JAKKS PACIFIC INC 10-K

Item 5. Market for Registrant ’ s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market Information Our common stock is traded on the Nasdaq Global Select exchange under the symbol “JAKK.” Security Holders To the best of our knowledge, as of March 15, 2022, there were 89 holders of record of our common stock. We believe there are numerous beneficial owners of our common stock whose shares are held in “street name.” Dividends The payment of dividends on common stock is at the discretion of the Board of Directors and is subject to customary limitations and may be subject to certain restrictions pursuant to the terms of our preferred stock and under our credit facility and term loan. We currently do not anticipate paying any dividends in the foreseeable future. Compensation Plan Information The table below sets forth the following information as of the year ended December 31, 2021 for (i) all compensation plans previously approved by our stockholders and (ii) all compensation plans not previously approved by our stockholders, if any: (a) the number of securities to be issued upon the exercise of outstanding options, warrants and rights; (b) the weighted-average exercise price of such outstanding options, warrants and rights; and (c) other than securities to be issued upon the exercise of such outstanding options, warrants and rights, the number of securities remaining available for future issuance under the plans. Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans, Excluding Securities Reflected in Column (a) Plan Category (a) (b) (c) Equity compensation plans approved by security holders — — 1,657,820 Equity compensation plans not approved by security holders — — — Total — — 1,657,820 Equity compensation plans approved by our stockholders consists of the 2002 Stock Award and Incentive Plan. An additional 1.4 million, 2.5 million, 3.6 million and 1.0 million shares were added to the number of total issuable shares under the Plan and approved by the Board in 2013, 2017, 2019, and 2021, respectively. Additionally, no shares of restricted stock awards remained unvested as of December 31, 2021. Disclosures with respect to equity issuable to certain of our executive officers pursuant to the terms of their employment agreements are disclosed below under Item 11. 27 Table of Contents Issuer Purchases of Equity Securities There were no issuer purchases of equity securities in the fourth quarter of 2021. Issuer Unregistered Sale of Equity Securities There were no issuer sales of unregistered equity securities in the fourth quarter of 2021. Item 6. [Reserved] 28 Table of Contents Item 7. Management ’ s Discussion and Analysis of Financial Condition and Results of Operations The following Management ’ s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors. You should read this section in conjunction with our consolidated financial statements and the related notes included in Item 8 “ Consolidated Financial Statements and Supplementary Data. ” Critical Accounting Policies The accompanying consolidated financial statements and supplementary information were prepared in accordance with accounting principles generally accepted in the United States of America. Significant accounting policies are discussed in Note 2 to the Consolidated Financial Statements, included within Item 8. Inherent in the application of many of these accounting policies is the need for management to make estimates and judgments in the determination of certain revenues, expenses, assets and liabilities. As such, materially different financial results can occur as circumstances change and additional information becomes known. The policies with the greatest potential effect on our results of operations and financial position include: Allowance for Doubtful Accounts. Our allowance for doubtful accounts is based upon management’s assessment of the business environment, customers’ financial condition, historical collection experience, accounts receivable aging, customer disputes and the collectability of specific customer accounts. If there were a deterioration of a major customer’s creditworthiness, or actual defaults were higher than our historical experience, our estimates of the recoverability of amounts due to us could be overstated, which could have an adverse impact on our operating results. Our allowance for doubtful accounts is also affected by the time at which uncollectible accounts receivable balances are actually written off. Major customers’ accounts are monitored on an ongoing basis and more in-depth reviews are performed based upon changes in a customer’s financial condition and/or the level of credit being extended. When a significant event occurs, such as a bankruptcy filing by a specific customer, and on a quarterly basis, the allowance is reviewed for adequacy and the balance or accrual rate is adjusted to reflect current risk prospects. When certain shocks to the market occur, customers are unilaterally reviewed to assess the potential impact of that shock on their financial stability. Many retailers have been operating under financial duress for several years. Ultimately, we assess the risk of liquidation bankruptcy by a customer and the associated likelihood that we will not be paid for product shipped. To that end, it is not only outstanding accounts receivable balances but the decisions to design and develop account-specific product and ultimately ship product on a go-forward basis that plays into our attempts to maximize profitability while minimizing uncollectable accounts receivable. Revenue Recognition. Our contracts with customers only include one performance obligation (i.e., sale of our products). Revenue is recognized in the gross amount at a point in time when delivery is completed and control of the promised goods is transferred to the customers. Revenue is measured as the amount of consideration we expect to be entitled to in exchange for those goods. Our contracts do not involve financing elements as payment terms with customers are less than one year. Further, because revenue is recognized at the point in time goods are sold to customers, there are no contract assets or contract liability balances. We disaggregate our revenues from contracts with customers by reporting segment: Toys/Consumer Products and Costumes. We further disaggregate revenues by major geographic regions (see Item 8 "Consolidated Financial Statements and Supplementary Data Note 3 - Business Segments, Geographic Data, and Sales by Major Customers” for further information). We offer various discounts, pricing concessions, and other allowances to customers, all of which are considered in determining the transaction price. Certain discounts and allowances are fixed and determinable at the time of sale and are recorded at the time of sale as a reduction to revenue. Other discounts and allowances can vary and are determined at management’s discretion (variable consideration). Specifically, we occasionally grant discretionary credits to facilitate markdowns and sales of slow moving merchandise, and consequently accrue an allowance based on historic credits and management estimates. Further, while we generally do not allow product returns, we do make occasional exceptions to this policy, and consequently record a sales return allowance based upon historic return amounts and management estimates. These allowances (variable consideration) are estimated using the expected value method and are recorded at the time of sale as a reduction to revenue. We adjust our estimate of variable consideration at least quarterly or when facts and circumstances used in the estimation process may change. The variable consideration is not constrained as we have sufficient history on the related estimates and do not believe there is a risk of significant revenue reversal. 29 Table of Contents We also participate in cooperative advertising arrangements with some customers, whereby we allow a discount from invoiced product amounts in exchange for customer purchased advertising that features our products. Generally, these allowances range from 1% to 20% of gross sales, and are generally based upon product purchases or specific advertising campaigns. Such allowances are accrued when the related revenue is recognized. These cooperative advertising arrangements provide a distinct benefit at fair value, and are accounted for as direct selling expenses. Sales commissions are expensed when incurred as the related revenue is recognized at a point in time and therefore the amortization period is less than one year. As a result, these costs are recorded as direct selling expenses, as incurred. Shipping and handling activities are considered part of our obligation to transfer the products and therefore are recorded as direct selling expenses, as incurred. Our reserve for sales returns and allowances amounted to $46.3 million as of December 31, 2021 and $42.1 million as of December 31, 2020. Royalties. We enter 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. Fair value measurements. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, we use various methods including market, income and cost approaches. Based upon these approaches, we often utilize certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market-corroborated, or unobservable inputs. We utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based upon observable inputs used in the valuation techniques, we are required to provide information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values into three broad levels as follows: Level 1: Valuations for assets and liabilities traded in active markets from readily available pricing sources for market transactions involving identical assets or liabilities. Level 2: Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third-party pricing services for identical or similar assets or liabilities. Level 3: Valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities. In instances where the determination of the fair value measurement is based upon inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based upon the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability (see Item 8 "Consolidated Financial Statements and Supplementary Data Note 16 - Fair Value Measurements” for further information). Reserve for Inventory Obsolescence. We value our inventory at the lower of cost or net realizable value. Based upon a consideration of quantities on hand, actual and projected sales volume, anticipated product selling prices and product lines planned to be discontinued, slow-moving and obsolete inventory is written down to its net realizable value. Failure to accurately predict and respond to consumer demand could result in us under-producing popular items or over-producing less popular items. Furthermore, significant changes in demand for our products would impact management’s estimates in establishing our inventory provision. Management’s estimates are monitored on a quarterly basis, and a further adjustment to reduce inventory to its net realizable value is recorded as an increase to cost of sales when deemed necessary under the lower of cost or net realizable value standard. 30 Table of Contents When unexpected shocks to market demand occur, we review whether that shock has materially impacted the value of our owned inventory. In some cases where customers have cancelled orders, accommodation can be reached that the product will be reordered when the customer has restarted operations (in the event of store closures) or the customer agrees to minimize/eliminate requests for product line refreshment (in the event of Halloween order cancellations) which allows the inventory and in some cases raw materials to be held through to the following calendar year without incurring any additional obsolescence. Income Allocation for Income Taxes. Our annual income tax provision and related income tax assets and liabilities are based upon actual income as allocated to the various tax jurisdictions based upon our transfer pricing study, US and foreign statutory income tax rates and tax regulations and planning opportunities in the various jurisdictions in which we operate. Significant judgment is required in interpreting tax regulations in the U.S. and foreign jurisdictions, and in evaluating worldwide uncertain tax positions. Actual results could differ materially from those judgments, and changes from such judgments could materially affect our consolidated financial statements. Income taxes and interest and penalties related to income tax payable. We do not file a consolidated return for our foreign subsidiaries. We file federal and state returns and our foreign subsidiaries each file returns in their respective jurisdictions, as applicable. Deferred taxes are provided on an asset and liability method. Deferred tax assets are recognized as deductible temporary differences, operating losses, or tax credit carry-forwards. Deferred tax liabilities are recognized as taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. We must assess the likelihood that we will be able to recover our deferred tax assets. Deferred tax assets are reduced by a valuation allowance, if, based upon the weight of available evidence, it is more likely than not that we will not realize some portion or all of the deferred tax assets. We consider all available positive and negative evidence when assessing whether it is more likely than not that deferred tax assets are recoverable. We consider evidence such as our past operating results, the existence of cumulative losses in previous periods and our forecast of future taxable income. We believe this to be a critical accounting policy because should there be a change in our ability to recover our deferred tax assets, our tax provision would increase in the period in which we determine that the recovery is not likely, as well as decrease in the period in which the assessment of the recoverability of the deferred tax assets reverses, which could have a material impact on our results of operations. We accrue a tax reserve for additional income taxes and interest, which may become payable in future years as a result of audit adjustments by tax authorities. The reserve is based upon management’s assessment of all relevant information and is periodically reviewed and adjusted as circumstances warrant. As of December 31, 2021, our income tax reserves were approximately $0.2 million and relates to the potential tax settlement in Hong Kong. We recognize current period interest expense and penalties and the reversal of previously recognized interest expense and penalties that has been determined to not be assessable due to the expiration of the related audit period or other compelling factors on the income tax liability for unrecognized tax benefits as a component of the income tax provision recognized in the consolidated statements of operations. Recent Accounting Pronouncements. See Item 8 “Consolidated Financial Statements and Supplementary Data Note 2 - Summary of Significant Accounting Policies.” 31 Table of Contents Results of Operations The following table sets forth, for the periods indicated, certain statement of operations data as a percentage of net sales. A discussion of the operating results for 2019 can be found in our Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the SEC on March 19, 2021, in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations. Year Ended December 31, 2021 2020 Net sales 100.0 % 100.0 % Cost of sales 70.5 71.0 Gross profit 29.5 29.0 Selling, general and administrative expenses 23.2 26.1 Restructuring charge — 0.3 Pandemic related charges — 0.1 Income from operations 6.3 2.5 Income from joint ventures — — Other income (expense), net — — Change in fair value of preferred stock derivative liability (2.1 ) (0.5 ) Change in fair value of convertible senior notes (2.6 ) (0.4 ) Gain on loan forgiveness 1.0 — Loss on debt extinguishment (1.2 ) — Interest income — — Interest expense (2.3 ) (4.2 ) Loss before provision for income taxes (0.9 ) (2.6 ) Provision for income taxes — 0.2 Net loss (0.9 ) (2.8 ) Net income attributable to non-controlling interests — — Net loss attributable to JAKKS Pacific, Inc. (0.9 )% (2.8 )% Net loss attributable to common stockholders (1.2 )% (3.0 )% The following table summarizes, for the periods indicated, certain statement of operations data by segment (in thousands). Year Ended December 31, 2021 2020 Net Sales Toys/Consumer Products $ 513,517 $ 427,122 Costumes 107,599 88,750 621,116 515,872 Cost of Sales Toys/Consumer Products 357,226 294,792 Costumes 80,933 71,315 438,159 366,107 Gross Profit Toys/Consumer Products 156,291 132,330 Costumes 26,666 17,435 $ 182,957 $ 149,765 32 Table of Contents Comparison of the Years Ended December 31, 2021 and 2020 Net Sales Toys/Consumer Products. Net sales of our Toys/Consumer Products segment were $513.5 million in 2021, compared to $427.1 million in 2020, representing an increase of $86.4 million, or 20.2%. The increase in net sales was primarily due to higher sales of Disney Style Collection and Disney Encanto™. In addition, net sales from video game properties, Nintendo® and Sonic the Hedgehog®, also added to the yearly increase in net sales. Costumes. Net sales of our Costumes segment were $107.6 million in 2021, compared to $88.8 million in 2020, representing an increase of $18.8 million, or 21.2%. The increase in net sales was primarily driven by the Disney® and Microsoft® lines of costumes. Cost of Sales Toys/Consumer Products. Cost of sales of our Toys/Consumer Products segment was $357.2 million, or 69.6% of related net sales in 2021 compared to $294.8 million, or 69.0% of related net sales in 2020 representing an increase of $62.4 million or 21.2%. The increase in dollars is due to higher overall sales in 2021, while the increase in percentage of net sales, year-over-year is due to increased freight costs offset by product margin improvements. Costumes. Cost of sales of our Costumes segment was $80.9 million, or 75.2% of related net sales for 2021 compared to $71.3 million, or 80.3% of related net sales for 2020 representing an increase of $9.6 million, or 13.5%. The increase in dollars is due to higher overall sales in 2021. The decrease as a percentage of net sales, year-over-year, is due to a lower overall royalty rate in 2021 as well as product margin improvements. Selling, General and Administrative Expenses Selling, general and administrative expenses were $144.2 million in 2021 and $134.9 million in 2020, constituting 23.2% and 26.1% of net sales, respectively. Selling, general and administrative expenses increased from the prior year primarily driven by higher compensation expense, media spend, and temporary help related to higher domestic shipping. Restructuring Charge In 2020, we recognized $1.6 million. The restructuring charges are primarily related to employee severance. Pandemic Related Charges In 2020, we recognized $0.4 million in spending directly attributable to making necessary accommodations related to the COVID-19 pandemic. Gain on loan forgiveness In 2021, we recognized a gain on loan forgiveness of $6.2 million as a result of the forgiveness of the Paycheck Protection Program Loan secured under the Coronavirus Aid Relief and Economic Security Act. Loss on debt extinguishment In 2021, we recognized a loss on debt extinguishment of $7.4 million in connection with the refinance of the 2019 Recap Term Loan. 33 Table of Contents Interest Expense Interest expense was $14.1 million for the year ended December 31, 2021, as compared to $21.6 million in the prior year period. In 2021, we booked interest expense of $7.3 million related to our 2019 Recap Term Loan, $5.4 million related to our 2021 BSP Term Loan, $0.8 million related to our revolving credit facility and $0.6 million related to our convertible senior notes due in 2023. In 2020, we booked interest expense of $2.0 million related to our convertible senior notes due in 2020 and 2023, $18.2 million related to our 2019 Recap Term Loan, which includes $3.4 million of payment-in-kind interest, and $3.9 million related to amortization of the debt discount and deferred financing fees, and $1.2 million related to our revolving credit facility. Provision for Income Taxes Our income tax expense, which includes federal, state and foreign income taxes and discrete items, was $0.2 million, or an effective tax rate of (4.0%) for 2021. During 2020, the income tax expense was $0.7 million, or an effective tax rate of (5.5%). 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 expenses, our effective tax rate for 2021 was (10.7%), primarily due to the various state taxes and taxes on foreign income. The 2020 tax expense of $0.7 million included a discrete tax benefit of ($0.3) million primarily comprised of return to provision and uncertain tax position adjustments. Absent these discrete tax benefits, our effective tax rate for 2020 was (7.7%), primarily due to the various state taxes and taxes on foreign income. We assess the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets by jurisdiction. Based on our evaluation of all positive and negative evidence, as of December 31, 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. The net deferred tax liabilities of $51,000 consists of the net deferred tax liabilities in the foreign jurisdiction, where we are in a cumulative income position. Uncertainties that may have a significant impact on net sales and income (loss) from operations Significant outbreaks of contagious diseases, and other adverse public health developments, could have a material impact on our business operations and operating results. In December 2019, a strain of Novel Coronavirus causing respiratory illness and death emerged in the city of Wuhan in the Hubei province of China. The Chinese government took certain emergency measures to combat the spread of the virus, including extension of the Lunar New Year holiday, implementation of travel bans and closure of factories and businesses. The majority of our materials and products are sourced from suppliers located in China. In 2020, the Novel Coronavirus was declared a global pandemic by the World Health Organization and has been spreading throughout the world, including the United States, resulting in emergency measures, including travel bans, closure of retail stores, and restrictions on gatherings of more than a maximum number of people. To the extent that these outbreaks are disruptive to local economies and commercial activity, that development creates downward pressure on our ability to make our product line available to consumers or for consumers to purchase our products, even if our products are available. At this time, we cannot quantify the extent of the impact this disease has had or will have on our sales, net income and cash flows, but it could be significant. In the first quarter of 2022, Russia and Ukraine were engaged in an armed conflict. We cannot predict at this time the length of this conflict and if it will spread to other countries. Accordingly, we cannot quantify at this time if, or the extent, this conflict will adversely impact our business operations. 34 Table of Contents Quarterly Fluctuations and Seasonality We have experienced significant quarterly fluctuations in operating results and anticipate these fluctuations in the future. The operating results for any quarter are not necessarily indicative of results for any future period. Our first quarter is typically expected to be the least profitable as a result of lower net sales but substantially similar fixed operating expenses. This is consistent with the performance of many companies in the toy industry. The following table presents our unaudited quarterly results for the years indicated. The seasonality of our business is reflected in this quarterly presentation. 2021 2020 First Second Third Fourth First Second Third Fourth (Unaudited) Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter Net sales $ 83,843 $ 112,352 $ 236,957 $ 187,964 $ 66,557 $ 78,758 $ 242,290 $ 128,267 As a % of full year 13.5 % 18.1 % 38.1 % 30.3 % 12.9 % 15.2 % 47.0 % 24.9 % Gross profit $ 26,094 $ 31,897 $ 74,924 $ 50,042 $ 16,350 $ 16,770 $ 74,616 $ 42,029 As a % of full year 14.3 % 17.4 % 41.0 % 27.3 % 10.9 % 11.2 % 49.8 % 28.1 % As a % of net sales 31.1 % 28.4 % 31.6 % 26.6 % 24.6 % 21.3 % 30.8 % 32.8 % Income (loss) from operations $ (2,723 ) $ 1,821 $ 36,743 $ 2,926 $ (15,986 ) $ (9,746 ) $ 37,513 $ 1,127 As a % of full year (7.0 )% 4.7 % 94.8 % 7.5 % (123.8 )% (75.5 )% 290.6 % 8.7 % As a % of net sales (3.2 )% 1.6 % 15.5 % 1.6 % (24.0 )% (12.4 )% 15.5 % 0.9 % Income (loss) before provision for (benefit from) income taxes $ (23,963 ) $ (15,160 ) $ 36,674 $ (3,213 ) $ (11,722 ) $ (22,996 ) $ 32,164 $ (10,855 ) As a % of net sales (28.6 )% (13.5 )% 15.5 % (1.7 )% (17.6 )% (29.2 )% 13.3 % (8.5 )% Net income (loss) $ (24,051 ) $ (15,060 ) $ 36,376 $ (3,153 ) $ (11,998 ) $ (23,268 ) $ 32,431 $ (11,309 ) As a % of net sales (28.7 )% (13.4 )% 15.4 % (1.7 )% (18.0 )% (29.5 )% 13.4 % (8.8 )% Net income attributable to non-controlling interests $ 35 $ 24 $ 42 $ 19 $ 40 $ 8 $ 49 $ 33 As a % of net sales — % — % — % — % 0.1 % — % — % — % Net income (loss) attributable to JAKKS Pacific, Inc. $ (24,086 ) $ (15,084 ) $ 36,334 $ (3,172 ) $ (12,038 ) $ (23,276 ) $ 32,382 $ (11,342 ) As a % of net sales (28.7 )% (13.4 )% 15.3 % (1.7 )% (18.1 )% (29.6 )% 13.4 % (8.8 )% Net income (loss) attributable to common stockholders $ (24,412 ) $ (15,415 ) $ 35,998 $ (3,513 ) $ (12,345 ) $ (23,588 ) $ 32,066 $ (11,664 ) As a % of net sales (29.1 )% (13.7 )% 15.2 % (1.9 )% (18.5 )% (29.9 )% 13.2 % (9.1 )% Diluted income (loss) per share $ (4.54 ) $ (2.48 ) $ 3.97 $ (0.37 ) $ (4.09 ) $ (7.70 ) $ 3.19 $ (2.55 ) Weighted average shares and equivalents outstanding 5,379 6,220 9,073 9,511 3,021 3,064 9,307 4,575 Consistent with the seasonality of our business, the first, second and fourth quarters of 2021 and 2020, experienced seasonally low sales which coupled with fixed overhead resulted in significant net losses. Quarterly and year-to-date computations of income (loss) per share amounts are made independently. Therefore, the sum of the per share amounts for the quarters may not agree with the per share amounts for the year. 35 Table of Contents Liquidity and Capital Resources As of December 31, 2021, we had working capital of $114.5 million compared to $112.6 million as of December 31, 2020. Operating activities used net cash of $5.9 million in 2021 and provided net cash of $43.6 million in 2020. The decrease in cash flows provided by operating activities was primarily due to higher working capital usage driven by an increase in accounts receivable due to higher Q4 sales and a higher inventory balance resulting from an increase in freight-in-transit, partially offset by a lower net loss and higher non-cash charges related to valuation adjustments for our convertible senior notes and preferred stock derivative liability. Other than open purchase orders issued in the normal course of business related to shipped product, we have no obligations to purchase inventory from our manufacturers. However, we may incur costs or other losses as a result of not placing orders consistent with our forecasts for product manufactured by our suppliers or manufacturers for a variety of reasons including customer order cancellations or a decline in demand. As part of our strategy to develop and market new products, we have entered into various character and product licenses with royalties/obligations generally ranging from 1% to 23% payable on net sales of such products. As of December 31, 2021, these agreements required future aggregate minimum royalty guarantees of $71.9 million, exclusive of $0.7 million in advances already paid. Of this $71.9 million future minimum royalty guarantee, $31.0 million is due over the next twelve months. Investing activities used net cash of $8.2 million and $8.2 million for the year ended December 31, 2021 and 2020, respectively, and consisted primarily of cash paid for the purchase of molds and tooling used in the manufacture of our products. Financing activities used net cash of $32.8 million in 2021 and $10.9 million in 2020. The cash used in 2021 primarily consists of the repayment of our 2019 Recap Term Loan of $125.8 million, as well as, debt issuance costs of $2.6 million incurred in connection with the refinancing of our debt (see Item 8 “Consolidated Financial Statements and Supplementary Data Note 10 – Debt”), partially offset by the net proceeds from the issuance of our 2021 BSP Term Loan of $96.3 million. The cash used in 2020 primarily consists of the repayment of our 2019 Recap Term Loan of $15.1 million and retirement of our 2020 convertible senior notes of $1.9 million, partially offset by the proceeds from the loan under the Paycheck Protection Program (the “PPP Loan”) secured under the Coronavirus Aid Relief and Economic Security Act (the “CARES Act”). The following is a summary of our significant contractual cash obligations for the periods indicated that existed as of December 31, 2021 and is based upon information appearing in the notes to the consolidated financial statements (in thousands): 2022 2023 2024 2025 2026 Thereafter Total Short-term debt $ 2,104 $ — $ — $ — $ — $ — $ 2,104 Long-term debt — 2,475 2,475 2,475 2,475 86,501 96,401 Interest on debt 7,441 7,244 7,075 6,867 6,679 2,745 38,051 Operating leases 11,176 6,579 956 468 380 — 19,559 Minimum guaranteed license/royalty payments 31,009 21,596 18,784 538 — — 71,927 Employment contracts 7,972 8,055 2,760 — — — 18,787 Total contractual cash obligations $ 59,702 $ 45,949 $ 32,050 $ 10,348 $ 9,534 $ 89,246 $ 246,829 The above table excludes any potential uncertain income tax liabilities that may become payable upon examination of our income tax returns by taxing authorities. Such amounts and periods of payment cannot be reliably estimated (see Item 8 “Consolidated Financial Statements and Supplementary Data Note 13 - Income Taxes” for further explanation of our uncertain tax positions). As of December 31, 2021, we have $98.5 million of outstanding indebtedness under our first-lien secured term loan (the “2021 BSP Term Loan Agreement”) and we have no outstanding indebtedness under our senior secured revolving credit facility (the “JPMorgan ABL Facility”), aside from utilizing $9.8 million in letters of credit. 36 Table of Contents The First Lien Term Loan Facility Credit Agreement (the “2021 BSP Term Loan Agreement”) and the Credit Agreement with JPMorgan Chase Bank, N.A., as agent and lender (the “JPMorgan ABL Credit Agreement”) each contain negative covenants that, subject to certain exceptions, limit our ability and our subsidiaries ability to, among other things, incur additional indebtedness, make restricted payments, pledge our assets as security, make investments, loans, advances, guarantees and acquisitions, undergo fundamental changes and enter into transactions with affiliates. The terms of the 2021 BSP Term Loan Agreement also require us 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 we are required to maintain a Net Leverage Ratio of 3:00x. As of the Closing Date, we 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 of the JPMorgan ABL Credit Agreement also subject us to a springing fixed charge coverage ratio covenant of not less than 1.1 to 1.0 under certain circumstances. The terms of both Agreements are described in more detail in their respective Agreements. The 2021 BSP Term Loan Agreement and the JPMorgan ABL Agreement contain 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 each Agreement. If an event of default occurs under either Agreement, the maturity of the amounts owed under the 2021 BSP Term Loan Agreement and the JPMorgan ABL Agreement may be accelerated. We were in compliance with the financial covenants under the 2021 BSP Term Loan Agreement and the JPMorgan ABL Agreement as of December 31, 2021. (See Item 8 “Consolidated Financial Statements and Supplementary Data, Note 10 – Debt, and Note 11 – Credit Facilities” for additional information pertaining to our Debt and Credit Facilities.) As of December 31, 2021 and 2020, we held cash and cash equivalents, including restricted cash, of $45.3 million and $92.7 million, respectively. Cash, and cash equivalents, including restricted cash held outside of the United States in various foreign subsidiaries totaled $30.7 million and $48.7 million as of December 31, 2021 and 2020, respectively. The cash and cash equivalents, including restricted cash balances in our foreign subsidiaries have either been fully taxed in the U.S. or tax has been accounted for in connection with the Tax Cuts and Jobs Act, or may be eligible for a full foreign dividends received deduction under such Act, and thus would not be subject to additional U.S. tax should such amounts be repatriated in the form of dividends or deemed distributions. Any such repatriation may result in foreign withholding taxes, which we expect would not be significant as of December 31, 2021. Our primary sources of working capital are cash flows from operations and borrowings under our JPMorgan ABL Facility (See Item 8 “Consolidated Financial Statements and Supplementary Data Note 11 – Credit Facilities”) Typically, cash flows from operations are impacted by the effect on sales of (1) the appeal of our products, (2) the success of our licensed brands in motivating consumer purchase of related merchandise, (3) the highly competitive conditions existing in the toy industry and in securing commercially-attractive licenses, (4) dependency on a limited set of large customers, and (5) general economic conditions. A downturn in any single factor or a combination of factors could have a material adverse impact upon our ability to generate sufficient cash flows to operate the business. In addition, our business and liquidity are dependent to a significant degree on our vendors and their financial health, as well as the ability to accurately forecast the demand for products. The loss of a key vendor, or material changes in support by them, or a significant variance in actual demand compared to the forecast, can have a material adverse impact on our cash flows and business. Given the conditions in the toy industry environment in general, vendors, including licensors, may seek further assurances or take actions to protect against non-payment of amounts due to them. Changes in this area could have a material adverse impact on our liquidity. As of December 31, 2021, off-balance sheet arrangements include letters of credit issued by JPMorgan of $9.8 million. During the last three fiscal years ending December 31, 2021, we do not believe that inflation has had a material impact on our net sales and on income from continuing operations. 37 Table of Contents Exchange Rates Sales from our United States and Hong Kong operations are denominated in U.S. dollars and our manufacturing costs are denominated in either U.S. or Hong Kong dollars. Local sales (other than in Hong Kong) and operating expenses of our operations in Hong Kong, the United Kingdom, Germany, the Netherlands, France, Canada, Mexico and China are denominated in local currency, thereby creating exposure to changes in exchange rates. Changes in the various exchange rates against the U.S. dollar may positively or negatively affect our operating results. The exchange rate of the Hong Kong dollar to the U.S. dollar has been linked to the U.S. dollar by the Hong Kong Monetary Authority at HK$7.75 - HK$7.85 to US$1.00 since 2005 and, accordingly, has not represented a currency exchange risk to the U.S. dollar. We cannot assure you that the exchange rate between the United States and Hong Kong currencies will continue to be fixed or that exchange rate fluctuations between the United States and Hong Kong or all other currencies will not have a material adverse effect on our business, financial condition or results of operations.