JAKKS PACIFIC INC 10-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk Market risk represents the risk of loss that may impact our financial position, results of operations or cash flows due to adverse changes in financial and commodity market prices and rates. We are exposed to market risk in the areas of changes in United States and international borrowing rates and changes in foreign currency exchange rates. In addition, we are exposed to market risk in certain geographic areas that have experienced or remain vulnerable to an economic downturn, such as China. We purchase substantially all of our inventory from companies in China, and, therefore, we are subject to the risk that such suppliers will be unable to provide inventory at competitive prices. While we believe that, should such events occur we would be able to find alternative sources of inventory at competitive prices, we cannot assure you that we would be able to do so. These exposures are directly related to our normal operating and funding activities. To date, we have not used derivative instruments or engaged in hedging activities to minimize our market risk. Interest Rate Risk 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 (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). Borrowings under the revolving credit facility are therefore subject to risk based upon prevailing market interest rates. Interest rate risk may result from many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors that are beyond our control. During the 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. Foreign Currency Risk 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. dollars. However, purchases of inventory and Hong Kong operating expenses are typically denominated in Hong Kong dollars and local operating expenses in the United Kingdom, Germany, France, Netherlands, Canada, Mexico and China are denominated in local currency, thereby creating exposure to changes in exchange rates. Changes in the U.S. dollar exchange rates may positively or negatively affect our gross margins, operating income and retained earnings. The exchange rate of the Hong Kong dollar to the U.S. dollar has been fixed by the Hong Kong government since 1983 at HK$7.80 to US$1.00 and, accordingly, has not represented a currency exchange risk to the U.S. dollar. We do not believe that near-term changes in these exchange rates, if any, will result in a material effect on our future earnings, fair values or cash flows. Therefore, we have chosen not to enter into foreign currency hedging transactions. We cannot assure you that this approach will be successful, especially in the event of a significant and sudden change in the value of these foreign currencies. 43 Table of Contents Item 8. Consolidated Financial Statements and Supplementary Data Report of Independent Registered Public Accounting Firm Shareholders and Board of Directors JAKKS Pacific, Inc. Santa Monica, California Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of JAKKS Pacific, Inc. (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. 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 These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. 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. 44 Table of Contents 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 45 Table of Contents JAKKS PACIFIC, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS Assets December 31, 2020 2019 (In thousands, except per share data) Current assets Cash and cash equivalents $ 87,953 $ 61,613 Restricted cash 4,740 4,673 Accounts receivable, net of allowance for doubtful accounts of $ 4,566 and $ 3,394 in 2020 and 2019, respectively 102,254 117,942 Inventory 38,642 54,259 Prepaid expenses and other assets 17,239 21,898 Total current assets 250,828 260,385 Property and equipment Office furniture and equipment 11,795 11,678 Molds and tooling 95,367 103,335 Leasehold improvements 6,883 6,808 Total 114,045 121,821 Less accumulated depreciation and amortization 100,534 106,562 Property and equipment, net 13,511 15,259 Operating lease right-of-use assets, net 24,393 32,081 Other long term assets 3,223 18,926 Intangible assets, net 2,031 3,188 Goodwill 35,083 35,083 Trademarks 300 300 Total assets $ 329,369 $ 365,222 Liabilities, Preferred Stock and Stockholders' Equity Current liabilities Accounts payable $ 40,495 $ 61,196 Accrued expenses 39,304 39,515 Reserve for sales returns and allowances 42,108 38,365 Income taxes payable 484 2,492 Short term operating lease liabilities 9,925 9,451 Short term debt, net 5,950 1,905 Total current liabilities 138,266 152,924 Long term operating lease liabilities 16,883 25,632 Debt, non-current portion, net of issuance costs and debt discounts 150,410 174,962 Other liabilities 8,062 5,409 Income taxes payable 947 1,565 Deferred income taxes, net 123 226 Total liabilities 314,691 360,718 Preferred stock, $ 0.001 par value; 5,000,000 shares authorized; 200,000 shares issued and outstanding in 2020 and 2019 1,740 483 Stockholders' Equity* Common stock, $ 0.001 par value; 100,000,000 shares authorized; 5,694,772 and 3,521,037 shares issued and outstanding in 2020 and 2019, respectively* 6 4 Additional paid-in capital * 221,590 200,507 Accumulated deficit ( 197,423 ) ( 183,149 ) Accumulated other comprehensive loss ( 12,446 ) ( 14,422 ) Total JAKKS Pacific, Inc. stockholders' equity* 11,727 2,940 Non-controlling interests 1,211 1,081 Total stockholders' equity* 12,938 4,021 Total liabilities, preferred stock and stockholders' equity $ 329,369 $ 365,222 * After giving effect to a 1 for 10 reverse stock split effective July 9, 2020. See accompanying notes to consolidated financial statements. 46 Table of Contents JAKKS PACIFIC, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended December 31, 2020 2019 2018 (In thousands, except per share amounts) Net sales $ 515,872 $ 598,649 $ 567,810 Cost of sales 366,107 439,304 412,094 Gross profit 149,765 159,345 155,716 Selling, general and administrative expenses 134,860 161,210 185,142 Intangible asset impairment — 9,379 — Restructuring charge 1,631 341 1,114 Pandemic related charges 366 — — Acquisition related and other — 6,204 1,633 Income (loss) from operations 12,908 ( 17,789 ) ( 32,173 ) Income from joint ventures 2 — 227 Other income (expense), net 301 ( 1,158 ) 152 Loss on extinguishment of debt — ( 13,205 ) ( 453 ) 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 Interest income 22 85 68 Interest expense ( 21,562 ) ( 15,935 ) ( 10,243 ) Loss before provision for income taxes ( 13,409 ) ( 53,467 ) ( 39,474 ) Provision for income taxes 735 1,912 2,951 Net loss ( 14,144 ) ( 55,379 ) ( 42,425 ) Net income (loss) attributable to non-controlling interests 130 169 ( 57 ) Net loss attributable to JAKKS Pacific, Inc. $ ( 14,274 ) $ ( 55,548 ) $ ( 42,368 ) Net loss attributable to common stockholders $ ( 15,531 ) $ ( 56,031 ) $ ( 42,368 ) Loss per share - basic and diluted* $ ( 4.27 ) $ ( 21.57 ) $ ( 18.34 ) Shares used in loss per share - basic and diluted* 3,634 2,598 2,310 * After giving effect to a 1 for 10 reverse stock split effective July 9, 2020. See accompanying notes to consolidated financial statements. 47 Table of Contents JAKKS PACIFIC, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS Year Ended December 31, 2020 2019 2018 (In thousands) Net loss $ ( 14,144 ) $ ( 55,379 ) $ ( 42,425 ) Other comprehensive income (loss): Foreign currency translation adjustment 1,976 1,425 ( 2,788 ) Comprehensive loss ( 12,168 ) ( 53,954 ) ( 45,213 ) Less: Comprehensive income (loss) attributable to non-controlling interests 130 169 ( 57 ) Comprehensive loss attributable to JAKKS Pacific, Inc. $ ( 12,298 ) $ ( 54,123 ) $ ( 45,156 ) See accompanying notes to consolidated financial statements. 48 Table of Contents JAKKS PACIFIC, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS ’ EQUITY Common Stock Additional Accumulated Other JAKKS Pacific, Inc. Non- Total Number of Shares * Amount * Treasury Stock Paid-in Capital * Accumulated Deficit Comprehensive Loss Stockholders’ Equity * Controlling Interests Stockholders’ Equity * In Thousands Balance, December 31, 2017 2,696 $ 3 $ ( 24,000 ) $ 215,833 $ ( 85,233 ) $ ( 13,059 ) $ 93,544 $ 969 $ 94,513 Stock-based compensation expense 225 — — 2,434 — — 2,434 — 2,434 Repurchase of common stock for employee tax withholding ( 4 ) — — ( 85 ) — — ( 85 ) — ( 85 ) Net loss — — — — ( 42,368 ) — ( 42,368 ) ( 57 ) ( 42,425 ) Foreign currency translation adjustment — — — — — ( 2,788 ) ( 2,788 ) — ( 2,788 ) Balance, December 31, 2018 2,917 3 ( 24,000 ) 218,182 ( 127,601 ) ( 15,847 ) 50,737 912 51,649 Stock-based compensation expense 355 — — 2,868 — — 2,868 — 2,868 Common stock issuance 585 1 — 4,213 — — 4,214 — 4,214 Treasury shares retirement ( 311 ) — 24,000 ( 24,000 ) — — — — — Retirement of restricted stock ( 6 ) — — — — — — — — Repurchase of common stock for employee tax withholding ( 19 ) — — ( 273 ) — — ( 273 ) — ( 273 ) Preferred stock accrued dividends — — — ( 483 ) — — ( 483 ) — ( 483 ) Net income (loss) — — — — ( 55,548 ) — ( 55,548 ) 169 ( 55,379 ) Foreign currency translation adjustment — — — — — 1,425 1,425 — 1,425 Balance, December 31, 2019 3,521 4 — 200,507 ( 183,149 ) ( 14,422 ) 2,940 1,081 4,021 Stock-based compensation expense 64 — — 2,303 — — 2,303 — 2,303 Conversion of convertible senior notes 2,127 2 — 20,210 — — 20,212 — 20,212 Repurchase of common stock for employee tax withholding ( 17 ) — — ( 174 ) — — ( 174 ) — ( 174 ) Preferred stock accrued dividends — — — ( 1,257 ) — — ( 1,257 ) — ( 1,257 ) Net income (loss) — — — — ( 14,274 ) — ( 14,274 ) 130 ( 14,144 ) Foreign currency translation adjustment — — — — — 1,976 1,976 — 1,976 Adjustment to additional paid in capital — — — 1 — — 1 — 1 Balance, December 31, 2020 5,695 $ 6 $ — $ 221,590 $ ( 197,423 ) $ ( 12,446 ) $ 11,727 $ 1,211 $ 12,938 * After giving effect to a 1 for 10 reverse stock split effective July 9, 2020. See accompanying notes to consolidated financial statements. 49 Table of Contents JAKKS PACIFIC, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, 2020 2019 2018 (In thousands) Cash flows from operating activities Net loss $ ( 14,144 ) $ ( 55,379 ) $ ( 42,425 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Provision for doubtful accounts 1,619 864 9,586 Depreciation and amortization 10,936 17,634 17,081 Write-off and amortization of debt issuance costs 1,404 1,454 1,800 Share-based compensation expense 2,303 2,868 2,434 Payment-in-kind interest 4,366 1,725 — Amortization of debt discount 2,800 1,077 — (Gain) loss on disposal of property and equipment 71 ( 65 ) ( 96 ) Tools and molds disposal 149 972 — Intangibles impairment — 9,379 — Loss on extinguishment of debt — 13,205 453 Deferred income taxes ( 103 ) ( 1,205 ) 210 Change in fair value of convertible senior notes 2,265 5,112 ( 2,948 ) Change in fair value of preferred stock derivative liability 2,815 353 — Changes in operating assets and liabilities: Accounts receivable 14,069 3,472 10,593 Inventory 15,617 ( 379 ) 4,552 Prepaid expenses and other assets 20,004 ( 6,190 ) ( 11,000 ) Accounts payable ( 20,761 ) 4,873 9,517 Accrued expenses ( 211 ) 9,601 ( 12,231 ) Reserve for sales returns and allowances 3,743 8,962 11,781 Income taxes payable ( 2,626 ) 2,599 197 Other liabilities ( 749 ) 894 ( 128 ) Total adjustments 57,711 77,205 41,801 Net cash provided by (used in) operating activities 43,567 21,826 ( 624 ) Cash flows from investing activities Purchases of property and equipment ( 8,268 ) ( 9,415 ) ( 11,770 ) Proceeds from sale of property and equipment 78 12 128 Net cash used in investing activities ( 8,190 ) ( 9,403 ) ( 11,642 ) Cash flows from financing activities Repurchase of common stock for employee tax withholding ( 174 ) ( 273 ) ( 85 ) Proceeds from loan under the Paycheck Protection Program 6,206 — — Net proceeds from credit facility borrowings — 5,000 7,500 Retirement of convertible senior notes ( 1,905 ) — ( 13,178 ) Repayment of credit facility borrowings — ( 12,500 ) ( 5,000 ) Debt issuance costs — ( 4,957 ) ( 1,256 ) Proceeds from term loan facility — — 20,000 Repayment of term loan facility ( 15,073 ) ( 20,000 ) — Term loan prepayment penalty — ( 393 ) — Net proceeds from issuance of long term debt — 27,356 — Net cash provided by (used in) financing activities ( 10,946 ) ( 5,767 ) 7,981 Net increase (decrease) in cash, cash equivalents and restricted cash 24,431 6,656 ( 4,285 ) Effect of foreign currency translation 1,976 1,425 ( 2,487 ) Cash, cash equivalents and restricted cash, beginning of year 66,286 58,205 64,977 Cash, cash equivalents and restricted cash, end of year $ 92,693 $ 66,286 $ 58,205 Cash paid during the period for: Interest $ 13,216 $ 6,434 $ 9,446 Income taxes, net $ 3,849 $ 29 $ 2,096 As of December 31, 2020, there was $ 2.1 million of property and equipment included in accounts payable. As of December 31, 2019, there was $ 2.1 million of property and equipment included in accounts payable. As of December 31, 2018, there was $ 3.3 million of property and equipment included in accounts payable. The Company received income tax refunds of $ 0.6 million, $ 1.8 million, and $ 0.6 million for the year ended December 31, 2020, 2019 and 2018, respectively, and has included these amounts in cash paid during the period for Income taxes, net. See Notes 4, 5, 14 and 20 for additional supplemental information to consolidated statements of cash flows. See accompanying notes to consolidated financial statements. 50 Table of Contents JAKKS PACIFIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2020 Note 1 — Principal Industry JAKKS Pacific, Inc. (the “Company”) is engaged in the development, production and marketing of consumer products, including toys and related products, electronic products, and other consumer products, many of which are based on highly-recognized character and entertainment licenses. The Company commenced its primary business operations in July 1995 through the purchase of substantially all of the assets of a Hong Kong toy company. The Company markets its product lines domestically and internationally. The Company was incorporated under the laws of the State of Delaware in January 1995. Liquidity On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China (the “COVID-19 outbreak”) and the risks to the international community as the virus spreads globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally. The full impact of the COVID-19 outbreak continues to evolve as of the date of this report. As such, it is uncertain as to the full magnitude that the pandemic will have on the Company’s financial condition, liquidity, and future results of operations. Management is actively monitoring the global situation and the resulting impact on its financial condition, liquidity, operations, suppliers, industry, and workforce. Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, the Company is unable to estimate the effects of the COVID-19 outbreak on its results of operations, financial condition, and liquidity for fiscal years 2021 and 2022. In mid-March 2020, the Company began migrating to a work-from-home model in compliance with local guidance. The Company continues to operate under that model as of the date of this filing. On March 27, 2020, President Trump signed into law the “Coronavirus Aid, Relief and Economic Security Act (“CARES Act”). The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer-side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. On December 27, 2020, President Trump signed into law the Consolidated Appropriations Act of 2021 (“CAA”), which includes many tax and health components, as well as CARES Act extensions and modifications. The Company continues to monitor and explore any relevant government assistance programs that could support either cash liquidity or operating results in the short-medium term. 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. 51 Table of Contents 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. 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 the Company expects would not be significant as of December 31, 2020. The Company’s primary sources of working capital are cash flows from operations and borrowings under its credit facility (see Note 11 - Credit Facilities). 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. In addition, the Company’s business and liquidity are dependent to a significant degree on its vendors and their financial health, as well as the ability to accurately forecast the demand for products. The loss of a key vendor, or material changes in support by them, or a significant variance in actual demand compared to the forecast, can have a material adverse impact on the Company’s cash flows and business. 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. 52 Table of Contents 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’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 and basis of preparation These consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries, and its majority owned joint venture. All intercompany transactions have been eliminated. The Company entered into a joint venture with Meisheng Culture & Creative Corp., for the purpose of providing certain JAKKS licensed and non-licensed toys and consumer products to agreed-upon territories of the People’s Republic of China. The joint venture includes a subsidiary in the Shanghai Free Trade Zone that sells, distributes and markets these products, which include dolls, plush, role play products, action figures, costumes, seasonal items, technology and app-enhanced toys, based on top entertainment licenses and JAKKS’ own proprietary brands. The Company owns 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 The Company considers all highly liquid investments with an original maturity of three months or less, when acquired, to be cash equivalents. The Company maintains its cash in bank deposits which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk of cash and cash equivalents. Restricted cash Restricted cash consists primarily of a Wells Fargo collateral account established to cover the excess Wells Fargo borrowing base availability shortfall and a cash collateral account to cover a guarantee bond. 53 Table of Contents Accounts Receivable and Allowance for Doubtful Accounts Credit is granted to customers on an unsecured basis. Credit limits and payment terms are established based on evaluations made on an ongoing basis throughout the fiscal year of the financial performance, cash generation, financing availability, and liquidity status of each customer. Customers are reviewed at least annually, with more frequent reviews performed as necessary, depending upon the customer’s financial condition and the level of credit being extended. For customers who are experiencing financial difficulties, management performs additional financial analyses before shipping to those customers on credit. The Company uses a variety of financial arrangements to ensure collectability of accounts receivable of customers deemed to be a credit risk, including requiring letters of credit, purchasing various forms of credit insurance with unrelated third parties, or requiring cash in advance of shipment. The Company records an allowance for doubtful accounts 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. Use of estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the dates of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods. Actual future results could differ from those estimates. On an ongoing basis, the Company evaluates its estimates, including those related to the accounts receivable and sales allowances, fair values of financial instruments, intangible assets and goodwill, useful lives of intangible assets and property and equipment, income taxes, and contingent liabilities, among others. 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 The Company’s contracts with customers only include one performance obligation (i.e., sale of the Company’s products). Revenue is recognized in the gross amount at a point in time when delivery is completed and control of the promised goods is transferred to the customers. Revenue is measured as the amount of consideration the Company expects to be entitled to in exchange for those goods. The Company’s contracts do not involve financing elements as payment terms with customers are less than one year. Further, because revenue is recognized at the point in time goods are sold to customers, there are no contract assets or contract liability balances. The Company disaggregates its revenues from contracts with customers by reporting segment: Toys/Consumer Products and 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. Certain discounts and allowances are fixed and determinable at the time of sale and are recorded at the time of sale as a reduction to revenue. Other discounts and allowances can vary and are determined at management’s discretion (variable consideration). Specifically, the Company occasionally grants discretionary credits to facilitate markdowns and sales of slow moving merchandise, and consequently accrues an allowance based on historic credits and management estimates. Further, while the Company generally does not allow product returns, the Company does make occasional exceptions to this policy, and consequently records a sales return allowance based upon historic return amounts and management estimates. These allowances (variable consideration) are estimated using the expected value method and are recorded at the time of sale as a reduction to revenue. The Company adjusts its estimate of variable consideration at least quarterly or when facts and circumstances used in the estimation process may change. The variable consideration is not constrained as the Company has sufficient history on the related estimates and does not believe there is a risk of significant revenue reversal. The Company also participates in cooperative advertising arrangements with some customers, whereby it allows a discount from invoiced product amounts in exchange for customer purchased advertising that features the Company’s products. Generally, these allowances range from 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. 54 Table of Contents Sales commissions are expensed when incurred as the related revenue is recognized at a point in time and therefore the amortization period is less than one year. As a result, these costs are recorded as direct selling expenses, as incurred. Shipping and handling activities are considered part of the Company’s obligation to transfer the products and therefore are recorded as direct selling expenses, as incurred. The Company’s reserve for sales returns and allowances amounted to $ 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, the Company uses various methods including market, income and cost approaches. Based upon these approaches, the Company often utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market-corroborated, or unobservable inputs. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based upon observable inputs used in the valuation techniques, the Company is required to provide information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values into three broad levels as follows: Level 1: Valuations for assets and liabilities traded in active markets from readily available pricing sources for market transactions involving identical assets or liabilities. Level 2: Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third-party pricing services for identical or similar assets or liabilities. Level 3: Valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities. In instances where the determination of the fair value measurement is based upon inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based upon the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability. Inventory Inventory, which includes the ex-factory cost of goods, capitalized warehouse costs and in-bound freight and duty, is valued at the lower of cost (first-in, first-out) or net realizable value, net of inventory obsolescence reserve, and consists of the following (in thousands): December 31, 2020 2019 Raw materials $ 135 $ 144 Finished goods 38,507 54,115 $ 38,642 $ 54,259 As of December 31, 2020 and 2019, the inventory obsolescence reserve was $ 10.8 million and $ 12.9 million, respectively. Property and equipment Property and equipment are stated at cost and are being depreciated using the straight-line method over their estimated useful lives as follows: Office equipment 5 years Automobiles 5 years Furniture and fixtures 5 - 7 years Leasehold improvements Shorter of length of lease or 10 years 55 Table of Contents During interim reporting periods, the Company uses the usage method as its depreciation methodology for molds and tools used in the manufacturing of its products, which is more closely correlated to the production of goods as it follows the seasonality of sales. The Company believes that the usage method more accurately matches costs with revenues. From a full-year perspective, the depreciation methodology follows the straight-line method, based on the estimated useful life of molds and tools of three years. Estimated useful lives are periodically reviewed and, where appropriate, changes are made prospectively. 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 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) Other comprehensive income (loss) includes all changes in equity from non-owner sources. The Company accounts for other comprehensive income in accordance with Accounting Standards Codification (“ASC”) ASC 220, “Comprehensive Income.” All the activity in other comprehensive income (loss) and all amounts in accumulated other comprehensive income (loss) relate to foreign currency translation adjustments. Advertising Production costs of commercials and programming are charged to operations in the period during which the production is first aired. The costs of other advertising, promotion and marketing programs are charged to operations in the period incurred. 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. Income taxes The Company does not file a consolidated return with its foreign subsidiaries. The Company files federal and state returns and its foreign subsidiaries file returns in their respective jurisdictions. 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 portion 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. The Company recognizes net deferred tax assets to the extent that the Company believes these assets are more likely than not to be realized. In making such a determination, management considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If management determines that the Company would be able to realize its deferred tax assets in the future in excess of their net recorded amount, management would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes. The Company records uncertain tax positions on the basis of a two-step process whereby (1) management determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, management recognizes the largest amount of tax benefit that is more than 50% likely to be realized upon ultimate settlement with the related tax authority. The Company recognizes interest and penalties related to unrecognized tax benefits within income tax expense. Any accrued interest and penalties are included within the related tax liability. 56 Table of Contents Foreign Currency Translation Exposure The Company’s reporting currency is the U.S. dollar. The translation of its net investment in subsidiaries with non-U.S. dollar functional currencies subjects the Company to currency exchange rate fluctuations in its results of operations and financial position. Assets and liabilities of subsidiaries with non-U.S. dollar functional currencies are translated into U.S. dollars at year-end exchange rates. Income, expense and cash flow items are translated at average exchange rates prevailing during the year. The resulting currency translation adjustments are recorded as a component of accumulated other comprehensive income (loss) within stockholders’ equity. The Company’s primary currency translation exposures in 2020, 2019 and 2018 were related to its net investment in entities having functional currencies denominated in the Hong Kong Dollar, British Pound, Canadian Dollar, Chinese Yuan, Mexican Peso and the Euro. Foreign Currency Transaction Exposure Currency exchange rate fluctuations may impact the Company’s results of operations and cash flows. The Company’s currency transaction exposures include gains and losses realized on unhedged inventory purchases and unhedged receivables and payables balances that are denominated in a currency other than the applicable functional currency. Gains and losses on unhedged inventory purchases and other transactions associated with operating activities are recorded in the components of operating income in the consolidated statement of operations. Accounting for the impairment of finite-lived tangible and intangible assets Long-lived assets with finite lives, which include property and equipment and intangible assets other than goodwill, are evaluated for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through the estimated undiscounted future cash flows from the use of these assets. When any such impairment exists, the related assets will be written down to fair value. Finite-lived intangible assets often consist of product technology rights, acquired backlog, customer relationships, product lines and license agreements. These intangible assets are amortized over the estimated economic lives of the related assets. 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 and asset level, respectively. Losses in value are recorded when material impairment has occurred in the underlying assets or when the benefits of the identified intangible assets are realized. Indefinite-lived intangible assets other than goodwill consist of trademarks. The carrying value of goodwill and trademarks is based upon cost, which is subject to management’s current assessment of fair value. Management evaluates fair value recoverability using both objective and subjective factors. Objective factors include cash flows and analysis of recent sales and earnings trends. Subjective factors include management’s best estimates of projected future earnings and competitive analysis and the Company’s strategic focus. Share-based Compensation The Company measures all employee share-based compensation awards using a fair value method and records such expense in its consolidated financial statements. 57 Table of Contents 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, 2020 2019 2018 Net loss $ ( 14,144 ) $ ( 55,379 ) $ ( 42,425 ) Net income (loss) attributable to non-controlling interests 130 169 ( 57 ) Net loss attributable to JAKKS Pacific, Inc. ( 14,274 ) ( 55,548 ) ( 42,368 ) Preferred stock dividend ( 1,257 ) ( 483 ) — Net loss attributable to common stockholders $ ( 15,531 ) $ ( 56,031 ) $ ( 42,368 ) Weighted average common shares outstanding - basic and diluted 3,634 2,598 2,310 Loss per share available to common stockholders - basic and diluted $ ( 4.27 ) $ ( 21.57 ) $ ( 18.34 ) Basic earnings per share is calculated using the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated using the weighted average number of common shares and common share equivalents outstanding during the period (which consist of restricted stock awards, restricted stock units and convertible debt to the extent they are dilutive). 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. These repurchased shares were treated as retired for basic and diluted income (loss) per share purposes although they remained legally outstanding. The Company reflected the aggregate purchase price of its common shares repurchased as a reduction to stockholders’ equity allocated to 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. Recent Accounting Pronouncements In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The new standard was initially effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. In November 2019, the FASB issued ASU 2019-10 which deferred the effective date of ASU 2016-13 by three years for Smaller Reporting Companies. As a result, the effective date for the standard is fiscal years beginning after December 15, 2022, and interim periods therein, and early adoption is permitted. The Company is currently evaluating the impact of the adoption of ASU 2016-13 on its consolidated financial statements. In August 2018, the FASB issued ASU 2018-13, “Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement,” which improves the effectiveness of the disclosures required under ASC 820 and modifies the disclosure requirements on fair value measurements, including the consideration of costs and benefits. 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 did not have an impact on the Company’s consolidated financial statements. In October 2018, the FASB issued ASU 2018-17, "Consolidation: Targeted Improvements to Related Party Guidance for Variable Interest Entities," which improves the accounting for variable interest entities by considering indirect interests held through related parties under common control for determining whether fees paid to decision makers and service providers are variable interests. This new standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The amendments are required to be applied retrospectively with a cumulative-effect adjustment to retained earnings at the beginning of the earliest period presented. Early adoption is permitted. The adoption of this standard did not have an impact on the Company's consolidated financial statements. 58 Table of Contents 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 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. All sales are made to external customers and general corporate expenses have been attributed to the various segments based upon relative sales volumes. Segment assets are primarily comprised of accounts receivable and inventories, net of applicable reserves and allowances, goodwill and other assets. Certain assets which are not tracked by operating segment and/or that benefit multiple operating segments have been allocated on the same basis. 59 Table of Contents Results are not necessarily those which would be achieved if each segment was an unaffiliated business enterprise. Information by segment and a reconciliation to reported amounts as of December 31, 2020 and 2019 and for the three years in the period ended December 31, 2020 are as follows (in thousands): Year Ended December 31, 2020 2019 2018 Net Sales Toys/Consumer Products $ 427,122 $ 479,038 $ 466,186 Halloween 88,750 119,611 101,624 $ 515,872 $ 598,649 $ 567,810 Year Ended December 31, 2020 2019 2018 Income (Loss) from Operations Toys/Consumer Products $ 20,002 $ ( 8,128 ) $ ( 20,399 ) Halloween ( 7,094 ) ( 9,661 ) ( 11,774 ) $ 12,908 $ ( 17,789 ) $ ( 32,173 ) Year Ended December 31, 2020 2019 2018 Depreciation and Amortization Expense Toys/Consumer Products $ 10,292 $ 16,227 $ 16,002 Halloween 644 1,407 1,079 $ 10,936 $ 17,634 $ 17,081 December 31, 2020 2019 Assets Toys/Consumer Products $ 315,838 $ 356,584 Halloween 13,531 8,638 $ 329,369 $ 365,222 Net revenues are categorized based upon location of the customer, while long-lived assets are categorized based upon the location of the Company’s assets. The following tables present information about the Company by geographic area as of December 31, 2020 and 2019 and for each of the three years in the period ended December 31, 2020 (in thousands): December 31, 2020 2019 Long-lived Assets United States $ 23,607 $ 31,175 China 10,773 11,461 Hong Kong 1,870 2,937 United Kingdom 1,458 1,633 Canada 100 134 Mexico 96 — $ 37,904 $ 47,340 60 Table of Contents Year Ended December 31, 2020 2019 2018 Net Sales by Customer Area United States $ 421,222 $ 481,309 $ 439,979 Europe 51,885 65,557 69,646 Canada 18,486 19,937 21,923 Asia 8,285 10,112 8,504 Latin America 7,734 11,415 17,827 Australia and New Zealand 5,795 7,870 5,937 Middle East and Africa 2,465 2,449 3,994 $ 515,872 $ 598,649 $ 567,810 Major Customers Net sales to major customers were as follows (in thousands, except for percentages): 2020 2019 2018 Amount Percentage of Net Sales Amount Percentage of Net Sales Amount Percentage of Net Sales Wal-Mart $ 150,250 29.1 % $ 177,063 29.6 % $ 143,587 25.3 % Target 132,354 25.7 124,709 20.8 122,141 21.5 $ 282,604 54.8 % $ 301,772 50.4 % $ 265,728 46.8 % No other customer accounted for more than 10% of the Company's total net sales. The concentration of the Company’s business with a relatively small number of customers may expose the Company to material adverse effects if one or more of its large customers were to experience financial difficulty. The Company performs ongoing credit evaluations of its top customers and maintains an allowance for potential credit losses. Note 4 — Joint Ventures On December 16, 2009, the Company entered into a joint venture agreement with the U.S. entertainment subsidiary of a leading Japanese advertising and animation production company in which it owned 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. 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 . In September 2012, the Company entered into a joint venture (“DreamPlay Toys”) with NantWorks LLC (“NantWorks”) in which it owns a fifty percent interest. Pursuant to the operating agreement of DreamPlay Toys, the Company paid to NantWorks cash in the amount of $ 8.0 million and issued NantWorks a warrant to purchase 1.5 million shares of the Company’s common stock at a value of $ 7.0 million in exchange for the exclusive right to arrange for the provision of the NantWorks recognition technology platform for toy products. The Company had classified these rights as an intangible asset, which was being amortized over the anticipated revenue stream from the exploitation of these rights. However, the Company has abandoned the use of the technology in connection with its toy products and no future sales are anticipated, and the Company recorded an impairment charge to income of $ 2.9 million to write off the remaining unamortized technology rights during the third quarter of 2017. The Company retains the financial risk of the joint venture and is responsible for the day-to-day operations, which are expected to be nominal in future periods. The results of operations of the joint venture are consolidated with the Company’s results. 61 Table of Contents In addition, in 2012, the Company invested $ 7.0 million in cash in exchange for a five percent economic interest in a related entity, DreamPlay, LLC, that was expected to monetize the exploitation of the recognition technologies in non-toy consumer product categories. Adoption of the technology has been inadequate to establish a commercially viable market for the technology. NantWorks has the right to repurchase the Company’s interest for $7.0 million, but the Company does not anticipate that NantWorks will do so. As of September 30, 2017, the Company determined the value of this investment will not be realized and that full impairment of the value had occurred. Accordingly, the Company recorded an impairment charge of $ 7.0 million during the quarter ended September 30, 2017. In November 2014, the Company entered into a joint venture with Meisheng Culture & Creative Corp., for the purpose of providing certain JAKKS licensed and non-licensed toys and consumer products to agreed-upon territories of the People’s Republic of China. The joint venture includes a subsidiary in the Shanghai Free Trade Zone that sells, distributes and markets these products, which include dolls, plush, role play products, action figures, costumes, seasonal items, technology and app-enhanced toys, based on top entertainment licenses and JAKKS’ own proprietary brands. The Company owns 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 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. JAKKS and Meisheng each own fifty percent of the joint venture and will jointly own the content. JAKKS will retain merchandising rights for kids’ consumer products in all markets except China, which Meisheng Culture & Creative Corp. will oversee through the Company’s existing distribution joint venture. 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 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): December 31, 2020 2019 Royalty advances $ 13,518 $ 17,018 Prepaid expenses 2,490 3,606 Income taxes receivable 927 1,274 Other assets 304 - $ 17,239 $ 21,898 Note 6 — Goodwill 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 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. As a result of the retesting performed, no goodwill impairment was determined to have occurred for the three months ended March 31, 2020. 62 Table of Contents Based on the Company’s April 1, 2020 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, 2020. Based on the Company’s April 1, 2019 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, 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 Intangible assets other than goodwill consist primarily of licenses, product lines, customer relationships and trademarks. Amortized intangible assets are included in intangibles in the accompanying consolidated balance sheets. Trademarks are disclosed separately in the accompanying consolidated balance sheets. Intangible assets are as follows (in thousands, except for weighted useful lives): December 31, 2020 December 31, 2019 Weighted Useful Lives Gross Carrying Amount Accumulated Amortization Net Amount Gross Carrying Amount Accumulated Amortization Net Amount (Years) Amortized Intangible Assets: Licenses 5.81 $ 20,130 $ ( 20,130 ) $ — $ 20,130 $ ( 19,988 ) $ 142 Product lines 10.36 33,858 ( 31,827 ) 2,031 33,858 ( 30,812 ) 3,046 Customer relationships 4.90 3,152 ( 3,152 ) — 3,152 ( 3,152 ) — Trade names 5.00 3,000 ( 3,000 ) — 3,000 ( 3,000 ) — Non-compete agreements 5.00 200 ( 200 ) — 200 ( 200 ) — Total amortized intangible assets $ 60,340 $ ( 58,309 ) $ 2,031 $ 60,340 $ ( 57,152 ) $ 3,188 Unamortized Intangible Assets: Trademarks $ 300 $ — $ 300 $ 300 $ — $ 300 In 2019, the Company assessed the recoverability of the Maui product lines and determined that the fair value was less than its carrying amount. As a result, the Company recorded an impairment charge of $ 9.4 million. 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 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): 2021 $ 1,015 2022 1,016 $ 2,031 63 Table of Contents Note 8 — Concentration of Credit Risk Financial instruments that subject the Company to concentration of credit risk are cash and cash equivalents and accounts receivable. Cash equivalents consist principally of short-term money market funds. These instruments are short-term in nature and bear minimal risk. The Company performs ongoing credit evaluations of its customers’ financial conditions, but does not require collateral to support domestic customer accounts receivable. For goods shipped FOB Hong Kong or China, the Company may require irrevocable letters of credit from the customer or purchase various forms of credit insurance. Note 9 — Accrued Expenses Accrued expenses consist of the following (in thousands): December 31, 2020 2019 Royalties $ 13,659 $ 14,061 Inventory liabilities 7,115 7,954 Interest expense 4,132 4,535 Salaries and employee benefits 4,032 3,017 Goods in transit 2,597 1,664 Professional fees 1,877 2,115 Unearned revenue 938 557 Bonuses 666 570 Sales commissions 351 669 Unclaimed property liability — 1,200 Other 3,937 3,173 $ 39,304 $ 39,515 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 Convertible senior notes consist of the following (in thousands): December 31, 2020 December 31, 2019 Principal/ Fair Value Amount Debt Issuance Costs Net Amount Principal/ Fair Value Amount Debt Issuance Costs Net Amount 4.875 % convertible senior notes due 2020 $ — $ — $ — $ 1,905 $ — $ 1,905 3.25 % convertible senior notes due 2023 * 34,134 — 34,134 50,753 — 50,753 Total convertible senior notes $ 34,134 $ — $ 34,134 $ 52,658 $ — $ 52,658 *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. 64 Table of Contents 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. 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 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 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. In connection with this transaction, the Company recognized a loss on extinguishment of the debt of approximately $ 0.6 million. 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 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. 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 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, 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 (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"). 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. 65 Table of Contents 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. The Company may trigger a mandatory conversion of the New Oasis Notes if the market price exceeds 150 % of the conversion price under certain circumstances. The Company may redeem the New Oasis Notes in cash if a person, entity or group acquires shares of the Company’s Common Stock, par value $ 0.001 per share (the “Common Stock”), and as a result owns at least 49 % of the Company’s issued and outstanding Common Stock. 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. 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. In June 2014, the Company sold an aggregate of $ 115.0 million principal amount of 4.875 % convertible senior notes due 2020 (the “2020 Notes”). 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. 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. Holders of the 2020 Notes may require that the Company 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, the Company repurchased and retired an aggregate of $ 2.0 million principal amount of the 2020 Notes. 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. 66 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 (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). 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. 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 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. Key components of the 4.25% convertible senior notes due 2018 consist of the following (in thousands): Year ended December 31, 2020 2019 2018 Contractual interest expense $ — $ — $ 373 Amortization of debt issuance costs recognized as interest expense — — 103 $ — $ — $ 476 Key components of the 4.875% convertible senior notes due 2020 consist of the following (in thousands): Year ended December 31, 2020 2019 2018 Contractual interest expense $ 32 $ 3,370 $ 5,509 Amortization of debt issuance costs recognized as interest expense — 460 789 $ 32 $ 3,830 $ 6,298 Key components of the 3.25% convertible senior notes due 2020 consist of the following (in thousands): Year ended December 31, 2020 2019 2018 Contractual interest expense $ — $ 580 $ 815 Key components of the 3.25% convertible senior notes due 2023 consist of the following (in thousands): Year ended December 31, 2020 2019 2018 Contractual interest expense $ 2,004 $ 899 $ — 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. 67 Table of Contents Term Loan Term loan consists of the following (in thousands): December 31, 2020 December 31, 2019 Principal Amount** Debt Discount/ Issuance Costs* Net Amount Principal Amount** Debt Discount/ Issuance Costs* Net Amount Term Loan $ 119,801 $ ( 8,471 ) $ 111,330 $ 134,801 $ ( 12,319 ) $ 122,482 * The term loan was valued using the discounted cash flow method to determine the implied debt discount. The debt discount and issuance costs are being amortized over the life of the term loan. ** The amount presented excludes accrued, but unpaid, payment-in-kind interest of $ 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”). The Company also issued common stock and preferred stock (see 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 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. 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 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. 68 Table of Contents 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. The PPP Loan may be forgiven, partially or in full, if certain conditions are met, principally based on having been disbursed for permissible purposes and maintaining certain average levels of employment and payroll as required by the CARES Act. As of 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 Wells Fargo In March 2014, the Company and its domestic subsidiaries entered into a secured credit facility with General Electric Capital Corporation (“GECC”). The credit facility, as amended and subsequently assigned to Wells Fargo Bank pursuant to its acquisition of GECC, provides for a $ 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 the Company 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, the Company 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, the Company revised certain of the Credit Facility documents (and entered into new ones) so that certain of its 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 the Company 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 Note 10 - Debt), the Company entered into an amended and extended revolving credit facility with Wells Fargo (the “Amended ABL Credit Agreement” or “Amended ABL facility”). The Amended ABL Credit Agreement amends and restates the Company’s existing Credit Facility, dated as of March 27, 2014, as amended, with GECC and subsequently assigned to Wells Fargo, to, among other things, decrease the borrowing capacity from $ 75.0 million to $ 60.0 million and extend the maturity to August 9, 2022. 69 Table of Contents The obligations under the Amended ABL Credit Agreement are guaranteed by the Company, the subsidiary borrowers thereunder and certain of the other existing and future direct and indirect subsidiaries of the Company and are secured by substantially all of the assets of the Company, the subsidiary borrowers thereunder and such other subsidiary guarantors, in each case, subject to certain exceptions and permitted liens. As of December 31, 2020, the amount of outstanding borrowings was 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 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, 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, 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 the obligations of the Company and its subsidiaries under the Amended ABL Facility may be declared immediately due and payable. For certain events of default relating to insolvency, all outstanding obligations become due and payable. As described in Note 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. Great American Capital Partners On June 14, 2018, the Company entered into a Term Loan Agreement, Term Note, Guaranty and Security Agreement and other ancillary documents and agreements (the “Term Loan”) with 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 the Company by Lenders of a $ 20.0 million term loan. To secure the Company’s obligations under the Term Loan, the Company granted to Agent, for the benefit of the Secured Parties, a security interest in a substantial amount of the Company’s consolidated assets and a pledge of the majority of the capital stock of various of its subsidiaries. The Term Loan was a secured obligation, second only to the Credit Facility with Wells Fargo, except with respect to certain of the Company’s inventory in which GACP has a priority secured position. The Term Loan required the repayment of principal in the amount of 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 the Company’s various convertible senior notes due in 2020 (See Note 10 - Debt). The Company was permitted to prepay the Term Loan, which would have required a prepayment fee (i) in year one of up to any unearned and unpaid interest that would have become due and payable in year one had the prepayment not occurred plus 2 % of the initial amount of the Term Loan (i.e., $ 20.0 million), (ii) in year two of 2 % of the initial amount of the Term Loan and (iii) in year three of 1 % of the initial amount of the Term Loan. In August 2019, in connection with the Recapitalization Transaction (See Note 10 - Debt), the Company repaid in full and terminated the Term Loan Agreement. 70 Table of Contents 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 $ 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. Pursuant to the joint venture agreements, the Company is obligated to pay NantWorks a preferred return on joint venture sales. This agreement expired on September 30, 2018. 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. The joint venture includes a subsidiary in the Shanghai Free Trade Zone that sells, distributes and markets these products, which include dolls, plush, role play products, action figures, costumes, seasonal items, technology and app-enhanced toys, based on top entertainment licenses and JAKKS’ own proprietary brands. The Company owns 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 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. JAKKS and Meisheng each own fifty percent of the joint venture and will jointly own the content. JAKKS will retain merchandising rights for kids’ consumer products in all markets except China, which Meisheng Culture & Creative Corp. will oversee through the Company’s existing distribution joint venture. 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. After their shareholder and China regulatory approval, the transaction closed on April 27, 2017. Upon the closing, the Company added a representative of Meisheng Culture & Creative Corp as a non-employee director and issued 1,332 shares of restricted stock at a value of $ 0.1 million, which vested in January 2018. In 2018, the Company issued 4,158 shares of restricted stock at a value of $ 0.1 million to the non-employee director, which vested in January 2019. In 2019, the Company issued 5,471 shares of restricted stock at a value of $ 0.1 million to the non-employee director, which vested in January 2020. Meisheng also serves as a significant manufacturer of the Company. In the first quarter of 2019, Meisheng acquired New Time Group, which was a third-party manufacturer of the Company. For the 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. 71 Table of Contents A director of the Company is a portfolio manager at Oasis Management. In August 2017, the Company agreed with Oasis Management and Oasis Investments II Master Fund Ltd., the holder of approximately $ 21.6 million face amount of its 4.25 % convertible senior notes due in 2018, to exchange and extend the maturity date of these notes to November 1, 2020. The transaction closed on November 7, 2017. In July 2018, the Company closed a transaction with Oasis Management and Oasis Investments II Master Fund Ltd., to exchange $ 8.0 million face amount of the 4.25% convertible senior notes due in August 2018 with convertible senior notes similar to those issued in November 2017. In August 2019, the Company entered into 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, and (ii) a new $8.0 million convertible senior note having the same terms as such amended and restated notes. 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. A director of the Company is a director at Benefit Street Partners. 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. 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. The transaction closed on February 8, 2021. A director of the Company is the managing Partner and portfolio manager at Axar Capital Management. 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 The Company does not file a consolidated return with its foreign subsidiaries. The Company files federal and state returns and its foreign subsidiaries file returns in their respective jurisdiction. 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. 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. Provision for income taxes reflected in the accompanying consolidated statements of operations are comprised of the following (in thousands): Year ended December 31, 2020 2019 2018 Federal $ ( 212 ) $ ( 212 ) $ ( 1,475 ) State and local 134 66 62 Foreign 704 3,037 4,154 Total Current 626 2,891 2,741 Deferred 109 ( 979 ) 210 Total $ 735 $ 1,912 $ 2,951 72 Table of Contents The components of deferred tax assets/(liabilities) are as follows (in thousands): December 31, 2020 2019 Net deferred tax assets/(liabilities): Reserve for sales allowances and possible losses $ 658 $ 686 Accrued expenses 3,227 2,381 Prepaid royalties 4,282 6,224 Accrued royalties 4,191 2,314 Inventory 8,793 10,309 State income taxes 23 17 Property and equipment 1,618 1,952 Goodwill and intangibles 6,015 9,185 Share-based compensation 780 894 Interest limitation 2,114 3,539 Undistributed foreign earnings ( 2,419 ) ( 1,970 ) Operating lease right-of-use assets ( 5,798 ) ( 7,422 ) Operating lease liabilities 6,427 8,195 Federal and state net operating loss carryforwards 61,239 53,845 Credit carryforwards 697 909 Other 794 1,706 Gross 92,641 92,764 Valuation allowance ( 92,764 ) ( 92,778 ) Total net deferred tax liabilities $ ( 123 ) $ ( 14 ) Provision for income taxes varies from the U.S. federal statutory rate. The following reconciliation shows the significant differences in the tax at statutory and effective rates: Year ended December 31, 2020 2019 2018 Federal income tax expense 21.0 % 21.0 % 21.0 % State income tax expense, net of federal tax effect 7.7 6.1 9.7 Effect of differences in U.S. and foreign statutory rates 1.2 0.6 2.0 Uncertain tax positions 3.4 ( 0.3 ) ( 0.8 ) Provision to return 0.6 ( 1.6 ) ( 40.6 ) Non-deductible expenses ( 36.2 ) ( 13.0 ) ( 16.9 ) Other 0.0 ( 0.4 ) ( 0.6 ) Undistributed foreign earnings ( 3.3 ) 0.2 4.5 Valuation allowance 0.1 ( 16.2 ) 14.2 ( 5.5 )% ( 3.6 )% ( 7.5 )% Deferred taxes result from temporary differences between tax basis of assets and liabilities and their reported amounts in the consolidated financial statements. The temporary differences result from costs required to be capitalized for tax purposes by the U.S. 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. 73 Table of Contents The components of income (loss) before provision for income taxes are as follows (in thousands): Year ended December 31, 2020 2019 2018 Domestic $ ( 18,748 ) $ ( 61,798 ) $ ( 58,693 ) Foreign 5,339 8,331 19,219 $ ( 13,409 ) $ ( 53,467 ) $ ( 39,474 ) 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. 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 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): Balance, December 31, 2017 $ 1.3 Current year additions 0.6 Current year reduction due to audit settlement ( 0.4 ) Balance, December 31, 2018 1.5 Current year additions 0.1 Balance, December 31, 2019 1.6 Current year reduction ( 0.6 ) Balance, December 31, 2020 $ 1.0 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. The tax years 2016 through 2019 are generally still subject to examination in the various states. The tax years 2014 through 2019 are still subject to examination in Hong Kong. In the normal course of business, the Company is audited by federal, state and foreign tax authorities. Management assesses 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. The Company is required to establish a valuation allowance for the U.S. 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 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. 74 Table of Contents At December 31, 2020, the Company has U.S. federal net operating loss carryforwards, or "NOLs", of approximately $ 190.2 million, which will begin to expire in 2033. At December 31, 2020, the Company's state NOLs were mainly from California. The majority of the approximately $228.6 million of California NOLs will begin to expire in 2031. At December 31, 2020, the Company had foreign tax credit carryforwards of approximately $ 0.1 million, which will begin to expire in 2027. At December 31, 2020, the Company had federal research and development tax credit carryforwards ("credit carryforwards") of approximately $ 0.5 million, which will begin to expire in 2029. At December 31, 2020, the Company had state research and development tax credits of approximately $ 0.1 million, which carry forward indefinitely. Utilization of certain NOLs and research credit carryforwards may be subject to an annual limitation due to ownership change limitations set forth in Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, and comparable state income tax laws. Any future annual limitation may result in the expiration of NOLs and credit carryforwards before utilization. Note 14 — Leases The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets and operating lease liabilities in its consolidated balance sheets. The Company does not have any finance leases. ROU assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit interest rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset also includes any prepaid lease amounts and excludes lease incentives. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that it will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. The Company has lease agreements with lease and non-lease components, which are generally accounted for separately. The Company has operating leases for corporate offices, warehouses, and certain equipment. The Company’s leases have remaining lease terms of 1 to 6 years, some of which include options to extend the lease for up to 10 years, and some of which include options to terminate the lease within 1 year. 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 %. 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. 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. 75 Table of Contents 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, 2021 $ 11,082 2022 10,603 2023 6,049 2024 590 2025 281 Thereafter 258 Total lease payments 28,863 Less imputed interest 2,055 Total $ 26,808 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 Common Stock 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”). 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 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 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 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. In addition, an aggregate of 24,948 shares of restricted stock at an aggregate value of approximately $ 0.6 million were issued to its six non-employee directors, which vested in January 2019. 76 Table of Contents During 2018, an executive officer surrendered an aggregate of 4,235 shares of restricted stock for $ 98,000 to cover income taxes due on the vesting of restricted shares. In January 2019, the Company was obligated to issue an aggregate of 306,122 shares of restricted stock at a value of approximately $ 4.5 million to two executive officers pursuant to the applicable employment contracts. The shares were not issued at that time due to insufficient shares available in the 2002 Stock Award and Incentive Plan. Such shares were subsequently approved by the Company's shareholders and issued in July 2019. In addition, an aggregate of 32,823 shares of restricted stock at an aggregate value of approximately $ 0.5 million were issued to its six non-employee directors. In August 2019, the Board resolved to accelerate and immediately vest upon closing of the Recapitalization Transaction, 16,417 shares of the annual stock compensation granted to resigning members of the Board on January 1, 2019. Each resigning Board member forfeited the remaining balance of the annual stock compensation granted on January 1, 2019, or an aggregate of 5,470 shares. The remaining 10,936 shares of restricted stock vested in January 2020. During 2019, certain employees, including executive officers, surrendered an aggregate of 19,098 shares of restricted stock for $ 273,000 to cover income taxes due on the vesting of restricted shares. 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"). 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. 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. No dividend was declared or paid in 2020 and 2019. Preferred Stock On August 9, 2019, in connection with the Recapitalization Transaction (see Note 10 - Debt), the Company issued 200,000 shares of Series A Senior Preferred Stock (the “Series A Preferred Stock”), $ 0.001 par value per share, to the Investor Parties (the “New Preferred Equity”). As of December 31, 2020 and 2019, 200,000 shares of Series A Preferred Stock were outstanding. Each share of Series A Preferred Stock has an initial value of $ 100 per share, which is automatically increased for any accrued and unpaid dividends (the “Accreted Value”). The Series A Preferred Stock has the right to receive dividends on a quarterly basis equal to 6.0 % per annum, payable in cash or, if not paid in cash, by an automatic accretion of the Series A Preferred Stock. No dividends have been declared or paid. For the year ended December 31, 2020 and 2019, the Company recorded $ 1.3 million and $ 483 ,000, respectively of preferred stock dividends as an increase in the value of the Series A Preferred Stock. 77 Table of Contents The Series A Preferred Stock has no stated maturity, however, the Company has the right to redeem all or a portion of the Series A Preferred Stock at its Liquidation Preference (as defined below) at any time after payment in full of the New Term Loan. In addition, upon the occurrence of certain change of control type events, holders of the Series A Preferred Stock are entitled to receive an amount (the “Liquidation Preference”), in preference to holders of Common Stock or other junior stock, equal to (i) 20 % of the Accreted Value in the case of a certain specified transaction, or (ii) otherwise, 150 % of the Accreted value, plus any accrued and unpaid dividends. The Company has the right, but is not required, to repurchase all or a portion of the Series A Preferred Stock at its Liquidation Preference at any time after payment in full of the New Term Loan (see Note 10 - Debt). The Series A Preferred Stock does not have any voting rights, except to the extent required by the Delaware General Corporation Law, except for the exclusive right to elect the Series A Preferred Directors (as described below) and except for certain approval rights over certain transactions (as described below). These approval rights require the prior consent of specified percentages of holders (or in certain cases, all holders) of the Series A Preferred Stock in order for the Company to take certain actions, including the issuance of additional shares of Series A Preferred Stock or parity stock, the issuance of senior stock, certain amendments to the Amended and Restated Certificate of Incorporation, the Certificate of Designations of the Series A Preferred Stock (the “Certificate of Designations”), the Second Amended and Restated By-laws or the Amended and Restated Nominating and Corporate Governance Committee Charter, material changes in the Company’s line of business and certain change of control type transactions. In addition, the Certificate of Designations provides that the approval of at least six directors is required for any related person transaction within the meaning of Item 404 of Regulation S-K under the Securities Act of 1933, as amended, including, without limitation, the adoption of, or any amendment, modification or waiver of, any agreement or arrangement related to any such transaction. The Certificate of Designations also includes restrictions on the ability of the Company to pay dividends on or make distributions with respect to, or redeem or repurchase, shares of Common Stock or other junior stock. In addition, holders of the Series A Preferred Stock have preemptive rights regarding future issuance of Series A Preferred Stock or parity stock. In addition, the Certificate of Designations provides the holders of Series A Preferred Stock certain board representation rights. The Certificate of Designations provides, among other things, that, for so long as at least 50,000 shares of Series A Preferred Stock remain outstanding, (i) the holders of a majority of the outstanding shares of Series A Preferred Stock have the sole right to nominate candidates to serve as the Series A Preferred Directors and (ii) the holders of shares of Series A Preferred Stock, voting as a separate class, have the right to elect two individuals to serve as the Series A Preferred Directors. From and after (i) the first annual meeting of stockholders occurring after less than 50,000 shares of Series A Preferred Stock remain outstanding, the holders of Series A Preferred Stock will only have the right to nominate and elect one Series A Preferred Director, and (ii) the time no shares of Series A Preferred Stock remain outstanding, the holders of Series A Preferred Stock will no longer have the right to nominate or elect any Series A Preferred Directors. The Series A Preferred Directors serve for terms ending at the annual meeting of stockholders in 2023 and for successive three-year terms thereafter (until no shares of Series A Preferred Stock remain outstanding). The number of directors elected by the holders of the Company’s Common Stock and the number of Series A Preferred Directors is fixed and cannot be amended without the approval of holders of a majority of the outstanding Common Stock and holders of at least 80% of the outstanding shares of Series A Preferred Stock, each voting as a separate class. The Series A Preferred Stock redemption amount is contingent upon certain events with no stated redemption date as of the reporting date, although may become redeemable in the future. In accordance with the SEC guidance within ASC Topic 480, Distinguishing Liabilities from Equity: Classification and Measurement of Redeemable Securities , the Company classified the Series A Preferred Stock as temporary equity as the Series A Preferred Stock contains a redemption feature which is contingent upon certain deemed liquidation events, the occurrence of which may not solely be within the control of the Company. Under ASC 815, Derivatives and Hedging , certain contractual terms that meet the accounting definition of a derivative must be accounted for separately from the financial instrument in which they are embedded. The Company has concluded that the redemption upon a change of control and the repurchase option by the Company constitute embedded derivatives. The embedded redemption upon a change of control must be accounted for separately from the Series A Preferred Stock. The redemption provision specifies if certain events that constitute a change of control occur, the Company may be required to settle the Series A Preferred Stock at 150% of its accreted amount. Accordingly, the redemption provision meets the definition of a derivative, and its economic characteristics are not considered clearly and closely related to the economic characteristics of the Series A Preferred Stock, which is considered more akin to a debt instrument than equity. 78 Table of Contents Accordingly, these two embedded derivatives are required to be bundled into a single derivative instrument and accounted for separately from the Series A Preferred Stock at fair value. The Company considers the repurchase option to have no value as the likelihood is remote that this event, within the Company’s control, would ever occur. On August 9, 2019, the Company determined that the fair value of the redemption provision upon a change of control was $ 4.9 million and recorded as a long term liability. In subsequent periods, the liability is accounted for at fair value, with changes in fair value recognized as other income (expense) on the Company's consolidated statements of operations. The value of the redemption provision explicitly considered the present value of the potential premium that would be paid related to, and the probability of, an event that would trigger its payment. The probability of a triggering event was based on management’s estimates of the probability of a change of control event occurring. As of December 31, 2020, the Series A Preferred Stock is recorded in temporary equity at the amount of accrued, but unpaid dividends of $ 1.7 million, and the redemption provision, as a bifurcated derivative, is recorded as a long term liability with an estimated value of $ 8.1 million. As of December 31, 2019, the Series A Preferred Stock is recorded in temporary equity at the amount of accrued, but unpaid dividends of $483,000, and the redemption provision, as a bifurcated derivative, is recorded as a long term liability with an estimated value of $ 5.2 million. Note 16 — Fair Value Measurements Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various methods including market, income and cost approaches. Based upon these approaches, the Company often utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market-corroborated, or unobservable inputs. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based upon observable inputs used in the valuation techniques, the Company is required to provide information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values into three broad levels as follows: Level 1: Valuations for assets and liabilities traded in active markets from readily available pricing sources for market transactions involving identical assets or liabilities. Level 2: Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third-party pricing services for identical or similar assets or liabilities. Level 3: Valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities. In instances where the determination of the fair value measurement is based upon inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based upon the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability. The following tables summarize the Company’s financial liabilities measured at fair value on a recurring basis as of December 31, 2020 and 2019 (in thousands): Carrying Amount as of December 31, 2020 Fair Value Measurements As of December 31, 2020 Level 1 Level 2 Level 3 3.25% convertible senior notes due in 2023 $ 34,134 $ — $ — $ 34,134 Preferred stock derivative liability 8,062 — — 8,062 Carrying Amount as of December 31, 2019 Fair Value Measurements As of December 31, 2019 Level 1 Level 2 Level 3 3.25% convertible senior notes due in 2023 $ 50,753 $ — $ — $ 50,753 Preferred stock derivative liability 5,247 — — 5,247 79 Table of Contents The following table provides a reconciliation of the beginning and ending balances of liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) (in thousands): 3.25% convertible senior notes due 2020 2020 2019 Balance at January 1, $ — $ 27,974 Additions — 7,250 Loss on extinguishment of convertible senior notes — 10,417 Extinguishment of convertible senior notes — ( 48,170 ) Change in fair value — 2,529 Balance at December 31, $ — $ — 3.25% convertible senior notes due 2023 2020 2019 Balance at January 1, $ 50,753 $ — New issuance ($ 29.6 million face value) — 37,916 New issuance ($ 8.0 million face value) — 10,254 Conversion of convertible senior notes ( 20,212 ) — Change in fair value 2,265 2,583 Payment-in-kind interest 1,328 — Balance at December 31, $ 34,134 $ 50,753 Preferred stock derivative liability 2020 2019 Balance at January 1, $ 5,247 $ — New issuance of Series A Preferred Stock — 4,894 Change in fair value 2,815 353 Balance at December 31, $ 8,062 $ 5,247 The Company’s derivative liability is classified within Level 3 of the fair value hierarchy because unobservable inputs were used in estimating the fair value. The fair value of the redemption provision embedded in the Series A Preferred Stock is estimated based on a discounted cash flow model and probability assumptions based on management’s estimates of a change of control event occurring. In subsequent periods, the derivative liability is accounted for at fair value, with changes in fair value recognized as other income (expense) on the Company's consolidated statements of operations. In August 2017, the Company agreed with 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 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. These notes are hereafter referred to as the “3.25% convertible senior notes due in 2020” or “3.25% 2020 Notes.” 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. 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 new 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. Excluding the impact of the 1 for 10 reverse stock split, the conversion price of the 3.25% 2020 Notes reset on November 1, 2018 to $ 2.54 per share and the conversion rate was increased to 393.7008 of the Company's common stock per $ 1,000 principal amount of notes. 80 Table of Contents 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 (collectively, the “3.25% 2023 Notes”). 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, accrue interest 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. 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. In connection with these transactions, the Company elected the fair value option of measurement for the 3.25% 2020 Notes and the 3.25% 2023 Notes, under ASC 815, Derivatives and Hedging. As a result, these notes are re-measured each reporting period using Level 3 inputs (Monte Carlo simulation model and inputs for stock price, risk-free rate and volatility), with changes in fair value reflected in current period earnings in its consolidated statements of operations. 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 of $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. The remaining $ 1.9 million principal amount of the 4.875% convertible senior notes due 2020 were redeemed at par at maturity on June 1, 2020. In connection with the Recapitalization Transaction, the Company also issued 200,000 shares of Series A Preferred Stock, to the Investor Parties. The fair value of the Series A Preferred Stock derivative liability is calculated using unobservable inputs (Level 3 fair measurements). The value of the redemption provision explicitly considered the present value of the potential premium that would be paid related to, and the probability of, an event that would trigger its payment. The probability of a triggering event was based on management’s estimates of the probability of a change of control event occurring. The 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. The Company’s accounts receivable, accounts payable, and accrued expenses represent financial instruments. The carrying value of these financial instruments is a reasonable approximation of fair value. Note 17 — Commitments The Company has entered into various license agreements whereby the Company may use certain characters and intellectual properties in conjunction with its products. Generally, such license agreements provide for royalties to be paid ranging from 1 % to 25 % of net sales with minimum guarantees and advance payments. In the event the Company estimates that a shortfall in achieving the minimum guarantee is probable, a liability is recorded for the estimated shortfall and charged to royalty expense. Future annual minimum royalty guarantees as of December 31, 2020 are as follows (in thousands): 2021 $ 32,106 2022 2,696 2023 350 2024 20 $ 35,172 81 Table of Contents The Company has entered into employment and consulting agreements with certain executives expiring through December 31, 2024. The aggregate future annual minimum guaranteed amounts due under those agreements as of December 31, 2020 are as follows (in thousands): 2021 $ 5,040 2022 2,344 2023 2,362 2024 2,410 $ 12,156 Note 18 — Share-Based Payments Under the Company’s 2002 Stock Award and Incentive Plan (“the Plan”), which incorporated its Third Amended and Restated 1995 Stock Option Plan, the Company has reserved shares of its common stock for issuance upon the exercise of options granted under the Plan, as well as for the awarding of other securities. Under the Plan, employees (including officers), non-employee directors and independent consultants may be granted options to purchase shares of common stock, restricted stock units and other securities (see Note 15 - Common Stock and Preferred Stock). The vesting of these share-based awards may vary, but typically vest over a requisite service period or are based on performance criteria, with a maximum vesting period of four years . Restricted shares typically vest in the same manner, with the exception of certain awards vesting over one to three years . Share-based compensation expense is recognized on a straight-line basis over the requisite service period. Compensation expense for performance-awards is measured based on the amount of shares ultimately expected to vest, estimated at each reporting date based on management expectations regarding the relevant performance criteria. As of December 31, 2020, 1,180,226 shares were available for future grant. Additional shares may become available to the extent that options or shares of restricted stock presently outstanding under the Plan terminate, expire, or are forfeited. Restricted Stock Under the Plan, share-based compensation payments may include the issuance of shares of restricted stock. Restricted stock award grants are based upon employment contracts, which vary by individual and year, and are subject to vesting conditions. The following table summarizes the restricted stock award activity, annually, for the year ended December 31, 2020, 2019 and 2018: 2020 2019 2018 Number of Shares Weighted Average Grant Date Fair Value Number of Shares Weighted Average Grant Date Fair Value Number of Shares Weighted Average Grant Date Fair Value Outstanding, January 1 559,307 $ 16.00 295,078 $ 24.10 98,121 $ 41.20 Granted 70,422 10.30 338,946 10.70 216,437 18.80 Vested ( 69,442 ) 21.76 ( 69,247 ) 24.90 ( 19,480 ) 51.40 Forfeited ( 52,420 ) 32.20 ( 5,470 ) 14.70 — — Outstanding, December 31 507,867 12.73 559,307 16.00 295,078 24.10 As of December 31, 2020, there was $ 2.1 million of total unrecognized compensation cost related to non-vested restricted stock, which is expected to be recognized over a weighted-average period of 1.96 years. 82 Table of Contents Restricted Stock Units Under the Plan, share-based compensation payments may include the issuance of Restricted Stock Units (RSUs) to employees, which occurs approximately once per year and are subject to vesting conditions. RSUs are valued at the market price of the shares underlying the award on the date of grant. The following table summarizes the RSU award activity, annually for the year ended December 31, 2020, 2019 and 2018: 2020 2019 2018 Number of Shares Weighted Average Grant Date Fair Value Number of Shares Weighted Average Grant Date Fair Value Number of Shares Weighted Average Grant Date Fair Value Outstanding, January 1 102,718 $ 23.42 105,217 $ 37.20 95,920 $ 46.80 Granted 100,200 3.89 133,431 7.70 35,714 19.60 Vested ( 41,640 ) 16.64 ( 16,149 ) 38.00 ( 12,529 ) 51.50 Forfeited ( 29,761 ) 42.83 ( 119,781 ) 16.00 ( 13,888 ) 45.60 Outstanding, December 31 131,517 6.32 102,718 23.42 105,217 37.20 As of December 31, 2020, there was $ 0.4 million of total unrecognized compensation cost related to non-vested restricted stock units, which is expected to be recognized over a weighted-average period of 2.67 years. Share-Based Compensation Expense The following table summarizes the total share-based compensation expense and related tax benefits recognized (in thousands): Year Ended December 31, 2020 2019 2018 Share-based compensation expense $ 2,303 $ 2,868 $ 2,434 Note 19 — Employee Benefits Plan The Company sponsored for its U.S. employees, a defined contribution plan under Section 401(k) of the Internal Revenue Code. The Plan provided that employees may defer up to 50 % of their annual compensation subject to annual dollar limitations, and that the Company would make a matching contribution equal to 100 % of each employee’s deferral, up to 5 % of the employee’s annual compensation. The Company eliminated the match on March 31, 2019. Company matching contributions, which vested immediately, totaled nil , $ 1.1 million and $ 2.4 million for the year ended December 31, 2020, 2019 and 2018, respectively. The Company resumed the match on contributions effective January 1, 2021. Note 20 — Supplemental Information to Consolidated Statements of Cash Flows In 2018, an executive officer surrendered an aggregate of 4,235 shares of restricted stock at a value of less than $ 0.1 million to cover income taxes due on the 2018 vesting of the restricted shares granted to them in 2016 and 2017. In 2019, two executive officers surrendered an aggregate of 14,391 shares of restricted stock at a value of less than $ 0.1 million to cover income taxes due on the 2019 vesting of the restricted shares granted to them in 2016, 2017, and 2018. 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. 83 Table of Contents On August 9, 2019, in connection with the Recapitalization Transaction (see Note 10 - Debt), the Company issued 200,000 shares of Series A Senior Preferred Stock (the “Series A Preferred Stock”), $ 0.001 par value per share, to the Investor Parties. The Company determined that the fair value of the redemption provision upon a change of control was $ 4.9 million. In 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. Note 21 — Selected Quarterly Financial Data (Unaudited) Selected unaudited quarterly financial data for the years 2020 and 2019 are summarized below. The Company has derived this data from the unaudited consolidated interim financial statements that, in the Company's opinion, have been prepared on substantially the same basis as the audited financial statements contained elsewhere in this report and include all normal recurring adjustments necessary for a fair presentation of the financial information for the periods presented. These unaudited quarterly results should be read in conjunction with the financial statements and notes thereto included elsewhere in this report. The operating results in any quarter are not necessarily indicative of the results that may be expected for any future period. 2020 2019 First Quarter Second Quarter Third Quarter Fourth Quarter First Quarter Second Quarter Third Quarter Fourth Quarter (in thousands, except per share data) Net sales $ 66,557 $ 78,758 $ 242,290 $ 128,267 $ 70,826 $ 95,182 $ 280,130 $ 152,511 Gross profit $ 16,350 $ 16,770 $ 74,616 $ 42,029 $ 14,340 $ 17,746 $ 80,859 $ 46,400 Income (loss) from operations $ ( 15,986 ) $ ( 9,746 ) $ 37,513 $ 1,127 $ ( 24,041 ) $ ( 18,649 ) $ 35,662 $ ( 10,761 ) Income (loss) before provision (benefit) for income taxes $ ( 11,722 ) $ ( 22,996 ) $ 32,164 $ ( 10,855 ) $ ( 29,372 ) $ ( 21,896 ) $ 17,430 $ ( 19,629 ) Net income (loss) $ ( 11,998 ) $ ( 23,268 ) $ 32,431 $ ( 11,309 ) $ ( 29,127 ) $ ( 22,485 ) $ 16,414 $ ( 20,181 ) Net income (loss) attributable to JAKKS Pacific, Inc. $ ( 12,038 ) $ ( 23,276 ) $ 32,382 $ ( 11,342 ) $ ( 29,158 ) $ ( 22,542 ) $ 16,445 $ ( 20,293 ) Net income (loss) attributable to common stockholders $ ( 12,345 ) $ ( 23,588 ) $ 32,066 $ ( 11,664 ) $ ( 29,158 ) $ ( 22,542 ) $ 16,265 $ ( 20.596 ) Basic earnings (loss) per share $ ( 4.10 ) $ ( 7.70 ) $ 8.39 $ ( 2.55 ) $ ( 12.40 ) $ ( 9.60 ) $ 6.00 $ ( 7.00 ) Weighted average shares Outstanding 3,021 3,064 3,824 4,575 2,356 2,360 2,709 2,962 Diluted earnings (loss) per share $ ( 4.10 ) $ ( 7.70 ) $ 3.19 $ ( 2.55 ) $ ( 12.40 ) $ ( 9.60 ) $ 5.10 $ ( 7.00 ) Weighted average shares and equivalents outstanding 3,021 3,064 9,307 4,575 2,356 2,360 6,035 2,962 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. Note 22 – Litigation and Contingencies The Company is a party to, and certain of its property is the subject of, various pending claims and legal proceedings that routinely arise in the ordinary course of its business. The Company accrues for losses when the loss is deemed probable and the liability can reasonably be estimated. Where a liability is probable and there is a range of estimated loss with no best estimate in the range, the Company records the minimum estimated liability related to the claim. As additional information becomes available, the Company assesses the potential liability related to its pending litigation and revises its estimates. 84 Table of Contents A purported class action lawsuit was filed on November 10, 2020 in the United States District Court for the District of Delaware (Brown v. JAKKS Pacific, Inc. et al) alleging that the Proxy Statement issued in connection with the shareholder meeting held in June 2020 contained misstatements regarding the manner in which broker votes would be counted and that such votes were improperly included in approving the Company’s reverse stock split at the meeting. The purported class action seeks damages in an unspecified amount, alleging breach of fiduciary duties by the Company’s directors. The Company intends to vigorously defend the lawsuit. Since the action was recently commenced, however, we cannot assure you of its outcome and cannot estimate the range of any potential damage award. The Company is taking steps to hold a Special Meeting of the Shareholders on April 30, 2021 to obtain shareholder ratification of the filing of the Certificate of Amendment to its Certificate of Incorporation effecting the reverse split, in accordance with ratification procedures under Delaware law, and if ratified, to then seek settlement and dismissal of the lawsuit. In the normal course of business, the Company may provide certain indemnifications and/or other commitments of varying scope to a) its licensors, customers and certain other parties, including against third-party claims of intellectual property infringement, and b) its officers, directors and employees, including against third-party claims regarding the periods in which they serve in such capacities with the Company. The duration and amount of such obligations is, in certain cases, indefinite. The Company's director’s and officer’s liability insurance policy may, however, enable it to recover a portion of any future payments related to its officer, director or employee indemnifications. For the past five years, costs related to director and officer indemnifications have not been significant. Other than certain liabilities recorded in the normal course of business related to royalty payments due the Company's licensors, no liabilities have been recorded for indemnifications and/or other commitments. Note 23 — Subsequent Event 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. 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. (see Note 10 – Debt). 85 Table of Contents JAKKS PACIFIC, INC. AND SUBSIDIARIES SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS YEAR ENDED DECEMBER 31, 2020, 2019 and 2018 Allowances are deducted from the assets to which they apply, except for sales returns and allowances. Balance at Beginning of Period Charged to Costs and Expenses Net Deductions and other Balance at End of Period (In thousands) Year ended December 31, 2020: Allowance for: Uncollectible accounts $ 3,394 $ 1,619 $ ( 447 ) $ 4,566 Reserve for sales returns and allowances 38,365 35,370 ( 31,627 ) 42,108 $ 41,759 $ 36,989 $ ( 32,074 ) $ 46,674 Year ended December 31, 2019: Allowance for: Uncollectible accounts $ 2,149 $ 864 $ 381 $ 3,394 Reserve for sales returns and allowances 29,403 42,618 ( 33,656 ) 38,365 $ 31,552 $ 43,482 $ ( 33,275 ) $ 41,759 Year ended December 31, 2018: Allowance for: Uncollectible accounts $ 10,940 $ 9,586 $ ( 18,377 ) $ 2,149 Reserve for sales returns and allowances 17,622 46,759 ( 34,978 ) 29,403 $ 28,562 $ 56,345 $ ( 53,355 ) $ 31,552 86 Table of Contents