What changed in this filing

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Item 1. Financial Statements

2021-11-12 compared with 2021-08-09 · 392 added, 322 removed, 933 unchanged (43% of the section changed)

4 unchanged sentences

(In thousands, except share amounts)

September 30,

Current assets

1 unchanged sentence

Restricted cash

Accounts receivable, net of allowance for doubtful accounts of $ 3,176 and $ 4,566 at June 30, 2021 and December 31, 2020, respectively

Accounts receivable, net of allowance for doubtful accounts of $ 3,761 and $ 4,566 at September 30, 2021 and December 31, 2020, respectively

Prepaid expenses and other assets

9 unchanged sentences

Intangible assets, net

Liabilities, Preferred Stock and Stockholders' Equity (Deficit)

Liabilities, Preferred Stock and Stockholders' Equity

Current liabilities

14 unchanged sentences

5,000,000 shares authorized;

200,000 shares issued and outstanding at June 30, 2021 and December 31, 2020

Stockholders' Equity (Deficit)*

200,000 shares issued and outstanding at September 30, 2021 and December 31, 2020

Stockholders' Equity*

Common stock, $ 0.001 par value;

100,000,000 shares authorized;

7,458,323 and 5,694,772 shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively*

9,503,535 and 5,694,772 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively*

Additional paid-in capital *

2 unchanged sentences

Total JAKKS Pacific, Inc.

stockholders' equity (deficit)*

stockholders' equity *

Non-controlling interests

Total stockholders' equity (deficit)*

Total liabilities, preferred stock and stockholders' equity (deficit)

Total stockholders' equity *

Total liabilities, preferred stock and stockholders' equity

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

2 unchanged sentences

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(In thousands, except per share data)

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended

September 30,

Nine Months Ended

September 30,

Cost of sales

2 unchanged sentences

Pandemic related charges

Income (loss) from operations

Income from operations

Income from joint ventures

2 unchanged sentences

Change in fair value of convertible senior notes

Gain on loan forgiveness

Loss on debt extinguishment

1 unchanged sentence

Interest expense

Loss before provision for (benefit from) income taxes

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

Provision for (benefit from) income taxes

Net income (loss)

Net income attributable to non-controlling interests

Net loss attributable to JAKKS Pacific, Inc.

Net loss attributable to common stockholders

Loss per share - basic and diluted*

Shares used in loss per share - basic and diluted*

Comprehensive loss

Comprehensive loss attributable to JAKKS Pacific, Inc.

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

Net income (loss) attributable to common stockholders

Income (loss) per share - basic*

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

Income (loss) per share – diluted*

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

Comprehensive income (loss)

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

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

4 unchanged sentences

(In thousands)

Three and Six Months Ended June 30, 2021

Three and Nine Months Ended September 30, 2021

Pacific, Inc.

16 unchanged sentences

Balance, June 30, 2021

Three and Six Months Ended June 30, 2020

Stock-based compensation expense

Conversion of convertible senior notes

Preferred stock accrued dividends

Foreign currency translation adjustment

Balance, September 30, 2021

Three and Nine Months Ended September 30, 2020

Pacific, Inc.

16 unchanged sentences

Balance, June 30, 2020

Conversion of convertible senior notes

Stock-based compensation expense

Preferred stock accrued dividends

Foreign currency translation adjustment

Balance, September 30, 2020

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

4 unchanged sentences

(In thousands)

Six Months Ended June 30,

Nine Months Ended September 30,

Cash flows from operating activities

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

Provision for doubtful accounts

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

Provision for (recovery of) doubtful accounts

Depreciation and amortization

4 unchanged sentences

Gain on disposal of property and equipment

Gain on loan forgiveness

Loss on debt extinguishment

10 unchanged sentences

Total adjustments

Net cash used in operating activities

Net cash provided by (used in) operating activities

Cash flows from investing activities

7 unchanged sentences

Net proceeds from issuance of long term debt

Debt issuance costs

Repayment of term loan

Deferred issuance costs

Repayment of 2019 Recap Term Loan

Repayment of 2021 BSP Term Loan

Net cash provided by (used in) financing activities

3 unchanged sentences

Cash, cash equivalents and restricted cash, end of period

Cash paid during the period for:

As of June 30, 2021, there was $ 3.6 million of property and equipment purchases included in accounts payable.

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

Supplemental disclosures of non-cash financing activities:

Forgiveness of Paycheck Protection Program Loan

Supplemental disclosures of cash flow information:

Cash paid for income taxes

Cash paid for interest

As of September 30, 2021, there was $ 3.1 million of property and equipment purchases included in accounts payable.

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

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

3 unchanged sentences

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

September 30, 2021

Note 1 — Basis of Presentation

23 unchanged sentences

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

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

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

5 unchanged sentences

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

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

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):

1 unchanged sentence

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.

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

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

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

15 unchanged sentences

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.

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

On June 12, 2020, the Company received a $ 6.2 million loan under the Paycheck Protection Program (the “PPP Loan”) 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 matures on June 2, 2022 and was subject to the CARES Act terms which included, 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 allowed for prepayment at any time prior to maturity with no prepayment penalties.

The PPP Loan was 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.

A 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 was also dependent on the Company having initially qualified for the loan.

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

In June 2021, the Company filed its application for forgiveness of the entirety of its PPP loan.

In the absence of knowing whether any funds will be forgiven, the Company accounts for the note as debt under ASC 470 and has reflected $ 6.2 million as short term debt on the Company’s condensed consolidated balance sheet related to this loan.

On September 10, 2021, the full amount of the PPP Loan was forgiven.

Income from the forgiveness of the PPP Loan is recognized as a $ 6.2 million gain on loan forgiveness in the condensed consolidated statements of operations.

The CARES Act also provided an employee retention credit (“ERC”) which was a refundable tax credit against certain employment taxes of up to $5,000 per employee for eligible employers.

7 unchanged sentences

The Company will qualify for the employee retention credit for quarters where the Company’s operations were partially suspended due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to COVID-19.

During the three and six months ended June 30, 2021, the Company recorded $ 0.1 million and $ 2.0 million, respectively, related to the ERC as an offset within selling, general and administrative expenses on the Company’s condensed consolidated statements of operations and within prepaid expenses and other assets on the Company's condensed consolidated balance sheet (See Note 18 – Prepaid Expense and Other Assets).

As of June 30, 2021 and December 31, 2020, the Company held cash and cash equivalents, including restricted cash, of $ 38.3 million and $ 92.7 million, respectively.

Cash, and cash equivalents, including restricted cash held outside of the United States in various foreign subsidiaries totaled $ 18.0 million and $ 48.7 million as of June 30, 2021 and December 31, 2020, respectively.

During the three and nine months ended September 30, 2021, the Company recorded nil and $ 2.0 million, respectively, related to the ERC as an offset within selling, general and administrative expenses on the Company’s condensed consolidated statements of operations and within prepaid expenses and other assets on the Company's condensed consolidated balance sheet (See Note 18 – Prepaid Expenses and Other Assets).

As of September 30, 2021 and December 31, 2020, the Company held cash and cash equivalents, including restricted cash, of $ 26.7 million and $ 92.7 million, respectively.

Cash, and cash equivalents, including restricted cash held outside of the United States in various foreign subsidiaries totaled $ 20.6 million and $ 48.7 million as of September 30, 2021 and December 31, 2020, 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.

1 unchanged sentence

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

Any such repatriation may result in foreign withholding taxes, which the Company expects would not be significant as of June 30, 2021.

Any such repatriation may result in foreign withholding taxes, which the Company expects would not be significant as of September 30, 2021.

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

3 unchanged sentences

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.

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

On June 2, 2021, the Company and certain of its subsidiaries, as borrowers, entered into a Credit Agreement (the “JPMorgan ABL Credit Agreement”), with JPMorgan Chase Bank, N.A., as agent and lender for a $ 67,500,000 senior secured revolving credit facility (the “JPMorgan ABL Facility”).

2 unchanged sentences

The JPMorgan ABL Facility matures in June 2026.

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

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

8 unchanged sentences

The Delayed Draw Term Loan provision was secured to redeem any of the Company’s outstanding 2023 Convertible Senior Notes (the “New Oasis Notes” or “ 3.25 % convertible senior notes due 2023”), upon its maturity, which, upon repayment of the 2019 Recap Term Loan, accelerated to no later than 91 days from the repayment of the 2019 Recap Term Loan, or September 1, 2021.

As of June 30, 2021, the Company had $ 14.1 million (including $ 0.7 million in PIK interest) of outstanding indebtedness under the New Oasis Notes.

As of August 9, 2021, the Company had $ 0.4 million (including $ 23,007 in PIK interest) of outstanding indebtedness under the New Oasis Notes.

On July 29, 2021 the Company terminated its Delayed Draw Term Loan option as it determined it had sufficient liquidity to fund any outstanding convertible senior notes that remained upon maturity.

As of September 30, 2021, the Company had $ 0.1 million of outstanding indebtedness under the New Oasis Notes due to residual interest owed.

Amounts outstanding under the 2021 BSP Term Loan will bear interest at either (i) LIBOR plus 6.50 % - 7.00 % (determined by reference to a net leverage pricing grid), subject to a 1.00% LIBOR floor, or (ii) base rate plus 5.50% - 6.00% (determined by reference to a net leverage pricing grid), subject to a 2.00% base rate floor .

The 2021 BSP Term Loan matures in June 2027.

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

The 2021 BSP Term Loan Agreement contains negative covenants that, subject to certain exceptions, limit the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, make restricted payments, pledge its assets as security, make investments, loans, advances, guarantees and acquisitions, undergo fundamental changes and enter into transactions with affiliates.

5 unchanged sentences

If an event of default occurs, the maturity of the amounts owed under the 2021 BSP Term Loan Agreement may be accelerated.

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

The obligations under the 2021 BSP Term Loan Agreement are guaranteed by the Company, the subsidiary borrowers thereunder and certain of the other existing and future direct and indirect subsidiaries of the Company and are secured by substantially all of the assets of the Company, the subsidiary borrowers thereunder and such other subsidiary guarantors, in each case, subject to certain exceptions and permitted liens and subject to the priority lien granted under the JPMorgan ABL Credit Agreement.

The agent and Sole Lead Arranger under the 2021 BSP Term Loan are affiliates of an affiliate of the Company, which affiliate owned common stock and the 3.25 % convertible senior notes due 2023 of the Company at the time of the refinancing, as well as a majority of the Company’s outstanding Series A Preferred Stock giving the affiliates various rights as described in the Company’s public filings.

As of June 30, 2021, the Company had $ 99.0 million of outstanding indebtedness under the 2021 BSP Term Loan Agreement and no outstanding indebtedness under its amended and extended JPMorgan ABL Credit Agreement with JPM Chase aside from utilizing $ 11.0 million in Letters of Credit.

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

As of September 30, 2021, the Company had $ 98.8 million of outstanding indebtedness under the 2021 BSP Term Loan Agreement and no outstanding indebtedness under its amended and extended JPMorgan ABL Credit Agreement with JPM Chase aside from utilizing $ 9.7 million in Letters of Credit.

On June 2, 2021, the Company repaid in full and terminated the First Lien Term Loan Facility Credit Agreement (the “2019 Recap Term Loan Agreement,” formerly known as the “New Term Loan Agreement” in prior filings), dated as of August 9, 2019, with Cortland Capital Market Services LLC, as agent.

The Wells Fargo ABL Credit Facility Agreement was also terminated as of June 2, 2021.

The Company’s unaudited interim condensed consolidated financial statements for the three and six months ended June 30, 2021 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.

The Company was in compliance with the financial covenants under the 2021 BSP Term Loan Agreement and the JPMorgan ABL Agreement as of September 30, 2021.

The Company’s unaudited interim condensed consolidated financial statements for the three and nine months ended September 30, 2021 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.

The Company believes that 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.

3 unchanged sentences

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.

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

The Costumes segment, under its Disguise branding, has been bringing innovative and trend-setting product to market since its inception in 1987.

4 unchanged sentences

Certain assets which are not tracked by operating segment and/or that benefit multiple operating segments have been allocated on the same basis.

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

Results are not necessarily those which would be achieved if each segment was an unaffiliated business enterprise.

Information by segment and a reconciliation to reported amounts for the three and six months ended June 30, 2021 and 2020 and as of June 30, 2021 and December 31, 2020 are as follows (in thousands):

Information by segment and a reconciliation to reported amounts for the three and nine months ended September 30, 2021 and 2020 and as of September 30, 2021 and December 31, 2020 are as follows (in thousands):

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Toys/Consumer Products

Three Months Ended

Six Months Ended

Income (loss) from Operations

Nine Months Ended

September 30,

Income from Operations

Toys/Consumer Products

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Depreciation and Amortization Expense

Toys/Consumer Products

September 30,

Toys/Consumer Products

2 unchanged sentences

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

September 30, 2021

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 June 30, 2021 and December 31, 2020 and for the three and six months ended June 30, 2021 and 2020 (in thousands):

The following tables present information about the Company by geographic area as of September 30, 2021 and December 31, 2020 and for the three and nine months ended September 30, 2021 and 2020 (in thousands):

September 30,

Long-lived Assets

2 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Net Sales by Customer Area

4 unchanged sentences

Major Customers

Net sales to major customers for the three and six months ended June 30, 2021 and 2020 were as follows (in thousands, except for percentages):

Three Months Ended June 30,

Six Months Ended June 30,

Net sales to major customers for the three and nine months ended September 30, 2021 and 2020 were as follows (in thousands, except for percentages):

Three Months Ended September 30,

Nine Months Ended September 30,

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

4 unchanged sentences

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

September 30, 2021

Note 3 — Inventory

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

September 30,

Raw materials

Finished goods

As of June 30, 2021 and December 31, 2020, the inventory obsolescence reserve was $ 10.5 million and $ 10.8 million, respectively.

As of September 30, 2021 and December 31, 2020, the inventory obsolescence reserve was $ 7.1 million and $ 10.8 million, respectively.

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

22 unchanged sentences

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 $ 42.3 million as of June 30, 2021, compared to $ 42.1 million as of December 31, 2020.

The Company’s reserve for sales returns and allowances amounted to $ 47.7 million as of September 30, 2021, compared to $ 42.1 million as of December 31, 2020.

JAKKS PACIFIC, INC.

1 unchanged sentence

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

September 30, 2021

Note 5 — Debt

1 unchanged sentence

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

September 30,

3.25 % convertible senior notes due 2023*

* The amounts presented for the 3.25 % convertible senior notes due 2023 within the table represent the fair value as of June 30, 2021 and December 31, 2020 (see Note 16 - Fair Value Measurements).

The principal amount of these notes is $ 13.3 million and $ 22.9 million as of June 30, 2021 and December 31, 2020, respectively.

The accrued, but unpaid, PIK interest is $ 0.7 million and $ 0.9 million as of June 30, 2021 and December 31, 2020, respectively.

* The amounts presented for the 3.25 % convertible senior notes due 2023 within the table represent the fair value as of September 30, 2021 and December 31, 2020 (see Note 16 - Fair Value Measurements).

The principal amount of these notes is nil and $ 22.9 million as of September 30, 2021 and December 31, 2020, respectively.

The accrued, but unpaid, PIK interest is $ 0.1 million and $ 0.9 million as of September 30, 2021 and December 31, 2020, respectively.

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

19 unchanged sentences

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

September 30, 2021

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.

29 unchanged sentences

As a result, the Company recorded an increase to additional paid-in capital of $ 10.3 million.

In July 2021, $ 11.2 million of the New Oasis Notes (including $ 583,540 in PIK interest) were converted for 1,975,164 shares of common stock.

As a result, the Company recorded an increase to additional paid-in capital of $ 23.8 million.

In August 2021, $ 2.8 million of the New Oasis Notes (including $ 150,039 in PIK interest) were converted for 500,814 shares of common stock.

As a result, the Company recorded an increase to additional paid-in capital of $ 7.1 million.

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

The Company has elected to measure and present the debt held by Oasis at fair value using Level 3 inputs and as a result, recognized a loss of $ 3.8 million and $ 7.7 million for the three months ended June 30, 2021 and 2020, respectively, related to changes in the fair value of the New Oasis Notes.

At June 30, 2021 and December 31, 2020, the debt held by Oasis had a fair value of approximately $ 27.4 million and $ 34.1 million, respectively (see Note 16 - Fair Value Measurements).

The Company evaluated its credit risk as of June 30, 2021, and determined that there was no change from December 31, 2020.

JAKKS PACIFIC, INC.

1 unchanged sentence

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

September 30, 2021

The Company has elected to measure and present the New Oasis Notes at fair value using Level 3 inputs and as a result, recognized a loss of $ 3.7 million and a gain of $ 2.8 million for the three months ended September 30, 2021 and 2020, respectively, related to changes in the fair value of the New Oasis Notes.

At September 30, 2021 and December 31, 2020, the New Oasis Notes had a fair value of approximately $ 0.2 million and $ 34.1 million, respectively (see Note 16 - Fair Value Measurements).

The Company evaluated its credit risk as of September 30, 2021 and determined that there was no change from December 31, 2020.

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 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).

Excluding the impact of the Reverse Stock Split, the initial conversion rate for the 2020 Notes was 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.

In January 2016, the Company repurchased and retired an aggregate of $ 2.0 million principal amount of the 2020 Notes.

8 unchanged sentences

The transaction closed on February 8, 2021.

As of June 30, 2021, Benefit Street Partners held $ 10.7 million in principal amount (including $ 0.2 million in PIK interest) of the New Oasis Notes.

As of September 30, 2021, Benefit Street Partners held nil in principal amount of the New Oasis Notes.

Term loan consists of the following (in thousands):

June 30, 2021

September 30, 2021

December 31, 2020

4 unchanged sentences

* 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 debt discount and issuance costs are being amortized over the life of the term loan on a straight-line basis which approximates the effective interest method.

** The amount presented excludes accrued, but unpaid, PIK interest of $ 4.7 million as of December 31, 2020.

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

In August 2019, in connection with the Recapitalization Transaction, the Company entered into the 2019 Recap Term Loan Agreement, with certain of the Investor Parties, and Cortland Capital Market Services LLC, as agent, for a $ 134.8 million 2019 Recap Term Loan.

2 unchanged sentences

The 2019 Recap Term Loan matures on February 9, 2023.

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

The 2019 Recap 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.

4 unchanged sentences

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 June 30, 2021, the Company had nil outstanding under the 2019 Recap Term Loan Agreement.

As of September 30, 2021, the Company had nil outstanding under the 2019 Recap Term Loan Agreement.

As of December 31, 2020, the Company had $ 124.5 million (including $4.7 million in PIK interest) outstanding under the 2019 Recap 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 condensed consolidated balance sheet.

2 unchanged sentences

The obligations under the 2019 Recap Term Loan Agreement are guaranteed by the Company, the subsidiary borrowers thereunder and certain of the other existing and future direct and indirect subsidiaries of the Company and are secured by substantially all of the assets of the Company, the subsidiary borrowers thereunder and such other subsidiary guarantors, in each case, subject to certain exceptions and permitted liens.

Amortization expense classified as interest expense related to the $ 3.8 million of debt issuance costs associated with the issuance of the 2019 Recap Term Loan was $ 0.2 million and $ 0.4 million for the three and six months ended June 30, 2021, respectively.

Amortization expense classified as interest expense related to the $3.8 million of debt issuance costs associated with the issuance of the 2019 Recap Term Loan was $ 0.3 million and $ 0.5 million for the three and six months ended June 30, 2020, respectively.

Amortization expense classified as interest expense related to the $ 10.1 million debt discount associated with the issuance of the 2019 Recap Term Loan was $ 0.5 million and $ 1.2 million for the three and six months ended June 30, 2021, respectively.

Amortization expense classified as interest expense related to the $10.1 million debt discount associated with the issuance of the 2019 Recap Term Loan was $ 0.7 million and $ 1.4 million for the three and six months ended June 30, 2020, respectively.

The fair value of the 2019 Recap Term Loan as of June 30, 2021 and December 31, 2020 was nil and $ 129.6 million, respectively.

Amortization expense classified as interest expense related to the $ 3.8 million of debt issuance costs associated with the issuance of the 2019 Recap Term Loan was nil and $ 0.4 million for the three and nine months ended September 30, 2021, respectively.

Amortization expense classified as interest expense related to the $3.8 million of debt issuance costs associated with the issuance of the 2019 Recap Term Loan was $ 0.3 million and $ 0.8 million for the three and nine months ended September 30, 2020, respectively.

Amortization expense classified as interest expense related to the $ 10.1 million debt discount associated with the issuance of the 2019 Recap Term Loan was nil and $ 1.2 million for the three and nine months ended September 30, 2021, respectively.

Amortization expense classified as interest expense related to the $10.1 million debt discount associated with the issuance of the 2019 Recap Term Loan was $ 0.7 million and $ 2.1 million for the three and nine months ended September 30, 2020, respectively.

The fair value of the 2019 Recap Term Loan as of September 30, 2021 and December 31, 2020 was nil and $ 129.6 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.

3 unchanged sentences

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

September 30, 2021

On June 2, 2021, the Company and certain of its subsidiaries, as borrowers, entered into the 2021 BSP Term Loan Agreement with Benefit Street Partners L.L.C., as Sole Lead Arranger, and BSP Agency, LLC, as agent, for a $ 99.0 million Initial Term Loan and a $ 19.0 million Delay Draw Term Loan.

Net proceeds from the issuance of the 2021 BSP Term Loan, after deduction of $ 2.2 million in closing fees and $ 0.5 million of other administrative fees paid directly to the lenders, totaled $ 96.3 million.

These fees are being amortized over the life of the 2021 BSP Term Loan.

These fees are being amortized over the life of the 2021 BSP Term Loan on a straight-line basis which approximates the effective interest method.

Proceeds from the Initial Term Loan, together with available cash from the Company, were used to repay the Company’s 2019 Recap Term Loan under the agreement dated as of August 9, 2019 with Cortland Capital Market Services LLC, as agent for certain investor parties.

The Delayed Draw Term Loan provision was designed to provide necessary capital to redeem any of the Company’s outstanding 3.25 % convertible senior notes due 2023, upon their maturity, which, upon repayment of the 2019 Recap Term Loan, accelerated to no later than 91 days from the repayment of the 2019 Recap Term Loan, or September 1, 2021.

As of June 30, 2021, the Company had $ 14.1 million (including $ 0.7 million in PIK interest) of outstanding indebtedness under the New Oasis Notes.

On July 29, the Company terminated its Delayed Draw Term Loan option as it determined it had sufficient liquidity to fund any outstanding convertible senior notes that remained upon maturity.

As of September 30, 2021, the Company had $ 0.1 million of outstanding indebtedness under the New Oasis Notes due to residual interest owed.

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The agent and Sole Lead Arranger under the 2021 BSP Term Loan are affiliates of an affiliate of the Company, which affiliate, at the time of refinancing, owned common stock and the 3.25 % convertible senior notes due 2023 of the Company, as well as a majority of the Company’s outstanding Series A Preferred Stock giving the affiliates various rights as described in the Company’s public filings.

Amortization expense classified as interest expense related to the $ 1.0 million of debt issuance costs associated with the issuance of the 2021 BSP Term Loan was $ 14,094 for the three and six months ended June 30, 2021.

Amortization expense classified as interest expense related to the $ 2.3 million debt discount associated with the issuance of the 2021 BSP Term Loan was $ 30,342 for the three and six months ended June 30, 2021.

The fair value of the 2021 BSP Term Loan as of June 30, 2021 was $ 99.0 million.

Amortization expense classified as interest expense related to the $ 1.0 million of debt issuance costs associated with the issuance of the 2021 BSP Term Loan was $ 43,533 and $57,627 for the three and nine months ended September 30, 2021.

Amortization expense classified as interest expense related to the $ 2.3 million debt discount associated with the issuance of the 2021 BSP Term Loan was $ 94,164 and $124,506 for the three and nine months ended September 30, 2021.

The fair value of the 2021 BSP Term Loan as of September 30, 2021 was $ 99.4 million.

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

2 unchanged sentences

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

September 30, 2021

Loan under Paycheck Protection Program

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

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

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

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

As of June 30, 2021, the Company has recorded the PPP Loan as a liability and classified $ 6.2 million as short term debt on the condensed consolidated balance sheet.

The Company has applied for forgiveness of the $6.2 million PPP loan.

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.

The PPP Loan matures on June 2, 2022, and was subject to the CARES Act terms which included, 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 allowed for prepayment at any time prior to maturity with no prepayment penalties.

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

On September 10, 2021, the full amount of the PPP Loan was forgiven.

Income from the forgiveness of the PPP Loan is recognized as a $ 6.2 million gain on loan forgiveness in the condensed consolidated statements of operations.

Note 6 — Credit Facilities

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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.

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

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.

The Company was 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, the Company was in compliance with the financial covenants under the Amended ABL Facility and the previous Credit Facility, as applicable.

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As of December 31, 2020, the weighted average interest rate on the credit facility with Wells Fargo was nil .

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

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

2 unchanged sentences

As described in Note 5 – Debt, on October 16, 2020, the Company amended its 2019 Recap Term Loan to reduce the amount and defer the calculation of its EBITDA covenant, with Wells Fargo as party to the agreement.

Amortization expense classified as interest expense related to the $ 1.1 million of debt issuance costs associated with the transaction that closed on August 9, 2019 (i.e., Amended ABL Facility) was $ 0.1 million and $ 0.2 million for the three and six months ended June 30, 2021, respectively.

Amortization expense classified as interest expense related to the $1.1 million of debt issuance costs associated with the Amended ABL Facility was $ 0.1 million and $ 0.2 million for the three and six months ended June 30, 2020, respectively.

Amortization expense classified as interest expense related to the $ 1.1 million of debt issuance costs associated with the transaction that closed on August 9, 2019 (i.e., Amended ABL Facility) was nil and $ 0.2 million for the three and nine months ended September 30, 2021, respectively.

Amortization expense classified as interest expense related to the $1.1 million of debt issuance costs associated with the Amended ABL Facility was $ 0.1 million and $ 0.3 million for the three and nine months ended September 30, 2020, respectively.

On June 2, 2021, the Company terminated the Wells Fargo ABL Credit Facility Agreement.

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

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

JPMorgan Chase

On June 2, 2021, the Company and certain of its subsidiaries, as borrowers, entered into the JPMorgan ABL Credit Agreement with JPMorgan Chase Bank, N.A., as agent and lender for a $ 67,500,000 senior secured revolving credit facility.

2 unchanged sentences

The JPMorgan ABL Facility matures in June 2026.

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

3 unchanged sentences

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

As of June 30, 2021, the amount of outstanding borrowings was nil , the amount of outstanding stand-by letters of credit totaled $ 11.0 million and the total excess borrowing availability was $ 53.4 million.

Amortization expense classified as interest expense related to the $ 1.5 million of debt issuance costs associated with the transaction that closed on June 2, 2021 (i.e., JPMorgan ABL Credit Agreement) was $ 24,742 for the three and six months ended June 30, 2021.

As of June 30, 2021, off-balance sheet arrangements include letters of credit issued by JPMorgan of $ 11.0 million.

As of September 30, 2021, the amount of outstanding borrowings was nil and the total excess borrowing availability was $ 43.1 million.

As of September 30, 2021, off-balance sheet arrangements include letters of credit issued by JPMorgan of $ 9.7 million.

Amortization expense classified as interest expense related to the $ 1.6 million of debt issuance costs associated with the transaction that closed on June 2, 2021 (i.e., JPMorgan ABL Credit Agreement) was $ 79,888 and $104,630 for the three and nine months ended September 30, 2021, respectively.

Note 7 — Income Taxes

The Company’s income tax benefit of $ 0.1 million for the three months ended June 30, 2021 reflects an effective tax rate of 0.7 %.

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

The tax benefit for the three months ended June 30, 2021 relates to discrete items offset by foreign income taxes.

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

The Company’s income tax benefit of $ 12,000 for the six months ended June 30, 2021 reflects an effective tax rate of 0.0 %.

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

The majority of the tax benefit for the six months ended June 30, 2021 relates to discrete items offset by foreign income taxes.

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

The Company’s income tax expense of $ 0.3 million for the three months ended September 30, 2021 reflects an effective tax rate of 0.8 %.

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

The tax expense for the three months ended September 30, 2021 relates to foreign income taxes and discrete items.

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

The Company’s income tax expense of $ 0.3 million for the nine months ended September 30, 2021 reflects an effective tax rate of ( 11.7 %).

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

The majority of the tax expense for the nine months ended September 30, 2021 relates to foreign income taxes offset by discrete items.

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

JAKKS PACIFIC, INC.

1 unchanged sentence

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

Note 8 — Loss Per Share

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

Three Months Ended

Six Months Ended

Net income attributable to non-controlling interests

Net loss attributable to JAKKS Pacific, Inc.

Preferred stock dividend

Net loss attributable to common stockholders *

Weighted average common shares outstanding - basic and diluted

Loss per share available to common stockholders - basic and diluted

* Net loss attributable to common stockholders was computed by deducting preferred dividends of $ 330,985 and $ 657,079 for the three and six months ended June 30, 2021, respectively.

Net loss attributable to common stockholders was computed by deducting preferred dividends of $ 311,849 and $ 619,090 for the three and six months ended June 30, 2020, respectively.

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

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

For the three and six months ended June 30, 2021, the convertible senior notes interest and related weighted common share equivalent of 3,012,120 and 3,430,432 , respectively, were excluded from the diluted earnings per share calculation since they would have been anti-dilutive.

For the three and six months ended June 30, 2020, the convertible senior notes interest and related weighted common share equivalent of 3,717,354 and 3,746,060 , 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 291,187 and 267,631 for each of the three and six months ended June 30, 2021, respectively, were excluded from the computation of diluted earnings per share since they would have been anti-dilutive.

Potentially dilutive restricted stock awards and units of 603,479 and 609,909 for each of the three and six months ended June 30, 2020, respectively, were excluded from the computation of diluted earnings per share since they would have been anti-dilutive.

September 30, 2021

Note 8 — Income (Loss) Per Share

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

Three Months Ended September 30,

Income (loss) per share – basic

Net income (loss) attributable to common stockholders

Effect of dilutive securities:

Convertible senior notes

Unvested performance stock grants

Unvested restricted stock grants

Income (loss) per share - diluted

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

Nine Months Ended September 30,

Income (loss) per share – basic

Net income (loss) attributable to common stockholders

Effect of dilutive securities:

Convertible senior notes

Unvested performance stock grants

Unvested restricted stock grants

Income (loss) per share - diluted

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

* Net income (loss) attributable to common stockholders was computed by deducting preferred dividends of $ 335,950 and $ 993,029 for the three and nine months ended September 30, 2021, respectively.

Net income (loss) attributable to common stockholders was computed by deducting preferred dividends of $ 316,527 and $ 935,616 for the three and nine months ended September 30, 2020, respectively.

Basic income (loss) per share is calculated using the weighted average number of common shares outstanding during the period.

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

For the three and nine months ended September 30, 2021, the convertible senior notes interest and related weighted common share equivalent of 409,589 and 2,412,419 , respectively, were excluded from the diluted earnings per share calculation since they would have been anti-dilutive.

For the three and nine months ended September 30, 2020, the convertible senior notes interest and related weighted common share equivalent of nil and 6,166,372 , 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 534,201 and 389,879 for the three months ended September 30, 2021, and 2020, respectively, were excluded from the computation of diluted earnings per share.

Potentially dilutive restricted stock awards and units of 499,584 and 587,697 for the nine months ended September 30, 2021, and 2020 respectively, were excluded from the computation of diluted earnings per share since they would have been anti-dilutive.

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

Note 9 — Common Stock and Preferred Stock

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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.

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

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 .

11 unchanged sentences

As a result, the Company recorded an increase to additional paid-in capital of $ 1.4 million.

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

In January 2021, the Company issued an aggregate of 113,896 shares of restricted stock at a value of approximately $ 0.6 million to two executive officers, which vest, in four equal annual installments over four years .

7 unchanged sentences

As a result, the Company recorded an increase to additional paid-in capital of $ 10.3 million.

No dividend was declared or paid in the three and six months ended June 30, 2021 and 2020.

In July 2021, $ 11.2 million of the New Oasis Notes (including $ 583,540 in PIK interest) were converted for 1,975,164 shares of common stock.

As a result, the Company recorded an increase to additional paid-in capital of $ 23.8 million.

In August 2021, $ 2.8 million of the New Oasis Notes (including $ 150,039 in PIK interest) were converted for 500,814 shares of common stock.

As a result, the Company recorded an increase to additional paid-in capital of $ 7.1 million.

No dividend was declared or paid in the three and nine months ended September 30, 2021 and 2020.

Preferred Stock

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

As of June 30, 2021 and December 31, 2020, 200,000 shares of Series A Preferred Stock were outstanding.

As of September 30, 2021 and December 31, 2020, 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”).

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

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 cash dividends have been declared or paid.

For the three and six months ended June 30, 2021, the Company recorded $ 330,985 and $ 657,079 of preferred stock dividends as an increase in the value of the Series A Preferred Stock, respectively.

For the three and six months ended June 30, 2020, the Company recorded $ 311,849 and $ 619,090 of preferred stock dividends as an increase in the value of the Series A Preferred Stock, respectively.

For the three and nine months ended September 30, 2021, the Company recorded $ 335,950 and $ 993,029 of preferred stock dividends as an increase in the value of the Series A Preferred Stock, respectively.

For the three and nine months ended September 30, 2020, the Company recorded $ 316,527 and $ 935,616 of preferred stock dividends as an increase in the value of the Series A Preferred Stock, respectively.

The Series A Preferred Stock has no stated maturity, however, the Company has the right to redeem all or a portion of the Series A Preferred Stock at its Liquidation Preference (as defined below) at any time after payment in full of the 2019 Recap Term Loan.

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

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

The Company has the right, but is not required, to repurchase all or a portion of the Series A Preferred Stock at its Liquidation Preference at any time after payment in full of the 2019 Recap Term Loan (see Note 5 - Debt).

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The Company has concluded that the redemption upon a change of control and the repurchase option by the Company constitute embedded derivatives.

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

The embedded redemption upon a change of control must be accounted for separately from the Series A Preferred Stock.

2 unchanged sentences

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.

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

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.

3 unchanged sentences

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

As of June 30, 2021, the Series A Preferred Stock is recorded in temporary equity at the amount of accrued, but unpaid dividends of $ 2.4 million, and the redemption provision, as a bifurcated derivative, is recorded as a long term liability with an estimated value of $ 17.0 million.

As of September 30, 2021, the Series A Preferred Stock is recorded in temporary equity at the amount of accrued, but unpaid dividends of $ 2.7 million, and the redemption provision, as a bifurcated derivative, is recorded as a long term liability with an estimated value of $ 17.1 million.

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.

5 unchanged sentences

Balance, June 30,

Preferred stock accrued dividends

Balance, September 30,

Note 10 — Joint Ventures

1 unchanged sentence

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 joint venture (“Pacific Animation Partners”) was created to develop and produce an 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.

1 unchanged sentence

The joint venture was terminated on December 2, 2020.

For the three and six months ended June 30, 2021 the Company recognized income from Pacific Animation Partners of nil .

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

As of June 30, 2021 and December 31, 2020, the balance of the investment in Pacific Animation Partners is nil .

For the three and nine months ended September 30, 2021 the Company recognized income from Pacific Animation Partners of nil .

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

As of September 30, 2021 and December 31, 2020, the balance of the investment in Pacific Animation Partners is nil .

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

1 unchanged sentence

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

The non-controlling interest’s share of the income was $ 24,000 and $ 59,000 for the three and six months ended June 30, 2021, respectively.

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

The non-controlling interest’s share of the income was $ 42,000 and $ 101,000 for the three and nine months ended September 30, 2021, respectively.

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

JAKKS PACIFIC, INC.

1 unchanged sentence

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

September 30, 2021

In October 2016, the Company entered into a joint venture with Hong Kong Meisheng Cultural Company Limited ("Meisheng"), a Hong Kong-based subsidiary of Meisheng Culture & Creative Corp., for the purpose of creating and developing original, multiplatform content for children including new short-form series and original shows.

3 unchanged sentences

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

The non-controlling interest’s share of the income (loss) from the joint venture for the three and six months ended June 30, 2021 and 2020 was nil .

As of June 30, 2021, Meisheng beneficially owns more than 7.0 % of the Company’s outstanding common stock.

The non-controlling interest’s share of the income (loss) from the joint venture for the three and nine months ended September 30, 2021 and 2020 was nil .

As of September 30, 2021, Meisheng beneficially owns more than 5.5 % 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.

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

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 three and six months ended June 30, 2021, the Company made inventory-related payments to Meisheng of approximately $ 21.8 million and $ 29.2 million, respectively.

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

As of June 30, 2021 and December 31, 2020, amounts due to Meisheng for inventory received by the Company, but not paid totaled $ 19.6 million and $ 10.1 million, respectively.

For the three and nine months ended September 30, 2021, the Company made inventory-related payments to Meisheng of approximately $ 33.1 million and $ 62.3 million, respectively.

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

As of September 30, 2021 and December 31, 2020, amounts due to Meisheng for inventory received by the Company, but not paid totaled $ 27.6 million and $ 10.1 million, respectively.

Note 11 — Goodwill

2 unchanged sentences

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

No goodwill impairment was determined to have occurred for the six months ended June 30, 2021.

As of June 30, 2021, $ 35.1 million of goodwill was allocated to the Toys/Consumer Products reporting unit, which had a negative carrying value.

No goodwill impairment was determined to have occurred for the nine months ended September 30, 2021.

Note 12 — Intangible Assets Other Than Goodwill

2 unchanged sentences

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

Intangible assets as of June 30, 2021 and December 31, 2020 include the following (in thousands, except for weighted useful lives):

June 30, 2021

Intangible assets as of September 30, 2021 and December 31, 2020 include the following (in thousands, except for weighted useful lives):

September 30, 2021

December 31, 2020

8 unchanged sentences

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

Note 13 — Comprehensive Loss

The table below presents the components of the Company’s comprehensive loss for the three and six months ended June 30, 2021 and 2020 (in thousands):

September 30, 2021

Note 13 — Comprehensive Income (Loss)

The table below presents the components of the Company’s comprehensive income (loss) for the three and nine months ended September 30, 2021 and 2020 (in thousands):

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Net Income (Loss)

Other comprehensive income (loss):

Foreign currency translation adjustment

Comprehensive loss

Comprehensive income (loss)

Comprehensive income attributable to non-controlling interests

Comprehensive loss attributable to JAKKS Pacific, Inc.

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

Note 14 — Litigation and Contingencies

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The Company intends to seek settlement and dismissal of the lawsuit.

A putative class action lawsuit was filed on May 18, 2021 in the Superior Court of the State of California for the County of Los Angeles (Isaiah Villarica v.

Jakks Pacific, Inc.).

Plaintiff formerly worked in one of the Company’s warehouses and was retained via Workforce Enterprises, a provider of temporary employees.

The lawsuit alleges that the Company violated various California Labor Code provisions governing wage and hour requirements, including that the Company failed to pay all minimum and overtime wages owed, provide legally compliant meal and rest periods, or reimburse business expenses.

The lawsuit further alleges derivative wage and hour claims for failure to timely pay all wages owed at separation of employment, failure to provide accurate wage statements, and unfair business practices.

Plaintiff seeks to represent a class consisting of all individuals who have worked for the Company—either directly or through a staffing agency—in California since November 19, 2016 and who were classified as non-exempt.

Plaintiff seeks unpaid wages, meal and rest period premiums, interest, various statutory penalties, attorneys’ fees, and costs, all in unspecified amounts.

The Company intends to vigorously defend the lawsuit.

Since the action was recently commenced, however, the Company cannot be assured of its outcome and cannot estimate the range of any potential damage award.

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

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Other than certain liabilities recorded in the normal course of business related to royalty payments due to the Company's licensors, no liabilities have been recorded for indemnifications and/or other commitments.

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

Note 15 — Share-Based Payments

The Company’s 2002 Stock Award and Incentive Plan (the “Plan”), as amended, provides for the awarding of stock options, restricted stock and restricted stock units to certain key employees, executive officers and non-employee directors.

Current awards under the Plan include grants to directors, executive officers and certain key employees of restricted stock awards and units, with vesting contingent upon (a) the completion of specified service periods ranging from one to five years and/or (b) meeting certain financial performance and/or market-based metrics.

Current awards under the Plan include grants to directors, executive officers and certain key employees of restricted stock awards and units, with vesting contingent upon (a) the completion of specified service periods ranging from one to four years and/or (b) meeting certain financial performance and/or market-based metrics.

Unlike the restricted stock awards, the shares for the restricted stock units are not issued until they vest.

The Plan is more fully described in Notes 15 and 18 to the Consolidated Financial Statements in the Company’s 2020 Annual Report on Form 10-K.

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

The following table summarizes the total share-based compensation expense recognized for the three and six months ended June 30, 2021 and 2020 (in thousands):

The following table summarizes the total share-based compensation expense recognized for the three and nine months ended September 30, 2021 and 2020 (in thousands):

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Share-based compensation expense

Restricted Stock Awards

Restricted stock award activity (including those with performance-based vesting criteria) for the six months ended June 30, 2021 is summarized as follows:

Restricted stock award activity (including those with performance-based vesting criteria) for the nine months ended September 30, 2021 is summarized as follows:

Restricted Stock Awards

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Outstanding, December 31, 2020

Outstanding, June 30, 2021

As of June 30, 2021, there was $ 1.9 million of total unrecognized compensation cost related to non-vested restricted stock awards, which is expected to be recognized over a weighted-average period of 2.09 years.

Converted to RSU

Outstanding, September 30, 2021

As of September 30, 2021, there was nil unrecognized compensation cost related to non-vested restricted stock awards.

Restricted Stock Units

Restricted stock unit activity (including those with performance-based vesting criteria) for the six months ended June 30, 2021 is summarized as follows:

Restricted stock unit activity (including those with performance-based vesting criteria) for the nine months ended September 30, 2021 is summarized as follows:

Restricted Stock Units

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Outstanding, December 31, 2020

Outstanding, June 30, 2021

As of June 30, 2021, there was $ 0.3 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 2.20 years.

Converted from RSA

Outstanding, September 30, 2021

As of September 30, 2021, there was $ 6.9 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 2.6 years.

JAKKS PACIFIC, INC.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

September 30, 2021

Note 16 — Fair Value Measurements

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The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

The following tables summarize the Company's financial liabilities measured at fair value on a recurring basis as of June 30, 2021 and December 31, 2020 (in thousands):

The following tables summarize the Company's financial liabilities measured at fair value on a recurring basis as of September 30, 2021 and December 31, 2020 (in thousands):

Fair Value Measurements

as of June 30, 2021

as of September 30, 2021

Carrying Amount as of

June 30, 2021

September 30, 2021

3.25% convertible senior notes due in 2023

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021

September 30, 2021

The following tables provide a reconciliation of the beginning and ending balances of liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) (in thousands):

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Change in fair value

Balance, June 30,

Balance, September 30,

Preferred stock derivative liability

1 unchanged sentence

Change in fair value

Balance, June 30,

Balance, September 30,

The Company’s derivative liability is classified within Level 3 of the fair value hierarchy because unobservable inputs were used in estimating the fair value.

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

The non-controlling interest’s share of the income was $ 24,000 and $ 59,000 for the three and six months ended June 30, 2021, respectively.

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

The non-controlling interest’s share of the income was $ 42,000 and $ 101,000 for the three and nine months ended September 30, 2021, respectively.

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

In October 2016, the Company entered into a joint venture with Hong Kong Meisheng Cultural Company Limited ("Meisheng"), a Hong Kong-based subsidiary of Meisheng Culture & Creative Corp, for the purpose of creating and developing original, multiplatform content for children including new short-form series and original shows.

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

The non-controlling interest’s share of the income (loss) from the joint venture for three and six months ended June 30, 2021 and 2020 was nil .

The non-controlling interest’s share of the income (loss) from the joint venture for three and nine months ended September 30, 2021 and 2020 was nil .

MC&C is an affiliate of Meisheng.

As of June 30, 2021, Meisheng beneficially owns more than 7.0 % of the Company’s outstanding common stock.

As of September 30, 2021, Meisheng beneficially owns more than 5.5 % of the Company’s outstanding common stock.

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

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

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In 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.