What changed in this filing

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Item 1. Financial Statements

2022-05-10 compared with 2021-11-12 · 314 added, 672 removed, 653 unchanged (60% of the section changed)

4 unchanged sentences

(In thousands, except share amounts)

September 30,

Current assets

1 unchanged sentence

Restricted cash

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

Accounts receivable, net of allowance for doubtful accounts of $ 2,576 and $ 2,626 at March 31, 2022 and December 31, 2021, respectively

Prepaid expenses and other assets

12 unchanged sentences

Accounts payable

Payable to Meisheng (related party)

Accrued expenses

6 unchanged sentences

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

Other liabilities

Preferred stock derivative liability

Income taxes payable

3 unchanged sentences

5,000,000 shares authorized;

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

200,000 shares issued and outstanding at March 31, 2022 and December 31, 2021

Stockholders' Equity

1 unchanged sentence

100,000,000 shares authorized;

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

9,587,806 and 9,520,817 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively

Additional paid-in capital

6 unchanged sentences

Total liabilities, preferred stock and stockholders' equity

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

See accompanying notes to condensed consolidated financial statements.

1 unchanged sentence

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except per share data)

Three Months Ended

September 30,

Nine Months Ended

September 30,

Three Months Ended March 31,

Cost of sales:

Cost of goods

Royalty expense

Amortization of tools and molds

Cost of sales

Direct selling expenses

General and administrative expenses

Depreciation and amortization

Selling, general and administrative expenses

Restructuring charge

Pandemic related charges

Income from operations

Income from joint ventures

Loss from operations

Other income (expense), net

1 unchanged sentence

Change in fair value of convertible senior notes

Gain on loan forgiveness

Loss on debt extinguishment

Interest income

Interest expense

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

Provision for (benefit from) income taxes

Net income (loss)

Net income attributable to non-controlling interests

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

Net income (loss) attributable to common stockholders

Income (loss) per share - basic*

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

Income (loss) per share – diluted*

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

Comprehensive income (loss)

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

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

Loss before provision for income taxes

Provision for income taxes

Net income (loss) attributable to non-controlling interests

Net loss attributable to JAKKS Pacific, Inc.

Net loss attributable to common stockholders

Loss per share - basic and diluted

Shares used in loss per share - basic and diluted

Comprehensive loss

Comprehensive loss attributable to JAKKS Pacific, Inc.

See accompanying notes to condensed consolidated financial statements.

3 unchanged sentences

(In thousands)

Three and Nine Months Ended September 30, 2021

Three Months Ended March 31, 2022

Pacific, Inc.

3 unchanged sentences

Balance, December 31, 2021

Stock-based compensation expense

Share-based compensation expense

Repurchase of common stock for employee tax withholding

Conversion of convertible senior notes

Preferred stock accrued dividends

2 unchanged sentences

Balance, March 31, 2022

Stock-based compensation expense

Conversion of convertible senior notes

Preferred stock accrued dividends

Net income (loss)

Foreign currency translation adjustment

Balance, June 30, 2021

Stock-based compensation expense

Conversion of convertible senior notes

Preferred stock accrued dividends

Foreign currency translation adjustment

Balance, September 30, 2021

Three and Nine Months Ended September 30, 2020

Three Months Ended March 31, 2021

Pacific, Inc.

3 unchanged sentences

Balance, December 31, 2020

Stock-based compensation expense

Share-based compensation expense

Repurchase of common stock for employee tax withholding

Preferred stock accrued dividends

Net income (loss)

Foreign currency translation adjustment

Balance, March 31, 2020

Conversion of convertible senior notes

Stock-based compensation expense

Repurchase of common stock for employee tax withholding

Preferred stock accrued dividends

1 unchanged sentence

Foreign currency translation adjustment

Balance, June 30, 2020

Conversion of convertible senior notes

Stock-based compensation expense

Preferred stock accrued dividends

Foreign currency translation adjustment

Balance, September 30, 2020

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

Balance, March 31, 2021

See accompanying notes to condensed consolidated financial statements.

3 unchanged sentences

(In thousands)

Nine Months Ended September 30,

Three Months Ended March 31,

Cash flows from operating activities

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

Provision for (recovery of) doubtful accounts

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

Recovery of doubtful accounts

Depreciation and amortization

4 unchanged sentences

Gain on disposal of property and equipment

Gain on loan forgiveness

Loss on debt extinguishment

Change in fair value of convertible senior notes

3 unchanged sentences

Prepaid expenses and other assets

Accounts payable

Accounts payable and payable to Meisheng (related party)

Accrued expenses

3 unchanged sentences

Total adjustments

Net cash provided by (used in) operating activities

Net cash used in operating activities

Cash flows from investing activities

3 unchanged sentences

Cash flows from financing activities

Retirement of convertible senior notes

Proceeds from loan under the Paycheck Protection Program

Repurchase of common stock for employee tax withholding

Net proceeds from issuance of long term debt

Deferred issuance costs

Repayment of 2019 Recap Term Loan

Repayment of credit facility borrowings

Proceeds from credit facility borrowings

Repayment of 2021 BSP Term Loan

Net cash provided by (used in) financing activities

Net cash used in financing activities

Net decrease in cash, cash equivalents and restricted cash

2 unchanged sentences

Cash, cash equivalents and restricted cash, end of period

Supplemental disclosures of non-cash financing activities:

Forgiveness of Paycheck Protection Program Loan

Supplemental disclosures of cash flow information:

Cash paid for income taxes

Cash paid for income taxes, net

Cash paid for interest

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

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

As of March 31, 2022, there was $ 3.3 million of property and equipment purchases included in accounts payable.

As of March 31, 2021, there was $ 1.7 million of property and equipment purchases included in accounts payable.

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

3 unchanged sentences

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

March 31, 2022

Note 1 — Basis of Presentation

33 unchanged sentences

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

March 31, 2022

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):

5 unchanged sentences

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

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.

(Note 5 – Debt and Note 18 –Prepaid Expenses and Other Assets, for disclosures related to government assistance received by the Company).

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

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

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

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

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

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

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

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

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

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

Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, the Company is unable to estimate 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”).

2 unchanged sentences

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.

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

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

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

The PPP Loan matures on June 2, 2022 and 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.

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.

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

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 maturity date was 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.

4 unchanged sentences

The forgiveness of the loan was also dependent on the Company having initially qualified for the loan.

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

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

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

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

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

7 unchanged sentences

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

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

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

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

During the three months ended March 31, 2021, the Company recorded $ 1.9 million related to the ERC as an offset within selling, general and administrative expenses on the Company’s condensed consolidated statements of operations and within prepaid expenses and other assets on the Company's condensed consolidated balance sheet (See Note 18 – Prepaid Expenses and Other Assets).

As of March 31, 2022 and December 31, 2021, the Company held cash and cash equivalents, including restricted cash, of $ 39.2 million and $ 45.3 million, respectively.

Cash, and cash equivalents, including restricted cash held outside of the United States in various foreign subsidiaries totaled $ 33.3 million and $ 30.7 million as of March 31, 2022 and December 31, 2021, respectively.

The cash and cash equivalents, including restricted cash balances in the Company's foreign subsidiaries have either been fully taxed in the U.S.

1 unchanged sentence

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

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

Any such repatriation may result in foreign withholding taxes, which the Company expects would not be significant as of March 31, 2022.

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

3 unchanged sentences

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

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

The JPMorgan ABL Credit Agreement replaces the Company’s existing asset-based revolving credit agreement, dated as of March 27, 2014 (the “Wells Fargo ABL Facility,” formerly known as the “Amended ABL Facility” in prior filings), with General Electric Capital Corporation, since assigned to Wells Fargo Bank, National Association.

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.

JAKKS PACIFIC, INC.

1 unchanged sentence

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

March 31, 2022

The JPMorgan ABL Credit Agreement replaced the Company’s existing asset-based revolving credit agreement, dated as of March 27, 2014 (the “Wells Fargo ABL Facility,” formerly known as the “Amended ABL Facility” in prior filings), 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.

The JPMorgan ABL Facility matures in June 2026.

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

5 unchanged sentences

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

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

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

Proceeds from the Initial Term Loan, together with available cash from the Company, were used to repay the Company’s 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.

1 unchanged sentence

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

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

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

5 unchanged sentences

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.

JAKKS PACIFIC, INC.

1 unchanged sentence

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

March 31, 2022

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

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

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

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

As of March 31, 2022, the Company had $ 98.3 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 $ 17.2 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 September 30, 2021.

The Company’s unaudited interim condensed consolidated financial statements for the three and nine months ended September 30, 2021 have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business.

The Company was in compliance with the financial covenants under the 2021 BSP Term Loan Agreement and the JPMorgan ABL Agreement as of March 31, 2022.

The Company’s unaudited interim condensed consolidated financial statements for the three months ended March 31, 2022 have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business.

The Company believes that cash and cash equivalents, including restricted cash, projected cash flow from operations, and borrowings under the Company’s credit facility are sufficient to meet the Company’s working capital and capital expenditure requirements for the next 12 months.

1 unchanged sentence

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, has been bringing innovative and trend-setting product to market since its inception in 1987.

This business 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.

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

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.

5 unchanged sentences

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

March 31, 2022

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

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

Information by segment and a reconciliation to reported amounts for the three months ended March 31, 2022 and 2021 and as of March 31, 2022 and December 31, 2021 are as follows (in thousands):

Three Months Ended

Nine Months Ended

September 30,

Toys/Consumer Products

Three Months Ended

Nine Months Ended

September 30,

Income from Operations

Income (Loss) from Operations

Toys/Consumer Products

Three Months Ended

Nine Months Ended

September 30,

Depreciation and Amortization Expense

Toys/Consumer Products

September 30,

Toys/Consumer Products

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

March 31, 2022

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

September 30,

The following tables present information about the Company by geographic area as of March 31, 2022 and December 31, 2021 and for the three months ended March 31, 2022 and 2021 (in thousands):

Long-lived Assets

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Three Months Ended

Nine Months Ended

September 30,

Net Sales by Customer Area

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Major Customers

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

Three Months Ended September 30,

Nine Months Ended September 30,

Net sales to major customers for the three months ended March 31, 2022 and 2021 were as follows (in thousands, except for percentages):

Three Months Ended March 31,

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

March 31, 2022

Note 3 — Inventory

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

September 30,

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 or net realizable value, net of inventory obsolescence reserve, and consists of the following (in thousands):

Raw materials

Finished goods

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

As of March 31, 2022 and December 31, 2021, the inventory obsolescence reserve was $ 6.4 million and $ 4.6 million, respectively.

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

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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.

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.

To the extent these cooperative advertising arrangements provide a distinct benefit at fair value, they are accounted for as direct selling expenses, otherwise they are recorded as a reduction to revenue.

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.

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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.

Generally, these allowances range from 1 % to 20 % of gross sales, and are generally based upon product purchases or specific advertising campaigns.

Such allowances are accrued when the related revenue is recognized.

These cooperative advertising arrangements provide a distinct benefit at fair value, and are accounted for as direct selling expenses.

Sales commissions are expensed when incurred as the related revenue is recognized at a point in time and therefore the amortization period is less than one year.

1 unchanged sentence

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 $ 47.7 million as of September 30, 2021, compared to $ 42.1 million as of December 31, 2020.

The Company’s reserve for sales returns and allowances amounted to $ 39.4 million as of March 31, 2022, compared to $ 46.3 million as of December 31, 2021.

JAKKS PACIFIC, INC.

1 unchanged sentence

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

March 31, 2022

Note 5 — Debt

Convertible senior notes

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

September 30,

3.25 % convertible senior notes due 2023*

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

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

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

The Company’s Term Loan Agreement entered into with Great American Capital Partners (See Note 6 – Credit Facilities) was paid in full and terminated in connection with the Recapitalization Transaction.

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

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 was paid in full and terminated in connection with the Recapitalization Transaction.

In connection with the Recapitalization Transaction, the Company issued (i) amended and restated notes with respect to the 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, or the New Oasis Notes.

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.

6 unchanged sentences

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 the Reverse Stock Split).

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

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

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

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

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

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

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

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

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

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

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

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

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

In March 2021, $ 3.0 million of the New Oasis Notes (including $ 128,230 in PIK interest) were converted for 531,255 shares of common stock.

As a result, the Company recorded an increase to additional paid-in capital of $ 5.6 million.

In May 2021, $ 2.0 million of the New Oasis Notes (including $ 93,805 in PIK interest) were converted for 354,170 shares of common stock.

As a result, the Company recorded an increase to additional paid-in capital of $ 4.0 million.

In June 2021, $ 5.0 million of the New Oasis Notes (including $ 245,040 in PIK interest) were converted for 885,425 shares of common stock.

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

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

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

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

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 $ 9.0 million for the three months ended March 31, 2021, related to changes in the fair value of the 3.25% convertible senior notes due 2023.

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 17 – Related Party Transactions).

The transaction closed on February 8, 2021.

JAKKS PACIFIC, INC.

1 unchanged sentence

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

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

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

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

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

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

Excluding the impact of the Reverse Stock Split, the initial 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 9 - 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.

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

The transaction closed on February 8, 2021.

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

March 31, 2022

Term loan consists of the following (in thousands):

September 30, 2021

March 31, 2022

December 31, 2021

Principal Amount

Debt Discount/

Principal Amount**

Debt Discount/

2019 Recap Term Loan

2021 BSP Term Loan

1 unchanged sentence

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

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

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

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

The Company also issued common stock and preferred stock (see Note 9 - Common Stock and Preferred Stock) to the Investor Parties.

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 matures on February 9, 2023.

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

As of December 31, 2020, the Company had $ 124.5 million (including $4.7 million in PIK interest) outstanding under the 2019 Recap Term Loan Agreement, $ 5.0 million of which is recorded as short term debt, and $ 114.8 million is recorded as long term debt on the condensed consolidated balance sheet.

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 nil and $ 0.4 million for the three and nine months ended September 30, 2021, respectively.

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

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

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

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

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

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.

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

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

4 unchanged sentences

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

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

4 unchanged sentences

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.

1 unchanged sentence

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

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

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

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

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

JAKKS PACIFIC, INC.

1 unchanged sentence

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

March 31, 2022

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 $ 43,584 for the three months ended March 31, 2022.

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 $ 0.1 million for the three months ended March 31, 2022.

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 was $ 91.1 million and $ 97.3 million as of March 31, 2022 and December 31, 2021, respectively, compared to a carrying value of $ 95.4 million and $ 95.5 million as of March 31, 2022 and December 31, 2021, respectively.

As of March 31, 2022, the Company was in compliance with the financial covenants under the 2021 BSP Term Loan Agreement.

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 maturity date was 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.

2 unchanged sentences

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

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

Note 6 — Credit Facilities

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 5 - 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.

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 .

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

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

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

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

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

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

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 5 - 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 5 - Debt), the Company repaid in full and terminated the Term Loan Agreement.

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 JPMorgan ABL Credit Agreement replaced 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.

The JPMorgan ABL Facility matures in June 2026.

As of March 31, 2022, the weighted average interest rate on the credit facility with JPMorgan Chase Bank was 1.88 %.

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.

JAKKS PACIFIC, INC.

1 unchanged sentence

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

March 31, 2022

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.

1 unchanged sentence

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

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

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

As of March 31, 2022, the amount of outstanding borrowings was nil and the total excess borrowing availability was $ 49.4 million.

As of March 31, 2022, off-balance sheet arrangements include letters of credit issued by JPMorgan of $ 17.2 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 $ 0.1 million for the three months ended March 31, 2022.

As of March 31, 2022, the Company was in compliance with the financial covenants under the JPMorgan ABL Credit Agreement.

Note 7 — Income Taxes

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

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

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

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

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

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

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

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

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

Note 8 — Income (Loss) Per Share

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

Three Months Ended September 30,

Income (loss) per share – basic

Net income (loss) attributable to common stockholders

Effect of dilutive securities:

Convertible senior notes

Unvested performance stock grants

Unvested restricted stock grants

Income (loss) per share - diluted

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

Nine Months Ended September 30,

Income (loss) per share – basic

Net income (loss) attributable to common stockholders

Effect of dilutive securities:

Convertible senior notes

Unvested performance stock grants

Unvested restricted stock grants

Income (loss) per share - diluted

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

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

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

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

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

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

For the three and nine months ended September 30, 2020, the convertible senior notes interest and related weighted common share equivalent of nil and 6,166,372 , respectively, were excluded from the diluted earnings per share calculation since they would have been anti-dilutive.

Potentially dilutive restricted stock awards and units of 534,201 and 389,879 for the three months ended September 30, 2021, and 2020, respectively, were excluded from the computation of diluted earnings per share.

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

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.

The Company’s income tax expense of $ 0.4 million for the three months ended March 31, 2022, reflects an effective tax rate of ( 11.9 )%.

The Company’s income tax expense of $ 0.1 million for the three months ended March 31, 2021, reflects an effective tax rate of ( 0.4 )%.

The tax expense for the three months ended March 31, 2022 and March 31, 2021 relates to foreign income taxes and discrete items.

Note 8 — Loss Per Share

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

Three Months Ended March 31,

Loss per share - basic and diluted

Net income (loss) attributable to non-controlling interests

Net loss attributable to JAKKS Pacific, Inc.

Preferred stock dividend

Net loss attributable to common stockholders *

Weighted average common shares outstanding - basic and diluted

Loss per share available to common stockholder- basic and diluted

* Net loss attributable to common stockholders was computed by deducting preferred dividends of $ 0.3 million for the three months ended March 31, 2022 and 2021.

JAKKS PACIFIC, INC.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

March 31, 2022

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

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

For the three months ended March 31, 2022 and 2021, the convertible senior notes interest and related weighted common share equivalent of nil and 3,853,393 , respectively, were excluded from the diluted loss per share calculation since they would have been anti-dilutive.

Potentially dilutive restricted stock awards and units of 310,907 and 239,707 for the three months ended March 31, 2022, and 2021, respectively, were excluded from the computation of diluted loss per share since they would have been anti-dilutive.

Note 9 — Common Stock and Preferred 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.

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

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

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

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.