What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2022-08-10 compared with 2022-05-10 · 337 added, 258 removed, 709 unchanged (46% of the section changed)

7 unchanged sentences

Restricted cash

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

Accounts receivable, net of allowance for doubtful accounts of $ 2,795 and $ 2,626 at June 30, 2022 and December 31, 2021, respectively

Prepaid expenses and other assets

12 unchanged sentences

Accounts payable

Payable to Meisheng (related party)

Accounts payable – Meisheng (related party)

Accrued expenses

10 unchanged sentences

Total liabilities

Preferred stock, $ 0.001 par value;

Preferred stock accrued dividends, $ 0.001 par value;

5,000,000 shares authorized;

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

200,000 shares issued and outstanding at June 30, 2022 and December 31, 2021

Stockholders' Equity

1 unchanged sentence

100,000,000 shares authorized;

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

9,587,806 and 9,520,817 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively

Additional paid-in capital

9 unchanged sentences

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(In thousands, except per share data)

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

Cost of sales:

7 unchanged sentences

Selling, general and administrative expenses

Loss from operations

Intangibles impairment

Income (loss) from operations

Other income (expense), net

Loss on debt extinguishment

Change in fair value of preferred stock derivative liability

2 unchanged sentences

Interest expense

Loss before provision for income taxes

Provision for income taxes

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

Provision for (benefit from) income taxes

Net income (loss)

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.

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

Net income (loss) attributable to common stockholders

Earnings (loss) per share - basic

Shares used in earnings (loss) per share - basic

Earnings (loss) per share - diluted

Shares used in earnings (loss) per share - diluted

Comprehensive income (loss)

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

See accompanying notes to condensed consolidated financial statements.

3 unchanged sentences

(In thousands)

Three Months Ended March 31, 2022

Three and Six Months Ended June 30, 2022

Pacific, Inc.

9 unchanged sentences

Balance, March 31, 2022

Three Months Ended March 31, 2021

Share-based compensation expense

Preferred stock accrued dividends

Net income (loss)

Foreign currency translation adjustment

Balance, June 30, 2022

Three and Six Months Ended June 30, 2021

Pacific, Inc.

10 unchanged sentences

Balance, March 31, 2021

Share-based compensation expense

Conversion of convertible senior notes

Preferred stock accrued dividends

Net income (loss)

Foreign currency translation adjustment

Balance, June 30, 2021

See accompanying notes to condensed consolidated financial statements.

3 unchanged sentences

(In thousands)

Three Months Ended March 31,

Six Months Ended June 30,

Cash flows from operating activities

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

Recovery of doubtful accounts

Net income (loss)

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

Provision for (recovery of) doubtful accounts

Depreciation and amortization

4 unchanged sentences

Gain on disposal of property and equipment

Loss on debt extinguishment

Intangibles impairment

Change in fair value of convertible senior notes

9 unchanged sentences

Total adjustments

Net cash used in operating activities

Net cash provided by (used in) operating activities

Cash flows from investing activities

7 unchanged sentences

Repayment of 2021 BSP Term Loan

Net proceeds from issuance of long term debt

Deferred issuance costs

Repayment of 2019 Recap Term Loan

Net cash used in financing activities

Net decrease in cash, cash equivalents and restricted cash

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

Effect of foreign currency translation

4 unchanged sentences

Cash paid for interest

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.

As of June 30, 2022, there was $ 4.4 million of property and equipment purchases included in accounts payable.

As of June 30, 2021, there was $ 3.6 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

March 31, 2022

June 30, 2022

Note 1 — Basis of Presentation

8 unchanged sentences

The condensed consolidated financial statements also include the accounts of DreamPlay Toys, LLC, a joint venture with NantWorks LLC, JAKKS Meisheng Trading (Shanghai) Limited, a joint venture with Meisheng Cultural & Creative Corp., Ltd., and JAKKS Meisheng Animation (HK) Limited, a joint venture with Hong Kong Meisheng Cultural Company Limited.

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.

In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments-Credit Losses (Topic 326):

18 unchanged sentences

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

June 30, 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):

8 unchanged sentences

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).

The Company adopted ASU 2021-10 during the fiscal period December 31, 2021 (see Note 1 – Basis of Presentation, 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.

15 unchanged sentences

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

June 30, 2022

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

17 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 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.

During the three and six months ended June 30, 2021, the Company recorded $ 0.1 million 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 June 30, 2022 and December 31, 2021, the Company held cash and cash equivalents, including restricted cash, of $ 62.3 million and $ 45.3 million, respectively.

Cash, and cash equivalents, including restricted cash held outside of the United States in various foreign subsidiaries totaled $ 53.5 million and $ 30.7 million as of June 30, 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 March 31, 2022.

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

6 unchanged sentences

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

June 30, 2022

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”).

16 unchanged sentences

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.

JAKKS PACIFIC, INC.

1 unchanged sentence

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

June 30, 2022

On April 26, 2022, the Company entered into a First Amendment to the 2021 BSP Term Loan Agreement, to provide, among other things, that the Company must maintain Qualified Cash of at least:

(a) at all times after the Closing Date and prior to the First Amendment Effective Date, $20.0 million;

(b) at all times during the period commencing on the First Amendment Effective Date through and including June 30, 2022, $15.0 million;

and (c) at all times on and after July 1, 2022, through September 30, 2022, $17.5 million;

Notwithstanding the foregoing, the Applicable Minimum Cash Amount shall be reduced by $1.0 million for every $5.0 million principal prepayment or repayment of the Term Loans following the First Amendment Effective Date;

provided however, that, the Applicable Minimum Cash Amount shall in no event be reduced below $15.0 million .

On June 27, 2022, as permitted by the terms within the 2021 BSP Term Loan Agreement, the Company made a voluntary fee-free $10.0 million prepayment towards the outstanding principal amount 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.

2 unchanged sentences

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 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.

As of June 30, 2022, the Company had $ 87.6 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 JPMorgan 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 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 was in compliance with the financial covenants under the 2021 BSP Term Loan Agreement and the JPMorgan ABL Agreement as of June 30, 2022.

The Company’s unaudited interim condensed consolidated financial statements for the three and six months ended June 30, 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.

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

Note 2 — Business Segments, Geographic Data, and Sales by Major Customers

7 unchanged sentences

Certain assets which are not tracked by operating segment and/or that benefit multiple operating segments have been allocated on the same basis.

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 months ended March 31, 2022 and 2021 and as of March 31, 2022 and December 31, 2021 are as follows (in thousands):

Information by segment and a reconciliation to reported amounts for the three and six months ended June 30, 2022 and 2021, and as of June 30, 2022 and December 31, 2021 are as follows (in thousands):

Three Months Ended

Six Months Ended

Toys/Consumer Products

Three Months Ended

Six Months Ended

Income (Loss) from Operations

1 unchanged sentence

Three Months Ended

Six Months Ended

Depreciation and Amortization Expense

4 unchanged sentences

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

June 30, 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 March 31, 2022 and December 31, 2021 and for the three months ended March 31, 2022 and 2021 (in thousands):

The following tables present information about the Company by geographic area as of June 30, 2022 and December 31, 2021 and for the three and six months ended June 30, 2022 and 2021 (in thousands):

Long-lived Assets

2 unchanged sentences

Three Months Ended

Six Months Ended

Net Sales by Customer Area

4 unchanged sentences

Major Customers

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,

Net sales to major customers for the three and six months ended June 30, 2022 and 2021 were as follows (in thousands, except for percentages):

Three Months Ended June 30,

Six Months Ended June 30,

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

4 unchanged sentences

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

June 30, 2022

Note 3 — Inventory

2 unchanged sentences

Finished goods

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

As of June 30, 2022 and December 31, 2021, the inventory obsolescence reserve was $ 10.2 million and $ 4.6 million, respectively.

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

22 unchanged sentences

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 $ 39.4 million as of March 31, 2022, compared to $ 46.3 million as of December 31, 2021.

The Company’s reserve for sales returns and allowances amounted to $ 45.6 million as of June 30, 2022, compared to $ 46.3 million as of December 31, 2021.

JAKKS PACIFIC, INC.

1 unchanged sentence

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

June 30, 2022

Note 5 — Debt

2 unchanged sentences

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.

1 unchanged sentence

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 .

Excluding the impact of the Reverse Stock Split in July of 2020, 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.

2 unchanged sentences

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).

4 unchanged sentences

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.

The Company has elected to measure and present the debt held by Oasis at fair value using Level 3 inputs and as a result, recognized a loss of $ 3.8 million and $ 12.8 million for the three and six months ended June 30, 2021, respectively, related to changes in the fair value of the 3.25% convertible senior notes due 2023 (see Note 16 – Fair Value Measurement).

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).

3 unchanged sentences

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

June 30, 2022

Term loan consists of the following (in thousands):

March 31, 2022

June 30, 2022

December 31, 2021

Principal Amount

Debt Discount/

Principal Amount**

Debt Discount/

1 unchanged sentence

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

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.

These fees are 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.

5 unchanged sentences

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

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

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

The 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.

On April 26, 2022, the Company entered into a First Amendment to the 2021 BSP Term Loan Agreement, to provide, among other things, that the Company must maintain Qualified Cash of at least:

(a) at all times after the Closing Date and prior to the First Amendment Effective Date, $20.0 million;

(b) at all times during the period commencing on the First Amendment Effective Date through and including June 30, 2022, $15.0 million;

and (c) at all times on and after July 1, 2022, through September 30, 2022, $17.5 million;

provided however, that, the Applicable Minimum Cash Amount shall in no event be reduced below $15.0 million .

JAKKS PACIFIC, INC.

1 unchanged sentence

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

June 30, 2022

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

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

Amortization expense classified as interest expense related to the $ 1.0 million of debt issuance costs associated with the issuance of the 2021 BSP Term Loan was $ 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.

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 and $ 87,167 for the three and six months ended June 30, 2022, respectively.

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 and $ 0.2 million for the three and six months ended June 30, 2022, respectively.

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.

2 unchanged sentences

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.

The estimated fair value of the 2021 BSP Term Loan was $ 69.1 million and $ 97.3 million as of June 30, 2022 and December 31, 2021, respectively, compared to a carrying value of $ 84.9 million and $ 95.5 million as of June 30, 2022 and December 31, 2021, respectively.

As of June 30, 2022, the Company was in compliance with the financial covenants under the 2021 BSP Term Loan Agreement.

Loan under Paycheck Protection Program

5 unchanged sentences

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

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

Note 6 — Credit Facilities

5 unchanged sentences

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 %.

As of June 30, 2022, 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.

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 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.

As of June 30, 2022, the amount of outstanding borrowings was nil and the total excess borrowing availability was $ 49.0 million.

As of June 30, 2022, off-balance sheet arrangements include letters of credit issued by JPMorgan of $ 17.2 million.

As of June 30, 2022, the Company was in compliance with the financial covenants under the JPMorgan ABL Credit Agreement.

Note 7 — 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.

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.

The Company’s income tax expense of $ 1.3 million for the three months ended June 30, 2022, reflects an effective tax rate of 4.8 %.

The Company’s income tax benefit of $ 0.1 million for the three months ended June 30, 2021, reflects an effective tax rate of 0.7 %.

The tax expense for the three months ended June 30, 2022, primarily relates to foreign income taxes and discrete items.

The tax benefit for the three months ended June 30, 2021 primarily relates to discrete items offset by foreign income taxes.

JAKKS PACIFIC, INC.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

June 30, 2022

The Company’s income tax expense of $ 1.8 million for the six months ended June 30, 2022 reflects an effective tax rate of 7.3 %.

The Company’s income tax benefit of $ 12 ,000 for the six months ended June 30, 2021 reflects an effective tax rate of 0.0 %.

The majority of the tax expense for the six months ended June 30, 2022 relates to foreign income taxes and discrete items.

The majority of the tax benefit for the six months ended June 30, 2021 relates to discrete items offset by foreign income taxes.

Note 8 — Earnings (Loss) Per Share

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

Three Months Ended

Six Months Ended

Earnings (loss) per share - basic and diluted

Net income (loss)

Net income (loss) attributable to non-controlling interests

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

Preferred stock dividend

Net income (loss) attributable to common stockholders *

Weighted average common shares outstanding - basic

Earnings (loss) per share available to common stockholder- basic

Weighted average common shares outstanding - diluted

Earnings (loss) per share available to common stockholder- diluted

* Net income attributable to common stockholders was computed by deducting preferred dividends of $ 0.4 million and $ 0.7 million for the three and six months ended June 30, 2022, respectively.

Net loss attributable to common stockholders was computed by deducting preferred dividends of $ 0.3 million and $ 0.7 million for the three and six months ended June 30, 2021, respectively.

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

Diluted earnings (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 six months ended June 30, 2021, the convertible senior notes interest and related weighted common share equivalent of 3,012,120 and 3,430,432 , respectively, were excluded from the diluted earnings per share calculation since they would have been anti-dilutive.

No restricted stock units were excluded from the computation of diluted earnings per share for the three and six months ended June 30, 2022.

Potentially dilutive restricted stock awards and units of 291,187 and 267,631 for the three and six months ended June 30, 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

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Additionally, an aggregate of 11,480 shares of restricted stock granted in 2019 with a value of approximately $ 0.1 million was forfeited during 2022.

No dividend was declared or paid in the three months ended March 31, 2022 and 2021.

No dividend was declared or paid in the three and six months ended June 30, 2022 and 2021.

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

Preferred Stock

On August 9, 2019, in connection with the Recapitalization Transaction (see Note 5 - 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 March 31, 2022 and December 31, 2021, 200,000 shares of Series A Preferred Stock were outstanding.

As of June 30, 2022 and December 31, 2021, 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”).

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No cash dividends have been declared or paid.

For the three months ended March 31, 2022 and 2021, the Company recorded $0.3 million of preferred stock dividends as an increase in the value of the Series A Preferred Stock.

For the three and six months ended June 30, 2022, the Company recorded $ 0.4 million and $ 0.7 million of preferred stock dividends as an increase in the value of the Series A Preferred Stock, respectively.

For the three and six months ended June 30, 2021, the Company recorded $ 0.3 million and $ 0.7 million of preferred stock dividends as an increase in the value of the Series A Preferred Stock, respectively.

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.

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

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 5 - Debt).

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The Series A Preferred Directors (or Director if less than 50,000 Series A Preferred 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.

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

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.

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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.

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

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 condensed consolidated statements of operations.

The liability is accounted for at fair value, with changes in fair value recognized as other income (expense) on the Company's condensed consolidated statements of operations (see Note 16 – Fair Value Measurement).

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.

As of March 31, 2022, the Series A Preferred Stock is recorded in temporary equity at the amount of accrued, but unpaid dividends of $ 3.4 million, and the redemption provision, as a bifurcated derivative, is recorded as a long term liability with an estimated value of $ 21.9 million.

As of June 30, 2022, the Series A Preferred Stock is recorded in temporary equity at the amount of accrued, but unpaid dividends of $ 3.8 million, and the redemption provision, as a bifurcated derivative, is recorded as a long term liability with an estimated value of $ 15.9 million.

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.

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Balance, January 1,

$ 3,074 $ 1,740

Preferred stock accrued dividends

Balance, March 31,

Preferred stock accrued dividends

Balance, June 30,

$ 3,771 $ 2,397

Note 10 — Joint Ventures

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.

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

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

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

The non-controlling interest’s share of the income (loss) was ($ 0.1 ) million and $ 35,000 for the three months ended March 31, 2022 and 2021, respectively.

The non-controlling interest’s share of the loss was $ 0.4 million and $ 0.5 million for the three and six months ended June 30, 2022, respectively.

The non-controlling interest’s share of the income was $ 24,000 and $ 59,000 for the three and six months ended June 30, 2021, respectively.

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

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

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

The non-controlling interest’s share of the income (loss) from the joint venture for the three months ended March 31, 2022 and 2021 was nil .

The non-controlling interest’s share of the income (loss) from the joint venture for the three and six months ended June 30, 2022 and 2021 was nil .

Note 11 — Goodwill

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

For the three months ended March 31, 2022, there were no events or circumstances that indicated that an impairment loss may have been incurred.

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

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

No goodwill impairment was determined to have occurred for the six months ended June 30, 2022 and June 30, 2021.

Note 12 — Intangible Assets Other Than Goodwill

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Trademarks are disclosed separately in the accompanying condensed consolidated balance sheets.

Intangible assets as of March 31, 2022 and December 31, 2021 include the following (in thousands, except for weighted useful lives):

March 31, 2022

Intangible assets as of June 30, 2022 and December 31, 2021 include the following (in thousands, except for weighted useful lives):

June 30, 2022

December 31, 2021

Amortization/

Amortized Intangible Assets:

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Unamortized Intangible Assets:

Note 13 — Comprehensive Loss

The table below presents the components of the Company’s comprehensive loss for the three months ended March 31, 2022 and 2021 (in thousands):

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

Note 13 — Comprehensive Income (Loss)

The table below presents the components of the Company’s comprehensive income (loss) for the three and six months ended June 30, 2022 and 2021 (in thousands):

Three Months Ended

Six Months Ended

Net income (loss)

Other comprehensive income (loss)

Foreign currency translation adjustment

Comprehensive loss

Comprehensive income (loss)

Comprehensive income (loss) attributable to non-controlling interests

Comprehensive loss attributable to JAKKS Pacific, Inc.

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

Note 14 — Litigation and Contingencies

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As additional information becomes available, the Company assesses the potential liability related to its pending litigation and revises its estimates.

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

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.

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.

At a mediation between the Company, counsel to three temporary providers who provided temporary employees to the Company during the relevant time periods, and counsel for both lawsuits occurred on March 24, 2022.

The Company is responsible for its own fees related to the lawsuits and has demanded and is in the process of obtaining indemnification for the settlement amounts for both of these matters from the three temporary employee providers who supplied temporary employees to the Company during the relevant time periods at issue in the lawsuits.

Following mediation in March 2022, the Company agreed to settlement terms with respect to both cases and are currently waiting for the settlement paperwork to be finalized.

The Company currently expects to incur only a nominal amount to settle both cases.

In the normal course of business, the Company may provide certain indemnifications and/or other commitments of varying scope to a) its licensors, customers and certain other parties, including against third-party claims of intellectual property infringement, and b) its officers, directors and employees, including against third-party claims regarding the periods in which they serve in such capacities with the Company.

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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.

Note 15 — Share-Based Payments

The Company’s 2002 Stock Award and Incentive Plan (the “Plan”), as amended, provides for the awarding of stock options, restricted stock and restricted stock units to certain key employees, executive officers and non-employee directors.

Current awards under the Plan include grants to directors, executive officers and certain key employees of restricted stock awards and units, with vesting contingent upon (a) the completion of specified service periods ranging from one to four years and/or (b) meeting certain financial performance and/or market-based metrics.

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

The Plan is more fully described in Notes 15 and 18 to the consolidated financial statements in the Company’s 2021 Annual Report on Form 10-K.

JAKKS PACIFIC, INC.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

The following table summarizes the total share-based compensation expense recognized for the three months ended March 31, 2022 and 2021 (in thousands)

June 30, 2022

Note 15 — Share-Based Payments

Current awards under the Plan include grants to executive officers and certain key employees of restricted stock units, with vesting contingent upon (a) the completion of specified service periods ranging from one to four years and/or (b) meeting certain financial performance and/or market-based metrics.

Shares for the restricted stock units are not issued until they vest.

The Plan is more fully described in Notes 15 and 18 to the consolidated financial statements in the Company’s 2021 Annual Report on Form 10-K.

The following table summarizes the total share-based compensation expense recognized for the three and six months ended June 30, 2022 and 2021 (in thousands) :

Three Months Ended

Six Months Ended

Share-based compensation expense

Restricted Stock Units

Restricted stock unit activity (including those with performance-based vesting criteria) for the three months ended March 31, 2022 is summarized as follows:

Restricted stock unit activity (including those with performance-based vesting criteria) for the six months ended June 30, 2022 is summarized as follows:

Restricted Stock Units

Number of Shares

Weighted Average

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Outstanding, December 31, 2021

Outstanding, March 31, 2022

As of March 31, 2022, there was $ 8.5 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 2.39 years.

Outstanding, June 30, 2022

As of June 30, 2022, there was $ 7.3 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 2.17 years.

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

Note 16 — Fair Value Measurements

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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.

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

The following tables summarize the Company's financial liabilities measured at fair value on a recurring basis as of March 31, 2022 and December 31, 2021 (in thousands):

The following tables summarize the Company's financial liabilities measured at fair value on a recurring basis as of June 30, 2022 and December 31, 2021 (in thousands):

Fair Value Measurements

as of March 31, 2022

as of June 30, 2022

Carrying Amount as of

March 31, 2022

June 30, 2022

Preferred stock derivative liability

4 unchanged sentences

Preferred stock derivative liability

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

The following tables provide 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 in 2023

Preferred stock derivative liability

Balance, January 1,

Conversion of convertible senior notes

Change in fair value

Balance, March 31,

Preferred stock derivative liability

Balance, June 30,

3.25% convertible senior notes due in 2023

Balance, January 1,

Conversion of convertible senior notes

Change in fair value

Balance, March 31,

Balance, June 30,

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.

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

2 unchanged sentences

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

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

Note 17 — 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.

In November 2014, the Company entered into a joint venture with 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 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) was ($ 0.1 ) million and $ 35,000 for the three months ended March 31, 2022 and 2021, 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.

The non-controlling interest’s share of the loss was $ 0.4 million and $ 0.5 million for the three and six months ended June 30, 2022, respectively.

The non-controlling interest’s share of the income was $ 24,000 and $ 59,000 for the three and six months ended June 30, 2021, respectively.

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

In October 2016, the Company entered into a joint venture with Hong Kong Meisheng Cultural Company Limited, 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.

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

The non-controlling interest’s share of the income (loss) from the joint venture for the three months ended March 31, 2022 and 2021 was nil .

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

The non-controlling interest’s share of the income (loss) from the joint venture for the three and six months ended June 30, 2022 and 2021 was nil , respectively.

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.

1 unchanged sentence

Meisheng also serves as a significant manufacturer of the Company.

For the three months ended March 31, 2022 and 2021, the Company made inventory-related payments to Meisheng of approximately $ 15.5 million and $ 7.5 million, respectively.

As of March 31, 2022 and December 31, 2021, amounts due to Meisheng for inventory received by the Company, but not paid totaled $ 15.5 million and $ 15.9 million, respectively.

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

(see Note 5 - Debt)

For the three and six months ended June 30, 2022, the Company made inventory-related payments to Meisheng of approximately $ 50.2 million and $ 65.7 million, respectively.

For the three and six months ended June 30, 2021, the Company made inventory-related payments to Meisheng of approximately $ 21.8 million and $ 29.2 million, respectively.

As of June 30, 2022 and December 31, 2021, amounts due to Meisheng for inventory received by the Company, but not paid totaled $ 42.3 million and $ 15.9 million, respectively.

A director of the Company is a portfolio manager at Oasis Management (see Note 5 - Debt).

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

As of March 31, 2022, Benefit Street Partners held $ 98.3 million in principal amount of the 2021 BSP Term Loan.

(see Note 5 - Debt)

As of June 30, 2022, Benefit Street Partners held $ 87.6 million in principal amount of the 2021 BSP Term Loan (see Note 5 - Debt).

Note 18 — Prepaid Expenses and Other Assets

Prepaid expenses and other assets as of March 31, 2022 and December 31, 2021 consist of the following (in thousands):

Royalty advances

Prepaid expenses and other assets as of June 30, 2022 and December 31, 2021 consist of the following (in thousands):

Prepaid expenses

Employee retention credit

Royalty advances

Government-funded COVID-19 relief

Income taxes receivable

Prepaid expenses and other assets

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

Note 19 – Subsequent Events

On April 26, 2022 the Company entered into a First Amendment to the 2021 BSP Term Loan Agreement, to provide, among other things, that the Company must maintain Qualified Cash of at least:

(a) at all times after the Closing Date and prior to the First Amendment Effective Date, $20,000,000;

(b) at all times during the period commencing on the First Amendment Effective Date through and including June 30, 2022, $15,000,000;

and (c) at all times on and after July 1, 2022, through September 30, 2022, $17,500,000;

provided, however, that if the Total Net Leverage Ratio exceeded 1.75:1.00 as of the last day of the most recently ended month for which financial statements were required to have been delivered pursuant to Section 5.1(a) of the 2021 BSP Term Loan Agreement, then the amount set forth in this clause (c) shall be increased to $20,000,000 on the third Business Day following the due date of such financial statements.

Notwithstanding the foregoing, the Applicable Minimum Cash Amount shall be reduced by $1,000,000 for every $5,000,000 principal prepayment or repayment of the Term Loans following the First Amendment Effective Date;

provided however, that, the Applicable Minimum Cash Amount shall in no event be reduced below $15,000,000 .

On July 1, 2022, the Company filed a Form S-3 shelf registration statement (File No.

333-266009) with the SEC to register for future issuances, from time to time, up to 2,000,000 shares of common stock, in one or more offerings in amounts, at prices and on the terms that the Company will determine at the time of the offering.

On August 1, 2022, the SEC declared the Form S-3 shelf registration filed by the Company to be effective.

On August 3, 2022, the Company entered into an agreement (the “Agreement”) to terminate all existing Voting Agreements with each of its Preferred Stockholders.

Among other things, the Agreement also provided that the special rights granted to the Preferred Stockholders with respect to the nomination and election of members of the Company’s Board of Directors (the “Board”) and Nominating and Corporate Governance Committee are terminated;

and that the Certificate of Designations of the Powers, Preferences and Relative, Participating, Optional and Other Special Rights, and Qualifications, Limitations and Restrictions thereof, of Series A Senior Preferred Stock, the Company’s By-Laws, and the Nominating Committee Charter shall be amended, consistent with the terms of the Agreement, in such manner as is approved by the Board to eliminate such rights.

The classification of the Board into three separate classes consisting of Class I, Class II and Class III, each with separate terms, has not, however, been eliminated.

Management ’ s Discussion and Analysis of Financial Condition and Results of Operations

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Shipping and handling activities are considered part of our obligation to transfer the products and therefore are recorded as direct selling expenses, as incurred.

Our reserve for sales returns and allowances amounted to $39.4 million as of March 31, 2022 and $46.3 million as of December 31, 2021.

Our reserve for sales returns and allowances amounted to $45.6 million as of June 30, 2022 and $46.3 million as of December 31, 2021.

We enter into license agreements with strategic partners, inventors, designers and others for the use of intellectual properties in our products.

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Discrete Items for Income Taxes.

The discrete expense recorded in the three months ended March 31, 2022 is $0.1 million which is related to excess tax deficiencies fully offset by valuation allowance, foreign return-to-provision adjustments, and state income taxes.

For the comparable period in 2021, a discrete tax expense of $22,000 was recorded related primarily to excess tax deficiencies fully offset by valuation allowance, state income taxes and foreign return-to-provision adjustments.

The discrete expense recorded for the three and six months ended June 30, 2022 was $57,000 and $0.1 million, respectively, which relate to foreign return-to-provision adjustments and state income taxes.

For the comparable period in 2021, a discrete benefit of $0.3 million was recorded for the three and six months ended June 30, 2021, primarily related to the change in uncertain tax positions offset by state income taxes, foreign return-to-provision adjustments, and excess tax deficiencies fully offset by valuation allowance.

Income taxes and interest and penalties related to income tax payable.

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The reserve is based upon management’s assessment of all relevant information and is periodically reviewed and adjusted as circumstances warrant.

As of March 31, 2022 and December 31, 2021, our income tax reserves were approximately $0.2 million.

As of June 30, 2022 and December 31, 2021, our income tax reserves were approximately $0.2 million.

The $0.2 million balance primarily relates to the potential tax settlements in Hong Kong.

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We recognize current period interest expense and penalties and the reversal of previously recognized interest expense and penalties that has been determined to not be assessable due to the expiration of the related audit period or other compelling factors on the income tax liability for unrecognized tax benefits as a component of the income tax provision recognized in the condensed consolidated statements of operations.

Income Taxes.

In determining the interim provision for income taxes for the three and six months ended June 30, 2022, we utilized the discrete effective tax rate method for the U.S.

jurisdiction, as allowed by ASC 740-270-30-18, “Income Taxes - Interim Reporting.” The discrete method is applied when the application of the estimated annual effective tax rate is impractical because it is not possible to reliably estimate the annual effective tax rate.

The discrete method treats the year-to-date period as if it were the annual period and determines the income tax expense or benefit on that basis.

We believe that, at this time, the use of the discrete method is more appropriate than the annual effective tax rate method for the U.S.

jurisdiction due to the uncertainty in estimating annual pretax earnings in the U.S.

and our ongoing assessment that the recoverability of our deferred tax assets is not likely in the U.S.

New Accounting Pronouncements.

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The following unaudited table sets forth, for the periods indicated, certain statement of income data as a percentage of net sales:

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

Cost of sales:

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Selling, general and administrative expenses

Loss from operations

Other income, net

Intangibles impairment

Income (loss) from operations

Other income (expense), net

Loss on debt extinguishment

Change in fair value of preferred stock derivative liability

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Interest expense

Loss before provision for income taxes

Provision for income taxes

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

Provision for (benefit from) income taxes

Net income (loss)

Net income (loss) attributable to non-controlling interests

Net loss attributable to JAKKS Pacific, Inc.

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

The following unaudited table summarizes, for the periods indicated, certain statements of operations data by segment (in thousands):

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

Toys/Consumer Products

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Toys/Consumer Products

Comparison of the Three Months Ended March 31, 2022 and 2021

Comparison of the Three Months Ended June 30, 2022 and 2021

Toys/Consumer Products.

Net sales of our Toys/Consumer Products segment were $111.1 million for the three months ended March 31, 2022 compared to $79.9 million for the prior year period, representing an increase of $31.2 million, or 39.0%.

Net sales of our Toys/Consumer Products segment were $148.9 million for the three months ended June 30, 2022 compared to $81.5 million for the prior year period, representing an increase of $67.4 million, or 82.7%.

The Doll/Dress-Up/Nurturing Play and Action Play and Collectibles division sales increased, led by Disney Encanto™ and Sonic the Hedgehog®.

Net sales of our Costumes segment were $9.8 million for the three months ended March 31, 2022 compared to $4.0 million for the prior year period, representing an increase of $5.8 million, or 145%.

Much of the increase in sales was related to delayed Q4 2021 customer FOB shipments occurring in Q1 2022.

Some of the increase in sales was related to convincing customers to place FOB orders earlier in the year in lieu of domestic orders later in the year, in order to get ahead of possible supply chain issues experienced a year ago, and to take advantage of the larger customers’ scale in the area of import logistics infrastructures.

Net sales of our Costumes segment were $71.6 million for the three months ended June 30, 2022 compared to $30.8 million for the prior year period, representing an increase of $40.8 million, or 132.5%.

Similar to the Toys/Consumer Products segment, some of the increase in sales was related to earlier customer shipments to get ahead of possible supply chain issues experienced a year ago.

Cost of Sales

Toys/Consumer Products.

Cost of sales of our Toys/Consumer Products segment was $83.0 million, or 74.7% of related net sales for the three months ended March 31, 2022 compared to $54.2 million, or 67.8% of related net sales for the prior year period, representing an increase of $28.8 million, or 53.1%.

Cost of sales of our Toys/Consumer Products segment was $105.7 million, or 71.0% of related net sales for the three months ended June 30, 2022 compared to $56.0 million, or 68.7% of related net sales for the prior year period, representing an increase of $49.7 million, or 88.8%.

The increase in dollars is related to higher overall sales.

The increase as a percentage of net sales, year over year, is due to higher freight costs, slightly offset by lower product costs.

Cost of sales of our Costumes segment was $8.0 million, or 81.6% of related net sales for the three months ended March 31, 2022, compared to $3.6 million, or 90.0% of related net sales for the prior year period, representing an increase in dollars of $4.4 million, or 122.2%.

The increase as a percentage of net sales, year over year, is due to a higher average royalty rate and higher freight costs, slightly offset by lower product costs.

Cost of sales of our Costumes segment was $53.8 million, or 75.1% of related net sales for the three months ended June 30, 2022, compared to $24.5 million, or 79.5% of related net sales for the prior year period, representing an increase in dollars of $29.3 million, or 119.6%.

The increase in dollars is related to higher overall sales.

The decrease as a percentage of net sales was primarily driven by a lower average royalty rate.

The decrease as a percentage of net sales was driven by lower product costs and a lower average royalty rate.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $30.7 million for the three months ended March 31, 2022 compared to $28.8 million for the prior year period constituting 25.4% and 34.4% of net sales, respectively.

Selling, general and administrative expenses were $36.9 million for the three months ended June 30, 2022 compared to $30.1 million for the prior year period constituting 16.8% and 26.8% of net sales, respectively.

Selling, general and administrative expenses increased as a result of higher payroll costs.

Interest Expense

Interest expense was $2.2 million for the three months ended March 31, 2022, as compared to $4.9 million in the prior year period.

During the three months ended March 31, 2022, we incurred interest expense of $2.0 million related to our 2021 BSP Term Loan and $0.2 million related to our revolving credit facility.

During the three months ended March 31, 2021, we incurred interest expense of $4.3 million related to our 2019 Recap Term Loan, $0.4 million related to our convertible senior notes due in 2023, and $0.2 million related to our revolving credit facility.

Provision for Income Taxes

Our income tax expense, which includes federal, state and foreign income taxes and discrete items, was $0.4 million, or an effective tax rate of (11.9)%, for the three months ended March 31, 2022.

During the comparable period in 2021, our income tax expense was $0.1 million, or an effective tax rate of (0.4)%.

Interest expense was $2.3 million for the three months ended June 30, 2022, as compared to $4.4 million in the prior year period.

During the three months ended June 30, 2022, we incurred interest expense of $2.0 million related to our 2021 BSP Term Loan and $0.3 million related to our revolving credit facility.

During the three months ended June 30, 2021, we incurred interest expense of $3.0 million related to our 2019 Recap Term Loan, $0.9 million related to our 2021 BSP Term Loan, $0.3 million related to our convertible senior notes due in 2023 and $0.2 million related to our revolving credit facility.

Provision for (Benefit From) Income Taxes

Our income tax expense, which includes federal, state and foreign income taxes and discrete items, was $1.3 million, or an effective tax rate of 4.8%, for the three months ended June 30, 2022.

During the comparable period in 2021, our income tax benefit was $0.1 million, or an effective tax rate of 0.7%.

Comparison of the Six Months Ended June 30, 2022 and 2021

Toys/Consumer Products.

Net sales of our Toys/Consumer Products segment were $260.0 million for the six months ended June 30, 2022 compared to $161.4 million for the prior year period, representing an increase of $98.6 million, or 61.1%.

The Doll/Dress-Up/Nurturing Play and Action Play and Collectibles division sales increased, led by Disney Encanto™ and Sonic the Hedgehog®.

Net sales of our Costumes segment were $81.3 million for the six months ended June 30, 2022 compared to $34.8 million for the prior year period, representing an increase of $46.5 million, or 133.6%.

Some of the increase in sales was related to earlier customer shipments to get ahead of possible supply chain issues experienced a year ago.

Cost of Sales

Toys/Consumer Products.

Cost of sales of our Toys/Consumer Products segment was $188.7 million, or 72.6% of related net sales for the six months ended June 30, 2022 compared to $110.2 million, or 68.3% of related net sales for the prior year period, representing an increase of $78.5 million, or 71.2%.

The increase in dollars is related to higher overall sales.

The increase as a percentage of net sales, year over year, is due to higher freight costs and a higher average royalty rate.

Cost of sales of our Costumes segment was $61.8 million, or 76.0% of related net sales for the six months ended June 30, 2022, compared to $28.0 million, or 80.5% of related net sales for the prior year period, representing an increase in dollars of $33.8 million, or 120.7%.

The increase in dollars is related to higher overall sales.

The decrease as a percentage of net sales was driven by lower product costs and a lower average royalty rate.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $67.6 million for the six months ended June 30, 2022 compared to $58.9 million for the prior year period constituting 19.8% and 30.0% of net sales, respectively.

Selling, general and administrative expenses increased as a result of higher payroll costs.

Interest Expense

Interest expense was $4.5 million for the six months ended June 30, 2022, as compared to $9.2 million in the prior year period.

During the six months ended June 30, 2022, we incurred interest expense of $4.0 million related to our 2021 BSP Term Loan and $0.5 million related to our revolving credit facility.

During the six months ended June 30, 2021, we incurred interest expense of $7.3 million related to our 2019 Recap Term Loan, $0.9 million related to our 2021 BSP Term Loan, $0.6 million related to our convertible senior notes due in 2023, and $0.4 million related to our revolving credit facility.

Provision for (Benefit From) Income Taxes

Our income tax expense, which includes federal, state and foreign income taxes and discrete items, was $1.8 million, or an effective tax rate of 7.3%, for the six months ended June 30, 2022.

During the comparable period in 2021, our income tax benefit was $12,000, or an effective tax rate of 0.0%.

Seasonality and Backlog

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Our working capital needs have been highest during the second and third quarters as we make royalty advance payments for some of our licenses and buy and sell inventory subject to customer payment terms.

The pandemic has somewhat disrupted historical industry seasonality.

Consumer demand for certain product categories has surged during this time.

Surges in consumer demand have also strained the supply-chain, lengthening the amount of time it takes to move products from factory to warehouse to customers.

Customers have also had increased challenges in managing their inventory levels, resulting in either out-of-stock or over-supply scenarios, depending on the product category and product line.

While we have taken steps to level sales over the entire year, sales are expected to remain heavily influenced by the seasonality of our toy and costume products.

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Liquidity and Capital Resources

As of March 31, 2022, we had working capital (inclusive of cash, cash equivalents and restricted cash) of $109.1 million, compared to $114.5 million as of December 31, 2021, representing a decrease in working capital of $5.4 million during the three-month period ended March 31, 2022.

Operating activities used net cash of $2.7 million during the three months ended March 31, 2022, as compared to using net cash of $7.0 million in the prior year period.

The decrease in net cash used in operating activities year-over-year is primarily due to a lower net loss, partially offset by lower non-cash charges related to valuation adjustments for our convertible senior notes and preferred stock derivative liability.

As of June 30, 2022, we had working capital (inclusive of cash, cash equivalents and restricted cash) of $116.7 million, compared to $114.5 million as of December 31, 2021, representing an increase in working capital of $2.2 million during the six-month period ended June 30, 2022.

Operating activities provided net cash of $36.5 million during the six months ended June 30, 2022, as compared to net cash used of $18.5 million in the prior year period.

The increase in net cash provided by operating activities year-over-year is primarily due to a higher net income, an increase in accounts payable due to higher inventory purchases, an increase in accrued expenses primarily due to higher royalty accruals, partially offset by a higher inventory balance, a higher accounts receivable balance due to higher sales, and lower non-cash charges related to valuation adjustments for our convertible senior notes and preferred stock derivative liability.

Other than open purchase orders issued in the normal course of business related to shipped product, we have no obligations to purchase inventory from our manufacturers.

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As part of our strategy to develop and market new products, we have entered into various character and product licenses with royalties/obligations generally ranging from 1% to 22% payable on net sales of such products.

As of March 31, 2022, these agreements required future aggregate minimum royalty guarantees of $61.4 million exclusive of $6.7 million in advances already paid.

As of June 30, 2022, these agreements required future aggregate minimum royalty guarantees of $86.4 million exclusive of $3.2 million in advances already paid.

Of this $86.4 million future minimum royalty guarantee, $29.9 million is due over the next twelve months.

Investing activities used net cash of $1.8 million and $1.5 million for the three months ended March 31, 2022 and 2021, respectively, and consisted primarily of cash paid for the purchase of molds and tooling used in the manufacture of our products.

Financing activities used net cash of $0.9 million and $0.2 million for the three months ended March 31, 2022 and 2021, respectively.

The cash used in financing activities during the three months ended March 31, 2022, primarily consists of the repayment of our 2021 BSP Term Loan of $0.2 million, and the repurchase of common stock for employee tax withholding of $0.6 million.

The cash used in financing activities during the three months ended March 31, 2021 consists of the repurchase of common stock for employee tax withholding.

As of March 31, 2022, we have $98.3 million of outstanding indebtedness under our first-lien secured term loan (the “2021 BSP Term Loan Agreement”) and we have no outstanding indebtedness under our senior secured revolving credit facility (the “JPMorgan ABL Facility”), aside from utilizing $17.2 million in letters of credit.

Investing activities used net cash of $5.3 million and $3.7 million for the six months ended June 30, 2022 and 2021, respectively, and consisted primarily of cash paid for the purchase of molds and tooling used in the manufacture of our products.

Financing activities used net cash of $11.5 million and $32.5 million for the six months ended June 30, 2022 and 2021, respectively.

The cash used in financing activities during the six months ended June 30, 2022, primarily consists of the repayment of our 2021 BSP Term Loan of $10.9 million, and the repurchase of common stock for employee tax withholding of $0.6 million.

The cash used in financing activities during the six months ended June 30, 2021 of $32.5 million consists of the repayment of our 2019 Recap Term Loan of $125.8 million, as well as, debt issuance costs of $2.8 million incurred in connection with the refinancing of our debt (see Note 5 – Debt), partially offset by the net proceeds from the issuance of our 2021 BSP Term Loan of $96.3 million.

As of June 30, 2022, we have $87.6 million of outstanding indebtedness under our first-lien secured term loan (the “2021 BSP Term Loan Agreement”) and we have no outstanding indebtedness under our senior secured revolving credit facility (the “JPMorgan ABL Facility”), aside from utilizing $17.2 million in letters of credit.

The First Lien Term Loan Facility Credit Agreement (the “2021 BSP Term Loan Agreement”) and the Credit Agreement with JPMorgan Chase Bank, N.A., as agent and lender (the “JPMorgan ABL Credit Agreement”) each contain negative covenants that, subject to certain exceptions, limit our ability and our subsidiaries ability to, among other things, incur additional indebtedness, make restricted payments, pledge our assets as security, make investments, loans, advances, guarantees and acquisitions, undergo fundamental changes and enter into transactions with affiliates.

The terms of the 2021 BSP Term Loan Agreement also require us to maintain a Net Leverage Ratio of 4:00x, with step-downs occurring each fiscal year starting with the quarter ending March 31, 2022 through the quarter ending September 30, 2024 in which we are required to maintain a Net Leverage Ratio of 3:00x.

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

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

The terms of the JPMorgan ABL Credit Agreement also subject us to a springing fixed charge coverage ratio covenant of not less than 1.1 to 1.0 under certain circumstances.

The terms of both Agreements are described in more detail in their respective Agreements.

On April 26, 2022, we entered into a First Amendment to the 2021 BSP Term Loan Agreement, to provide, among other things, that we must maintain Qualified Cash of at least:

(a) at all times after the Closing Date and prior to the First Amendment Effective Date, $20.0 million;

(b) at all times during the period commencing on the First Amendment Effective Date through and including June 30, 2022, $15.0 million;

and (c) at all times on and after July 1, 2022, through September 30, 2022, $17.5 million;

provided however, that, the Applicable Minimum Cash Amount shall in no event be reduced below $15.0 million.

On June 27, 2022, as permitted by the terms within the 2021 BSP Term Loan Agreement, we made a voluntary fee-free $10.0 million prepayment towards the outstanding principal amount of the 2021 BSP Term Loan.

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

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

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

We were in compliance with the financial covenants under the 2021 BSP Term Loan Agreement and the JPMorgan ABL Agreement as of June 30, 2022.

See Note 5 – Debt and Note 6 – Credit Facilities for additional information pertaining to our Debt and Credit Facilities.

As of March 31, 2022 and December 31, 2021, we 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.

As of June 30, 2022 and December 31, 2021, we held cash and cash equivalents, including restricted cash, of $62.3 million and $45.3 million, respectively.

Cash, and cash equivalents, including restricted cash held outside of the United States in various foreign subsidiaries totaled $53.5 million and $30.7 million as of June 30, 2022 and December 31, 2021, respectively.

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

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

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

Any such repatriation may result in foreign withholding taxes, which we expect would not be significant as of June 30, 2022.

On July 1, 2022, we filed a Form S-3 shelf registration statement (File No.

On August 1, 2022, the SEC declared the Form S-3 shelf registration filed by us to be effective.

Our primary sources of working capital are cash flows from operations and borrowings under our JPMorgan ABL Facility (see Note 6 - Credit Facilities).

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Changes in this area could have a material adverse impact on our liquidity.

As of March 31, 2022 off-balance sheet arrangements include letters of credit issued by JPMorgan of $17.2 million.

As of June 30, 2022 off-balance sheet arrangements include letters of credit issued by JPMorgan of $17.2 million.

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

What changed 10-Q

Item 1. Financial Statements