What changed in this filing

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Item 1A. Risk Factors

2022-03-16 compared with 2021-03-19 · 25 added, 38 removed, 283 unchanged (18% of the section changed)

From time to time, including in this Annual Report on Form 10-K, we publish forward-looking statements, as disclosed in our Disclosure Regarding Forward-Looking Statements, immediately following the Table of Contents of this Annual Report.

We note that a variety of factors could cause our actual results and experience to differ materially from the anticipated results or other expectations expressed or anticipated in our forward-looking statements.

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If one or more of these licensors were to terminate or fail to renew our licenses or not grant us new licenses, our business, results of operations and financial condition could be adversely affected.

Our license agreements are subject to audit.

In most of our license agreements, the licensor retains the right to utilize an auditor of their choosing to audit our performance against all elements of the agreement up to some number of years after license expiration.

In the event that errors were made in our normal course of business that resulted in underpayment of royalties, shipping product to an unlicensed territory or a variety of other infractions, we could be liable for past due royalties, accrued interest and other financial penalties as outlined in the agreement.

The failure of our character-related and theme-related products to become and/or remain popular with children may materially and adversely impact our business, results of operations and financial condition.

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A limited number of customers account for a large portion of our net sales, so that if one or more of our major customers were to experience difficulties in fulfilling their obligations to us, cease doing business with us, significantly reduce the amount of their purchases from us or return substantial amounts of our products, it could have a materially adverse effect on our business, results of operations and financial condition.

Our two largest customers, Wal-Mart and Target, accounted for 54.8% of our net sales in 2020.

Our two largest customers, Walmart and Target, accounted for 55.3% of our net sales in 2021.

Except for outstanding purchase orders for specific products, we do not have written contracts with, or commitments from, any of our customers, and pursuant to the terms of certain of our vendor agreements, even some purchase orders may be cancelled without penalty up until delivery.

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In addition, pressure by large customers seeking price reductions, financial incentives and changes in other terms of sale or for us to bear the risks and the cost of carrying inventory could also adversely affect our business, results of operations and financial condition.

For example, the bankruptcy and liquidation of Toys “R” Us (“TRU”) in the United States, and in certain other jurisdictions around the world, had a material, adverse impact on the toy industry and our business, results of operations and financial condition.

In 2017, TRU was our third largest customer with net sales of $69.5 million.

In 2018, net sales to TRU declined by over 76.1% to $16.6 million.

In addition to the reduction in net sales, we also recorded significant bad debt charges in 2017 and 2018 as a result of the TRU bankruptcy and liquidation.

If one or more of our major customers were to experience difficulties in fulfilling their obligations to us resulting from bankruptcy or other deterioration in their financial condition or ability to meet their obligations, cease doing business with us, significantly reduce the amount of their purchases from us, or return substantial amounts of our products, it could have a material adverse effect on our business, results of operations and financial condition.

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Restrictions under or the loss of availability under our term loan and revolving credit line could adversely impact our business and financial condition .

In August 2019, we entered into and consummated multiple, binding definitive agreements among Wells Fargo Bank, National Association, Oasis Investments II Master Fund Ltd.

and an ad hoc group of holders of our 4.875% convertible senior notes due 2020 to recapitalize our balance sheet, including the extension to us of incremental liquidity and at least three-year extensions of substantially all of our outstanding convertible debt obligations and revolving credit facility.

In June 2021, we entered into and consummated binding definitive agreements with JPMorgan Chase (for an asset-based credit line) and Benefit Street Partners (a subsidiary of Franklin Templeton – for a secured term loan) to refinance our balance sheet, with the objectives of increasing our overall liquidity, extending the duration of our debt obligations and reducing our overall borrowing costs.

All outstanding borrowings under the revolving credit line and term loan are accelerated and become immediately due and payable (and the revolving credit line and term loan terminate) in the event of a default, which includes, among other things, failure to comply with certain financial covenants or breach of representations contained in the credit line and term loan documents, defaults under other loans or obligations, involvement in bankruptcy proceedings, an occurrence of a change of control or an event constituting a material adverse effect on us (as such terms are defined in the credit line and term loan documents).

We are also subject to negative covenants which, during the life of the credit line and term loan, prohibit and/or limit us from, among other things, incurring certain types of other debt, acquiring other companies, making certain expenditures or investments, and changing the character of our business.

An outbreak of infectious disease, a pandemic or a similar public health threat, such as the 2019 Novel Coronavirus outbreak (see below), could adversely impact our ability to comply with such covenants.

An outbreak of infectious disease, a pandemic or a similar public health threat, such as the COVID-19 pandemic (see below), could adversely impact our ability to comply with such covenants.

Our failure to comply with such covenants or any other breach of the credit line or term loan agreements could cause a default and we may then be required to repay borrowings under our credit line and term loan with capital from other sources.

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Any (i) failure by us to comply with the covenants or other provisions of the credit line and term loan, (ii) difficulty in securing any required future financing, or (iii) any such seizure or attachment of assets could have a material adverse effect on our business and financial condition.

Our revolving credit line and term loan mature in August 2022 and February 2023, respectively.

We may not have the funds necessary to purchase our outstanding convertible senior notes upon a fundamental change or other purchase date, as required by the indenture governing the notes.

In June 2014, we sold an aggregate of $115.0 million principal amount of 4.875% convertible senior notes due on June 1, 2020 (the “4.875% 2020 Notes”).

In July 2013, we sold an aggregate of $100.0 million principal amount of 4.25% convertible senior notes due on August 1, 2018, of which no amounts are currently outstanding, but $29.6 million were exchanged for new notes due on November 1, 2020 (the “3.25% 2020 Notes” and collectively with the 4.875% 2020 Notes, the “Notes”).

In August 2019, the 3.25% 2020 Notes were amended and, among other changes, now mature on the earlier of (i) 91 days after the repayment in full of the newly issued secured term loan that matures in February 2023 or (ii) July 2023 (the “3.25% 2023 Notes”).

In addition, a portion of the 4.875% 2020 Notes was exchanged for additional 3.25% 2023 Notes.

As of December 31, 2020, approximately $22.9 million of the 3.25% 2023 Notes are outstanding.

Holders of the Notes may require us to repurchase for cash all or some of their notes upon the occurrence of a fundamental change (as defined in the Notes).

Holders of the Notes may convert their notes upon the occurrence of specified events.

Upon conversion, the Notes will be settled in shares of our common stock and/or in cash.

Restrictions on borrowings under or loss of our revolving credit line could result in our not having the funds necessary to pay the Notes upon a fundamental change or other purchase date, as required by the indenture governing the Notes.

Our revolving credit line and term loan mature in May 2026 and June 2027, respectively.

The agreement governing our outstanding preferred stock includes terms and conditions that may adversely impact our business and cash flows.

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In addition, general economic conditions were significantly and negatively affected by the September 11th terrorist attacks and could be similarly affected by any future attacks.

The COVID-19 pandemic had a negative impact to our business in 2020 by disrupting consumer behavior, spending patterns and ultimately the play patterns and events that often motivate purchasing of our products.

Furthermore, restrictions on nearly all of our customers’ operating hours at one point in the year or another, limited consumers’ ability to discover our products thru traditional in-store browsing and unplanned purchase.

Furthermore, restrictions on nearly all of our customers’ operating hours in 2020 at one point in the year or another, limited consumers’ ability to discover our products thru traditional in-store browsing and unplanned purchase.

Continuation of such a weakened economic and business climate, as well as consumer uncertainty created by such a climate, could further adversely affect our sales and profitability.

Other conditions, such as the unavailability of electronic components or other raw materials, for example, may impede our ability to manufacture, source and ship new and continuing products on a timely basis.

Significant and sustained increases in the price of oil, for example, could adversely impact the cost of the raw materials used in the manufacture of certain of our products, such as plastic.

Significant and sustained increases in the price of oil, for example, could adversely impact the cost of the raw materials used in the manufacture of certain of our products, such as plastic, as well as shipping costs.

We face risks related to health epidemics and other widespread outbreaks of contagious disease, which could significantly disrupt our supply chain and impact our operating results.

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Accordingly, it is extremely challenging to estimate the extent by which we will be negatively impacted by this disease.

While the governmental organizations of the United States, as well as governments across the world, have implemented emergency economic measures and announced the consideration of additional emergency economic assistance packages, it is unclear what impact they are having, and will have, on the economy in the United States and worldwide.

Uncertainty surrounds the length of time this disease will continue to spread, and the extent governments will continue to impose, or add additional, quarantines, curfews, travel restrictions and closures of retail stores.

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Either scenario could have a negative impact on our overall business performance.

Our Halloween (Disguise) business is even more seasonal than our core Toy/Consumer Products business.

Our Costume (Disguise) business is even more seasonal than our core Toy/Consumer Products business as Halloween remains the primary purchase occasion for our costumes.

This seasonality is further exacerbated by consumer migration to online shopping as the style and size attributes of the Halloween business (i.e., we make the same costume in multiple sizes, and the same item “ costume ” across a very wide range of brands and properties) in part behaves like an apparel-driven transaction rather than “ one-size-for-all ” toy/consumer product transaction.

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Any similar event that suddenly makes the holiday less relevant or infeasible to celebrate can and likely will have a negative impact on that segment of business.

Given that securing licenses, product design and development and ultimately sourcing of the product takes place months in advance of the actual Halloween selling season, we have limited ability to recover invested expense if the market demand for those products were to suddenly be reduced.

Given that securing licenses, product design and development and ultimately sourcing of the product takes place several quarters in advance of the actual Halloween selling season, we have limited ability to recover invested expense if the market demand for those products were to suddenly be reduced.

Although some product could be held in inventory or materials rolled forward to the next manufacturing season, these events would in turn incrementally tie up our capital until the following year at best, and/or put added strain on our third-party manufacturers.

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In the event that some unexpected shock to the market (like the COVID-19 pandemic) were to suddenly drastically change demand for product anticipated to be procured from our third-party manufacturers, we may incur some costs relating to raw materials they have ordered on our behalf, and/or finished goods that were not shipped due to last-minute cancelled orders from our customers buying FOB from China.

Although our manufacturers bear the foreign-exchange risk by committing to USD pricing despite having non-USD cost elements, we could nonetheless be adversely impacted if they fail to manage that risk accordingly.

In that event, the predictable flow of product at the prices we expect could be disrupted, and we may not have adequate time to source comparable product elsewhere in time to avoid disruptions in our selling cycle.

The toy industry is highly competitive and our inability to compete effectively may materially and adversely impact our business, results of operations and financial condition.

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longer operating histories;

greater economies of scale.

greater economies of scale, inclusive of purchasing power and leverage of their investments/expenditures.

In addition, the toy industry has no significant barriers to entry.

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Any disruption or shut down at these locations could significantly impact our operations and have a material adverse effect on our financial condition and results of operations.

In addition, it is possible that our business operations will be adversely impacted by future climate changes, albeit in ways we cannot predict or quantify at this time.

We have substantial sales and manufacturing operations outside of the United States, subjecting us to risks common to international operations.

We sell products and operate facilities in numerous countries outside the United States.

Sales to our international customers comprised approximately 18.4% of our net sales for the year ended 2020 and approximately 19.6% of our net sales for year ended 2019.

Although COVID-19 disproportionately negatively impacted our international business in 2020, we expect our sales to international customers to account for a greater portion of our revenues in future fiscal periods.

Additionally, we use third-party manufacturers, located principally in China, and are subject to the risks normally associated with international operations, including:

Sales to our international customers comprised approximately 17.5% of our net sales for the year ended December 31, 2021 and approximately 18.3% of our net sales for year ended December 31, 2020.

Although COVID-19 disproportionately negatively impacted our international business in 2021 and 2020, we expect our sales to international customers to account for a greater portion of our revenues in future fiscal periods.

Additionally, we use third-party manufacturers, located principally in China, and are subject to the risks normally associated with operations, including:

currency conversion risks and currency fluctuations;

limitations, including taxes, on the repatriation of earnings;

political instability, civil unrest and economic instability;

political instability, including wars and civil unrest, and economic instability;

greater difficulty enforcing intellectual property rights and weaker laws protecting such rights;

complications in complying with laws in varying jurisdictions and changes in governmental policies;

greater difficulty and expenses associated with recovering from natural disasters, such as earthquakes,

hurricanes and floods;

greater difficulty and expenses associated with recovering from natural disasters, such as earthquakes, hurricanes and floods;

transportation delays and interruption, inclusive of raw material ’ s sourcing to our third-party manufacturers as well as finished goods delivery through to our customers and ultimate consumers;

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the potential imposition of tariffs;

the pricing of intercompany transactions may be challenged by taxing authorities in both foreign jurisdictions

and the United States, with potential increases in income and other taxes.

the pricing of intercompany transactions may be challenged by taxing authorities in both foreign jurisdictions and the United States, with potential increases in income and other taxes.

Our reliance upon external sources of manufacturing can be shifted, over a period of time, to alternative sources of supply, should such changes be necessary.

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Our acquisition strategy involves a number of risks, each of which could adversely affect our operating results, including:

difficulties in integrating acquired businesses or product lines, assimilating new facilities and personnel

and harmonizing diverse business strategies and methods of operation;

difficulties in integrating acquired businesses or product lines, assimilating new facilities and personnel, and harmonizing diverse business strategies and methods of operation;

diversion of management attention from operation of our existing business;

loss of key personnel from acquired companies;

failure of an acquired business to achieve targeted financial results;

failure of an acquired business to achieve targeted financial results, inclusive of working capital needs;

limited capital to finance acquisitions and/or fund appropriate working capital post-acquisition;

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

What changed 10-K

Item 1A. Risk Factors