What changed in this filing

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2022-03-16 compared with 2021-03-19 · 365 added, 392 removed, 829 unchanged (48% of the section changed)

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Interest Rate Risk

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

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

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

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

Borrowings under the revolving credit facility are therefore subject to risk based upon prevailing market interest rates.

Our exposure to market risk includes interest rate fluctuations in connection with our BSP Term Loan (see Item 8 “Consolidated Financial Statements and Supplementary Data, Note 10 – Debt) and our 2021 JPMorgan ABL Facility (see Item 8 “Consolidated Financial Statements and Supplementary Data, Note 11 – Credit Facilities).

As of December 31, 2021, we have $98.5 million of outstanding indebtedness under our BSP Term Loan which is due June 2027 with 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.

Borrowings under our JPMorgan ABL Facility bear interest at either (i) Eurodollar spread plus 1.50% - 2.00% (determined by reference to an excess availability pricing grid) or (ii) Alternate Base Rate plus 0.50% - 1.00% (determined by reference to an excess availability pricing grid and base rate subject to a 1.00% floor).

Borrowings under the BSP Term Loan and 2021 JPMorgan ABL Facility are therefore subject to risk based upon prevailing market interest rates.

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

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

During the twelve-month period ended December 31, 2021, the maximum amount borrowed under the revolving credit facility was $16.0 million and the average amount of borrowings outstanding was $1.8 million.

As of December 31, 2021, the amount of total borrowings outstanding under the revolving credit facility was nil.

London Interbank Offering Rate (“LIBOR”) is an interest rate benchmark used as a reference rate for our term loan.

Borrowings under our term loan will bear interest at a variable rate, primarily based on LIBOR.

In July 2017, the United Kingdom’s Financial Conduct Authority (the “FCA”), which regulates LIBOR, announced that it will no longer persuade or compel banks to submit rates for the calculation of LIBOR after 2021.

It is unclear whether or not LIBOR will cease to exist at that time (and if so, what reference rate will replace it) or if new methods of calculating LIBOR will be established such that it continues to exist after 2021.

On November 30, 2020, ICE Benchmark Administration (“IBA”), the administrator of LIBOR, with the support of the United States Federal Reserve and the United Kingdom’s FCA, announced plans to consult on ceasing publication of USD LIBOR on December 31, 2021 for only the one-week and two-month USD LIBOR tenors, and on June 30, 2023 for all other USD LIBOR tenors.

While this announcement extends the transition period to June 2023, the United States Federal Reserve concurrently issued a statement advising banks to stop new USD LIBOR issuances by the end of 2021.

In light of these recent announcements, the future of LIBOR at this time is uncertain and any changes in the methods by which LIBOR is determined or regulatory activity related to LIBOR’s phase-out could cause LIBOR to perform differently than in the past or cease to exist.

The Alternative Reference Rates Committee (“ARRC”) has identified the Secured Overnight Financing Rate ("SOFR") as the recommended alternative for use in financial and other derivatives contracts that are currently indexed to U.S.

dollar LIBOR.

At this time, it is not possible to predict the effect any modification or discontinuation of LIBOR, or the establishment of alternative reference rates such as SOFR, will have on our business and financial condition.

Although regulators and IBA have made clear that the recent announcements should not be read to say that LIBOR has ceased or will cease, in the event LIBOR does cease to exist, our term loan and related agreements would transition from LIBOR to SOFR, which may result in interest rates and/or payments that do not correlate over time with the interest rates and/or payments that would have been made on its obligations if LIBOR was available in its current form.

Foreign Currency Risk

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

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

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

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

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

Changes in the U.S.

dollar exchange rates may positively or negatively affect our gross margins, operating income and retained earnings.

dollar exchange rates may positively or negatively affect our results of operations.

The exchange rate of the Hong Kong dollar to the U.S.

dollar has been fixed by the Hong Kong government since 1983 at HK$7.80 to US$1.00 and, accordingly, has not represented a currency exchange risk to the U.S.

dollar has been linked to the U.S.

dollar by the Hong Kong Monetary Authority at HK$7.75 - HK$7.85 to US$1.00 since 2005 and, accordingly, has not represented a currency exchange risk to the U.S.

We do not believe that near-term changes in these exchange rates, if any, will result in a material effect on our future earnings, fair values or cash flows.

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

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

(the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021 , in conformity with accounting principles generally accepted in the United States of America.

Change in Accounting Method Related to Leases

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

Basis for Opinion

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

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

Going Concern

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

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

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

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

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

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

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

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

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

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

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

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

Cost of Revenue for Royalties and Related Liabilities

As described in Notes 2, 9 and 17 of the consolidated financial statements, the Company enters into various license agreements whereby the Company uses certain characters and intellectual properties in conjunction with its products.

For the year ended December 31, 2021, the cost of revenue related to license agreement royalties was $87.2 million.

As of December 31, 2021, accrued royalties were $18.6 million, respectively.

We identified auditing this cost of revenue for royalties and related liabilities as a critical audit matter.

The royalty expense calculation includes multiple variables based on various license agreements, including amended and renewed license agreements, and a significant volume of underlying data.

Variables in calculating the royalty expense include the territory of where the sale occurs, a broad range of negotiated royalty rates for the type of product, user/usage measures, and the applicable license holder.

The auditing of cost of revenue for royalties and related liabilities requires management judgment to critically evaluate its forecasts and evaluate its ability to fully utilize minimum guaranteed royalties, as well as incorporating the significant and unusual impacts of the COVID-19 pandemic.

Auditing management’s royalty expense and associated liabilities involved especially challenging auditor judgment and audit effort due to the nature and extent of effort required to address these matters.

Evaluating the reasonableness of management’s forecasts, which included:

(i) obtaining an understanding of management’s process for developing forecasts, (ii) comparing prior period forecasts to actual results, (iii) assessing the Company’s ability to meet its future guarantees and (iv) evaluating the impact of alternative assumptions on the measurement and comparing to management’s estimate.

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

(Signed BDO USA, LLP)

Recalculating royalty costs, agreeing calculation variables to the underlying agreements, and evaluating the reasonableness of royalty expense and related liabilities based on existing, amended and renewed license agreements during the year.

/s/ BDO USA, LLP

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

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Accounts payable

Payable to Meisheng

Accrued expenses

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Debt, non-current portion, net of issuance costs and debt discounts

Other liabilities

Preferred stock derivative liability

Income taxes payable

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Total liabilities

Preferred stock, $ 0.001 par value;

Preferred stock accrued dividends, $ 0.001 par value;

5,000,000 shares authorized;

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Cost of sales:

Selling, general and administrative expenses

Cost of goods

Royalty expense

Amortization of tools and molds

Cost of sales

Direct selling expenses

General and administrative expenses

Depreciation and amortization

Intangible asset impairment

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Other income (expense), net

Loss on extinguishment of debt

Change in fair value of preferred stock derivative liability

Change in fair value of convertible senior notes

Gain on loan forgiveness

Loss on debt extinguishment

Interest income

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Provision for income taxes

Net income (loss) attributable to non-controlling interests

Net income attributable to non-controlling interests

Net loss attributable to JAKKS Pacific, Inc.

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Comprehensive loss

Comprehensive income (loss) attributable to non-controlling interests

Comprehensive income attributable to non-controlling interests

Comprehensive loss attributable to JAKKS Pacific, Inc.

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CONSOLIDATED STATEMENTS OF STOCKHOLDERS ’ EQUITY

Pacific, Inc.

Comprehensive

Pacific, Inc.

Stockholders’

Non-Controlling

Stockholders’

Balance, December 31, 2017

Stock-based compensation expense

Repurchase of common stock for employee tax withholding

Foreign currency translation adjustment

(In thousands)

Balance, December 31, 2018

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Balance, December 31, 2020

Stock-based compensation expense

RSA to RSU conversion

Conversion of convertible senior notes

Repurchase of common stock for employee tax withholding

Preferred stock accrued dividends

Net income (loss)

Foreign currency translation adjustment

Balance, December 31, 2021

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

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

Provision for doubtful accounts

Provision for (recovery of) doubtful accounts

Depreciation and amortization

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Intangibles impairment

Loss on extinguishment of debt

Gain on loan forgiveness

Loss on debt extinguishment

Deferred income taxes

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Prepaid expenses and other assets

Accounts payable

Accounts payable and payable to Meisheng

Accrued expenses

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Proceeds from loan under the Paycheck Protection Program

Net proceeds from credit facility borrowings

Proceeds from credit facility borrowings

Retirement of convertible senior notes

Repayment of credit facility borrowings

Debt issuance costs

Proceeds from term loan facility

Repayment of term loan facility

Deferred issuance costs

Repayment of 2019 Recap Term Loan

Repayment of 2021 BSP Term Loan

Term loan prepayment penalty

Net proceeds from issuance of long term debt

Net cash provided by (used in) financing activities

Net cash used in financing activities

Net increase (decrease) in cash, cash equivalents and restricted cash

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Cash, cash equivalents and restricted cash, end of year

Cash paid during the period for:

Income taxes, net

Supplemental disclosures of non-cash financing activities:

Forgiveness of Paycheck Protection Program Loan

Supplemental disclosures of cash flow information:

Cash paid for interest

Cash paid for income taxes, net

As of December 31, 2021, there was $ 2.8 million of property and equipment included in accounts payable.

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The Company received income tax refunds of $ 0.3 million, $ 0.6 million and $ 1.8 million for the year ended December 31, 2021, 2020 and 2019, respectively, and has included these amounts in cash paid during the period for income taxes, net.

See Notes 4, 5, 14 and 20 for additional supplemental information to consolidated statements of cash flows.

See Note 20 for additional supplemental information to consolidated statements of cash flows.

See accompanying notes to consolidated financial statements.

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JAKKS Pacific, Inc.

(the “Company”) is engaged in the development, production and marketing of consumer products, including toys and related products, electronic products, and other consumer products, many of which are based on highly-recognized character and entertainment licenses.

The Company commenced its primary business operations in July 1995 through the purchase of substantially all of the assets of a Hong Kong toy company.

(the “Company”) is engaged in the development, production and marketing of consumer products, including toys and related products, electronic products, and other consumer products.

The Company markets its product lines domestically and internationally.

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

The Company is incorporated under the laws of the State of Delaware.

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

In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally.

The full impact of the COVID-19 outbreak continues to evolve as of the date of this report.

The global pandemic continues to be an unpredictable macro event impacting the world at large and by extension, the market for JAKKS products as well as its operations.

The Company has navigated the pandemic to date and has expectations of wider vaccinations and reduced pandemic restrictions on mobility and social interaction in the quarters to follow.

As such, it is uncertain as to the full magnitude that the pandemic will have on the Company’s financial condition, liquidity, and future results of operations.

Management is actively monitoring the global situation and the resulting impact on its financial condition, liquidity, operations, suppliers, industry and workforce.

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

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

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

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

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

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

As of the filing of this document, the Company continues to have no draw down on its credit facility with Wells Fargo Bank, National Association (“Wells Fargo”), aside from utilizing $ 10.8 million in Letters of Credit.

On June 12, 2020, the Company received a $ 6.2 million loan under the Paycheck Protection Program (the “PPP Loan”) within the Coronavirus Aid Relief and Economic Security Act (the “CARES Act”).

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

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

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

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

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

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

On June 12, 2020, the Company received a $ 6.2 million loan under the PPP within the CARES Act (the “PPP Loan”).

The PPP Loan matured 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.

It remains the Company’s intention to file for forgiveness of this loan.

In the absence of knowing whether any funds will be forgiven and how the program may change as the year continues, the Company accounts for the note as debt under ASC 470 and has reflected $ 0.9 million as short term debt and $ 5.3 million as long term debt on its balance sheet related to this loan.

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

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

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.

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

The credit is equal to 50% of qualified wages paid to employees during a quarter, capped at $10,000 of qualified wages through year end.

The Company became eligible for the credit beginning on March 16, 2020.

The CAA extended and expanded the availability of the ERC through June 30, 2021.

Subsequently, the American Rescue Plan Act of 2021 ("ARP"), enacted on March 11, 2021, extended and expanded the availability of the ERC through December 31, 2021, however, certain provisions apply only after December 31, 2020.

This new legislation amended the employee retention credit to be equal to 70% of qualified wages paid to employees after December 31, 2020, and before January 1, 2022.

During calendar year 2021, a maximum of $10,000 in qualified wages for each employee per qualifying calendar quarter may be counted in determining the 70% credit.

Therefore, the maximum tax credit that can be claimed by an eligible employer is $7,000 per employee per qualifying calendar quarter of 2021.

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 year ended December 31, 2021 and 2020, the Company recorded $ 2.1 million and $ 0.3 million, respectively, related to the ERC as an offset within selling, general and administrative expenses on the Company’s consolidated statements of operations and within prepaid expenses and other assets on the Company's consolidated balance sheet (See Note 5 – Prepaid Expenses and Other Assets).

As of December 31, 2021 and 2020, the Company held cash and cash equivalents, including restricted cash, of $ 45.3 million and $ 92.7 million, respectively.

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The Company’s primary sources of working capital are cash flows from operations and borrowings under its credit facility (see Note 11 - Credit Facilities).

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

Cash flow from operating activities used net cash of $ 5.9 million in 2021.

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

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The loss of a key vendor, or material changes in support by them, or a significant variance in actual demand compared to the forecast, can have a material adverse impact on the Company’s cash flows and business.

As of December 31, 2020, the Company had $ 124.5 million (including $ 4.7 million in payment-in-kind interest) of outstanding indebtedness under a First Lien Term Loan Facility Credit Agreement (the “New Term Loan Agreement”) and no outstanding indebtedness under its amended and extended Credit Agreement (the “Amended ABL Credit Agreement” or “Amended Wells Fargo Credit Agreement”) with Wells Fargo.

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

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

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

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

On October 16, 2020, the Company reached an agreement (the “Amendment”) with holders of its New Term Loan and Wells Fargo, holder of its revolving credit facility, to amend the New Term Loan Agreement and defer its EBITDA covenant calculation until March 31, 2022.

Under the Amendment, the trailing 12-month EBITDA requirement was reduced to $ 25.0 million, which will not be calculated earlier than March 31, 2022.

The Amendment also required the Company to pre-pay $ 15.0 million of the New Term Loan immediately and, under certain conditions, pre-pay up to an additional $ 5.0 million no later than the third quarter of fiscal year 2021.

As of December 31, 2020, the Company has classified $5.0 million as short term debt.

In connection with the amendment on October 20, 2020, the Company paid $15.0 million of its outstanding principal amount and $0.3 million in related interest and PIK interest.

The New Term Loan Agreement contains events of default, including nonpayment of principal, nonpayment of interest, fees or other amounts, material inaccuracy of representations and warranties, violation of covenants, cross-default to other material indebtedness, bankruptcy or insolvency events, material judgment defaults and a change of control as specified in the New Term Loan Agreement, and cross-default provisions with the Amended Wells Fargo Credit Agreement.

If an event of default occurs under either Agreement, the maturity of the amounts owed under the New Term Loan Agreement and the Amended Wells Fargo Credit Agreement may be accelerated.

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.

The JPMorgan ABL Credit Agreement replaces the Company’s Wells Fargo ABL Facility, dated as of March 27, 2014, with General Electric Capital Corporation, since assigned to Wells Fargo Bank, National Association.

The Company pays a commitment fee ( 0.25 % - 0.375 %) based on the unused portion of the revolving credit facility.

Any amounts borrowed under the JPMorgan ABL Facility will bear interest at either (i) Eurodollar spread plus 1.50 % - 2.00 % (determined by reference to an excess availability pricing grid) or (ii) Alternate Base Rate plus 0.50 % - 1.00 % (determined by reference to an excess availability pricing grid and base rate subject to a 1.00% floor).

The JPMorgan ABL Facility matures in June 2026.

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.

Under certain circumstances the Company is also subject to a springing fixed charge coverage ratio covenant of not less than 1.1 to 1.0 , as described in more detail in the JPMorgan ABL Credit Agreement.

The JPMorgan ABL Credit Agreement contains events of default that are customary for a facility of this nature, including (subject in certain cases to grace periods and thresholds) nonpayment of principal, interest, fees or other amounts, material inaccuracy of representations and warranties, violation of covenants, cross-default to certain other existing indebtedness, bankruptcy or insolvency events, certain judgment defaults, loss of liens or guarantees and a change of control as specified in the JPMorgan ABL Credit Agreement.

If an event of default occurs, the commitments of the lenders to lend under the JPMorgan ABL Credit Agreement may be terminated and the maturity of the amounts owed may be accelerated.

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.

On June 2, 2021, the Company and certain of its subsidiaries, as borrowers, entered into a First Lien Term Loan Facility Credit Agreement (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 first-lien secured term loan (the “Initial Term Loan”) and a $ 19.0 million delayed draw term loan (the “Delayed Draw Term Loan” and collectively, the “2021 BSP 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 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 existing term loan (the “2019 Recap Term Loan,” formerly known as the “New Term Loan” in prior filings) 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 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.

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.

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.

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.

Commencing with the fiscal quarter ending June 30, 2021, the Company is required to maintain a Net Leverage Ratio of 4:00x, with step-downs occurring each fiscal year starting with the quarter ending March 31, 2022 through the quarter ending September 30, 2024 in which the Company is required to maintain a Net Leverage Ratio of 3:00x.

As of the Closing Date, the Company must maintain a minimum cash balance of not less than $20.0 million.

The minimum cash balance can be reduced to $15.0 million in increments of $1.0 million for every $5.0 million in principal repayment of the 2021 BSP Term Loan .

The terms and covenants are described in more detail in the 2021 BSP Term Loan Agreement.

The 2021 BSP Term Loan Agreement contains events of default that are customary for a facility of this nature, including (subject in certain cases to grace periods and thresholds) nonpayment of principal, nonpayment of interest, fees or other amounts, material inaccuracy of representations and warranties, violation of covenants, cross-default to certain other existing indebtedness, bankruptcy or insolvency events, certain judgment defaults and a change of control as specified in the 2021 BSP Term Loan Agreement.

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

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 December 31, 2021, the Company had $ 98.5 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 $ 9.8 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 was in compliance with the financial covenants under the 2021 BSP Term Loan Agreement and the JPMorgan ABL Agreement as of December 31, 2021.

The Company’s consolidated financial statements for the year ended December 31, 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.

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Restricted cash

Restricted cash consists primarily of a Wells Fargo collateral account established to cover the excess Wells Fargo borrowing base availability shortfall and a cash collateral account to cover a guarantee bond.

Restricted cash consists of a cash collateral account to cover a guarantee bond.

Accounts Receivable and Allowance for Doubtful Accounts

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

Toys/Consumer Products and Halloween.

Toys/Consumer Products and Costumes.

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

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As of December 31, 2021 and 2020, the inventory obsolescence reserve was $ 4.6 million and $ 10.8 million, respectively.

The Company enters into license agreements with strategic partners, inventors, designers and others for the use of intellectual properties in its products.

These agreements may call for payment in advance or future payment of minimum guaranteed amounts.

Amounts paid in advance are recorded as an asset and charged to expense when the related revenue is recognized in the consolidated statements of operations.

If all or a portion of the minimum guaranteed amounts appear not to be recoverable through future use of the rights obtained under the license, the non-recoverable portion of the guaranty is charged to expense at that time.

Deferred Financing Charges

Deferred financing charges consist of credit facility loan origination fees.

These charges are capitalized and amortized over the life of the line of credit agreement.

Property and equipment

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For the year ended December 31, 2021, 2020 and 2019, the Company’s aggregate depreciation expense related to property and equipment was $9.2 million, $ 9.8 million and $ 12.9 million, respectively.

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

For the year ended December 31, 2021, 2020 and 2019, the Company recorded a (gain) loss on disposal of tools and molds of ($ 34,100 ), $ 0.1 million and $ 1.0 million, respectively, which is included in cost of sales in the consolidated statements of operations.

Other Comprehensive Income (Loss)

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Advertising expense for the year ended December 31, 2021, 2020 and 2019, was approximately $ 12.2 million, $ 10.1 million and $ 13.8 million, respectively.

See also Revenue Recognition regarding cooperative advertising arrangements.

The Company does not file a consolidated return with its foreign subsidiaries.

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

Earnings (Loss) per share

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

Income (Loss) per share

A reconciliation of the amounts used to calculate basic and diluted income (loss) per share for the year ended December 31, 2021, 2020, and 2019 follows (in thousands, except per share data):

Year Ended December 31,

Net income (loss) attributable to non-controlling interests

Net income attributable to non-controlling interests

Net loss attributable to JAKKS Pacific, Inc.

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Weighted average common shares outstanding - basic and diluted

Loss per share available to common stockholders - basic and diluted

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

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

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

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

Net loss per share available to common stockholders - basic and diluted

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 year ended December 31, 2021, 2020 and 2019, the convertible senior notes interest and related weighted common share equivalent of 1,735,938 , 5,758,365 and 2,907,498 , respectively, were excluded from the diluted income (loss) per share calculation since they would have been anti-dilutive.

Potentially dilutive restricted stock awards and units of 122,371 , 185,455 and 142,350 for each of the year ended December 31, 2021, 2020 and 2019, respectively, were excluded from the computation of diluted income (loss) per share since they would have been anti-dilutive.

The Company effectively repurchased 311,284 shares of its common stock at an average cost of $ 77.10 per share for an aggregate amount of $ 24.0 million pursuant to a prepaid forward share repurchase agreement entered into with Merrill Lynch International (“ML”) on June 9, 2014.

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The Company is currently evaluating the impact of the adoption of ASU 2016-13 on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, “Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement,” which improves the effectiveness of the disclosures required under ASC 820 and modifies the disclosure requirements on fair value measurements, including the consideration of costs and benefits.

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

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

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

Targeted Improvements to Related Party Guidance for Variable Interest Entities," which improves the accounting for variable interest entities by considering indirect interests held through related parties under common control for determining whether fees paid to decision makers and service providers are variable interests.

This new standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.

The amendments are required to be applied retrospectively with a cumulative-effect adjustment to retained earnings at the beginning of the earliest period presented.

Early adoption is permitted.

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

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

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

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

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

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

Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The new standard provides optional expedients and exceptions for applying U.S.

Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” In January 2021, the FASB issued ASU 2021-01, “Reference Rate Reform (Topic 848):

Scope.” The ASUs provide temporary optional expedients and exceptions for applying U.S.

GAAP to contracts, hedging relationships, and other transactions, for a limited period of time, to ease the potential burden of recognizing the effects of reference rate reform on financial reporting.

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

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

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

In August 2020, the FASB issued ASU 2020-06, “Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40):

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

In November 2021, the FASB issued ASU 2021-10, “Government Assistance (Topic 832):

Disclosures by Business Entities about Government Assistance.” ASU 2021-10 requires annual disclosures that are expected to increase the transparency of transactions involving government grants, including (1) the types of transactions, (2) the accounting for those transactions and (3) the effect of those transactions on an entity’s financial statements.

The provisions of ASU 2021-10 are effective for fiscal years beginning after December 31, 2021, with early adoption permitted.

The Company adopted ASU 2021-10 during the fiscal period December 31, 2021.

(See Note 1 – Principal Industry, Note 5 – Prepaid Expenses and Other Assets and Note 10 – Debt, for disclosures related to government assistance received by the Company).

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

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

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

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

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

The Company’s segments are (i) Toys/Consumer Products and (ii) Costumes (formerly known as “Halloween”).

The Toys/Consumer Products segment includes action figures, vehicles, play sets, plush products, dolls, electronic products, construction toys, infant and pre-school toys, child-sized and hand-held role play toys and everyday costume play, foot-to-floor ride-on vehicles, wagons, novelty toys, seasonal and outdoor products, kids’ indoor and outdoor furniture, and related products, and makeup and skincare products under the C'est Moi™ brand.

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

The Costumes segment, under its Disguise branding, designs, develops, markets and sells a wide range of every-day and special occasion dress-up costumes and related accessories in support of Halloween, Carnival, Children’s Day, Book Day/Week, and every-day/any-day costume play.

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

All sales are made to external customers and general corporate expenses have been attributed to the various segments based upon relative sales volumes.

All sales are made to external customers and general corporate expenses have been attributed to the segments based upon relative sales volumes.

Segment assets are primarily comprised of accounts receivable and inventories, net of applicable reserves and allowances, goodwill and other assets.

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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.

The joint venture completed and delivered 65 episodes of the show, which began airing in February 2012, and has since ceased production of the television show.

The joint venture has since ceased production of the television show.

The joint venture was terminated on December 2, 2020.

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

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

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

In September 2012, the Company entered into a joint venture (“DreamPlay Toys”) with NantWorks LLC (“NantWorks”) in which it owns a fifty percent interest.

Pursuant to the operating agreement of DreamPlay Toys, the Company paid to NantWorks cash in the amount of $ 8.0 million and issued NantWorks a warrant to purchase 1.5 million shares of the Company’s common stock at a value of $ 7.0 million in exchange for the exclusive right to arrange for the provision of the NantWorks recognition technology platform for toy products.

The Company had classified these rights as an intangible asset, which was being amortized over the anticipated revenue stream from the exploitation of these rights.

However, the Company has abandoned the use of the technology in connection with its toy products and no future sales are anticipated, and the Company recorded an impairment charge to income of $ 2.9 million to write off the remaining unamortized technology rights during the third quarter of 2017.

The Company retains the financial risk of the joint venture and is responsible for the day-to-day operations, which are expected to be nominal in future periods.

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

In addition, in 2012, the Company invested $ 7.0 million in cash in exchange for a five percent economic interest in a related entity, DreamPlay, LLC, that was expected to monetize the exploitation of the recognition technologies in non-toy consumer product categories.

Adoption of the technology has been inadequate to establish a commercially viable market for the technology.

NantWorks has the right to repurchase the Company’s interest for $7.0 million, but the Company does not anticipate that NantWorks will do so.

As of September 30, 2017, the Company determined the value of this investment will not be realized and that full impairment of the value had occurred.

Accordingly, the Company recorded an impairment charge of $ 7.0 million during the quarter ended September 30, 2017.

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

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

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

As of December 31, 2020, Meisheng beneficially owns 9.2 % of the Company’s outstanding common stock.

In March 2017, the Company entered into an equity purchase agreement with Meisheng which provided, among other things, that as long as Meisheng and its affiliates hold 10 % or more of the issued and outstanding shares of common stock of the Company, Meisheng shall have the right from time to time to designate a nominee (who currently is Mr.

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

The non-controlling interest’s share of the income (loss) from the joint venture for the years ended December 31, 2021, 2020 and 2019 was nil .

MC&C is an affiliate of Meisheng and Meisheng holds shares of the Company’s outstanding common stock.

Note 5 — Prepaid Expenses and Other Assets

Prepaid expenses and other assets for the year ended December 31, 2021 and 2020 consist of the following (in thousands):

Royalty advances

Prepaid expenses

Income taxes receivable

Royalty advances

Employee retention credit

Income tax receivable

Note 6 — Goodwill

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

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

As a result of the retesting performed, no goodwill impairment was determined to have occurred for the three months ended March 31, 2020.

Based on the Company’s April 1, 2020 annual assessment, it was determined that the fair values of its reporting units were not less than the carrying amounts.

Also, no goodwill impairment was determined to have occurred for the year ended December 31, 2020.

Based on the Company’s April 1, 2019 annual assessment, it was determined that the fair values of its reporting units were not less than the carrying amounts.

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

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

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

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

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

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

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

In the second quarter of 2021, the Company performed a qualitative assessment to determine whether it was more likely than not that the book value of each reporting unit exceeded its fair value.

As a result of the Company’s qualitative assessment, it was determined that goodwill was not impaired.

There were no events or changes in circumstances subsequent to the second quarter assessment that indicate that the carrying value of a reporting unit may exceed its fair value as of December 31, 2021.

Note 7 — Intangible Assets Other Than Goodwill

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For the year ended December 31, 2021, 2020 and 2019, the Company’s aggregate amortization expense related to intangible assets was $ 1.0 million, $ 1.2 million and $ 4.7 million, respectively.

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

The Company expects to amortize the remaining carrying value of $ 1.0 million in 2022.

Note 8 — Concentration of Credit Risk

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Inventory liabilities

Interest expense

Salaries and employee benefits

Goods in transit

Professional fees

Salaries and employee benefits

Unearned revenue

Third party warehouse

Professional fees

Sales commissions

Unclaimed property liability

Interest expense

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

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3.25 % convertible senior notes due 2023 *

Total convertible senior notes

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

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

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

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

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

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

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

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

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

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

In August 2017, the Company agreed with Oasis Management and Oasis Investments II Master Fund Ltd., (collectively, “Oasis”) the holder of approximately $ 21.6 million face amount of its 2018 Notes, to extend the maturity date of these notes to November 1, 2020.

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

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

In connection with this transaction, the Company recognized a loss on extinguishment of the debt of approximately $ 0.6 million.

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

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

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

The conversion price for the 3.25 % convertible senior notes due 2020 was reset on November 1, 2018 and November 1, 2019 (each, a “reset date”) to a price equal to 105 % above the 5-day Volume Weighted Average Price ("VWAP") preceding the reset date;

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

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

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

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

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

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

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

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

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

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

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

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

Interest on the New Oasis Notes is payable on each May 1 and November 1 until maturity and accrues at an annual rate of (i) 3.25 % if paid in cash or 5.00 % if paid in stock plus (ii) 2.75 % payable in kind.

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

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

The New Oasis Notes mature 91 days after the amounts outstanding under the 2019 Recap Term Loan are paid in full, and in no event later than July 3, 2023.

Excluding the impact of the Reverse Stock Split, the New Oasis Notes provide, among other things, that the initial conversion price is $ 1.00 .

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

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In connection with the issuance of the New Oasis Notes, the Company recognized a loss on extinguishment of the Existing Oasis Notes of approximately $ 10.4 million.

On February 9, 2020, excluding the impact of the 1 for 10 reverse stock split, the conversion price of the New Oasis Notes reset to $ 1.00 per share ($ 10.00 per share after reverse stock split).

On February 9, 2020, excluding the impact of the Reverse Stock Split, the conversion price of the New Oasis Notes reset to $ 1.00 per share ($ 10.00 per share after reverse stock split).

On August 9, 2020, the conversion price of the New Oasis Notes reset to $ 5.647 .

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

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

As a result, the Company recorded an increase to additional paid-in capital of $ 9.5 million.

In August 2020, $ 1.0 million of the New Oasis Notes (including $ 27,288 in payment-in-kind interest) were converted for 177,085 shares of common stock.

As a result, the Company recorded an increase to additional paid-in capital of $ 1.3 million.

In October 2020, $ 2.0 million of the New Oasis Notes (including $ 63,225 in payment-in-kind interest) were converted for 354,170 shares of common stock.

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

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

During 2020, $ 15.1 million of the New Oasis Notes (including $ 0.5 million in PIK interest) were converted for 2,126,780 shares of common stock.

As a result, the Company recorded an increase to additional paid-in capital of $ 20.2 million.

In December 2020, $ 1.0 million of the New Oasis Notes (including $ 36,528 in payment-in-kind interest) were converted for 177,085 shares of common stock.

During 2021, $ 24.0 million of the New Oasis Notes (including $ 1.2 million in PIK interest) were converted for 4,246,828 shares of common stock.

As a result, the Company recorded an increase to additional paid-in capital of $ 50.8 million.

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

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

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

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

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

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

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

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 $ 16.4 million, $ 2.3 million and $ 5.1 million for the year ended December 31, 2021, 2020 and 2019, respectively, related to changes in the fair value of the 3.25% convertible senior notes due 2023.

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

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

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

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

Holders of the 2020 Notes may require that the Company repurchase for cash all or some of their notes upon the occurrence of a fundamental change (as defined in the 2020 Notes).

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.

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The remaining refinanced amount of $ 7.3 million was exchanged into the new $8.0 million Oasis Note discussed above.

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

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

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

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

Key components of the 4.25% convertible senior notes due 2018 consist of the following (in thousands):

Year ended December 31,

Contractual interest expense

Amortization of debt issuance costs recognized as interest expense

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

The transaction closed on February 8, 2021.

As of December 31, 2021, Benefit Street Partners held nil in principal amount of the New Oasis Notes.

Key components of the 4.875% convertible senior notes due 2020 consist of the following (in thousands):

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Contractual interest expense

The transaction closed on February 8, 2021.

Term loan consists of the following (in thousands):

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Debt Discount/

2019 Recap Term Loan

2021 BSP Term Loan

* The term loan was valued using the discounted cash flow method to determine the implied debt discount.

The debt discount and issuance costs are being amortized over the life of the term loan.

** The amount presented excludes accrued, but unpaid, payment-in-kind interest of $ 4.7 million and $ 1.3 million as of December 31, 2020 and 2019, respectively.

In August 2019, in connection with the Recapitalization Transaction, the Company entered into a First Lien Term Loan Facility Credit Agreement (the “New Term Loan Agreement”), with certain of the Investor Parties, and Cortland Capital Market Services LLC, as agent, for a $ 134.8 million first-lien secured term loan (the “New Term Loan”).

The 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.

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.

The Company also issued common stock and preferred stock (see Note 15 - Common Stock and Preferred Stock) to the Investor Parties.

Amounts outstanding under the New Term Loan accrue interest at 10.50 % per annum, payable semi-annually (with 8 % per annum payable in cash and 2.5 % per annum payable in kind).

The New Term Loan matures on February 9, 2023.

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

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

On October 16, 2020, the Company reached an agreement (the “Amendment”) with holders of its New Term Loan and Wells Fargo, holder of its revolving credit facility, to amend its New Term Loan Agreement and defer its EBITDA covenant calculation until March 31, 2022.

Amounts outstanding under the 2019 Recap Term Loan accrue interest at 10.50 % per annum, payable semi-annually (with 8 % per annum payable in cash and 2.5 % per annum payable in kind).

The 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.

The original terms of the 2019 Recap Term Loan Agreement required the Company to maintain a trailing 12-month EBITDA (as defined and adjusted therein) of not less than $ 34.0 million and a minimum liquidity of not less than $ 10.0 million commencing with the fiscal quarter ended September 30, 2020.

On October 16, 2020, the Company reached an agreement (the “Amendment”) with holders of its 2019 Recap Term Loan and Wells Fargo, holder of its revolving credit facility, to amend its 2019 Recap Term Loan Agreement and defer its EBITDA covenant calculation until March 31, 2022.

Under the Amendment, the trailing 12-month EBITDA requirement was reduced to $ 25.0 million, which will not be calculated earlier than March 31, 2022.

The Amendment also required the Company to pre-pay $ 15.0 million of the term loan immediately and, under certain conditions, pre-pay up to an additional $ 5.0 million no later than the third quarter of fiscal year 2021.

The Amendment also required the Company to pre-pay $ 15.0 million of the 2019 Recap Term Loan immediately and, under certain conditions, pre-pay up to an additional $ 5.0 million no later than the third quarter of fiscal year 2021.

In connection with the amendment, on October 20, 2020, the Company paid $ 15.0 million of its outstanding principal amount and $ 0.3 million in related interest and PIK interest.

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

The New Term Loan Agreement contains events of default that are customary for a facility of this nature, including nonpayment of principal, nonpayment of interest, fees or other amounts, material inaccuracy of representations and warranties, violation of covenants, cross-default to other material indebtedness, bankruptcy or insolvency events, material judgment defaults and a change of control as specified in the New Term Loan Agreement.

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

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

Amortization expense classified as interest expense related to the $ 3.8 million of debt issuance costs associated with the issuance of the New Term Loan was $ 1.0 million and $ 0.4 million for the year ended December 31, 2020 and 2019, respectively.

Amortization expense classified as interest expense related to the $ 10.1 million debt discount associated with the issuance of the New Term Loan was $ 2.8 million and $ 1.1 million for the year ended December 31, 2020 and 2019, respectively.

The fair value of the New Term Loan as of December 31, 2020 and 2019 was $ 129.6 million and $ 123.4 million, respectively.

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

As of December 31, 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 consolidated balance sheet.

The 2019 Recap Term Loan Agreement contains events of default that are customary for a facility of this nature, including nonpayment of principal, nonpayment of interest, fees or other amounts, material inaccuracy of representations and warranties, violation of covenants, cross-default to other material indebtedness, bankruptcy or insolvency events, material judgment defaults and a change of control as specified in the 2019 Recap Term Loan Agreement.

If an event of default occurs, the maturity of the amounts owed under the 2019 Recap Term Loan Agreement may be accelerated.

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 $ 0.4 million, $ 1.0 million and $ 0.4 million for the year ended December 31, 2021, 2020 and 2019, 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 $ 1.2 million, $ 2.8 million and $ 1.1 million for the year ended December 31, 2021, 2020 and 2019, respectively.

The fair value of the Company’s 2019 Recap Term Loan is considered Level 3 fair value (see Note 16 – Fair Value Measurements for further discussion of the fair value hierarchy) and are measured using the discounted future cash flow method.

In addition to the debt terms, the valuation methodology includes an assumption of a discount rate that approximates the current yield on a debt security with comparable risk.

This assumption is considered an unobservable input in that it reflects the Company’s own assumptions about the inputs that market participants would use in pricing the asset or liability.

The Company believes that this is the best information available for use in the fair value measurement.

The estimated fair value of the 2019 Recap Term Loan as of December 31, 2020 was $ 129.6 million compared to a carrying value of $ 116.0 million.

On June 2, 2021, the Company repaid in full and terminated the 2019 Recap Term Loan Agreement, dated as of August 9, 2019, with Cortland Capital Market Services LLC, as agent.

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.

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.

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.

The 2021 BSP Term Loan matures in June 2027.

As of the Closing Date, the Company must maintain a minimum cash balance of not less than $20.0 million.

The minimum cash balance can be reduced to $15.0 million in increments of $1.0 million for every $5.0 million in principal repayment of the 2021 BSP Term Loan .

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

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 the Company’s outstanding Series A Preferred Stock.

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 $ 0.1 million for the year ended December 31, 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 $ 0.2 million for the year ended December 31, 2021.

The fair value of the Company’s 2021 BSP Term Loan is considered Level 3 fair value (see Note 16 – Fair Value Measurements for further discussion of the fair value hierarchy) and are measured using the discounted future cash flow method.

In addition to the debt terms, the valuation methodology includes an assumption of a discount rate that approximates the current yield on a debt security with comparable risk.

This assumption is considered an unobservable input in that it reflects the Company’s own assumptions about the inputs that market participants would use in pricing the asset or liability.

The Company believes that this is the best information available for use in the fair value measurement.

The estimated fair value of the 2021 BSP Term Loan as of December 31, 2021 was $ 97.3 million compared to a carrying value of $ 95.5 million.

As of December 31, 2021, the Company was in compliance with the financial covenants under the 2021 BSP Term Loan Agreement.

The aggregate principal amount of long-term debt maturing in the next five years and thereafter is as follows:

2021 BSP Term Loan

* Represents the Company’s current portion of principal amortization payments for the 2021 BSP Term Loan.

Loan under Paycheck Protection Program

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

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

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

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

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

The Company intends to apply for forgiveness of amounts received under the PPP in accordance with the requirements of the CARES Act, as amended.

Any loan amounts forgiven will be removed from liabilities recorded.

While the Company used the proceeds of the PPP Loan only for permissible purposes, there can be no assurance that it will be eligible for forgiveness of the PPP Loan, in full or in part.

The carrying value of the PPP Loan is a reasonable approximation of fair value.

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 consolidated statements of operations.

Note 11 — Credit Facilities

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The amounts outstanding under the Credit Facility, as amended, were payable in full upon maturity of the facility on September 27, 2019, except that the Credit Facility would mature on June 15, 2018 if the Company did not refinance or extend the maturity of the convertible senior notes that mature in 2018, provided that any such refinancing or extension shall have a maturity date that is no sooner than six months after the stated maturity of the Credit Facility (i.e., on or about September 27, 2019).

On June 14, 2018, the Company entered into a Term Loan Agreement with Great American Capital Partners to provide the necessary capital to refinance the 2018 convertible senior notes (see additional details regarding the Term Loan Agreement below).

On June 14, 2018, the Company entered into a Term Loan Agreement with Great American Capital Partners Finance Co., LLC (“GACP”) to provide the necessary capital to refinance the 2018 convertible senior notes (see additional details regarding the Term Loan Agreement below).

In addition, on June 14, 2018, the Company revised certain of the Credit Facility documents (and entered into new ones) so that certain of its Hong Kong based subsidiaries became additional parties to the Credit Facility.

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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.

As of December 31, 2019, the amount of outstanding borrowings was nil , the amount of outstanding stand-by letters of credit totaled $ 9.2 million and the total excess borrowing capacity was $ 38.4 million.

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

The Company is also required to maintain a fixed charge coverage ratio of not less than 1.1 to 1.0 under certain circumstances, and a minimum liquidity of $ 25.0 million and a minimum availability of at least $ 9.0 million.

As of December 31, 2020 and 2019, the Company was in compliance with the financial covenants under the Amended ABL Facility and the previous Credit Facility, as applicable.

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.

Any amounts borrowed under the Amended ABL Facility accrue interest, at either (i) LIBOR plus 1.50 % - 2.00 % (determined by reference to a fixed charge coverage ratio-based pricing grid) or (ii) base rate plus 0.50 % - 1.00 % (determined by reference to a fixed charge coverage ratio-based pricing grid).

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

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

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

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

As described in Note 10 – Debt, on October 16, 2020, the Company amended its New Term Loan to reduce the amount and defer the calculation of its EBITDA covenant, with Wells Fargo as party to the agreement.

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

As described in Note 10 – 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.

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

Great American Capital Partners

On June 14, 2018, the Company entered into a Term Loan Agreement, Term Note, Guaranty and Security Agreement and other ancillary documents and agreements (the “Term Loan”) with Great American Capital Partners Finance Co., LLC (“GACP”), for itself as a Lender (as defined below) and as the Agent (in such capacity, “Agent”) for the Lenders from time to time party to the Term Loan (collectively, “Lenders”) and the other “Secured Parties” under and as defined therein, with respect to the issuance to the Company by Lenders of a $ 20.0 million term loan.

On June 14, 2018, the Company entered into a Term Loan Agreement, Term Note, Guaranty and Security Agreement and other ancillary documents and agreements (the “Term Loan”) with GACP, for itself as a Lender (as defined below) and as the Agent (in such capacity, “Agent”) for the Lenders from time to time party to the Term Loan (collectively, “Lenders”) and the other “Secured Parties” under and as defined therein, with respect to the issuance to the Company by Lenders of a $ 20.0 million term loan.

To secure the Company’s obligations under the Term Loan, the Company granted to Agent, for the benefit of the Secured Parties, a security interest in a substantial amount of the Company’s consolidated assets and a pledge of the majority of the capital stock of various of its subsidiaries.

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

Amortization expense classified as interest expense related to the $ 1.3 million of debt issuance costs associated with the transactions that closed on June 14, 2018 (i.e., the amendment of the Wells Fargo Credit Facility and the GACP Term Loan) and $ 1.1 million of debt issuance costs associated with the transaction that closed on August 9, 2019 (i.e., Amended ABL Facility) was $ 0.4 million, $ 0.6 million and $ 0.9 million for the year ended December 31, 2020, 2019 and 2018, respectively.

Amortization of debt issuance costs was $ 0.2 million, $ 0.4 million and $ 0.6 million for the year ended December 31, 2021, 2020 and 2019, respectively.

JPMorgan Chase

The Company pays a commitment fee ( 0.25 % - 0.375 %) based on the unused portion of the revolving credit facility.

The JPMorgan ABL Facility matures in June 2026.

As of December 31, 2021, the weighted average interest rate on the credit facility with JPMorgan Chase Bank was 1.88 %.

If an event of default occurs, the commitments of the lenders to lend under the JPMorgan ABL Credit Agreement may be terminated and the maturity of the amounts owed may be accelerated.

As of December 31, 2021, the amount of outstanding borrowings was nil and the total excess borrowing availability was $ 56.7 million.

As of December 31, 2021, off-balance sheet arrangements include letters of credit issued by JPMorgan of $ 9.8 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 $ 0.2 million for the year ended December 31, 2021.

As of December 31, 2021, the Company was in compliance with the financial covenants under the JPMorgan ABL Credit Agreement.

Note 12 — Related Party Transactions

A former director of the Company, who resigned on August 9, 2019 is a partner in a law firm that acts as counsel to the Company.

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

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

The owner of NantWorks, the Company’s DreamPlay Toys joint venture partner, beneficially owned more than 5.0 % of the Company’s outstanding common stock.

Pursuant to the joint venture agreements, the Company is obligated to pay NantWorks a preferred return on joint venture sales.

This agreement expired on September 30, 2018.

The owner of NantWorks sold all of its holdings of the Company's shares on December 30, 2019.

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

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

The joint venture includes a subsidiary in the Shanghai Free Trade Zone that sells, distributes and markets these products, which include dolls, plush, role play products, action figures, costumes, seasonal items, technology and app-enhanced toys, based on top entertainment licenses and JAKKS’ own proprietary brands.

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

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

The non-controlling interest’s share of the income from the joint venture for the year ended December 31, 2021, 2020 and 2019 was $ 120 ,000, $ 130 ,000 and $ 169 ,000, respectively.

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

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

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

As of December 31, 2020, Meisheng beneficially owns 9.2 % of the Company’s outstanding common stock.

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

The non-controlling interest’s share of the income (loss) from the joint venture for the years ended December 31, 2021, 2020 and 2019 was nil .

MC&C is an affiliate of Meisheng and Meisheng holds shares of the Company’s outstanding common stock.

In March 2017, the Company entered into an agreement with a Hong Kong affiliate of its China joint venture partner.

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

Upon the closing, the Company added a representative of Meisheng Culture & Creative Corp as a non-employee director and issued 1,332 shares of restricted stock at a value of $ 0.1 million, which vested in January 2018.

In 2018, the Company issued 4,158 shares of restricted stock at a value of $ 0.1 million to the non-employee director, which vested in January 2019.

In 2019, the Company issued 5,471 shares of restricted stock at a value of $ 0.1 million to the non-employee director, which vested in January 2020.

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.

Meisheng also serves as a significant manufacturer of the Company.

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

For the year ended December 31, 2021, 2020 and 2019, the Company made inventory-related payments to Meisheng of approximately $ 77.7 million, $ 64.8 million and $ 94.3 million respectively.

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

In August 2017, the Company agreed with Oasis Management and Oasis Investments II Master Fund Ltd., the holder of approximately $ 21.6 million face amount of its 4.25 % convertible senior notes due in 2018, to exchange and extend the maturity date of these notes to November 1, 2020.

The transaction closed on November 7, 2017.

In July 2018, the Company closed a transaction with Oasis Management and Oasis Investments II Master Fund Ltd., to exchange $ 8.0 million face amount of the 4.25% convertible senior notes due in August 2018 with convertible senior notes similar to those issued in November 2017.

In August 2019, the Company entered into the Recapitalization Transaction.

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

(see Note 10 - Debt)

A director of the Company is a director at Benefit Street Partners.

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

The transaction closed on February 8, 2021.

A director of the Company is the managing Partner and portfolio manager at Axar Capital Management.

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

(see Note 10 - Debt)

The 2021 BSP Term Loan matures in June 2027.

The 2021 BSP Term Loan Agreement contains negative covenants, events of default, and the obligations under the 2021 BSP Term Loan Agreement are guaranteed by the Company.

The terms, covenants, events of default, and Company obligations are described in more detail in Note 10 – Debt, as well as in the 2021 BSP Term Loan Agreement.

As of December 31, 2021, Benefit Street Partners held $ 98.5 million in principal amount of the 2021 BSP Term Loan.

Beginning August 9, 2019 and continuing until September 27, 2021, the managing partner and portfolio manager at Axar Capital Management was a director at the Company.

As of December 31, 2020, Axar Capital Management held $ 24.3 million in principal amount (including $ 0.9 million in payment-in-kind interest) of the 2019 Recap Term Loan.

Note 13 — Income Taxes

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

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

For the years ended 2021, 2020 and 2019, the provision for income taxes, which included federal, state and foreign income taxes, was an expense of $ 0.2 million, $ 0.7 million and $ 1.9 million, respectively, reflecting effective tax provision rates of ( 4.0 %), ( 5.5 %) and ( 3.6 %) respectively.

The 2021 tax expense of $0.2 million included a discrete tax benefit of ($ 0.4 ) million primarily comprised of return to provision and uncertain tax position adjustments.

Absent these discrete tax benefits, the Company’s effective tax rate for 2021 was ( 10.7 %), primarily due to state taxes and taxes on foreign income.

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

For the years ended 2020 and 2019, provision for income taxes includes federal, state and foreign income taxes at effective tax rates of (5.5%) and (3.6%).

Exclusive of discrete items, the effective tax provision rate would be ( 7.7 %) in 2020 and ( 3.1 %) in 2019.

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

As of December 31, 2021 and 2020, the Company had net deferred tax liabilities of approximately $ 51,000 and $ 0.1 million, primarily related to foreign jurisdictions.

Provision for income taxes reflected in the accompanying consolidated statements of operations are comprised of the following (in thousands):

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Provision to return

Change in tax rate

Non-deductible expenses

Unrealized Loss

Undistributed foreign earnings

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

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

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

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

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

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

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

Approximately $ 0.8 million of the current year reduction was related to a settlement of an audit examination in Hong Kong in 2021.

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

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

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

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

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

During 2021 and 2020, the Company did not recognize any interest expense relating to UTPs.

The following table provides further information of UTPs that would affect the effective tax rate, if recognized, as of December 31, 2021 (in millions):

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Current year additions

Current year reduction due to audit settlement

Balance, December 31, 2019

Current year additions

Current year reduction

Balance, December 31, 2020

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The tax years 2017 through 2020 are generally still subject to examination in the various states.

Furthermore, all net operating losses and tax credit carryforwards are still subject to review given that the statute of limitation for these items would begin in the year of utilization.

The tax years 2015 through 2020 are still subject to examination in Hong Kong.

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Based on our evaluation of all positive and negative evidence, as of December 31, 2021, a valuation allowance of $ 84.7 million has been recorded against the deferred tax assets that more likely than not will not be realized.

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

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

deferred tax assets related to the AMT credit carryforwards.

For the year ended December 31, 2021, the valuation allowance decreased from $92.8 million at December 31, 2020.

The net deferred tax liabilities of $51,000 in 2021 represent the net deferred tax liabilities in the foreign jurisdiction, where the Company is in a cumulative income position.

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

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federal net operating loss carryforwards, or "NOLs", of approximately $ 181 million, which will begin to expire in 2033.

At December 31, 2020, the Company's state NOLs were mainly from California.

The majority of the approximately $228.6 million of California NOLs will begin to expire in 2031.

At December 31, 2021, the Company has state NOLs of approximately $ 302 million.

The majority of the Company's state NOLs were from California, which will begin to expire in 2031.

At December 31, 2021, the Company had foreign tax credit carryforwards of approximately $ 0.1 million, which will begin to expire in 2027.

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Sublease rental income was $ 0.8 million in 2020.

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

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

The Company had a cash outflow of $ 11.4 million, $ 11.1 million and $ 11.8 million related to operating leases for the year ended December 31, 2021, 2020 and 2019, respectively.

The following table represents a reconciliation of the Company’s undiscounted future minimum lease payments under operating leases to the lease liability excluding minimum lease payments for executed and legally enforceable leases that have not yet commenced as of December 31, 2021 (in thousands):

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Less imputed interest

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

As of December 31, 2021 and 2020, the minimum lease payments for executed and legally enforceable leases that have not yet commenced were nil and $ 0.1 million, respectively.

Note 15 — Common Stock and Preferred Stock

Effective July 9, 2020, the Company completed a 1 for 10 reverse stock split of its $ 0.001 par value common stock reducing the issued and outstanding shares of common stock from 42,395,782 to 4,239,578 (“Reverse Stock Split”).

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

Effective July 9, 2020, the Company completed a Reverse Stock Split of its $ 0.001 par value common stock reducing the issued and outstanding shares of common stock from 42,395,782 to 4,239,578 .

All common stock and price per share amounts in this report have been restated to reflect the Reverse Stock Split.

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

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

On September 11, 2020, the Company received notice from Nasdaq that during the prior 30-day period the Company had not met a listing requirement to maintain a minimum MVPHS of $15.0 million.

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

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

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

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

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

In June 2014, the Company effectively repurchased 311,284 shares of its common stock at an average cost of $ 77.10 per share for an aggregate amount of $ 24.0 million pursuant to a prepaid forward share repurchase agreement entered into with Merrill Lynch International (“ML”).

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

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

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

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

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

In addition, an aggregate of 24,948 shares of restricted stock at an aggregate value of approximately $ 0.6 million were issued to its six non-employee directors, which vested in January 2019.

During 2018, an executive officer surrendered an aggregate of 4,235 shares of restricted stock for $ 98,000 to cover income taxes due on the vesting of restricted shares.

In January 2019, the Company was obligated to issue an aggregate of 306,122 shares of restricted stock at a value of approximately $ 4.5 million to two executive officers pursuant to the applicable employment contracts.

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

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

As a result, the Company recorded an increase to additional paid-in capital of $ 9.5 million.

In August 2020, $ 1.0 million of the New Oasis Notes (including $ 27,288 in payment-in-kind interest) were converted for 177,085 shares of common stock.

As a result, the Company recorded an increase to additional paid-in capital of $ 1.3 million.

In October 2020, $ 2.0 million of the New Oasis Notes (including $ 63,225 in payment-in-kind interest) were converted for 354,170 shares of common stock.

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

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

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

In December 2020, $ 1.0 million of the New Oasis Notes (including $ 36,528 in payment-in-kind interest) were converted for 177,085 shares of common stock.

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

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 .

During 2021, certain employees, including two executive officers, surrendered an aggregate of 32,846 shares of restricted stock for $ 163,573 to cover income taxes due on the vesting of restricted shares.

Additionally, an aggregate of 93,352 shares of restricted stock granted in 2018 with a value of approximately $ 0.5 million was forfeited during 2021.

No dividend was declared or paid in 2021 and 2020.

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The Series A Preferred Stock has the right to receive dividends on a quarterly basis equal to 6.0 % per annum, payable in cash or, if not paid in cash, by an automatic accretion of the Series A Preferred Stock.

No dividends have been declared or paid.

For the year ended December 31, 2020 and 2019, the Company recorded $ 1.3 million and $ 483 ,000, respectively of preferred stock dividends as an increase in the value of the Series A Preferred Stock.

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

No cash dividends have been declared or paid.

For the year ended December 31, 2021 and 2020, the Company recorded $ 1.3 million and $ 1.3 million, respectively of preferred stock dividends as an increase in the value of the Series A Preferred Stock.

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

The Company has the right, but is not required, to repurchase all or a portion of the Series A Preferred Stock at its Liquidation Preference at any time after payment in full of the New Term Loan (see Note 10 - Debt).

The 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 10 - Debt).

The Series A Preferred Stock does not have any voting rights, except to the extent required by the Delaware General Corporation Law, except for the exclusive right to elect the Series A Preferred Directors (as described below) and except for certain approval rights over certain transactions (as described below).

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In addition, the Certificate of Designations provides the holders of Series A Preferred Stock certain board representation rights.

The Certificate of Designations provides, among other things, that, for so long as at least 50,000 shares of Series A Preferred Stock remain outstanding, (i) the holders of a majority of the outstanding shares of Series A Preferred Stock have the sole right to nominate candidates to serve as the Series A Preferred Directors and (ii) the holders of shares of Series A Preferred Stock, voting as a separate class, have the right to elect two individuals to serve as the Series A Preferred Directors.

The Certificate of Designations provides, among other things, that, for so long as at least 50,000 shares of Series A Preferred Stock remain outstanding, (i) the holders of a majority of the outstanding shares of Series A Preferred Stock have the sole right to nominate two candidates to serve as the Series A Preferred Directors and (ii) the holders of shares of Series A Preferred Stock, voting as a separate class, have the right to elect two individuals to serve as the Series A Preferred Directors.

From and after (i) the first annual meeting of stockholders occurring after less than 50,000 shares of Series A Preferred Stock remain outstanding, the holders of Series A Preferred Stock will only have the right to nominate and elect one Series A Preferred Director, and (ii) the time no shares of Series A Preferred Stock remain outstanding, the holders of Series A Preferred Stock will no longer have the right to nominate or elect any Series A Preferred Directors.

The Series A Preferred Directors serve for terms ending at the annual meeting of stockholders in 2023 and for successive three-year terms thereafter (until no shares of Series A Preferred Stock remain outstanding).

The Series A Preferred Directors (or Director if less than 50,000 Series A shares are outstanding) serve for terms ending at the annual meeting of stockholders in 2023 and for successive three-year terms thereafter (until no shares of Series A Preferred Stock remain outstanding).

The number of directors elected by the holders of the Company’s Common Stock and the number of Series A Preferred Directors is fixed and cannot be amended without the approval of holders of a majority of the outstanding Common Stock and holders of at least 80% of the outstanding shares of Series A Preferred Stock, each voting as a separate class.

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As of December 31, 2021, the Series A Preferred Stock is recorded in temporary equity at the amount of accrued, but unpaid dividends of $ 3.1 million, and the redemption provision, as a bifurcated derivative, is recorded as a long term liability with an estimated value of $ 21.3 million.

As of December 31, 2019, the Series A Preferred Stock is recorded in temporary equity at the amount of accrued, but unpaid dividends of $483,000, and the redemption provision, as a bifurcated derivative, is recorded as a long term liability with an estimated value of $ 5.2 million.

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.

The following table provides a reconciliation of the beginning and ending balances of the Series A Preferred Stock, which is recorded in temporary equity:

Balance, January 1,

Preferred stock accrued dividends

Balance, December 31,

Note 16 — Fair Value Measurements

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

In determining fair value, the Company uses various methods including market, income and cost approaches.

Based upon these approaches, the Company often utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique.

These inputs can be readily observable, market-corroborated, or unobservable inputs.

The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.

Based upon observable inputs used in the valuation techniques, the Company is required to provide information according to the fair value hierarchy.

The fair value hierarchy ranks the quality and reliability of the information used to determine fair values into three broad levels as follows:

Valuations for assets and liabilities traded in active markets from readily available pricing sources for market transactions involving identical assets or liabilities.

Valuations for assets and liabilities traded in less active dealer or broker markets.

Valuations are obtained from third-party pricing services for identical or similar assets or liabilities.

Valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.

In instances where the determination of the fair value measurement is based upon inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based upon the lowest level input that is significant to the fair value measurement in its entirety.

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

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

Carrying Amount as of

December 31, 2020

Fair Value Measurements

As of December 31, 2021

3.25% convertible senior notes due in 2023

December 31, 2021

Preferred stock derivative liability

Carrying Amount as of

December 31, 2019

Fair Value Measurements

As of December 31, 2020

December 31, 2020

3.25% convertible senior notes due in 2023

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Balance at January 1,

Loss on extinguishment of convertible senior notes

Extinguishment of convertible senior notes

Change in fair value

Balance at December 31,

3.25% convertible senior notes due 2023

Balance at January 1,

New issuance ($ 29.6 million face value)

New issuance ($ 8.0 million face value)

Conversion of convertible senior notes

Change in fair value

Payment-in-kind interest

Balance at December 31,

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Balance at January 1,

New issuance of Series A Preferred Stock

Change in fair value

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In subsequent periods, the derivative liability is accounted for at fair value, with changes in fair value recognized as other income (expense) on the Company's consolidated statements of operations.

In August 2017, the Company agreed with Oasis, the holder of approximately $ 21.6 million face amount of its 2018 Notes, to extend the maturity date of these notes to November 1, 2020.

These notes are hereafter referred to as the “3.25% convertible senior notes due in 2020” or “3.25% 2020 Notes.” After execution of a definitive agreement for the modification and final approval by the other members of the Company’s Board of Directors and Oasis’ Investment Committee, the transaction closed on November 7, 2017.

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

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

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

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

The New Oasis Notes mature 91 days after the amounts outstanding under the New Term Loan are paid in full, and in no event later than July 3, 2023, accrue interest at an annual rate of (i) 3.25% if paid in cash or 5.00 % if paid in stock plus (ii) 2.75 % payable in kind.

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

In connection with these transactions, the Company elected the fair value option of measurement for the 3.25% 2020 Notes and the 3.25% 2023 Notes, under ASC 815, Derivatives and Hedging.

The Company has elected the fair value option of measurement for the 3.25% 2023 Notes, under ASC 815, Derivatives and Hedging.

As a result, these notes are re-measured each reporting period using Level 3 inputs (Monte Carlo simulation model and inputs for stock price, risk-free rate and volatility), with changes in fair value reflected in current period earnings in its consolidated statements of operations.

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

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

The remaining $ 1.9 million principal amount of the 4.875% convertible senior notes due 2020 were redeemed at par at maturity on June 1, 2020.

In connection with the Recapitalization Transaction, the Company also issued 200,000 shares of Series A Preferred Stock, to the Investor Parties.

The fair value of the Series A Preferred Stock derivative liability is calculated using unobservable inputs (Level 3 fair measurements).

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

The fair value of the New Term Loan as of December 31, 2020 and 2019 was $ 129.6 million and $ 123.4 million, respectively.

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

The Company’s accounts receivable, accounts payable and accrued expenses represent financial instruments.

The carrying value of these financial instruments is a reasonable approximation of fair value.

The carrying value of these financial instruments is a reasonable approximation of fair value due to the short-term nature of the instruments.

Note 17 — Commitments

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Future annual minimum royalty guarantees as of December 31, 2021 are as follows (in thousands):

Royalty expense for the year ended December 31, 2021, 2020 and 2019, was $ 87.2 million, $ 83.2 million and $ 91.8 million, respectively.

The Company has entered into employment and consulting agreements with certain executives expiring through December 31, 2024.

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Compensation expense for performance-awards is measured based on the amount of shares ultimately expected to vest, estimated at each reporting date based on management expectations regarding the relevant performance criteria.

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

As of December 31, 2021, 1,657,820 shares were available for future grant.

Additional shares may become available to the extent that options or shares of restricted stock presently outstanding under the Plan terminate, expire, or are forfeited.

Restricted Stock

Restricted Stock Award

Under the Plan, share-based compensation payments may include the issuance of shares of restricted stock.

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Outstanding, January 1

Converted to RSU

Outstanding, December 31

As of December 31, 2021, there was nil of total unrecognized compensation cost related to non-vested restricted stock.

As of December 31, 2020, there was $ 2.1 million of total unrecognized compensation cost related to non-vested restricted stock, which is expected to be recognized over a weighted-average period of 1.96 years.

On September 27, 2021, the Company amended the employment agreements with certain executives.

The purpose of the amendments was to change the issuance, past and future, of all restricted stock awards to restricted stock units.

All other material terms of the respective employment agreements remain the same, including without limitation, the terms of all such grants including the timing of all vesting periods and the vesting benchmarks.

Restricted Stock Units

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Outstanding, January 1

Converted from RSA

Outstanding, December 31

As of December 31, 2021, there was $ 6.1 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 2.41 years.

As of December 31, 2020, there was $ 0.4 million of total unrecognized compensation cost related to non-vested restricted stock units, which is expected to be recognized over a weighted-average period of 2.67 years.

Share-Based Compensation Expense

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The Company eliminated the match on March 31, 2019.

Company matching contributions, which vested immediately, totaled nil , $ 1.1 million and $ 2.4 million for the year ended December 31, 2020, 2019 and 2018, respectively.

Company matching contributions, which vested immediately, totaled $ 1.9 million, nil and $ 1.1 million for the year ended December 31, 2021, 2020 and 2019, respectively.

The Company resumed the match on contributions effective January 1, 2021.

Note 20 — Supplemental Information to Consolidated Statements of Cash Flows

In 2018, an executive officer surrendered an aggregate of 4,235 shares of restricted stock at a value of less than $ 0.1 million to cover income taxes due on the 2018 vesting of the restricted shares granted to them in 2016 and 2017.

In 2019, two executive officers surrendered an aggregate of 14,391 shares of restricted stock at a value of less than $ 0.1 million to cover income taxes due on the 2019 vesting of the restricted shares granted to them in 2016, 2017, and 2018.

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

In 2021, certain employees, including two executive officers, surrendered an aggregate of 32,846 shares of restricted stock for $ 163,573 to cover income taxes due on the vesting of restricted shares.

Note 21 — Selected Quarterly Financial Data (Unaudited)

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Income (loss) from operations

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

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

Net income (loss)

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Net income (loss) attributable to common stockholders

Basic earnings (loss) per share

Basic income (loss) per share

Weighted average shares outstanding

Diluted earnings (loss) per share

Diluted income (loss) per share

Weighted average shares and equivalents outstanding

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The purported class action seeks damages in an unspecified amount, alleging breach of fiduciary duties by the Company’s directors.

The Company intends to vigorously defend the lawsuit.

Since the action was recently commenced, however, we cannot assure you of its outcome and cannot estimate the range of any potential damage award.

The Company is taking steps to hold a Special Meeting of the Shareholders on April 30, 2021 to obtain shareholder ratification of the filing of the Certificate of Amendment to its Certificate of Incorporation effecting the reverse split, in accordance with ratification procedures under Delaware law, and if ratified, to then seek settlement and dismissal of the lawsuit.

On April 30, 2021, the Company held a Special Meeting of the Shareholders to obtain shareholder ratification of the filing of the Certificate of Amendment to its Certificate of Incorporation effecting the Reverse Stock Split, in accordance with ratification procedures under Delaware law, which approval was obtained.

The Company settled this matter on December 14, 2021, paying only legal fees to plaintiff’s attorneys, and the case was dismissed.

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.

Workforce Enterprises has also been named as a defendant in this matter, but we cannot determine if a Complaint was served on them.

No formal discovery has commenced, and so the Company cannot be assured of the outcome of the action and cannot estimate the range of any potential damage award.

In addition, the same counsel in the Villarica matter filed a related lawsuit on February 15, 2022 in the same court (Matthew Cordova v.

Jakks Pacific, Inc).

Plaintiff also 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 committed wage and hour violations under the California Private Attorneys General Act, including failing to provide compliant meal and rest periods, properly calculate and pay all minimum and overtime wages, provide accurate wage statements, provide all wages due at separation of employment, provide sick leave, maintain accurate payroll records, or reimburse business expenses.

Plaintiff seeks to collect civil penalties on behalf of the State of California under the Private Attorneys General Act for each violation experienced by “aggrieved employees,” defined as all individuals who have worked for the Company—either directly or through a staffing agency—in California since December 8, 2020 and who were classified as non-exempt.

No formal discovery has commenced, and so the Company cannot be assured of the outcome of the action and cannot estimate the range of any potential damage award.

The Company has demanded indemnification for both of these matters from the temporary employee providers who supplied temporary employees to the Company during the relevant time periods at issue in the lawsuits.

A mediation between the Company and counsel for both matters is scheduled for March 24, 2022.

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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For the past five years, costs related to director and officer indemnifications have not been significant.

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

Note 23 — Subsequent Event

The transaction closed on February 8, 2021.

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

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

(see Note 10 – Debt).

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS

YEAR ENDED DECEMBER 31, 2020, 2019 and 2018

Allowances are deducted from the assets to which they apply, except for sales returns and allowances.

Net Deductions

(In thousands)

Year ended December 31, 2020:

Allowance for:

Uncollectible accounts

Reserve for sales returns and allowances

Year ended December 31, 2019:

Allowance for:

Uncollectible accounts

Reserve for sales returns and allowances

Year ended December 31, 2018:

Allowance for:

Uncollectible accounts

Reserve for sales returns and allowances

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.

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 7A. Quantitative and Qualitative Disclosures About Market Risk