JAKKS PACIFIC INC 10-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk Market risk represents the risk of loss that may impact our financial position, results of operations or cash flows due to adverse changes in financial and commodity market prices and rates. We are exposed to market risk in the areas of changes in United States and international borrowing rates and changes in foreign currency exchange rates. In addition, we are exposed to market risk in certain geographic areas that have experienced or remain vulnerable to an economic downturn, such as China. We purchase substantially all of our inventory from companies in China, and, therefore, we are subject to the risk that such suppliers will be unable to provide inventory at competitive prices. While we believe that, should such events occur we would be able to find alternative sources of inventory at competitive prices, we cannot assure you that we would be able to do so. These exposures are directly related to our normal operating and funding activities. To date, we have not used derivative instruments or engaged in hedging activities to minimize our market risk. Interest Rate Risk 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 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. 38 Table of Contents 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, 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. dollars. However, purchases of inventory and Hong Kong operating expenses are typically denominated in Hong Kong dollars and local operating expenses in the United Kingdom, Germany, France, 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 results of operations. 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 do not believe that near-term changes in these exchange rates, if any, will result in a material effect on our future earnings, fair values or cash flows. Therefore, we have chosen not to enter into foreign currency hedging transactions. We cannot assure you that this approach will be successful, especially in the event of a significant and sudden change in the value of these foreign currencies. 39 Table of Contents Item 8. Consolidated Financial Statements and Supplementary Data Report of Independent Registered Public Accounting Firm Shareholders and Board of Directors JAKKS Pacific, Inc. Santa Monica, California Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of JAKKS Pacific, Inc. (the “Company”) as of December 31, 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. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of 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. 40 Table of Contents 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. ● 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. Los Angeles, California March 16, 2022 41 Table of Contents JAKKS PACIFIC, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS Assets December 31, 2021 2020 (In thousands, except per share data) Current assets Cash and cash equivalents $ 44,521 $ 87,953 Restricted cash 811 4,740 Accounts receivable, net of allowance for doubtful accounts of $ 2,626 and $ 4,566 in 2021 and 2020, respectively 147,394 102,254 Inventory 83,954 38,642 Prepaid expenses and other assets 10,877 17,239 Total current assets 287,557 250,828 Property and equipment Office furniture and equipment 11,967 11,795 Molds and tooling 103,102 95,367 Leasehold improvements 6,876 6,883 Total 121,945 114,045 Less accumulated depreciation and amortization 108,796 100,534 Property and equipment, net 13,149 13,511 Operating lease right-of-use assets, net 16,950 24,393 Other long term assets 2,993 3,223 Intangible assets, net 1,015 2,031 Goodwill 35,083 35,083 Trademarks 300 300 Total assets $ 357,047 $ 329,369 Liabilities, Preferred Stock and Stockholders' Equity Current liabilities Accounts payable $ 50,237 $ 30,348 Payable to Meisheng 15,894 10,147 Accrued expenses 47,071 39,304 Reserve for sales returns and allowances 46,285 42,108 Income taxes payable 1,004 484 Short term operating lease liabilities 10,477 9,925 Short term debt, net 2,104 5,950 Total current liabilities 173,072 138,266 Long term operating lease liabilities 8,039 16,883 Debt, non-current portion, net of issuance costs and debt discounts 93,415 150,410 Preferred stock derivative liability 21,282 8,062 Income taxes payable 215 947 Deferred income taxes, net 51 123 Total liabilities 296,074 314,691 Preferred stock accrued dividends, $ 0.001 par value; 5,000,000 shares authorized; 200,000 shares issued and outstanding in 2021 and 2020 3,074 1,740 Stockholders' Equity* Common stock, $ 0.001 par value; 100,000,000 shares authorized; 9,520,817 and 5,694,772 shares issued and outstanding in 2021 and 2020, respectively* 10 6 Additional paid-in capital * 272,941 221,590 Accumulated deficit ( 203,431 ) ( 197,423 ) Accumulated other comprehensive loss ( 12,952 ) ( 12,446 ) Total JAKKS Pacific, Inc. stockholders' equity* 56,568 11,727 Non-controlling interests 1,331 1,211 Total stockholders' equity* 57,899 12,938 Total liabilities, preferred stock and stockholders' equity $ 357,047 $ 329,369 * After giving effect to a 1 for 10 reverse stock split effective July 9, 2020. See accompanying notes to consolidated financial statements. 42 Table of Contents JAKKS PACIFIC, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended December 31, 2021 2020 2019 (In thousands, except per share amounts) Net sales $ 621,116 $ 515,872 $ 598,649 Cost of sales: Cost of goods 343,130 274,867 335,450 Royalty expense 87,187 83,150 91,775 Amortization of tools and molds 7,842 8,090 12,079 Cost of sales 438,159 366,107 439,304 Gross profit 182,957 149,765 159,345 Direct selling expenses 43,069 41,590 55,103 General and administrative expenses 98,712 90,424 99,580 Depreciation and amortization 2,409 2,846 6,527 Intangible asset impairment — — 9,379 Restructuring charge — 1,631 341 Pandemic related charges — 366 — Acquisition related and other — — 6,204 Income (loss) from operations 38,767 12,908 ( 17,789 ) Income from joint ventures — 2 — Other income (expense), net 446 301 ( 1,158 ) Change in fair value of preferred stock derivative liability ( 13,220 ) ( 2,815 ) ( 353 ) Change in fair value of convertible senior notes ( 16,419 ) ( 2,265 ) ( 5,112 ) Gain on loan forgiveness 6,206 — — Loss on debt extinguishment ( 7,351 ) — ( 13,205 ) Interest income 13 22 85 Interest expense ( 14,104 ) ( 21,562 ) ( 15,935 ) Loss before provision for income taxes ( 5,662 ) ( 13,409 ) ( 53,467 ) Provision for income taxes 226 735 1,912 Net loss ( 5,888 ) ( 14,144 ) ( 55,379 ) Net income attributable to non-controlling interests 120 130 169 Net loss attributable to JAKKS Pacific, Inc. $ ( 6,008 ) $ ( 14,274 ) $ ( 55,548 ) Net loss attributable to common stockholders $ ( 7,342 ) $ ( 15,531 ) $ ( 56,031 ) Loss per share - basic and diluted* $ ( 0.98 ) $ ( 4.27 ) $ ( 21.57 ) Shares used in loss per share - basic and diluted* 7,498 3,634 2,598 * After giving effect to a 1 for 10 reverse stock split effective July 9, 2020. See accompanying notes to consolidated financial statements. 43 Table of Contents JAKKS PACIFIC, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS Year Ended December 31, 2021 2020 2019 (In thousands) Net loss $ ( 5,888 ) $ ( 14,144 ) $ ( 55,379 ) Other comprehensive income (loss): Foreign currency translation adjustment ( 506 ) 1,976 1,425 Comprehensive loss ( 6,394 ) ( 12,168 ) ( 53,954 ) Less: Comprehensive income attributable to non-controlling interests 120 130 169 Comprehensive loss attributable to JAKKS Pacific, Inc. $ ( 6,514 ) $ ( 12,298 ) $ ( 54,123 ) See accompanying notes to consolidated financial statements. 44 Table of Contents JAKKS PACIFIC, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS ’ EQUITY Common Stock Accumulated JAKKS Number of Treasury Additional Paid-in Accumulated Other Comprehensive Pacific, Inc. Stockholders’ Non-Controlling Total Stockholders’ Shares * Amount * Stock Capital * Deficit Loss Equity * Interests Equity * (In thousands) Balance, December 31, 2018 2,917 $ 3 $ ( 24,000 ) $ 218,182 $ ( 127,601 ) $ ( 15,847 ) $ 50,737 $ 912 $ 51,649 Stock-based compensation expense 355 — — 2,868 — — 2,868 — 2,868 Common stock issuance 585 1 — 4,213 — — 4,214 — 4,214 Treasury shares retirement ( 311 ) — 24,000 ( 24,000 ) — — — — — Retirement of restricted stock ( 6 ) — — — — — — — — Repurchase of common stock for employee tax withholding ( 19 ) — — ( 273 ) — — ( 273 ) — ( 273 ) Preferred stock accrued dividends — — — ( 483 ) — — ( 483 ) — ( 483 ) Net income (loss) — — — — ( 55,548 ) — ( 55,548 ) 169 ( 55,379 ) Foreign currency translation adjustment — — — — — 1,425 1,425 — 1,425 Balance, December 31, 2019 3,521 4 — 200,507 ( 183,149 ) ( 14,422 ) 2,940 1,081 4,021 Stock-based compensation expense 64 — — 2,303 — — 2,303 — 2,303 Conversion of convertible senior notes 2,127 2 — 20,210 — — 20,212 — 20,212 Repurchase of common stock for employee tax withholding ( 17 ) — — ( 174 ) — — ( 174 ) — ( 174 ) Preferred stock accrued dividends — — — ( 1,257 ) — — ( 1,257 ) — ( 1,257 ) Net income (loss) — — — — ( 14,274 ) — ( 14,274 ) 130 ( 14,144 ) Foreign currency translation adjustment — — — — — 1,976 1,976 — 1,976 Adjustment to additional paid in capital — — — 1 — — 1 — 1 Balance, December 31, 2020 5,695 6 — 221,590 ( 197,423 ) ( 12,446 ) 11,727 1,211 12,938 Stock-based compensation expense 43 — — 2,093 — — 2,093 — 2,093 RSA to RSU conversion ( 431 ) — — — — — — — — Conversion of convertible senior notes 4,247 4 — 50,756 — — 50,760 — 50,760 Repurchase of common stock for employee tax withholding ( 33 ) — — ( 164 ) — — ( 164 ) — ( 164 ) Preferred stock accrued dividends — — — ( 1,334 ) — — ( 1,334 ) — ( 1,334 ) Net income (loss) — — — — ( 6,008 ) — ( 6,008 ) 120 ( 5,888 ) Foreign currency translation adjustment — — — — — ( 506 ) ( 506 ) — ( 506 ) Balance, December 31, 2021 9,521 $ 10 $ — $ 272,941 $ ( 203,431 ) $ ( 12,952 ) $ 56,568 $ 1,331 $ 57,899 * After giving effect to a 1 for 10 reverse stock split effective July 9, 2020. See accompanying notes to consolidated financial statements. 45 Table of Contents JAKKS PACIFIC, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, 2021 2020 2019 (In thousands) Cash flows from operating activities Net loss $ ( 5,888 ) $ ( 14,144 ) $ ( 55,379 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Provision for (recovery of) doubtful accounts ( 1,397 ) 1,619 864 Depreciation and amortization 10,251 10,936 17,634 Write-off and amortization of debt issuance costs 1,304 1,404 1,454 Share-based compensation expense 2,093 2,303 2,868 Payment-in-kind interest 1,519 4,366 1,725 Amortization of debt discount 1,419 2,800 1,077 (Gain) loss on disposal of property and equipment ( 67 ) 71 ( 65 ) Tools and molds disposal — 149 972 Intangibles impairment — — 9,379 Gain on loan forgiveness ( 6,206 ) — — Loss on debt extinguishment 7,351 — 13,205 Deferred income taxes ( 72 ) ( 103 ) ( 1,205 ) Change in fair value of convertible senior notes 16,419 2,265 5,112 Change in fair value of preferred stock derivative liability 13,220 2,815 353 Changes in operating assets and liabilities: Accounts receivable ( 43,743 ) 14,069 3,472 Inventory ( 45,312 ) 15,617 ( 379 ) Prepaid expenses and other assets 7,330 20,004 ( 6,190 ) Accounts payable and payable to Meisheng 25,017 ( 20,761 ) 4,873 Accrued expenses 7,767 ( 211 ) 9,601 Reserve for sales returns and allowances 4,177 3,743 8,962 Income taxes payable ( 212 ) ( 2,626 ) 2,599 Other liabilities ( 849 ) ( 749 ) 894 Total adjustments 9 57,711 77,205 Net cash provided by (used in) operating activities ( 5,879 ) 43,567 21,826 Cash flows from investing activities Purchases of property and equipment ( 8,221 ) ( 8,268 ) ( 9,415 ) Proceeds from sale of property and equipment 32 78 12 Net cash used in investing activities ( 8,189 ) ( 8,190 ) ( 9,403 ) Cash flows from financing activities Repurchase of common stock for employee tax withholding ( 164 ) ( 174 ) ( 273 ) Proceeds from loan under the Paycheck Protection Program — 6,206 — Proceeds from credit facility borrowings 16,000 — 5,000 Retirement of convertible senior notes — ( 1,905 ) — Repayment of credit facility borrowings ( 16,000 ) — ( 12,500 ) Deferred issuance costs ( 2,629 ) — ( 4,957 ) Repayment of 2019 Recap Term Loan ( 125,805 ) ( 15,073 ) ( 20,000 ) Repayment of 2021 BSP Term Loan ( 495 ) — — Term loan prepayment penalty — — ( 393 ) Net proceeds from issuance of long term debt 96,306 — 27,356 Net cash used in financing activities ( 32,787 ) ( 10,946 ) ( 5,767 ) Net increase (decrease) in cash, cash equivalents and restricted cash ( 46,855 ) 24,431 6,656 Effect of foreign currency translation ( 506 ) 1,976 1,425 Cash, cash equivalents and restricted cash, beginning of year 92,693 66,286 58,205 Cash, cash equivalents and restricted cash, end of year $ 45,332 $ 92,693 $ 66,286 Supplemental disclosures of non-cash financing activities: Forgiveness of Paycheck Protection Program Loan $ 6,206 $ — $ — Supplemental disclosures of cash flow information: Cash paid for interest $ 13,355 $ 13,216 $ 6,434 Cash paid for income taxes, net $ 1,615 $ 3,849 $ 29 As of December 31, 2021, there was $ 2.8 million of property and equipment included in accounts payable. As of December 31, 2020, there was $ 2.1 million of property and equipment included in accounts payable. As of December 31, 2019, there was $ 2.1 million of property and equipment included in accounts payable. 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 Note 20 for additional supplemental information to consolidated statements of cash flows. See accompanying notes to consolidated financial statements. 46 Table of Contents JAKKS PACIFIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2021 Note 1 — Principal Industry JAKKS Pacific, Inc. (the “Company”) is engaged in the development, production and marketing of consumer products, including toys and related products, electronic products, and other consumer products. The Company markets its product lines domestically and internationally. The Company is incorporated under the laws of the State of Delaware. Liquidity On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China (the “COVID-19 outbreak”) and the risks to the international community as the virus spreads globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally. The 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 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”). The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer-side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. On December 27, 2020, President Trump signed into law the Consolidated Appropriations Act of 2021 (“CAA”), which includes many tax and health components, as well as CARES Act extensions and modifications. The Company continues to monitor and explore any relevant government assistance programs that could support either cash liquidity or operating results in the short-medium term. 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. 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. 47 Table of Contents 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. 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 the Company's foreign subsidiaries have either been fully taxed in the U.S. or tax has been accounted for in connection with the Tax Cuts and Jobs Act, or may be eligible for a full foreign dividends received deduction under such Act, and thus would not be subject to additional U.S. tax should such amounts be repatriated in the form of dividends or deemed distributions. Any such repatriation may result in foreign withholding taxes, which the Company expects would not be significant as of December 31, 2021. 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 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. A downturn in any single factor or a combination of factors could have a material adverse impact upon the Company’s ability to generate sufficient cash flows to operate the business. In addition, the Company’s business and liquidity are dependent to a significant degree on its vendors and their financial health, as well as the ability to accurately forecast the demand for products. The loss of a key vendor, or material changes in support by them, or a significant variance in actual demand compared to the forecast, can have a material adverse impact on the Company’s cash flows and business. 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. 48 Table of Contents 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. 49 Table of Contents 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. Cash and cash equivalents, including restricted cash, projected cash flow from operations, and borrowings under the Company’s credit facility are sufficient to meet the Company’s working capital and capital expenditure requirements for the next 12 months. Note 2 — Summary of Significant Accounting Policies Principles of consolidation and basis of preparation These consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries, and its majority owned joint venture. All intercompany transactions have been eliminated. The Company entered into a joint venture with Meisheng Culture & Creative Corp., for the purpose of providing certain JAKKS licensed and non-licensed toys and consumer products to agreed-upon territories of the People’s Republic of China. The joint venture includes a subsidiary in the Shanghai Free Trade Zone that sells, distributes and markets these products, which include dolls, plush, role play products, action figures, costumes, seasonal items, technology and app-enhanced toys, based on top entertainment licenses and JAKKS’ own proprietary brands. The Company owns fifty-one percent of the joint venture and consolidates the joint venture since control rests with the Company. Effective July 9, 2020, the Company completed a 1 for 10 reverse stock split of its $ 0.001 par value common stock reducing the issued and outstanding shares of common stock from 42,395,782 to 4,239,578 (“Reverse Stock Split”). The Reverse Stock Split did not cause an adjustment to the par value or the authorized shares of the common stock. All share and per share amounts in the financial statements and notes thereto have been retroactively adjusted for all periods presented to give effect to the Reverse Stock Split, including reclassifying an amount equal to the reduction in par value of common stock to additional paid-in capital. The primary reason for implementing the Reverse Stock Split was to regain compliance with the minimum bid price requirement of The NASDAQ Stock Market LLC (“Nasdaq”). On July 31, 2020, the Company was notified by Nasdaq that it had regained compliance with the Nasdaq listing requirements. Cash and cash equivalents The Company considers all highly liquid investments with an original maturity of three months or less, when acquired, to be cash equivalents. The Company maintains its cash in bank deposits which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk of cash and cash equivalents. Restricted cash Restricted cash consists of a cash collateral account to cover a guarantee bond. 50 Table of Contents Accounts Receivable and Allowance for Doubtful Accounts Credit is granted to customers on an unsecured basis. Credit limits and payment terms are established based on evaluations made on an ongoing basis throughout the fiscal year of the financial performance, cash generation, financing availability and liquidity status of each customer. Customers are reviewed at least annually, with more frequent reviews performed as necessary, depending upon the customer’s financial condition and the level of credit being extended. For customers who are experiencing financial difficulties, management performs additional financial analyses before shipping to those customers on credit. The Company uses a variety of financial arrangements to ensure collectability of accounts receivable of customers deemed to be a credit risk, including requiring letters of credit, purchasing various forms of credit insurance with unrelated third parties, or requiring cash in advance of shipment. The Company records an allowance for doubtful accounts based upon management’s assessment of the business environment, customers’ financial condition, historical collection experience, accounts receivable aging, customer disputes and the collectability of specific customer accounts. Use of estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the dates of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods. Actual future results could differ from those estimates. On an ongoing basis, the Company evaluates its estimates, including those related to the accounts receivable and sales allowances, fair values of financial instruments, intangible assets and goodwill, useful lives of intangible assets and property and equipment, income taxes, and contingent liabilities, among others. The Company bases its estimates on assumptions, both historical and forward looking, that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Revenue recognition The Company’s contracts with customers only include one performance obligation (i.e., sale of the Company’s products). Revenue is recognized in the gross amount at a point in time when delivery is completed and control of the promised goods is transferred to the customers. Revenue is measured as the amount of consideration the Company expects to be entitled to in exchange for those goods. The Company’s contracts do not involve financing elements as payment terms with customers are less than one year. Further, because revenue is recognized at the point in time goods are sold to customers, there are no contract assets or contract liability balances. The Company disaggregates its revenues from contracts with customers by reporting segment: Toys/Consumer Products and 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). The Company offers various discounts, pricing concessions, and other allowances to customers, all of which are considered in determining the transaction price. Certain discounts and allowances are fixed and determinable at the time of sale and are recorded at the time of sale as a reduction to revenue. Other discounts and allowances can vary and are determined at management’s discretion (variable consideration). Specifically, the Company occasionally grants discretionary credits to facilitate markdowns and sales of slow moving merchandise, and consequently accrues an allowance based on historic credits and management estimates. Further, while the Company generally does not allow product returns, the Company does make occasional exceptions to this policy, and consequently records a sales return allowance based upon historic return amounts and management estimates. These allowances (variable consideration) are estimated using the expected value method and are recorded at the time of sale as a reduction to revenue. The Company adjusts its estimate of variable consideration at least quarterly or when facts and circumstances used in the estimation process may change. The variable consideration is not constrained as the Company has sufficient history on the related estimates and does not believe there is a risk of significant revenue reversal. The Company also participates in cooperative advertising arrangements with some customers, whereby it allows a discount from invoiced product amounts in exchange for customer purchased advertising that features the Company’s products. Generally, these allowances range from 1 % to 20 % of gross sales, and are generally based upon product purchases or specific advertising campaigns. Such allowances are accrued when the related revenue is recognized. These cooperative advertising arrangements provide a distinct benefit at fair value, and are accounted for as direct selling expenses. 51 Table of Contents Sales commissions are expensed when incurred as the related revenue is recognized at a point in time and therefore the amortization period is less than one year. As a result, these costs are recorded as direct selling expenses, as incurred. Shipping and handling activities are considered part of the Company’s obligation to transfer the products and therefore are recorded as direct selling expenses, as incurred. The Company’s reserve for sales returns and allowances amounted to $ 46.3 million as of December 31, 2021 and $ 42.1 million as of December 31, 2020. Fair Value Measurements Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various methods including market, income and cost approaches. Based upon these approaches, the Company often utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market-corroborated, or unobservable inputs. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based upon observable inputs used in the valuation techniques, the Company is required to provide information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values into three broad levels as follows: Level 1: Valuations for assets and liabilities traded in active markets from readily available pricing sources for market transactions involving identical assets or liabilities. Level 2: Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third-party pricing services for identical or similar assets or liabilities. Level 3: Valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities. In instances where the determination of the fair value measurement is based upon inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based upon the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability. Inventory Inventory, which includes the ex-factory cost of goods, capitalized warehouse costs and in-bound freight and duty, is valued at the lower of cost (first-in, first-out) or net realizable value, net of inventory obsolescence reserve, and consists of the following (in thousands): December 31, 2021 2020 Raw materials $ 106 $ 135 Finished goods 83,848 38,507 $ 83,954 $ 38,642 As of December 31, 2021 and 2020, the inventory obsolescence reserve was $ 4.6 million and $ 10.8 million, respectively. Royalties 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. 52 Table of Contents 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 Property and equipment are stated at cost and are being depreciated using the straight-line method over their estimated useful lives as follows: Office equipment 5 years Automobiles 5 years Furniture and fixtures 5 - 7 years Leasehold improvements Shorter of length of lease or 10 years During interim reporting periods, the Company uses the usage method as its depreciation methodology for molds and tools used in the manufacturing of its products, which is more closely correlated to the production of goods as it follows the seasonality of sales. The Company believes that the usage method more accurately matches costs with revenues. From a full-year perspective, the depreciation methodology follows the straight-line method, based on the estimated useful life of molds and tools of three years. Estimated useful lives are periodically reviewed and, where appropriate, changes are made prospectively. The carrying value of property and equipment is reviewed when events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. No impairment charges were recorded for the year ended December 31, 2021, 2020 and 2019. 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, 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) Other comprehensive income (loss) includes all changes in equity from non-owner sources. The Company accounts for other comprehensive income in accordance with Accounting Standards Codification (“ASC”) ASC 220, “Comprehensive Income.” All the activity in other comprehensive income (loss) and all amounts in accumulated other comprehensive income (loss) relate to foreign currency translation adjustments. Advertising Production costs of commercials and programming are charged to operations in the period during which the production is first aired. The costs of other advertising, promotion and marketing programs are charged to operations in the period incurred. Advertising expense for the year ended December 31, 2021, 2020 and 2019, was approximately $ 12.2 million, $ 10.1 million and $ 13.8 million, respectively. Income taxes The Company does not file a consolidated return with its foreign subsidiaries. The Company files federal and state returns and its foreign subsidiaries file returns in their respective jurisdictions. Deferred taxes are provided on an asset and liability method. Deferred tax assets are recognized as deductible temporary differences, operating losses, or tax credit carry-forwards. Deferred tax liabilities are recognized as taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. The Company recognizes net deferred tax assets to the extent that the Company believes these assets are more likely than not to be realized. In making such a determination, management considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If management determines that the Company would be able to realize its deferred tax assets in the future in excess of their net recorded amount, management would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes. 53 Table of Contents The Company records uncertain tax positions on the basis of a two-step process whereby (1) management determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, management recognizes the largest amount of tax benefit that is more than 50% likely to be realized upon ultimate settlement with the related tax authority. The Company recognizes interest and penalties related to unrecognized tax benefits within income tax expense. Any accrued interest and penalties are included within the related tax liability. Foreign Currency Translation Exposure The Company’s reporting currency is the U.S. dollar. The translation of its net investment in subsidiaries with non-U.S. dollar functional currencies subjects the Company to currency exchange rate fluctuations in its results of operations and financial position. Assets and liabilities of subsidiaries with non-U.S. dollar functional currencies are translated into U.S. dollars at year-end exchange rates. Income, expense and cash flow items are translated at average exchange rates prevailing during the year. The resulting currency translation adjustments are recorded as a component of accumulated other comprehensive income (loss) within stockholders’ equity. The Company’s primary currency translation exposures in 2021, 2020 and 2019 were related to its net investment in entities having functional currencies denominated in the Hong Kong Dollar, British Pound, Canadian Dollar, Chinese Yuan, Mexican Peso and the Euro. Foreign Currency Transaction Exposure Currency exchange rate fluctuations may impact the Company’s results of operations and cash flows. The Company’s currency transaction exposures include gains and losses realized on unhedged inventory purchases and unhedged receivables and payables balances that are denominated in a currency other than the applicable functional currency. Gains and losses on unhedged inventory purchases and other transactions associated with operating activities are recorded in the components of operating income in the consolidated statement of operations. Accounting for the impairment of finite-lived tangible and intangible assets Long-lived assets with finite lives, which include property and equipment and intangible assets other than goodwill, are evaluated for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through the estimated undiscounted future cash flows from the use of these assets. When any such impairment exists, the related assets will be written down to fair value. Finite-lived intangible assets often consist of product technology rights, acquired backlog, customer relationships, product lines and license agreements. These intangible assets are amortized over the estimated economic lives of the related assets. Goodwill and other indefinite-lived intangible assets Goodwill and indefinite-lived intangible assets are not amortized, but are tested for impairment at least annually at the reporting unit level and asset level, respectively. Losses in value are recorded when material impairment has occurred in the underlying assets or when the benefits of the identified intangible assets are realized. Indefinite-lived intangible assets other than goodwill consist of trademarks. The carrying value of goodwill and trademarks is based upon cost, which is subject to management’s current assessment of fair value. Management evaluates fair value recoverability using both objective and subjective factors. Objective factors include cash flows and analysis of recent sales and earnings trends. Subjective factors include management’s best estimates of projected future earnings and competitive analysis and the Company’s strategic focus. Share-based Compensation The Company measures all employee share-based compensation awards using a fair value method and records such expense in its consolidated financial statements. 54 Table of Contents 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, 2021 2020 2019 Net loss $ ( 5,888 ) $ ( 14,144 ) $ ( 55,379 ) Net income attributable to non-controlling interests 120 130 169 Net loss attributable to JAKKS Pacific, Inc. ( 6,008 ) ( 14,274 ) ( 55,548 ) Preferred stock dividend ( 1,334 ) ( 1,257 ) ( 483 ) Net loss attributable to common stockholders $ ( 7,342 ) $ ( 15,531 ) $ ( 56,031 ) Weighted average common shares outstanding - basic and diluted 7,498 3,634 2,598 Net loss per share available to common stockholders - basic and diluted $ ( 0.98 ) $ ( 4.27 ) $ ( 21.57 ) 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. These repurchased shares were treated as retired for basic and diluted income (loss) per share purposes although they remained legally outstanding. The Company reflected the aggregate purchase price of its common shares repurchased as a reduction to stockholders’ equity allocated to treasury stock. On September 13, 2019, ML returned the shares to the Company. The Company subsequently retired the shares which had no impact to the Company’s stockholder’s equity. Recent Accounting Pronouncements In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The new standard was initially effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. In November 2019, the FASB issued ASU 2019-10 which deferred the effective date of ASU 2016-13 by three years for Smaller Reporting Companies. As a result, the effective date for the standard is fiscal years beginning after December 15, 2022, and interim periods therein, and early adoption is permitted. The Company is currently evaluating the impact of the adoption of ASU 2016-13 on its consolidated financial statements. In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes,” which simplifies the accounting for income taxes related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax assets for investments. The guidance also reduces complexity in certain areas, including the accounting for transactions that result in a step-up in the tax basis of goodwill and allocating taxes to members of a consolidated group. This new standard is effective for the Company for fiscal years beginning January 1, 2021, with early adoption permitted. The 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.” 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. The amendments in ASU 2020-04 apply to contracts, hedging relationships and other transactions that reference the London Inter-Bank Offered Rate ("LIBOR") or another reference rate expected to be discontinued due to the global transition away from LIBOR and certain other interbank offered rates. The new standard is effective for the Company for fiscal years beginning after December 15, 2022, including interim periods within these fiscal years, with early adoption permitted. The Company is currently evaluating the impact that the adoption of this new guidance will have on its condensed consolidated financial statements. 55 Table of Contents In August 2020, the FASB issued ASU 2020-06, “Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.” The new guidance eliminates two of the three models in ASC 470-20, which required entities to account for beneficial conversion features and cash conversion features in equity, separately from the host convertible debt or preferred stock. As a result, only conversion features accounted for under the substantial premium model in ASC 470-20 and those that require bifurcation in accordance with ASC 815-15 will be accounted for separately. In addition, the amendments in ASU 2020-06 eliminates some of the requirements in ASC 815-40 related to equity classification. The amendments in ASU 2020-06 further revised the guidance in ASC 260, Earnings Per Share (“EPS”), to address how convertible instruments are accounted for in calculating diluted EPS, and requires enhanced disclosures about the terms of convertible instruments and contracts in an entity’s own equity. The new standard is effective for the Company for fiscal years beginning after December 15, 2023, including interim periods within these fiscal years, with early adoption permitted. The Company is currently evaluating the impact that the adoption of this new guidance will have on its consolidated financial statements. 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’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. 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 segments based upon relative sales volumes. Segment assets are primarily comprised of accounts receivable and inventories, net of applicable reserves and allowances, goodwill and other assets. Certain assets which are not tracked by operating segment and/or that benefit multiple operating segments have been allocated on the same basis. 56 Table of Contents Results are not necessarily those which would be achieved if each segment was an unaffiliated business enterprise. Information by segment and a reconciliation to reported amounts as of December 31, 2021 and 2020 and for the three years in the period ended December 31, 2021 are as follows (in thousands): Year Ended December 31, 2021 2020 2019 Net Sales Toys/Consumer Products $ 513,517 $ 427,122 $ 479,038 Costumes 107,599 88,750 119,611 $ 621,116 $ 515,872 $ 598,649 Year Ended December 31, 2021 2020 2019 Income (Loss) from Operations Toys/Consumer Products $ 39,046 $ 20,002 $ ( 8,128 ) Costumes ( 279 ) ( 7,094 ) ( 9,661 ) $ 38,767 $ 12,908 $ ( 17,789 ) Year Ended December 31, 2021 2020 2019 Depreciation and Amortization Expense Toys/Consumer Products $ 9,585 $ 10,292 $ 16,227 Costumes 666 644 1,407 $ 10,251 $ 10,936 $ 17,634 December 31, 2021 2020 Assets Toys/Consumer Products $ 338,266 $ 315,838 Costumes 18,781 13,531 $ 357,047 $ 329,369 Net revenues are categorized based upon location of the customer, while long-lived assets are categorized based upon the location of the Company’s assets. The following tables present information about the Company by geographic area as of December 31, 2021 and 2020 and for each of the three years in the period ended December 31, 2021 (in thousands): December 31, 2021 2020 Long-lived Assets United States $ 16,252 $ 23,607 China 11,655 10,773 United Kingdom 1,270 1,458 Hong Kong 770 1,870 Canada 73 100 Mexico 79 96 $ 30,099 $ 37,904 57 Table of Contents Year Ended December 31, 2021 2020 2019 Net Sales by Customer Area United States $ 512,193 $ 421,222 $ 481,309 Europe 60,425 51,885 65,557 Canada 17,999 18,486 19,937 Latin America 12,606 7,734 11,415 Asia 9,232 8,285 10,112 Australia and New Zealand 6,423 5,795 7,870 Middle East and Africa 2,238 2,465 2,449 $ 621,116 $ 515,872 $ 598,649 Major Customers Net sales to major customers were as follows (in thousands, except for percentages): 2021 2020 2019 Percentage of Percentage of Percentage of Amount Net Sales Amount Net Sales Amount Net Sales Wal-Mart $ 167,260 26.9 % $ 150,250 29.1 % $ 177,063 29.6 % Target 176,561 28.4 132,354 25.7 124,709 20.8 $ 343,821 55.3 % $ 282,604 54.8 % $ 301,772 50.4 % No other customer accounted for more than 10% of the Company's total net sales. The concentration of the Company’s business with a relatively small number of customers may expose the Company to material adverse effects if one or more of its large customers were to experience financial difficulty. The Company performs ongoing credit evaluations of its top customers and maintains an allowance for potential credit losses. Note 4 — Joint Ventures On December 16, 2009, the Company entered into a joint venture agreement with the U.S. entertainment subsidiary of a leading Japanese advertising and animation production company in which it owned fifty percent interest. The joint venture (“Pacific Animation Partners”) was created to develop and produce 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 has since ceased production of the television show. The joint venture was terminated on December 2, 2020. 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 November 2014, the Company entered into a joint venture with Meisheng Culture & Creative Corp., for the purpose of providing certain JAKKS licensed and non-licensed toys and consumer products to agreed-upon territories of the People’s Republic of China. The joint venture includes a subsidiary in the Shanghai Free Trade Zone that sells, distributes and markets these products, which include dolls, plush, role play products, action figures, costumes, seasonal items, technology and app-enhanced toys, based on top entertainment licenses and JAKKS’ own proprietary brands. The Company owns fifty-one percent of the joint venture and consolidates the joint venture since control rests with the Company. The non-controlling interest’s share of the income (loss) from the joint venture for the year ended December 31, 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. JAKKS and Meisheng each own fifty percent of the joint venture and will jointly own the content. JAKKS will retain merchandising rights for kids’ consumer products in all markets except China, which Meisheng Culture & Creative Corp. will oversee through the Company’s existing distribution joint venture. The results of operations of the joint venture are consolidated with the Company’s results. The non-controlling interest’s share of the 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. 58 Table of Contents 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): December 31, 2021 2020 Prepaid expenses $ 4,151 $ 2,490 Royalty advances 2,619 13,518 Employee retention credit 2,390 300 Income tax receivable 1,527 927 Other assets 190 4 $ 10,877 $ 17,239 Note 6 — Goodwill There were no changes in the carrying amount of goodwill by reporting unit for the year ended December 31, 2021 and 2020. The Company applies a fair value-based impairment test to the carrying value of goodwill and indefinite-lived intangible assets on an annual basis and, on an interim basis, if certain events or circumstances indicate that an impairment loss may have been incurred. Goodwill impairment exists when the estimated fair value of goodwill is less than its carrying value. 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 Intangible assets other than goodwill consist primarily of licenses, product lines, customer relationships and trademarks. Amortized intangible assets are included in intangibles in the accompanying consolidated balance sheets. Trademarks are disclosed separately in the accompanying consolidated balance sheets. Intangible assets are as follows (in thousands, except for weighted useful lives): December 31, 2021 December 31, 2020 Weighted Gross Gross Useful Carrying Accumulated Net Carrying Accumulated Net Lives Amount Amortization Amount Amount Amortization Amount (Years) Amortized Intangible Assets: Licenses 5.81 $ 20,130 $ ( 20,130 ) $ — $ 20,130 $ ( 20,130 ) $ — Product lines 10.36 33,858 ( 32,843 ) 1,015 33,858 ( 31,827 ) 2,031 Customer relationships 4.90 3,152 ( 3,152 ) — 3,152 ( 3,152 ) — Trade names 5.00 3,000 ( 3,000 ) — 3,000 ( 3,000 ) — Non-compete agreements 5.00 200 ( 200 ) — 200 ( 200 ) — Total amortized intangible assets $ 60,340 $ ( 59,325 ) $ 1,015 $ 60,340 $ ( 58,309 ) $ 2,031 Unamortized Intangible Assets: Trademarks $ 300 $ — $ 300 $ 300 $ — $ 300 In 2019, the Company assessed the recoverability of the Maui product lines and determined that the fair value was less than its carrying amount. As a result, the Company recorded an impairment charge of $ 9.4 million. The fair value determination is categorized as Level 3 in the fair value hierarchy due to its use of internal projections and unobservable measurement inputs. For the year ended December 31, 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 expects to amortize the remaining carrying value of $ 1.0 million in 2022. 59 Table of Contents Note 8 — Concentration of Credit Risk Financial instruments that subject the Company to concentration of credit risk are cash and cash equivalents and accounts receivable. Cash equivalents consist principally of short-term money market funds. These instruments are short-term in nature and bear minimal risk. The Company performs ongoing credit evaluations of its customers’ financial conditions, but does not require collateral to support domestic customer accounts receivable. For goods shipped FOB Hong Kong or China, the Company may require irrevocable letters of credit from the customer or purchase various forms of credit insurance. Note 9 — Accrued Expenses Accrued expenses consist of the following (in thousands): December 31, 2021 2020 Royalties $ 18,606 $ 13,659 Inventory liabilities 6,003 7,115 Goods in transit 5,601 2,597 Salaries and employee benefits 4,347 4,032 Unearned revenue 2,510 938 Bonuses 1,997 666 Third party warehouse 1,807 475 Professional fees 1,097 1,877 Sales commissions 527 351 Interest expense 51 4,132 Other 4,525 3,462 $ 47,071 $ 39,304 In addition to royalties currently payable on the sale of licensed products during the year, the Company records a liability as accrued royalties for the estimated shortfall in achieving minimum royalty guarantees pursuant to certain license agreements (see Note 17 - Commitments). Note 10 — Debt Convertible senior notes Convertible senior notes consist of the following (in thousands): December 31, 2021 December 31, 2020 Principal/ Debt Principal/ Debt Fair Value Issuance Net Fair Value Issuance Net Amount Costs Amount Amount Costs Amount 3.25 % convertible senior notes due 2023 * $ — $ — $ — $ 34,134 $ — $ 34,134 * 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 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. 60 Table of Contents 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 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. Under no circumstances shall the reset result in a conversion price be below the greater of (i) the closing price on the trading day immediately preceding the applicable reset date and (ii) 30 % of the stock price as of the Transaction Agreement Date, or August 7, 2019, and will not be greater than the conversion price in effect immediately before such reset. The Company may trigger a mandatory conversion of the New Oasis Notes if the market price exceeds 150 % of the conversion price under certain circumstances. The Company may redeem the New Oasis Notes in cash if a person, entity or group acquires shares of the Company’s Common Stock, par value $ 0.001 per share (the “Common Stock”), and as a result owns at least 49 % of the Company’s issued and outstanding Common Stock. In connection with the issuance of the New Oasis Notes, the Company recognized a loss on extinguishment of the Existing Oasis Notes of approximately $ 10.4 million. On February 9, 2020, excluding the impact of the 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 . 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. 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. A director of the Company is a portfolio manager at Oasis Management. 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 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. In addition, approximately $ 0.1 million of the unamortized debt issuance costs were written off and a $ 0.1 million gain was recognized in conjunction with the retirement of the 2020 Notes. In connection with the Recapitalization Transaction, the 2020 Notes with a face amount of $ 111.1 million of the total $ 113.0 million that were outstanding at the time of the Recapitalization Transaction were refinanced and the maturity dates were extended. Of the refinanced amount, $ 103.8 million was refinanced with the Investor Parties through the issuance of the New Common Equity (as defined below), the New Preferred Equity (as defined below) (see Note 15 - Common Stock and Preferred Stock) and new secured term debt that matures in February 2023 (see Term Loan section below). Additionally, $ 1.0 million of accrued interest was refinanced with the Investor Parties. The remaining refinanced amount of $ 7.3 million was exchanged into the new $8.0 million Oasis Note discussed above. In connection with the issuance of the new secured term loan, as well as the New Common Equity and the New Preferred Equity, the Company recognized a loss on extinguishment of the 2020 Notes refinanced with the Investor Parties of approximately $ 2.4 million, and wrote off $ 0.7 million of unamortized debt issuance costs related to the 2020 Notes during the year ending December 31, 2019. 61 Table of Contents The remaining $1.9 million principal amount of the 2020 Notes were redeemed at par at maturity on June 1, 2020. 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): Year ended December 31, 2021 2020 2019 Contractual interest expense $ — $ 32 $ 3,370 Amortization of debt issuance costs recognized as interest expense — — 460 $ — $ 32 $ 3,830 Key components of the 3.25% convertible senior notes due 2020 consist of the following (in thousands): Year ended December 31, 2021 2020 2019 Contractual interest expense $ — $ — $ 580 Key components of the 3.25% convertible senior notes due 2023 consist of the following (in thousands): Year ended December 31, 2021 2020 2019 Contractual interest expense $ 620 $ 2,004 $ 899 Term Loan Term loan consists of the following (in thousands): December 31, 2021 December 31, 2020 Debt Discount/ Debt Discount/ Principal Issuance Net Principal Issuance Net Amount Costs* Amount Amount** Costs* Amount 2019 Recap Term Loan $ — $ — $ — $ 119,801 $ ( 8,471 ) $ 111,330 2021 BSP Term Loan 98,505 ( 2,986 ) 95,519 — — — * 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 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. 62 Table of Contents 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 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, 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. 63 Table of Contents On June 2, 2021, the Company and certain of its subsidiaries, as borrowers, entered into the 2021 BSP Term Loan Agreement with Benefit Street Partners L.L.C., as Sole Lead Arranger, and BSP Agency, LLC, as agent, for a $ 99.0 million Initial Term Loan and a $ 19.0 million Delay Draw Term Loan. Net proceeds from the issuance of the 2021 BSP Term Loan, after deduction of $ 2.2 million in closing fees and $ 0.5 million of other administrative fees paid directly to the lenders, totaled $ 96.3 million. These fees are being amortized over the life of the 2021 BSP Term Loan 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. 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 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, 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. 64 Table of Contents 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 2022 * $ 2,104 2023 2,475 2024 2,475 2025 2,475 2026 2,475 Thereafter 86,501 $ 98,505 * 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 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. 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. 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 Wells Fargo In March 2014, the Company and its domestic subsidiaries entered into a secured credit facility with General Electric Capital Corporation (“GECC”). The credit facility, as amended and subsequently assigned to Wells Fargo Bank pursuant to its acquisition of GECC, provides for a $ 75.0 million revolving credit facility subject to availability based on prescribed advance rates on certain domestic accounts receivable and inventory amounts used to compute the borrowing base (the “Credit Facility”). The Credit Facility includes a sub-limit of up to $ 35.0 million for the issuance of letters of credit. The amounts outstanding under the Credit Facility, as amended, were payable in full upon maturity of the facility on September 27, 2019, except that the Credit Facility would mature on June 15, 2018 if the Company did not refinance or extend the maturity of the convertible senior notes that mature in 2018, provided that any such refinancing or extension shall have a maturity date that is no sooner than six months after the stated maturity of the Credit Facility (i.e., on or about September 27, 2019). On June 14, 2018, the Company entered into a Term Loan Agreement with Great American Capital Partners 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. As a result, the receivables of these subsidiaries can now be included in the borrowing base computation, subject to certain limitations, thereby effectively increasing the amount of funds the Company can borrow under the Credit Facility. Any additional borrowings under the Credit Facility will be used for general working capital purposes. In August 2019, in connection with the Recapitalization Transaction (See Note 10 - Debt), the Company entered into an amended and extended revolving credit facility with Wells Fargo (the “Amended ABL Credit Agreement” or “Amended ABL facility”). The Amended ABL Credit Agreement amends and restates the Company’s existing Credit Facility, dated as of March 27, 2014, as amended, with GECC and subsequently assigned to Wells Fargo, to, among other things, decrease the borrowing capacity from $ 75.0 million to $ 60.0 million and extend the maturity to August 9, 2022. The obligations under the Amended ABL Credit Agreement are guaranteed by the Company, the subsidiary borrowers thereunder and certain of the other existing and future direct and indirect subsidiaries of the Company and are secured by substantially all of the assets of the Company, the subsidiary borrowers thereunder and such other subsidiary guarantors, in each case, subject to certain exceptions and permitted liens. As of December 31, 2020, the amount of outstanding borrowings was nil , the amount of outstanding stand-by letters of credit totaled $ 10.8 million and the total excess borrowing capacity was $ 37.3 million. 65 Table of Contents 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 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, 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. In the event of a default, all of the obligations of the Company and its subsidiaries under the Amended ABL Facility may be declared immediately due and payable. For certain events of default relating to insolvency, all outstanding obligations become due and payable. As described in Note 10 – Debt, on October 16, 2020, the Company amended its 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 GACP, for itself as a Lender (as defined below) and as the Agent (in such capacity, “Agent”) for the Lenders from time to time party to the Term Loan (collectively, “Lenders”) and the other “Secured Parties” under and as defined therein, with respect to the issuance to the Company by Lenders of a $ 20.0 million term loan. To secure the Company’s obligations under the Term Loan, the Company granted to Agent, for the benefit of the Secured Parties, a security interest in a substantial amount of the Company’s consolidated assets and a pledge of the majority of the capital stock of various of its subsidiaries. The Term Loan was a secured obligation, second only to the Credit Facility with Wells Fargo, except with respect to certain of the Company’s inventory in which GACP has a priority secured position. The Term Loan required the repayment of principal in the amount of 10 % of the outstanding Term Loan per year (payable monthly) beginning after the first anniversary. All then-outstanding borrowings under the Term Loan would be due, and the Term Loan would terminate, no later than June 14, 2021, unless sooner terminated in accordance with its terms, which included the date of termination of the Wells Fargo Credit Facility and the date that is 91 days prior to the maturity of the Company’s various convertible senior notes due in 2020 (See Note 10 - Debt). The Company was permitted to prepay the Term Loan, which would have required a prepayment fee (i) in year one of up to any unearned and unpaid interest that would have become due and payable in year one had the prepayment not occurred plus 2 % of the initial amount of the Term Loan (i.e., $ 20.0 million), (ii) in year two of 2 % of the initial amount of the Term Loan and (iii) in year three of 1 % of the initial amount of the Term Loan. In August 2019, in connection with the Recapitalization Transaction (See Note 10 - Debt), the Company repaid in full and terminated the Term Loan Agreement. 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. 66 Table of Contents JPMorgan Chase On June 2, 2021, the Company and certain of its subsidiaries, as borrowers, entered into the JPMorgan ABL Credit Agreement with JPMorgan Chase Bank, N.A., as agent and lender for a $ 67,500,000 senior secured revolving credit facility. 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. As of December 31, 2021, the weighted average interest rate on the credit facility with JPMorgan Chase Bank was 1.88 %. 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. 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 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 from the joint venture for the year ended December 31, 2021, 2020 and 2019 was $ 120 ,000, $ 130 ,000 and $ 169 ,000, respectively. 67 Table of Contents In October 2016, the Company entered into a joint venture with Hong Kong Meisheng Cultural Company Limited (“Meisheng”), a Hong Kong-based subsidiary of Meisheng Culture & Creative Corp, for the purpose of creating and developing original, multiplatform content for children including new short-form series and original shows. JAKKS and Meisheng each own fifty percent of the joint venture and will jointly own the content. JAKKS will retain merchandising rights for kids’ consumer products in all markets except China, which Meisheng Culture & Creative Corp. will oversee through the Company’s existing distribution joint venture. The results of operations of the joint venture are consolidated with the Company’s results. The non-controlling interest’s share of the 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. 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. 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. As of December 31, 2021 and 2020, amounts due to Meisheng for inventory received by the Company, but not paid totaled $ 15.9 million and $ 10.1 million, respectively. A director of the Company is a portfolio manager at Oasis Management. (see Note 10 - Debt) A director of the Company is a director at Benefit Street Partners. (see Note 10 - Debt) 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, 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 The Company does not file a consolidated return with its foreign subsidiaries. The Company files federal and state returns and its foreign subsidiaries file returns in their respective jurisdiction. For the 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. 68 Table of Contents 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, 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): Year ended December 31, 2021 2020 2019 Federal $ 1 $ ( 212 ) $ ( 212 ) State and local 43 134 66 Foreign 254 704 3,037 Total Current 298 626 2,891 Deferred ( 72 ) 109 ( 979 ) Total $ 226 $ 735 $ 1,912 The components of deferred tax assets/(liabilities) are as follows (in thousands): December 31, 2021 2020 Net deferred tax assets/(liabilities): Reserve for sales allowances and possible losses $ 356 $ 658 Accrued expenses 2,998 3,227 Prepaid royalties 1,298 4,282 Accrued royalties 1,731 4,191 Inventory 9,313 8,793 State income taxes 17 23 Property and equipment 1,832 1,618 Goodwill and intangibles 4,266 6,015 Share-based compensation 593 780 Interest limitation 3,595 2,114 Undistributed foreign earnings ( 2,919 ) ( 2,419 ) Operating lease right-of-use assets ( 4,117 ) ( 5,798 ) Operating lease liabilities 4,518 6,427 Federal and state net operating loss carryforwards 59,572 61,239 Credit carryforwards 697 697 Other 902 794 Gross 84,652 92,641 Valuation allowance ( 84,703 ) ( 92,764 ) Total net deferred tax liabilities $ ( 51 ) $ ( 123 ) 69 Table of Contents Provision for income taxes varies from the U.S. federal statutory rate. The following reconciliation shows the significant differences in the tax at statutory and effective rates: Year ended December 31, 2021 2020 2019 Federal income tax expense 21.0 % 21.0 % 21.0 % State income tax expense, net of federal tax effect 3.3 7.7 6.1 Effect of differences in U.S. and foreign statutory rates ( 0.5 ) 1.2 0.6 Uncertain tax positions 7.0 3.4 ( 0.3 ) Provision to return 6.3 ( 3.8 ) ( 0.1 ) Change in tax rate 6.5 4.4 ( 1.5 ) Non-deductible expenses ( 68.7 ) ( 26.2 ) ( 13.0 ) PPP Loan 29.1 0.0 0.0 Unrealized Loss ( 138.9 ) ( 10.0 ) 0.0 Other 0.0 0.0 ( 0.4 ) Undistributed foreign earnings ( 8.7 ) ( 3.3 ) 0.2 Valuation allowance 139.6 0.1 ( 16.2 ) ( 4.0 )% ( 5.5 )% ( 3.6 )% Deferred taxes result from temporary differences between tax basis of assets and liabilities and their reported amounts in the consolidated financial statements. The temporary differences result from costs required to be capitalized for tax purposes by the U.S. Internal Revenue Code (“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. net deferred tax assets will be realized. The components of income (loss) before provision for income taxes are as follows (in thousands): Year ended December 31, 2021 2020 2019 Domestic $ ( 7,881 ) $ ( 18,748 ) $ ( 61,798 ) Foreign 2,219 5,339 8,331 $ ( 5,662 ) $ ( 13,409 ) $ ( 53,467 ) 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 $ 0.8 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 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): Balance, December 31, 2018 $ 1.5 Current year additions 0.1 Balance, December 31, 2019 1.6 Current year reduction ( 0.6 ) Balance, December 31, 2020 1.0 Current year reduction ( 0.8 ) Balance, December 31, 2021 $ 0.2 70 Table of Contents The Company does not expect its gross unrecognized tax benefits to significantly change within the next 12 months. Tax years 2018 through 2020 remain subject to examination in the United States. 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. In the normal course of business, the Company is audited by federal, state and foreign tax authorities. Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets by jurisdiction. The Company is required to establish a valuation allowance for the U.S. deferred tax assets and record a charge to income if Management determines, based upon available evidence at the time the determination is made, that it is more likely than not that some portion or all of the deferred tax assets may not be realized. Based on our evaluation of all positive and negative evidence, as of December 31, 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, 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. At December 31, 2021, the Company has U.S. federal net operating loss carryforwards, or "NOLs", of approximately $ 181 million, which will begin to expire in 2033. 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. At December 31, 2021, the Company had federal research and development tax credit carryforwards ("credit carryforwards") of approximately $ 0.5 million, which will begin to expire in 2029. At December 31, 2021, the Company had state research and development tax credits of approximately $ 0.1 million, which carry forward indefinitely. Utilization of certain NOLs and research credit carryforwards may be subject to an annual limitation due to ownership change limitations set forth in Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, and comparable state income tax laws. Any future annual limitation may result in the expiration of NOLs and credit carryforwards before utilization. Note 14 — Leases The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets and operating lease liabilities in its consolidated balance sheets. The Company does not have any finance leases. ROU assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit interest rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset also includes any prepaid lease amounts and excludes lease incentives. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that it will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. The Company has lease agreements with lease and non-lease components, which are generally accounted for separately. The Company has operating leases for corporate offices, warehouses, and certain equipment. The Company’s leases have remaining lease terms of 1 to 5 years, some of which include options to extend the lease for up to 10 years, and some of which include options to terminate the lease within 1 year. As of December 31, 2021, the Company’s weighted average remaining lease term is approximately 2 years and the weighted average discount rate used to calculate the Company’s lease liability is approximately 5.09 %. 71 Table of Contents The Company adopted ASC 842 effective January 1, 2019. The Company also elected the practical expedients to exclude right-of-use ("ROU") assets and lease liabilities for leases with an initial term of 12 months or less from the balance sheet. Under ASC 842, total operating lease costs for the year ended December 31, 2021 and 2020 were $ 10.3 million and $ 11.7 million, respectively. Of the $10.3 million for the year ended December 31, 2021, $ 2.0 million related to short-term and variable lease costs, including common area maintenance charges, management fees, taxes and storage fees. Sublease rental income was $ 2.2 million in 2021. Of the $11.7 million for the year ended December 31, 2020, $ 2.0 million related to short-term and variable lease costs, including common area maintenance charges, management fees, taxes and storage fees. Sublease rental income was $ 0.8 million in 2020. 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): Year ending December 31, 2022 $ 11,176 2023 6,579 2024 956 2025 468 2026 380 Thereafter - Total lease payments 19,559 Less imputed interest 1,043 Total $ 18,516 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 Common Stock 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. All share and per share amounts in the financial statements and notes thereto have been retroactively adjusted for all periods presented to give effect to this Reverse Stock Split, including reclassifying an amount equal to the reduction in par value of common stock to additional paid-in capital. The primary reason for implementing the Reverse Stock Split was to regain compliance with the minimum bid price requirement of Nasdaq. On July 31, 2020, the Company was notified by Nasdaq that it had regained compliance with the Nasdaq listing requirements. 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 January 2019, the Company was obligated to issue an aggregate of 306,122 shares of restricted stock at a value of approximately $ 4.5 million to two executive officers pursuant to the applicable employment contracts. The shares were not issued at that time due to insufficient shares available in the 2002 Stock Award and Incentive Plan. Such shares were subsequently approved by the Company's shareholders and issued in July 2019. In addition, an aggregate of 32,823 shares of restricted stock at an aggregate value of approximately $ 0.5 million were issued to its six non-employee directors. In August 2019, the Board resolved to accelerate and immediately vest upon closing of the Recapitalization Transaction, 16,417 shares of the annual stock compensation granted to resigning members of the Board on January 1, 2019. Each resigning Board member forfeited the remaining balance of the annual stock compensation granted on January 1, 2019, or an aggregate of 5,470 shares. The remaining 10,936 shares of restricted stock vested in January 2020. 72 Table of Contents During 2019, certain employees, including executive officers, surrendered an aggregate of 19,098 shares of restricted stock for $ 273,000 to cover income taxes due on the vesting of restricted shares. On August 9, 2019, in connection with the Recapitalization Transaction (see Note 10 - Debt), the Company issued to the Investor Parties, in the aggregate, 585,300 shares of Common Stock valued at $ 4.2 million on the date of issuance (the "New Common Equity"). In January 2020, the Company issued an aggregate of 70,421 shares of restricted stock at a value of approximately $ 0.7 million to two executive officers, which vest, in four equal annual installments over four years . During 2020, certain employees, including two executive officers, surrendered an aggregate of 16,886 shares of restricted stock for $ 173,526 to cover income taxes due on the vesting of restricted shares. Additionally, an aggregate of 52,428 shares of restricted stock granted in 2017 with a value of approximately $ 433,000 was forfeited during 2020. In 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. Preferred Stock On August 9, 2019, in connection with the Recapitalization Transaction (see Note 10 - Debt), the Company issued 200,000 shares of Series A Senior Preferred Stock (the “Series A Preferred Stock”), $ 0.001 par value per share, to the Investor Parties (the “New Preferred Equity”). As of December 31, 2021 and 2020, 200,000 shares of Series A Preferred Stock were outstanding. Each share of Series A Preferred Stock has an initial value of $ 100 per share, which is automatically increased for any accrued and unpaid dividends (the “Accreted Value”). The Series A Preferred Stock has the right to receive dividends on a quarterly basis equal to 6.0 % per annum, payable in cash or, if not paid in cash, by an automatic accretion of the Series A Preferred Stock. No cash dividends have been declared or paid. For the 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. The Series A Preferred Stock has no stated maturity, however, the Company has the right to redeem all or a portion of the Series A Preferred Stock at its Liquidation Preference (as defined below) at any time after payment in full of the 2019 Recap Term Loan. In addition, upon the occurrence of certain change of control type events, holders of the Series A Preferred Stock are entitled to receive an amount (the “Liquidation Preference”), in preference to holders of Common Stock or other junior stock, equal to (i) 20 % of the Accreted Value in the case of a certain specified transaction, or (ii) otherwise, 150 % of the Accreted value, plus any accrued and unpaid dividends. 73 Table of Contents 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). These approval rights require the prior consent of specified percentages of holders (or in certain cases, all holders) of the Series A Preferred Stock in order for the Company to take certain actions, including the issuance of additional shares of Series A Preferred Stock or parity stock, the issuance of senior stock, certain amendments to the Amended and Restated Certificate of Incorporation, the Certificate of Designations of the Series A Preferred Stock (the “Certificate of Designations”), the Second Amended and Restated By-laws or the Amended and Restated Nominating and Corporate Governance Committee Charter, material changes in the Company’s line of business and certain change of control type transactions. In addition, the Certificate of Designations provides that the approval of at least six directors is required for any related person transaction within the meaning of Item 404 of Regulation S-K under the Securities Act of 1933, as amended, including, without limitation, the adoption of, or any amendment, modification or waiver of, any agreement or arrangement related to any such transaction. The Certificate of Designations also includes restrictions on the ability of the Company to pay dividends on or make distributions with respect to, or redeem or repurchase, shares of Common Stock or other junior stock. In addition, holders of the Series A Preferred Stock have preemptive rights regarding future issuance of Series A Preferred Stock or parity stock. In addition, the Certificate of Designations provides the holders of Series A Preferred Stock certain board representation rights. The Certificate of Designations provides, among other things, that, for so long as at least 50,000 shares of Series A Preferred Stock remain outstanding, (i) the holders of a majority of the outstanding shares of Series A Preferred Stock have the sole right to nominate 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 (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. The Series A Preferred Stock redemption amount is contingent upon certain events with no stated redemption date as of the reporting date, although may become redeemable in the future. In accordance with the SEC guidance within ASC Topic 480, Distinguishing Liabilities from Equity: Classification and Measurement of Redeemable Securities , the Company classified the Series A Preferred Stock as temporary equity as the Series A Preferred Stock contains a redemption feature which is contingent upon certain deemed liquidation events, the occurrence of which may not solely be within the control of the Company. Under ASC 815, Derivatives and Hedging , certain contractual terms that meet the accounting definition of a derivative must be accounted for separately from the financial instrument in which they are embedded. The Company has concluded that the redemption upon a change of control and the repurchase option by the Company constitute embedded derivatives. The embedded redemption upon a change of control must be accounted for separately from the Series A Preferred Stock. The redemption provision specifies if certain events that constitute a change of control occur, the Company may be required to settle the Series A Preferred Stock at 150% of its accreted amount. Accordingly, the redemption provision meets the definition of a derivative, and its economic characteristics are not considered clearly and closely related to the economic characteristics of the Series A Preferred Stock, which is considered more akin to a debt instrument than equity. Accordingly, these two embedded derivatives are required to be bundled into a single derivative instrument and accounted for separately from the Series A Preferred Stock at fair value. The Company considers the repurchase option to have no value as the likelihood is remote that this event, within the Company’s control, would ever occur. On August 9, 2019, the Company determined that the fair value of the redemption provision upon a change of control was $ 4.9 million and recorded as a long term liability. In subsequent periods, the liability is accounted for at fair value, with changes in fair value recognized as other income (expense) on the Company's consolidated statements of operations. The value of the redemption provision explicitly considered the present value of the potential premium that would be paid related to, and the probability of, an event that would trigger its payment. The probability of a triggering event was based on management’s estimates of the probability of a change of control event occurring. 74 Table of Contents 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, 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: 2021 2020 Balance, January 1, $ 1,740 $ 483 Preferred stock accrued dividends 1,334 1,257 Balance, December 31, $ 3,074 $ 1,740 Note 16 — Fair Value Measurements 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 Fair Value Measurements As of December 31, 2021 December 31, 2021 Level 1 Level 2 Level 3 Preferred stock derivative liability $ 21,282 $ — $ — $ 21,282 Carrying Amount as of Fair Value Measurements As of December 31, 2020 December 31, 2020 Level 1 Level 2 Level 3 3.25% convertible senior notes due in 2023 $ 34,134 $ — $ — $ 34,134 Preferred stock derivative liability 8,062 — — 8,062 The following table provides a reconciliation of the beginning and ending balances of liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) (in thousands): 3.25% convertible senior notes due 2023 2021 2020 Balance at January 1, $ 34,134 $ 50,753 Conversion of convertible senior notes ( 50,760 ) ( 20,212 ) Change in fair value 16,419 2,265 PIK interest 207 1,328 Balance at December 31, $ — $ 34,134 Preferred stock derivative liability 2021 2020 Balance at January 1, $ 8,062 $ 5,247 Change in fair value 13,220 2,815 Balance at December 31, $ 21,282 $ 8,062 75 Table of Contents The Company’s derivative liability is classified within Level 3 of the fair value hierarchy because unobservable inputs were used in estimating the fair value. The fair value of the redemption provision embedded in the Series A Preferred Stock is estimated based on a discounted cash flow model and probability assumptions based on management’s estimates of a change of control event occurring. In subsequent periods, the derivative liability is accounted for at fair value, with changes in fair value recognized as other income (expense) on the Company's consolidated statements of operations. 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 Series A Preferred Stock derivative liability is calculated using unobservable inputs (Level 3 fair measurements). The value of the redemption provision explicitly considered the present value of the potential premium that would be paid related to, and the probability of, an event that would trigger its payment. The probability of a triggering event was based on management’s estimates of the probability of a change of control event occurring. The 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 due to the short-term nature of the instruments. Note 17 — Commitments The Company has entered into various license agreements whereby the Company may use certain characters and intellectual properties in conjunction with its products. Generally, such license agreements provide for royalties to be paid ranging from 1 % to 23 % of net sales with minimum guarantees and advance payments. In the event the Company estimates that a shortfall in achieving the minimum guarantee is probable, a liability is recorded for the estimated shortfall and charged to royalty expense. Future annual minimum royalty guarantees as of December 31, 2021 are as follows (in thousands): 2022 $ 31,009 2023 21,596 2024 18,784 2025 538 $ 71,927 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. The aggregate future annual minimum guaranteed amounts due under those agreements as of December 31, 2021 are as follows (in thousands): 2022 $ 7,972 2023 8,055 2024 2,760 $ 18,787 76 Table of Contents Note 18 — Share-Based Payments Under the Company’s 2002 Stock Award and Incentive Plan (“the Plan”), which incorporated its Third Amended and Restated 1995 Stock Option Plan, the Company has reserved shares of its common stock for issuance upon the exercise of options granted under the Plan, as well as for the awarding of other securities. Under the Plan, employees (including officers), non-employee directors and independent consultants may be granted options to purchase shares of common stock, restricted stock units and other securities (see Note 15 - Common Stock and Preferred Stock). The vesting of these share-based awards may vary, but typically vest over a requisite service period or are based on performance criteria, with a maximum vesting period of four years . Restricted shares typically vest in the same manner, with the exception of certain awards vesting over one to three years . Share-based compensation expense is recognized on a straight-line basis over the requisite service period. Compensation expense for performance-awards is measured based on the amount of shares ultimately expected to vest, estimated at each reporting date based on management expectations regarding the relevant performance criteria. 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 Award Under the Plan, share-based compensation payments may include the issuance of shares of restricted stock. Restricted stock award grants are based upon employment contracts, which vary by individual and year, and are subject to vesting conditions. The following table summarizes the restricted stock award activity, annually, for the year ended December 31, 2021, 2020 and 2019: 2021 2020 2019 Weighted Weighted Weighted Number of Average Grant Date Number of Average Grant Date Number of Average Grant Date Shares Fair Value Shares Fair Value Shares Fair Value Outstanding, January 1 507,867 $ 12.73 559,307 $ 16.00 295,078 $ 24.10 Granted 113,896 4.98 70,422 10.30 338,946 10.70 Vested ( 97,645 ) 20.87 ( 69,442 ) 21.76 ( 69,247 ) 24.90 Forfeited ( 93,352 ) 12.67 ( 52,420 ) 32.20 ( 5,470 ) 14.70 Converted to RSU ( 430,766 ) 8.85 — — — — Outstanding, December 31 — — 507,867 12.73 559,307 16.00 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. 77 Table of Contents Restricted Stock Units Under the Plan, share-based compensation payments may include the issuance of Restricted Stock Units (RSUs) to employees, which occurs approximately once per year and are subject to vesting conditions. RSUs are valued at the market price of the shares underlying the award on the date of grant. The following table summarizes the RSU award activity, annually for the year ended December 31, 2021, 2020 and 2019: 2021 2020 2019 Weighted Weighted Weighted Number of Average Grant Date Number of Average Grant Date Number of Average Grant Date Shares Fair Value Shares Fair Value Shares Fair Value Outstanding, January 1 131,517 $ 6.32 102,718 $ 23.42 105,217 $ 37.20 Granted 540,154 8.72 100,200 3.89 133,431 7.70 Vested ( 23,089 ) 17.28 ( 41,640 ) 16.64 ( 16,149 ) 38.00 Forfeited ( 5,446 ) 9.66 ( 29,761 ) 42.83 ( 119,781 ) 16.00 Converted from RSA 430,766 8.85 — — — — Outstanding, December 31 1,073,902 8.62 131,517 6.32 102,718 23.42 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 The following table summarizes the total share-based compensation expense and related tax benefits recognized (in thousands): Year Ended December 31, 2021 2020 2019 Share-based compensation expense $ 2,093 $ 2,303 $ 2,868 Note 19 — Employee Benefits Plan The Company sponsored for its U.S. employees, a defined contribution plan under Section 401(k) of the Internal Revenue Code. The Plan provided that employees may defer up to 50 % of their annual compensation subject to annual dollar limitations, and that the Company would make a matching contribution equal to 100 % of each employee’s deferral, up to 5 % of the employee’s annual compensation. The Company eliminated the match on March 31, 2019. Company matching contributions, which vested immediately, totaled $ 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 2019, two executive officers surrendered an aggregate of 14,391 shares of restricted stock at a value of less than $ 0.1 million to cover income taxes due on the 2019 vesting of the restricted shares granted to them in 2016, 2017, and 2018. On August 9, 2019, in connection with the Recapitalization Transaction (see Note 10 - Debt), the Company issued to the Investor Parties, in the aggregate, 585,300 shares of Common Stock valued at $ 4.2 million on the date of issuance. On August 9, 2019, in connection with the Recapitalization Transaction (see Note 10 - Debt), the Company issued 200,000 shares of Series A Senior Preferred Stock (the “Series A Preferred Stock”), $ 0.001 par value per share, to the Investor Parties. The Company determined that the fair value of the redemption provision upon a change of control was $ 4.9 million. In 2020, certain employees, including two executive officers, surrendered an aggregate of 16,886 shares of restricted stock for $ 173,526 to cover income taxes due on the vesting of restricted shares. 78 Table of Contents 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) Selected unaudited quarterly financial data for the years 2021 and 2020 are summarized below. The Company has derived this data from the unaudited consolidated interim financial statements that, in the Company's opinion, have been prepared on substantially the same basis as the audited financial statements contained elsewhere in this report and include all normal recurring adjustments necessary for a fair presentation of the financial information for the periods presented. These unaudited quarterly results should be read in conjunction with the financial statements and notes thereto included elsewhere in this report. The operating results in any quarter are not necessarily indicative of the results that may be expected for any future period. 2021 2020 First Second Third Fourth First Second Third Fourth Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter (in thousands, except per share data) Net sales $ 83,843 $ 112,352 $ 236,957 $ 187,964 $ 66,557 $ 78,758 $ 242,290 $ 128,267 Gross profit $ 26,094 $ 31,897 $ 74,924 $ 50,042 $ 16,350 $ 16,770 $ 74,616 $ 42,029 Income (loss) from operations $ ( 2,723 ) $ 1,821 $ 36,743 $ 2,926 $ ( 15,986 ) $ ( 9,746 ) $ 37,513 $ 1,127 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 ) Net income (loss) $ ( 24,051 ) $ ( 15,060 ) $ 36,376 $ ( 3,153 ) $ ( 11,998 ) $ ( 23,268 ) $ 32,431 $ ( 11,309 ) Net income (loss) attributable to JAKKS Pacific, Inc. $ ( 24,086 ) $ ( 15,084 ) $ 36,334 $ ( 3,172 ) $ ( 12,038 ) $ ( 23,276 ) $ 32,382 $ ( 11,342 ) Net income (loss) attributable to common stockholders $ ( 24,412 ) $ ( 15,415 ) $ 35,998 $ ( 3,513 ) $ ( 12,345 ) $ ( 23,588 ) $ 32,066 $ ( 11,664 ) Basic income (loss) per share $ ( 4.54 ) $ ( 2.48 ) $ 4.08 $ ( 0.37 ) $ ( 4.10 ) $ ( 7.70 ) $ 8.39 $ ( 2.55 ) Weighted average shares outstanding 5,379 6,220 8,823 9,511 3,021 3,064 3,824 4,575 Diluted income (loss) per share $ ( 4.54 ) $ ( 2.48 ) $ 3.97 $ ( 0.37 ) $ ( 4.10 ) $ ( 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 Quarterly and year-to-date computations of income (loss) per share amounts are made independently. Therefore, the sum of the per-share amounts for the quarters may not agree with the per share amounts for the year. Note 22 – Litigation and Contingencies The Company is a party to, and certain of its property is the subject of, various pending claims and legal proceedings that routinely arise in the ordinary course of its business. The Company accrues for losses when the loss is deemed probable and the liability can reasonably be estimated. Where a liability is probable and there is a range of estimated loss with no best estimate in the range, the Company records the minimum estimated liability related to the claim. As additional information becomes available, the Company assesses the potential liability related to its pending litigation and revises its estimates. A purported class action lawsuit was filed on November 10, 2020 in the United States District Court for the District of Delaware (Brown v. JAKKS Pacific, Inc. et al) alleging that the Proxy Statement issued in connection with the shareholder meeting held in June 2020 contained misstatements regarding the manner in which broker votes would be counted and that such votes were improperly included in approving the Company’s Reverse Stock Split at the meeting. The purported class action seeks damages in an unspecified amount, alleging breach of fiduciary duties by the Company’s directors. 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. 79 Table of Contents 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. The duration and amount of such obligations is, in certain cases, indefinite. The Company's director’s and officer’s liability insurance policy may, however, enable it to recover a portion of any future payments related to its officer, director or employee indemnifications. For the past five years, costs related to director and officer indemnifications have not been significant. Other than certain liabilities recorded in the normal course of business related to royalty payments due to the Company's licensors, no liabilities have been recorded for indemnifications and/or other commitments. 80 Table of Contents