacific, Inc. (2.8 )% (9.3 )% Net loss attributable to common stockholders (3.0 )% (9.4 )% 33 Table of Contents The following table summarizes, for the periods indicated, certain statement of operations data by segment (in thousands). Year Ended December 31, 2020 2019 Net Sales Toys/Consumer Products $ 427,122 $ 479,038 Halloween 88,750 119,611 515,872 598,649 Cost of Sales Toys/Consumer Products 294,792 344,481 Halloween 71,315 94,823 366,107 439,304 Gross Profit Toys/Consumer Products 132,330 134,557 Halloween 17,435 24,788 $ 149,765 $ 159,345 Comparison of the Years Ended December 31, 2020 and 2019 Net Sales Toys/Consumer Products. Net sales of our Toys/Consumer Products segment were $427.1 million in 2020, compared to $479.0 million in 2019, representing a decrease of $51.9 million, or 10.8%. The decrease in net sales was primarily due to lower sales of Frozen 2, which was launched in 2019. In addition, the Seasonal business was down due to reduced sales of our Morf scooter business and the discontinuation of our Funnoodle pool noodle product line to improve margin. Halloween. Net sales of our Halloween segment were $88.8 million in 2020, compared to $119.6 million in 2019, representing a decrease of $30.8 million, or 25.8%. The decrease in net sales was primarily driven by the impact of COVID-19 and related social distancing restrictions on the traditional Halloween season. Cost of Sales Toys/ Consumer Products. Cost of sales of our Toys/Consumer Products segment was $294.8 million, or 69.0% of related net sales in 2020 compared to $344.5 million, or 71.9% of related net sales in 2019 representing a decrease of $49.7 million or 14.4%. The decrease in dollars is due to lower overall sales in 2020. The decrease in percentage of net sales, year-over-year is due to product margin improvement and lower product obsolescence and tooling expenses. Halloween. Cost of sales of our Halloween segment was $71.3 million, or 80.3% of related net sales for 2020 compared to $94.8 million, or 79.3% of related net sales in 2019 representing a decrease of $23.5 million, or 24.8%. The decrease in dollars is due to lower overall sales in 2020. The increase as a percentage of net sales, year-over-year, is due to a higher overall royalty rate in 2020 slightly offset by lower product obsolescence expenses. Selling, General and Administrative Expenses Selling, general and administrative expenses were $134.9 million in 2020 and $161.2 million in 2019, constituting 26.1% and 26.9% of net sales, respectively. Selling, general and administrative expenses decreased from the prior year period primarily driven by lower compensation, in part, due to a Company-wide COVID restructuring initiative, lower travel, and lower direct selling expenses. Intangible Asset Impairment Intangible asset impairment was nil in 2020, as compared to $9.4 million in 2019. In 2019, we recorded impairment charges of $9.4 million related to the Maui product lines because its fair value was determined to be less than its carrying amount. 34 Table of Contents Restructuring Charge In 2020 and 2019, we recognized $1.6 million and $0.3 million, respectively. The restructuring charges are primarily related to employee severance. Pandemic Related Charges In 2020, we recognized $0.4 million in spending directly attributable to making necessary accommodations related to the COVID-19 pandemic. Acquisition Related and Other In 2019, we recognized $6.2 million in acquisition related and other charges related to strategic and/or refinancing transactions, including the Recapitalization Transaction closed in August 2019. Other Income (Expense), net Other income (expense), net was $0.3 million in 2020, as compared to ($1.2) million in 2019. In 2019, we recognized a $1.2 million loss in other expense primarily related to a Delaware unclaimed property liability settlement. Interest Expense Interest expense was $21.6 million for the year ended December 31, 2020, as compared to $15.9 million in the prior year period. In 2020, we booked interest expense of $2.0 million related to our convertible senior notes due in 2020 and 2023, $18.2 million related to our Term Loan, which includes $3.4 million of payment-in-kind interest, and $3.9 million related to amortization of the debt discount and deferred financing fees, and $1.2 million related to our revolving credit facility. In 2019, we booked interest expense of $5.3 million related to our convertible senior notes, and $10.6 million primarily related to our revolving credit and term loan facilities, which includes $1.7 million of payment-in-kind interest, and $1.5 million related to amortization of the debt discount and deferred financing fees. Provision for Income Taxes Our income tax expense, which includes federal, state and foreign income taxes and discrete items, was $0.7 million, or an effective tax rate of (5.5%) for 2020. During 2019, the income tax expense was $1.9 million, or an effective tax rate of (3.6%). 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, our effective tax rate for 2020 was (7.7%), primarily due to the various state taxes and taxes on foreign income. 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, our effective tax rate for 2019 was (3.1%), primarily due to the various state taxes and taxes on foreign income. We assess the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets by jurisdiction. 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. The net deferred tax liabilities of $0.1 million consists of the net deferred tax liabilities in the foreign jurisdiction, where we are in a cumulative income position. Uncertainties that may have a significant impact on net sales and income (loss) from operations Significant outbreaks of contagious diseases, and other adverse public health developments, could have a material impact on our business operations and operating results. In December 2019, a strain of Novel Coronavirus causing respiratory illness and death emerged in the city of Wuhan in the Hubei province of China. The Chinese government took certain emergency measures to combat the spread of the virus, including extension of the Lunar New Year holiday, implementation of travel bans and closure of factories and businesses. The majority of our materials and products are sourced from suppliers located in China. 35 Table of Contents In 2020, the Novel Coronavirus was declared a global pandemic by the World Health Organization and has been spreading throughout the world, including the United States, resulting in emergency measures, including travel bans, closure of retail stores, and restrictions on gatherings of more than a maximum number of people. To the extent that these outbreaks are disruptive to local economies and commercial activity, that development creates downward pressure on our ability to make our product line available to consumers or for consumers to purchase our products, even if our products are available. At this time we cannot quantify the extent of the impact this disease will have on our sales, net income and cash flows, but it could be significant. Quarterly Fluctuations and Seasonality We have experienced significant quarterly fluctuations in operating results and anticipate these fluctuations in the future. The operating results for any quarter are not necessarily indicative of results for any future period. Our first quarter is typically expected to be the least profitable as a result of lower net sales but substantially similar fixed operating expenses. This is consistent with the performance of many companies in the toy industry. The following table presents our unaudited quarterly results for the years indicated. The seasonality of our business is reflected in this quarterly presentation. 2020 2019 (unaudited) First Quarter Second Quarter Third Quarter Fourth Quarter First Quarter Second Quarter Third Quarter Fourth Quarter Net sales $ 66,557 $ 78,758 $ 242,290 $ 128,267 $ 70,826 $ 95,182 $ 280,130 $ 152,511 As a % of full year 12.9 % 15.2 % 47.0 % 24.9 % 11.8 % 15.9 % 46.8 % 25.5 % Gross profit $ 16,350 $ 16,770 $ 74,616 $ 42,029 $ 14,340 $ 17,746 $ 80,859 $ 46,400 As a % of full year 10.9 % 11.2 % 49.8 % 28.1 % 9.0 % 11.1 % 50.8 % 29.1 % As a % of net sales 24.6 % 21.3 % 30.8 % 32.8 % 20.2 % 18.6 % 28.9 % 30.4 % Income (loss) from operations $ (15,986 ) $ (9,746 ) $ 37,513 $ 1,127 $ (24,041 ) $ (18,649 ) $ 35,662 $ (10,761 ) As a % of full year (123.8 )% (75.5 )% 290.6 % 8.7 % 135.1 % 104.8 % (200.4 )% 60.5 % As a % of net sales (24.0 )% (12.4 )% 15.5 % 0.9 % (33.9 )% (19.6 )% 12.7 % (7.1 )% Income (loss) before provision for (benefit from) income taxes $ (11,722 ) $ (22,996 ) $ 32,164 $ (10,855 ) $ (29,372 ) $ (21,896 ) $ 17,430 $ (19,629 ) As a % of net sales (17.6 )% (29.2 )% 13.3 % (8.5 )% (41.5 )% (23.0 )% 6.2 % (12.9 )% Net income (loss) $ (11,998 ) $ (23,268 ) $ 32,431 $ (11,309 ) $ (29,127 ) $ (22,485 ) $ 16,414 $ (20,181 ) As a % of net sales (18.0 )% (29.5 )% 13.4 % (8.8 )% (41.1 )% (23.6 )% 5.9 % (13.2 )% Net income (loss) attributable to non-controlling interests $ 40 $ 8 $ 49 $ 33 $ 31 $ 57 $ (31 ) $ 112 As a % of net sales 0.1 % — % — % — % — % 0.1 % — % 0.1 % Net income (loss) attributable to JAKKS Pacific, Inc. $ (12,038 ) $ (23,276 ) $ 32,382 $ (11,342 ) $ (29,158 ) $ (22,542 ) $ 16,445 $ (20,293 ) As a % of net sales (18.1 )% (29.6 )% 13.4 % (8.8 )% (41.2 )% (23.7 )% 5.9 % (13.3 )% Net income (loss) attributable to common stockholders $ (12,345 ) $ (23,588 ) $ 32,066 $ (11,664 ) $ (29,158 ) $ (22,542 ) $ 16,265 $ (20,596 ) As a % of net sales (18.5 )% (29.9 )% 13.2 % (9.1 )% (41.2 )% (23.7 )% 5.8 % (13.5 )% Diluted earnings (loss) per share $ (4.09 ) $ (7.70 ) $ 3.19 $ (2.55 ) $ (12.38 ) $ (9.55 ) $ 5.08 $ (6.95 ) Weighted average shares and equivalents outstanding 3,021 3,064 9,307 4,575 2,356 2,360 6,035 2,962 Consistent with the seasonality of our business, the first, second and fourth quarters of 2020 and 2019, experienced seasonally low sales which coupled with fixed overhead resulted in significant net losses. Quarterly and year-to-date computations of income (loss) per share amounts are made independently. Therefore, the sum of the per share amounts for the quarters may not agree with the per share amounts for the year. 36 Table of Contents Liquidity and Capital Resources As of December 31, 2020, we had working capital of $112.6 million compared to $107.5 million as of December 31, 2019. Operating activities provided net cash of $43.6 million in 2020 and $21.8 million in 2019. The increase in net cash provided by operating activities in 2020 was primarily impacted by the net loss, excluding the impact of non-cash charges, and a decrease in accounts receivable, inventory, and prepaid expenses and other assets, partially offset by a decrease in accounts payable. Net cash provided by operating activities in 2019 was primarily impacted by an increase in accounts payable, accrued expenses and reserve for sales returns and allowances. Other than open purchase orders issued in the normal course of business related to shipped product, we have no obligations to purchase inventory from our manufacturers. However, we may incur costs or other losses as a result of not placing orders consistent with our forecasts for product manufactured by our suppliers or manufacturers for a variety of reasons including customer order cancellations or a decline in demand. As part of our strategy to develop and market new products, we have entered into various character and product licenses with royalties/obligations generally ranging from 1% to 25% payable on net sales of such products. As of December 31, 2020, these agreements required future aggregate minimum royalty guarantees of $35.2 million, exclusive of $14.5 million in advances already paid. Of this $35.2 million future minimum royalty guarantee, $32.1 million is due over the next twelve months. Investing activities used net cash of $8.2 million and $9.4 million for the year ended December 31, 2020 and 2019, respectively, and consisted primarily of cash paid for the purchase of molds and tooling used in the manufacture of our products. Financing activities used net cash of $10.9 million in 2020 and $5.8 million in 2019. The cash used in 2020 primarily consists of the repayment of our term loan facility of $15.1 million and retirement of our 2020 convertible senior notes of $1.9 million, partially offset by the proceeds from the loan under the Paycheck Protection Program (the “PPP Loan”) secured under the Coronavirus Aid Relief and Economic Security Act (the “CARES Act”). The cash used in 2019 primarily consists of the repayment of our GACP term loan of $20.0 million and net payments of $7.5 million, as well as, debt issuance costs incurred in connection with the Recapitalization Transaction (see Item 8 "Consolidated Financial Statements and Supplementary Data Note 10 - Debt”), partially offset by the net proceeds included as a part of our New Term Loan agreement of $27.4 million. The following is a summary of our significant contractual cash obligations for the periods indicated that existed as of December 31, 2020 and is based upon information appearing in the notes to the consolidated financial statements (in thousands): 2021 2022 2023 2024 2025 Thereafter Total Short-term debt $ 5,950 $ — $ — $ — $ — $ — $ 5,950 Long-term debt — 5,256 137,683 — — — 142,939 Interest on debt 10,992 10,848 16,028 * — — — 37,868 Operating leases 11,082 10,603 6,049 590 281 258 28,863 Minimum guaranteed license/royalty payments 32,106 2,696 350 20 — — 35,172 Employment contracts 5,040 2,344 2,362 2,410 — — 12,156 Total contractual cash obligations $ 65,170 $ 31,747 $ 162,472 $ 3,020 $ 281 $ 258 $ 262,948 * Includes $2.5 million of payment-in-kind interest for the 3.25% convertible senior notes due 2023 and $11.5 million of payment-in-kind interest for the New Term Loan (see Item 8 "Consolidated Financial Statements and Supplementary Data Note 10 - Debt”). The above table excludes any potential uncertain income tax liabilities that may become payable upon examination of our income tax returns by taxing authorities. Such amounts and periods of payment cannot be reliably estimated (see Item 8 "Consolidated Financial Statements and Supplementary Data Note 13 - Income Taxes” for further explanation of our uncertain tax positions). As of December 31, 2020, we have $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 we have no outstanding indebtedness under our amended and extended Credit Agreement (the “Amended ABL Credit Agreement” or “Amended Wells Fargo Credit Agreement”) with Wells Fargo Bank, National Association (“Wells Fargo”). We also have a $6.2 million PPP loan under the PPP secured under the CARES Act. 37 Table of Contents The New Term Loan Agreement and Amended ABL Credit Agreement each contain negative covenants that, subject to certain exceptions, limit our ability, among other things, to 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 original terms of the New Term Loan Agreement required us 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, we reached an agreement (the “Amendment”) with holders of our term loan and Wells Fargo Bank, National Association (“Wells Fargo”), holder of our revolving credit facility, to amend our New Term Loan Agreement and defer the 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 us to pre-pay $15.0 million of the New Term Loan immediately and, under certain conditions, pre-pay up to an additional $5.0 million no later than the third quarter of fiscal year 2021. In connection with the Amendment on October 20, 2020, we paid $15.0 million of our outstanding principal amount and $0.3 million in related interest and PIK interest. The New Term Loan Agreement contains events of default that are customary for a facility of this nature, including nonpayment of principal, nonpayment of interest, fees or other amounts, material inaccuracy of representations and warranties, violation of covenants, cross-default to other material indebtedness, bankruptcy or insolvency events, material judgment defaults and a change of control as specified in the New Term Loan Agreement, and cross-default provisions with the Amended Wells Fargo Credit Agreement. If an event of default occurs under either Agreement, the maturity of the amounts owed under the New Term Loan Agreement and the Amended Wells Fargo Credit Agreement may be accelerated. We were in compliance with the financial covenants under the New Term Loan Agreement as of December 31, 2020. Debt and Credit Facilities Convertible Senior Notes In July 2013, we sold an aggregate of $100.0 million principal amount of 4.25% convertible senior notes due 2018 (the “2018 Notes”). The 2018 Notes, which were senior unsecured obligations, paid interest semi-annually in arrears on August 1 and February 1 of each year at a rate of 4.25% per annum and matured on August 1, 2018. Excluding the impact of the 1 for 10 reverse stock split, the initial conversion rate for the 2018 Notes was 114.3674 shares of our common stock per $1,000 principal amount of notes, equivalent to an initial conversion price of approximately $8.74 per share of common stock, subject to adjustment in certain events. In 2016, we repurchased and retired an aggregate of approximately $6.1 million principal amount of the 2018 Notes. During the first quarter of 2017, we exchanged and retired $39.1 million principal amount of the 2018 Notes at par for $24.1 million in cash and approximately 290,000 shares of our common stock. During the second quarter of 2017, we exchanged and retired $12.0 million principal amount of the 2018 Notes at par for $11.6 million in cash and 11,240 shares of our common stock. In August 2017, we agreed with Oasis Management and Oasis Investments II Master Fund Ltd., (collectively, “Oasis”) the holder of approximately $21.6 million face amount of our 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 excluding the impact of the 1 for 10 reverse stock split, the conversion rate was increased to 328.0302 shares of our common stock per $1,000 principal amount of notes, among other things. After execution of a definitive agreement for the modification and final approval by the other members of our Board of Directors and Oasis’ Investment Committee, the transaction closed on November 7, 2017. On July 26, 2018, we closed a transaction with Oasis to exchange $8.0 million face amount of the 2018 Notes with convertible senior notes similar to those issued to Oasis in November 2017. The July 26, 2018 $8.0 million Oasis notes mature on November 1, 2020, accrue interest at an annual rate of 3.25%, and excluding the impact of the 1 for 10 reverse stock split, are convertible into shares of our common stock at a rate of 322.2688 shares per $1,000 principal amount of the new notes. The conversion price for the 3.25% convertible senior notes due 2020 was reset on November 1, 2018 and November 1, 2019 (each, a “reset date”) to a price equal to 105% above the 5-day Volume Weighted Average Price ("VWAP") preceding the reset date; provided, however, among other reset restrictions, that if the conversion price resulting from such reset is lower than 90 percent of the average VWAP during the 90 calendar days preceding the reset date, then the reset price shall be the 30-day VWAP preceding the reset date. Excluding the impact of the 1 for 10 reverse stock split, the conversion price of the 3.25% convertible senior notes due 2020 reset on November 1, 2018 to $2.54 per share and the conversion rate was increased to 393.7008 shares of our common stock per $1,000 principal amount of notes. 38 Table of Contents The remaining $13.2 million of 2018 Notes were redeemed at par at maturity on August 1, 2018. In August 2019, we entered into and consummated multiple, binding definitive agreements (collectively, the “Recapitalization Transaction”) among Wells Fargo, Oasis Investments II Master Fund Ltd. and an ad hoc group of holders of the 4.875% convertible senior notes due 2020 ( the "Investor Parties") to recapitalize our balance sheet, including the extension to us of incremental liquidity and at least three-year extensions of substantially all of our outstanding convertible debt obligations and revolving credit facility. Our term loan agreement entered into with Great American Capital Partners (see Item 8 "Consolidated Financial Statements and Supplementary Data Note 11 - Credit Facilities”) was paid in full and terminated in connection with the Recapitalization Transaction. In connection with the Recapitalization Transaction, we issued (i) amended and restated notes with respect to the $21.6 million Oasis Note issued on November 7, 2017, and the $8.0 million Oasis Note issued on July 26, 2018 (together, the “Existing Oasis Notes”), and (ii) a new $8.0 million convertible senior note having the same terms as such amended and restated notes (the "New $8.0 million Oasis Note" and collectively, the “New Oasis Notes” or the "3.25% convertible senior notes due 2023"). Interest on the New Oasis Notes is payable on each May 1 and November 1 until maturity and accrues at an annual rate of (i) 3.25% if paid in cash or 5.00% if paid in stock plus (ii) 2.75% payable in kind. The New Oasis Notes mature 91 days after the amounts outstanding under the New Term Loan are paid in full, and in no event later than July 3, 2023. Excluding the impact of the 1 for 10 reverse stock split, the New Oasis Notes provide, among other things, that the initial conversion price is $1.00. The conversion price will be reset on each February 9 and August 9, starting on February 9, 2020 (each, a “reset date”) to a price equal to 105% of the 5-day VWAP preceding the applicable reset date. Under no circumstances shall the reset result in a conversion price be below the greater of (i) the closing price on the trading day immediately preceding the applicable reset date and (ii) 30% of the stock price as of the Transaction Agreement Date, or August 7, 2019, and will not be greater than the conversion price in effect immediately before such reset. We may trigger a mandatory conversion of the New Oasis Notes if the market price exceeds 150% of the conversion price under certain circumstances. We may redeem the New Oasis Notes in cash if a person, entity or group acquires shares of our Common Stock, par value $0.001 per share (the “Common Stock”), and as a result owns at least 49% of our issued and outstanding Common Stock. On February 9, 2020, excluding the impact of the 1 for 10 reverse stock split, the conversion price of the New Oasis Notes reset to $1.00 per share ($10.00 per share after reverse stock split). On August 9, 2020, the conversion price of the New Oasis Notes reset to $5.647. 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, we recorded an increase to additional paid-in capital of $9.5 million. In August 2020, $1.0 million of the New Oasis Notes (including $27,288 in payment-in-kind interest) were converted for 177,085 shares of common stock. As a result, we recorded an increase to additional paid-in capital of $1.3 million. In 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, we 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, we 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, we 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. 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 Item 8 "Consolidated Financial Statements and Supplementary Data Note 12 – Related Party Transactions”). The transaction closed on February 8, 2021 (see Item 8 "Consolidated Financial Statements and Supplementary Data Note 10 – Debt”). In June 2014, we sold an aggregate of $115.0 million principal amount of 4.875% convertible senior notes due 2020 (the “2020 Notes”). The 2020 Notes are senior unsecured obligations paying interest semi-annually in arrears on June 1 and December 1 of each year at a rate of 4.875% per annum and will mature on June 1, 2020. Excluding the impact of the 1 for 10 reverse stock split, the initial and still current conversion rate for the 2020 Notes is 103.7613 shares of our common stock per $1,000 principal amount of notes, equivalent to an initial conversion price of approximately $9.64 per share of common stock, subject to adjustment in certain events. Upon conversion, the 2020 Notes will be settled in shares of our common stock. Holders of the 2020 Notes may require that we repurchase for cash all or some of their notes upon the occurrence of a fundamental change (as defined in the 2020 Notes). In January 2016, we repurchased and retired an aggregate of $2.0 million principal amount of the 2020 Notes. 39 Table of Contents In connection with the Recapitalization Transaction, the 2020 Notes with a face amount of $111.1 million of the total $113.0 million that were outstanding at the time of the Recapitalization Transaction were refinanced and the maturity dates were extended. Of the refinanced amount, $103.8 million was refinanced with the Investor Parties through the issuance of the New Common Equity, the New Preferred Equity (see Item 8 "Consolidated Financial Statements and Supplementary Data Note 15 - Common Stock and Preferred Stock”) and new secured term debt that matures in February 2023 (see Term Loan section below). Additionally, $1.0 million of accrued interest was refinanced with the Investor Parties. The remaining refinanced amount of $7.3 million was exchanged into the new $8.0 million Oasis Note discussed above. The remaining $1.9 million principal amount of the 2020 Notes were redeemed at par at maturity on June 1, 2020. Term Loan On August 9, 2019, in connection with the Recapitalization Transaction, we entered into a First Lien Term Loan Facility Credit Agreement, (the “New Term Loan Agreement”), with certain holders of the 2020 Notes, or the Investor Parties, and Cortland Capital Market Services LLC, as agent, for a $134.8 million first-lien secured term loan (the “New Term Loan”). We also issued common stock and preferred stock (see Item 8 "Consolidated Financial Statements and Supplementary Data Note 15 - Common Stock and Preferred Stock”) to the Investor Parties. Amounts outstanding under the New Term Loan accrue interest at 10.50% per annum, payable semi-annually (with 8% per annum payable in cash and 2.5% per annum payable in kind). The New Term Loan matures on February 9, 2023. The New Term Loan Agreement contains negative covenants that, subject to certain exceptions, limit our ability, and the ability of our subsidiaries to, among other things, incur additional indebtedness, make restricted payments, pledge assets as security, make investments, loans, advances, guarantees and acquisitions, undergo fundamental changes and enter into transactions with affiliates. The original terms of the New Term Loan Agreement required us to maintain a trailing 12-month EBITDA (as defined and adjusted therein) of not less than $34.0 million and a minimum liquidity of not less than $10.0 million commencing with the fiscal quarter ended September 30, 2020. On October 16, 2020, we reached an agreement (the “Amendment”) with holders of our New Term Loan and Wells Fargo, holder of our revolving credit facility, to amend our New Term Loan Agreement and defer our 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 us to pre-pay $15.0 million of the New Term Loan immediately and, under certain conditions, pre-pay up to an additional $5.0 million no later than the third quarter of fiscal year 2021. As a result, we reclassified $20.0 million from long term debt to short term debt as of September 30, 2020. In connection with the amendment on October 20, 2020, we paid $15.0 million of our outstanding principal amount and $0.3 million in related interest and PIK interest. As of December 31, 2020, we 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 in the consolidated balance sheet. The New Term Loan Agreement contains events of default that are customary for a facility of this nature, including nonpayment of principal, nonpayment of interest, fees or other amounts, material inaccuracy of representations and warranties, violation of covenants, cross-default to other material indebtedness, bankruptcy or insolvency events, material judgment defaults and a change of control as specified in the New Term Loan Agreement. If an event of default occurs, the maturity of the amounts owed under the New Term Loan Agreement may be accelerated. The obligations under the New Term Loan Agreement are guaranteed by us, the subsidiary borrowers thereunder and certain of the other existing and future direct and indirect subsidiaries and are secured by substantially all of our assets, the subsidiary borrowers thereunder and such other subsidiary guarantors, in each case, subject to certain exceptions and permitted liens. Loan under Paycheck Protection Program On June 12, 2020, we received a $6.2 million PPP Loan under the PPP within the CARES Act. The PPP Loan matures on June 2, 2022 and is subject to the CARES Act terms which include, among other terms, an interest rate of 1.00% per annum and monthly installment payments of $261,275 commencing on 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 PPP Loan may be forgiven, partially or in full, if certain conditions are met, principally based on having been disbursed for permissible purposes and maintaining certain average levels of employment and payroll as required by the CARES Act. The loan received has been recorded as a liability by the Company as of the date received. We intend to apply for forgiveness of amounts received under the PPP, in accordance with the requirements of the CARES Act, as amended. Any loan amounts forgiven will be removed from liabilities recorded. While we used the proceeds of the PPP Loan only for permissible purposes, there can be no assurance that we will be eligible for forgiveness of the PPP Loan, in full or in part. 40 Table of Contents Wells Fargo In March 2014, we and our domestic subsidiaries entered into a secured credit facility with General Electric Capital Corporation (“GECC”). The credit facility, as amended and subsequently assigned to Wells Fargo pursuant to its acquisition of GECC, provides for a $75.0 million revolving credit facility subject to availability based on prescribed advance rates on certain domestic accounts receivable and inventory amounts used to compute the borrowing base (the “Credit Facility”). The Credit Facility includes a sub-limit of up to $35.0 million for the issuance of letters of credit. The amounts outstanding under the Credit Facility, as amended, were payable in full upon maturity of the facility on September 27, 2019, except that the Credit Facility would mature on June 15, 2018 if we did not refinance or extend the maturity of the convertible senior notes that mature in 2018, provided that any such refinancing or extension shall have a maturity date that is no sooner than six months after the stated maturity of the Credit Facility (i.e., on or about September 27, 2019). On June 14, 2018, we entered into a Term Loan Agreement with Great American Capital Partners to provide the necessary capital to refinance the 2018 convertible senior notes (see additional details regarding the Term Loan Agreement below). In addition, on June 14, 2018, we revised certain of the Credit Facility documents (and entered into new ones) so that certain of our Hong Kong based subsidiaries became additional parties to the Credit Facility. As a result, the receivables of these subsidiaries can now be included in the borrowing base computation, subject to certain limitations, thereby effectively increasing the amount of funds we can borrow under the Credit Facility. Any additional borrowings under the Credit Facility will be used for general working capital purposes. In August 2019, in connection with the Recapitalization Transaction (see Item 8 "Financial Statements and Supplementary Data Note 10 - Debt”), we 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 our existing Credit Facility, dated as of March 27, 2014, as amended, with GECC and subsequently assigned to Wells Fargo, to, among other things, decrease the borrowing capacity from $75.0 million to $60.0 million and extend the maturity to August 9, 2022. The obligations under the Amended ABL Credit Agreement are guaranteed by us, the subsidiary borrowers thereunder and certain of the other existing and future direct and indirect subsidiaries and are secured by substantially all of our assets, the subsidiary borrowers thereunder and such other subsidiary guarantors, in each case, subject to certain exceptions and permitted liens. As of 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. 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 our ability to, among other things, incur additional indebtedness, make restricted payments, pledge our assets as security, make investments, loans, advances, guarantees and acquisitions, undergo fundamental changes and enter into transactions with affiliates. We are also required to maintain a fixed charge coverage ratio of not less than 1.1 to 1.0 under certain circumstances, and a minimum liquidity of $25.0 million and a minimum availability of at least $9.0 million. As of December 31, 2020 and 2019, we are 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, 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. In the event of a default, all of our obligations and our subsidiaries obligations under the Amended ABL Facility may be declared immediately due and payable. For certain events of default relating to insolvency, all outstanding obligations become due and payable. As described in the aforementioned Term Loan section, on October 16, 2020, we amended the New Term Loan Agreement to reduce the amount and defer the calculation of our EBITDA covenant, with Wells Fargo as party to the agreement. 41 Table of Contents Great American Capital Partners On June 14, 2018, we entered into a Term Loan Agreement, Term Note, Guaranty and Security Agreement and other ancillary documents and agreements (the “Term Loan”) with Great American Capital Partners Finance Co., LLC (“GACP”), for itself as a Lender (as defined below) and as the agent (in such capacity, “Agent”) for the Lenders from time to time party to the Term Loan (collectively, “Lenders”) and the other “Secured Parties” under and as defined therein, with respect to the issuance to us by Lenders of a $20.0 million term loan. To secure our obligations under the Term Loan, we granted to Agent, for the benefit of the Secured Parties, a security interest in a substantial amount of our consolidated assets and a pledge of the majority of the capital stock of various of our subsidiaries. The Term Loan was a secured obligation, second only to the Credit Facility with Wells Fargo, except with respect to certain of our inventory in which GACP has a priority secured position. The Term Loan required the repayment of principal in the amount of 10% of the outstanding Term Loan per year (payable monthly) beginning after the first anniversary. All then-outstanding borrowings under the Term Loan would be due, and the Term Loan would terminate, no later than June 14, 2021, unless sooner terminated in accordance with its terms, which included the date of termination of the Wells Fargo Credit Facility and the date that is 91 days prior to the maturity of our various convertible senior notes due in 2020 (see Item 8 "Financial Statements and Supplementary Data Note 10 - Debt”). We were permitted to prepay the Term Loan, which would have required a prepayment fee (i) in year one of up to any unearned and unpaid interest that would have become due and payable in year one had the prepayment not occurred plus 2% of the initial amount of the Term Loan (i.e., $20.0 million), (ii) in year two of 2% of the initial amount of the Term Loan and (iii) in year three of 1% of the initial amount of the Term Loan. In August 2019, in connection with the Recapitalization Transaction (see Item 8 "Consolidated Financial Statements and Supplementary Data Note 10 - Debt”), we repaid in full and terminated the Term Loan Agreement. We are subject to negative covenants which, during the life of the Credit Facility and New Term Loan, prohibit and/or limit us from, among other things, incurring certain types of other debt, acquiring other companies, making certain expenditures or investments, and changing the character of our business. An outbreak of infectious disease, a pandemic or a similar public health threat, such as the 2019 Novel Coronavirus outbreak (discussed above), or a fear of any of the foregoing, could adversely impact our ability to comply with such covenants. Our failure to comply with such covenants or any other breach of the Credit Line or New Term Loan agreement could cause a default and we may then be required to repay borrowings under our Credit Line or New Term Loan with capital from other sources, or reach some other accommodation with those parties. As of December 31, 2020 and 2019, we 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 our foreign subsidiaries have either been fully taxed in the U.S. or tax has been accounted for in connection with the Tax Cuts and Jobs Act, or may be eligible for a full foreign dividends received deduction under such Act, and thus would not be subject to additional U.S. tax should such amounts be repatriated in the form of dividends or deemed distributions. Any such repatriation may result in foreign withholding taxes, which we expect would not be significant as of December 31, 2020. Our primary sources of working capital are cash flows from operations and borrowings under our credit facility (see Item 8 "Consolidated Financial Statements and Supplementary Data Note 11 - Credit Facilities”). Typically, cash flows from operations are impacted by the effect on sales of (1) the appeal of our products, (2) the success of our licensed brands in motivating consumer purchase of related merchandise, (3) the highly competitive conditions existing in the toy industry and in securing commercially attractive licenses, (4) dependency on a limited set of large customers, and (5) general economic conditions. A downturn in any single factor or a combination of factors could have a material adverse impact upon our ability to generate sufficient cash flows to operate the business. In addition, our business and liquidity are dependent to a significant degree on our vendors and their financial health, as well as the ability to accurately forecast the demand for products. The loss of a key vendor, or material changes in support by them, or a significant variance in actual demand compared to the forecast, can have a material adverse impact on our cash flows and business. Given the conditions in the toy industry environment in general, vendors, including licensors, may seek further assurances or take actions to protect against non-payment of amounts due to them. Changes in this area could have a material adverse impact on our liquidity. As of December 31, 2020, off-balance sheet arrangements include letters of credit issued by Wells Fargo of $10.8 million. During the last three fiscal years ending December 31, 2020, we do not believe that inflation has had a material impact on our net sales and on income from continuing operations. 42 Table of Contents Exchange Rates Sales from our United States and Hong Kong operations are denominated in U.S. dollars and our manufacturing costs are denominated in either U.S. or Hong Kong dollars. Local sales (other than in Hong Kong) and operating expenses of our operations in Hong Kong, the United Kingdom, Germany, Netherlands, France, Canada, Mexico and China are denominated in local currency, thereby creating exposure to changes in exchange rates. Changes in the various exchange rates against the U.S. dollar may positively or negatively affect our operating results. The exchange rate of the Hong Kong dollar to the U.S. dollar has been linked to the U.S. dollar by the Hong Kong Monetary Authority at HK$7.75 - HK$7.85 to US$1.00 since 2005 and, accordingly, has not represented a currency exchange risk to the U.S. dollar. We cannot assure you that the exchange rate between the United States and Hong Kong currencies will continue to be fixed or that exchange rate fluctuations between the United States and Hong Kong or all other currencies will not have a material adverse effect on our business, financial condition or results of operations.