What changed in this filing

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Item 1. Financial Statements

2022-11-14 compared with 2022-08-10 · 290 added, 443 removed, 603 unchanged (55% of the section changed)

4 unchanged sentences

(In thousands, except share amounts)

September 30,

Current assets

1 unchanged sentence

Restricted cash

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

Accounts receivable, net of allowance for doubtful accounts of $ 2,922 and $ 2,626 at September 30, 2022 and December 31, 2021, respectively

Prepaid expenses and other assets

27 unchanged sentences

5,000,000 shares authorized;

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

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

9,723,534 and 9,520,817 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively

Additional paid-in capital

11 unchanged sentences

(In thousands, except per share data)

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended

September 30,

Nine Months Ended

September 30,

Cost of sales:

8 unchanged sentences

Intangibles impairment

Income (loss) from operations

Income from operations

Other income (expense), net

Loss on debt extinguishment

Change in fair value of preferred stock derivative liability

Change in fair value of convertible senior notes

Gain on loan forgiveness

Loss on debt extinguishment

Interest income

Interest expense

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

Provision for (benefit from) income taxes

Income (loss) before provision for income taxes

Provision for income taxes

Net income (loss)

13 unchanged sentences

(In thousands)

Three and Six Months Ended June 30, 2022

Three and Nine Months Ended September 30, 2022

Pacific, Inc.

14 unchanged sentences

Balance, June 30, 2022

Three and Six Months Ended June 30, 2021

Share-based compensation expense

Repurchase of common stock for employee tax withholding

Preferred stock accrued dividends

Net income (loss)

Foreign currency translation adjustment

Balance, September 30, 2022

Three and Nine Months Ended September 30, 2021

Pacific, Inc.

16 unchanged sentences

Balance, June 30, 2021

Share-based compensation expense

Conversion of convertible senior notes

Preferred stock accrued dividends

Foreign currency translation adjustment

Balance, September 30, 2021

See accompanying notes to condensed consolidated financial statements.

3 unchanged sentences

(In thousands)

Six Months Ended June 30,

Nine Months Ended September 30,

Cash flows from operating activities

4 unchanged sentences

Payment-in-kind interest

Amortization of debt discount

Amortization of debt issuance costs

Write-off and amortization of debt discount

Write-off and amortization of debt issuance costs

Share-based compensation expense

Gain on disposal of property and equipment

Gain on loan forgiveness

Loss on debt extinguishment

Intangibles impairment

Deferred income taxes

Change in fair value of convertible senior notes

3 unchanged sentences

Prepaid expenses and other assets

Accounts payable and payable to Meisheng (related party)

Accounts payable

Accounts payable - Meisheng (related party)

Accrued expenses

21 unchanged sentences

Cash, cash equivalents and restricted cash, end of period

Supplemental disclosures of non-cash financing activities:

Forgiveness of Paycheck Protection Program Loan

Supplemental disclosures of cash flow information:

1 unchanged sentence

Cash paid for interest

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.

As of September 30, 2022, there was $ 4.7 million of property and equipment purchases included in accounts payable.

As of September 30, 2021, there was $ 3.1 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

June 30, 2022

September 30, 2022

Note 1 — Basis of Presentation

28 unchanged sentences

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

September 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 (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.

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

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

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

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

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

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

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

The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer-side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property.

On December 27, 2020, President Trump signed into law the Consolidated Appropriations Act of 2021 (“CAA”), which includes many tax and health components, as well as CARES Act extensions and modifications.

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

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

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

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

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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”).

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

The PPP Loan allowed for prepayment at any time prior to maturity with no prepayment penalties.

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

The application for the loan required the Company to, in good faith, certify that the current economic uncertainty made the loan request necessary to support the ongoing operations of the Company.

This certification further required the Company to take into account its current business activity and its ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the business.

A PPP Loan may be forgiven, partially or in full, if certain conditions are met, principally based on having been disbursed for permissible purposes and maintaining certain average levels of employment and payroll as required by the CARES Act.

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

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

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

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

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

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

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

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

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

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

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

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

During the 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.

or tax has been accounted for in connection with the Tax Cuts and Jobs Act, or may be eligible for a full foreign dividends received deduction under such Act, and thus would not be subject to additional U.S.

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

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

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

A downturn in any single factor or a combination of factors could have a material adverse impact upon the Company’s ability to generate sufficient cash flows to operate the business.

In addition, the Company’s business and liquidity are dependent to a significant degree on its vendors and their financial health, as well as the ability to accurately forecast the demand for products.

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

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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”).

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

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

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

The JPMorgan ABL Facility matures in June 2026.

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

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

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

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

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

On June 2, 2021, the Company and certain of its subsidiaries, as borrowers, entered into a First Lien Term Loan Facility Credit Agreement (the “2021 BSP Term Loan Agreement”) with Benefit Street Partners L.L.C., as Sole Lead Arranger, and BSP Agency, LLC, as agent, for a $ 99.0 million first-lien secured term loan (the “Initial Term Loan”) and a $ 19.0 million delayed draw term loan (the “Delayed Draw Term Loan” and collectively, the “2021 BSP Term Loan”).

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

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

Proceeds from the Initial Term Loan, together with available cash from the Company, were used to repay the Company’s existing term loan (the “2019 Recap Term Loan” formerly known as the “New Term Loan” in prior filings) under the agreement dated as of August 9, 2019 with Cortland Capital Market Services LLC, as agent for certain investor parties.

The Delayed Draw Term Loan provision was secured to redeem any of the Company’s outstanding 2023 Convertible Senior Notes (the “New Oasis Notes” or “ 3.25 % convertible senior notes due 2023”), upon its maturity, which, upon repayment of the 2019 Recap Term Loan, accelerated to no later than 91 days from the repayment of the 2019 Recap Term Loan, or September 1, 2021.

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

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

The 2021 BSP Term Loan matures in June 2027.

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

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.

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 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, then the amount set forth in this clause shall be increased to $20.0 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.

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

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

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

As of 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 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

The Company adopted ASU 2021-10 during the fiscal period December 31, 2021 (see Note 5 – Debt and Note 18 –Prepaid Expenses and Other Assets, for disclosures related to government assistance received by the Company).

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

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

September 30, 2022

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

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

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

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Toys/Consumer Products

Three Months Ended

Six Months Ended

Income (Loss) from Operations

Nine Months Ended

September 30,

Income from Operations

Toys/Consumer Products

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Depreciation and Amortization Expense

Toys/Consumer Products

September 30,

Toys/Consumer Products

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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

September 30,

Long-lived Assets

1 unchanged sentence

United Kingdom

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Net Sales by Customer Area

4 unchanged sentences

Major Customers

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,

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

Three Months Ended September 30,

Nine Months Ended September 30,

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

1 unchanged sentence

The Company performs ongoing credit evaluations of its top customers and maintains an allowance for potential credit losses.

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

Note 3 — Inventory

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

September 30,

Raw materials

Finished goods

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

As of September 30, 2022 and December 31, 2021, the inventory obsolescence reserve was $ 7.7 million and $ 4.6 million, respectively.

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

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 $ 45.6 million as of June 30, 2022, compared to $ 46.3 million as of December 31, 2021.

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

For the three and nine months ended September 30, 2022, shipping and handling costs were $ 1.1 million and $ 4.8 million, respectively.

For the three and nine months ended September 30, 2021, shipping and handling costs were $ 0.9 million and $ 3.0 million, respectively.

The Company’s reserve for sales returns and allowances amounted to $ 59.2 million as of September 30, 2022, compared to $ 46.3 million as of December 31, 2021.

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.

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.

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

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

10 unchanged sentences

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

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

The Company has elected to measure and present the 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).

As a result of the conversions in 2021, the New Oasis Notes were fully extinguished.

The Company accounted for the debt held by Oasis at fair value using Level 3 inputs and as a result, recognized a loss of $ 3.7 million and $ 16.5 million for the three and nine months ended September 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).

The transaction closed on February 8, 2021.

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

Term loan consists of the following (in thousands):

June 30, 2022

September 30, 2022

December 31, 2021

4 unchanged sentences

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.

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

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.

The Delayed Draw Term Loan provision was designed to provide necessary capital to redeem any of the Company’s outstanding 3.25 % convertible senior notes due 2023, upon their maturity, which, upon repayment of the 2019 Recap Term Loan, accelerated to no later than 91 days from the repayment of the 2019 Recap Term Loan, or September 1, 2021.

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

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

The 2021 BSP Term Loan matures in June 2027.

2 unchanged sentences

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;

(a) at all times after the Closing Date and prior to the First Amendment Effective Date, April 26, 2022, $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;

4 unchanged sentences

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.

On September 28, 2022, as permitted by the terms within the 2021 BSP Term Loan Agreement, the Company made a voluntary $ 17.5 million prepayment towards the outstanding principal amount of the 2021 BSP Term Loan and incurred a $ 0.5 million prepayment penalty.

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

JAKKS PACIFIC, INC.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

September 30, 2022

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

Amortization expense classified as interest expense related to the $ 1.0 million of debt issuance costs associated with the issuance of the 2021 BSP Term Loan was $ 43,584 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.

Amortization expense classified as interest expense related to the $ 0.8 million of debt issuance costs associated with the issuance of the 2021 BSP Term Loan was $ 0.3 million and $ 0.4 million for the three and nine months ended September 30, 2022, respectively.

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

Amortization expense classified as interest expense related to the $ 1.6 million debt discount associated with the issuance of the 2021 BSP Term Loan was $ 0.6 million and $ 0.8 million for the three and nine months ended September 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 $ 94,164 and $ 124,506 for the three and nine months ended September 30, 2021.

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

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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 $ 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.

The estimated fair value of the 2021 BSP Term Loan was $ 70.8 million and $ 97.3 million as of September 30, 2022 and December 31, 2021, respectively, compared to a carrying value of $ 67.7 million and $ 95.5 million as of September 30, 2022 and December 31, 2021, respectively.

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

Loan under Paycheck Protection Program

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

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

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

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

The Small Business Administration (“SBA”) may review the Company’s PPP loan forgiveness application for six years after the date of forgiveness.

The Company may be subjected to penalties and repayment of the PPP loan if the SBA disagrees with the Company’s eligibilities.

JAKKS PACIFIC, INC.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

September 30, 2022

Note 6 — Credit Facilities

JPMorgan Chase

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

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

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

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The JPMorgan ABL Facility matures in June 2026.

As of June 30, 2022, the weighted average interest rate on the credit facility with JPMorgan Chase Bank was 1.88 %.

As of September 30, 2022, the weighted average interest rate on the credit facility with JPMorgan Chase Bank was 1.88 %.

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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.

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

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

As of September 30, 2022, the amount of outstanding borrowings was nil and the total excess borrowing availability was $ 46.5 million.

As of September 30, 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 $ 79,132 and $ 0.2 million for the three and nine months ended September 30, 2022.

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

Note 7 — Income Taxes

The Company’s income tax expense of $ 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.

The Company’s income tax expense of $ 11.6 million for the three months ended September 30, 2022, reflects an effective tax rate of 27.4 %.

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

The tax expense for the three months ended September 30, 2022, primarily relates to U.S.

and foreign income taxes, and discrete items.

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

JAKKS PACIFIC, INC.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

September 30, 2022

The Company’s income tax expense of $ 13.3 million for the nine months ended September 30, 2022 reflects an effective tax rate of 20.1 %.

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

The majority of the tax expense for the nine months ended September 30, 2022 relates to U.S.

and foreign income taxes, and discrete items.

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

Note 8 — Earnings (Loss) Per Share

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Three Months Ended

Six Months Ended

September 30,

Nine Months Ended

September 30,

Earnings (loss) per share - basic and diluted

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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.

* The 200,000 shares issued and outstanding are non-participating.

** Net income (loss) attributable to common stockholders was computed by deducting preferred dividends of $ 0.4 million and $ 1.1 million for the three and nine months ended September 30, 2022, respectively.

Net income (loss) attributable to common stockholders was computed by deducting preferred dividends of $ 0.3 million and $ 1.0 million for the three and nine months ended September 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.

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 units and convertible debt to the extent they are dilutive).

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

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

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

No restricted stock units were excluded from the computation of diluted earnings per share for the three months ended September 30, 2021.

Note 9 — Common Stock and Preferred Stock

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

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

During 2021, certain employees, including two executive officers, surrendered an aggregate of 32,846 shares of restricted stock for $ 0.2 million to cover income taxes due on the vesting of restricted shares.

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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 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

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

Redeemable 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 June 30, 2022 and December 31, 2021, 200,000 shares of Series A Preferred Stock were outstanding.

As of September 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”).

1 unchanged sentence

No cash dividends have been declared or paid.

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.

For the three and nine months ended September 30, 2022, the Company recorded $ 0.4 million and $ 1.1 million, respectively, of preferred stock dividends as an increase in the value of the Series A Preferred Stock.

For the three and nine months ended September 30, 2021, the Company recorded $ 0.3 million and $ 1.0 million, respectively, of preferred stock dividends as an increase in the value of the Series A Preferred Stock.

The Series A Preferred Stock has no stated maturity, however, the Company has the right to redeem all or a portion of the Series A Preferred Stock at its Liquidation Preference (as defined below) at any time after payment in full of the 2019 Recap Term Loan.

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In addition, holders of the Series A Preferred Stock have preemptive rights regarding future issuance of Series A Preferred Stock or parity stock.

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

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

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

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

1 unchanged sentence

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

September 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.

5 unchanged sentences

The redemption provision specifies if certain events that constitute a change of control occur, the Company may be required to settle the Series A Preferred Stock at 150% of its accreted amount.

Accordingly, the redemption provision meets the definition of a derivative, and its economic characteristics are not considered clearly and closely related to the economic characteristics of the Series A Preferred Stock, which is considered more akin to a debt instrument than equity.

Accordingly, these two embedded derivatives are required to be bundled into a single derivative instrument and accounted for separately from the Series A Preferred Stock at fair value.

The Company considers the repurchase option to have no value as the likelihood is remote that this event, within the Company’s control, would ever occur.

2 unchanged sentences

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

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.

Accordingly, these two embedded derivatives are accounted for separately from the Series A Preferred Stock at fair value.

As of September 30, 2022, the Series A Preferred Stock is recorded in temporary equity at the amount of accrued, but unpaid dividends of $ 4.1 million, and the redemption provision, as a bifurcated derivative, is recorded as a long-term liability with an estimated value of $ 23.3 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.

As of September 30, 2022, the Series A Preferred Stock had a carrying value of $ 24.1 million, and a liquidation value of $ 36.2 million.

As of December 31, 2021, the Series A Preferred Stock had a carrying value of $ 23.1 million, and a liquidation value of $ 34.6 million.

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

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

5 unchanged sentences

Balance, June 30,

Preferred stock accrued dividends

Balance, September 30,

$ 4,128 $ 2,733

3 unchanged sentences

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 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

The non-controlling interest’s share of the loss was $ 17,000 and $ 470,000 for the three and nine months ended September 30, 2022, respectively.

The non-controlling interest’s share of the income was $ 42,000 and $ 101,000 for the three and nine months ended September 30, 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.

3 unchanged sentences

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 and six months ended June 30, 2022 and 2021 was nil .

The non-controlling interest’s share of the income (loss) from the joint venture for the three and nine months ended September 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.

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.

Based on the Company’s April 1 annual Step 1 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 nine months ended September 30, 2022 and September 30, 2021.

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

Note 12 — Intangible Assets Other Than Goodwill

2 unchanged sentences

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

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

June 30, 2022

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

September 30, 2022

December 31, 2021

6 unchanged sentences

Total amortized intangible assets

September 30, 2022

December 31, 2021

Unamortized Intangible Assets:

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):

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

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Net income (loss)

Other comprehensive income (loss)

Other comprehensive income

Foreign currency translation adjustment

15 unchanged sentences

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

September 30, 2022

Note 15 — Share-Based Payments

2 unchanged sentences

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) :

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

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Share-based compensation expense

Restricted Stock Units

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

Restricted Stock Units

Number of Shares

Weighted Average

1 unchanged sentence

Outstanding, December 31, 2021

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

Outstanding, September 30, 2022

As of September 30, 2022, there was $ 12.3 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 2.4 years.

Note 16 — Fair Value Measurements

10 unchanged sentences

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

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

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

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

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

Fair Value Measurements

as of June 30, 2022

as of September 30, 2022

Carrying Amount as of

June 30, 2022

September 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):

2 unchanged sentences

Change in fair value

Balance, June 30,

Balance, September 30,

3.25% convertible senior notes due in 2023

2 unchanged sentences

Change in fair value

Balance, June 30,

Balance, September 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.

1 unchanged sentence

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

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

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

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Note 17 — Related Party Transactions

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 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 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.

JAKKS will retain merchandising rights for kids’ consumer products in all markets except China, which Meisheng Culture & Creative Corp.

will oversee through the Company’s existing distribution joint venture.

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

The non-controlling interest’s share of the income (loss) from the joint venture for the 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 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 June 30, 2022, Benefit Street Partners held $ 87.6 million in principal amount of the 2021 BSP Term Loan (see Note 5 - Debt).

For the three and nine months ended September 30, 2022, the Company made inventory-related payments to Meisheng of approximately $ 43.6 million and $ 109.3 million, respectively.

For the three and nine months ended September 30, 2021, the Company made inventory-related payments to Meisheng of approximately $ 33.1 million and $ 62.3 million, respectively.

As of September 30, 2022 and December 31, 2021, amounts due to Meisheng for inventory received by the Company, but not paid totaled $ 28.3 million and $ 15.9 million, respectively.

A director of the Company is a director at Benefit Street Partners, who owns 145,788 shares of the Series A Preferred Stock (see Note 9 – Common Stock and Preferred Stock).

As of September 30, 2022, a division of Benefit Street Partners held $ 69.5 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 June 30, 2022 and December 31, 2021 consist of the following (in thousands):

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

September 30,

Prepaid expenses

Royalty advances

Government-funded COVID-19 relief

Income taxes receivable

Royalty advances

Prepaid expenses and other assets

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

Note 19 — Subsequent Events

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.

Sales Agreement

On October 26, 2022, the Company entered into an At Market Issuance Sales Agreement (the “Sales Agreement”) with B.

Riley Securities, Inc., (the “Agent”), pursuant to which the Company may, from time to time, offer and sell shares of the Company’s common stock having an aggregate offering price of up to $ 75.0 million in “at the market” offerings through the Agent.

Sales of the shares of common stock, if any, will be made at prevailing market prices at the time of sale, or as otherwise agreed with the Agent.

The Agent will receive a commission from the Company of 3.0 % of the gross proceeds of any shares of common stock sold under the Sales Agreement.

The Company is not obligated to sell, and the Agent is not obligated to buy or sell, any shares of common stock under the Sales Agreement.

No assurance can be given that the Company will sell any shares of common stock under the Sales Agreement, or, if it does, as to the price or amount of shares of common stock that it sells or the dates when such sales will take place.

The Company and the Agent may each terminate the Sales Agreement at any time upon specified prior written notice.

As of November 14, 2022, the Company has not sold any shares of its common stock under the Sales Agreement.

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

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Explanatory Note

As of the date of filing of this Quarterly Report on Form 10-Q (this “Report”), there continue to be uncertainties regarding the current Novel Coronavirus (“COVID-19”) pandemic, including the scope of health issues, the duration of the pandemic, and the continuing local and worldwide social, and economic disruption.

To date, the COVID-19 pandemic has had far-reaching impacts on many aspects of the operations of JAKKS Pacific, Inc.

As of the date of filing of this Quarterly Report on Form 10-Q (this “Report”), there continue to be uncertainties regarding the Novel Coronavirus (“COVID-19”) pandemic (“the pandemic”), including the scope of health issues, the duration of the pandemic, and the continuing local and worldwide social, and economic disruption.

To date, the pandemic has had far-reaching impacts on many aspects of the operations of JAKKS Pacific, Inc.

(the “Company,” “we,” “our” or “us”), including on consumer behavior, customer store traffic, production capabilities, timing of product availability, our employees’ personal and business lives, and the market generally.

The scope and nature of these impacts continue to evolve each day.

The COVID-19 pandemic has resulted in, and may continue to result in, regional and local quarantines, labor stoppages and shortages, changes in consumer purchasing patterns, mandatory or elective shut-downs of retail locations, disruptions to supply chains, including the inability of our suppliers and service providers to deliver materials and services on a timely basis, or at all, severe market volatility, liquidity disruptions, and overall economic instability, which, in many cases, have had, and we expect will continue to have, adverse impacts on our business, financial condition and results of operations.

The pandemic has resulted in, and may continue to result in, regional and local quarantines, labor stoppages and shortages, changes in consumer purchasing patterns, mandatory or elective shut-downs of retail locations, disruptions to supply chains, including the inability of our suppliers and service providers to deliver materials and services on a timely basis, or at all, severe market volatility, liquidity disruptions, and overall economic instability, which, in many cases, have had, and we expect will continue to have, adverse impacts on our business, financial condition and results of operations.

This situation is changing rapidly, and additional impacts may arise that we are not aware of currently.

In light of the uncertain and rapidly evolving situation relating to the COVID-19 pandemic, we have taken certain precautionary measures over the past two years intended to help minimize the risk to our Company, employees and customers.

A recap of the key elements as of today would include the following:

On March 23, 2020, we encouraged our staff to begin working from home.

In the US, we began to return to an in-office working model in July 2021, but paused that transition in consideration of the rise in cases attributable to the Delta-variant of COVID-19.

As of March 31, 2022, we have returned to an in-office operating model in our US offices.

We continue to monitor federal, state and local guidelines;

Although our distribution center in the City of Industry, California currently continues to operate, we continue to evaluate its operations, and may elect, or be required, to shut down its operations temporarily at any time in the future;

We are slowly increasing employee attendance at industry events and in-person work-related meetings.

Each of the remedial measures taken by us has had, and we expect will continue to have, adverse impacts on our current business, financial condition and results of operations, and may create additional risks for us.

While we anticipate that the foregoing measures are temporary, we cannot predict the specific duration for which these precautionary measures will stay in effect, and we may elect or need to take additional measures as the information available to us continues to develop, including with respect to our employees, inventory receipts, and relationships with our licensors.

We expect to continue to assess the evolving impact of the COVID-19 pandemic on our customers, consumers, employees, supply chain, and operations, and intend to make adjustments to our responses accordingly.

However, the extent to which the COVID-19 pandemic and our precautionary measures in response thereto may impact our business, financial condition, and results of operations will depend on how the COVID-19 pandemic and its impact continues to develop in the United States and elsewhere in the world, which remains highly uncertain and cannot be predicted at this time.

In light of these uncertainties, for purposes of this report, except where otherwise indicated, the descriptions of our business, our strategies, our risk factors, and any other forward-looking statements, including regarding us, our business and the market generally, do not reflect the potential impact of the COVID-19 pandemic or our responses thereto.

We expect to continue to assess the evolving impact of the pandemic on our customers, consumers, employees, supply chain, and operations, and intend to make adjustments to our responses accordingly.

However, the extent to which the pandemic and our precautionary measures in response thereto may impact our business, financial condition, and results of operations will depend on how the pandemic and its impact continues to develop in the United States and elsewhere in the world, which remains highly uncertain and cannot be predicted at this time.

The pandemic continues to have a lasting impact on household consumption and wealth.

Changes in personal behavior brought on by the pandemic in combination with government spending and stimulus have created an inflationary environment in many countries around the world, the United States included.

The war in Ukraine has also been disruptive to the economies of Europe in particular.

Global supply chains designed for optimized efficiency with minimal slack have been challenged to react in surges and rapid declines in demand, while also accounting for spikes in factor cost inputs like labor and fuel.

In addition, the disclosures contained in this report are made only as of the date hereof, and we undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.

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Critical Accounting Policies & Estimates

The accompanying condensed consolidated financial statements and supplementary information were prepared in accordance with accounting principles generally accepted in the United States of America.

Significant accounting policies are discussed in Note 2 to the consolidated financial statements set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

Inherent in the application of many of these accounting policies is the need for management to make estimates and judgments in the determination of certain revenues, expenses, assets and liabilities.

As such, materially different financial results can occur as circumstances change and additional information becomes known.

The policies with the greatest potential effect on our results of operations and financial position include:

Allowance for Doubtful Accounts.

Our allowance for doubtful accounts is based upon management’s assessment of the business environment, customers’ financial condition, historical collection experience, accounts receivable aging, customer disputes and the collectability of specific customer accounts.

If there were a deterioration of a major customer’s creditworthiness, or actual defaults were higher than our historical experience, our estimates of the recoverability of amounts due to us could be overstated, which could have an adverse impact on our operating results.

Our allowance for doubtful accounts is also affected by the time at which uncollectible accounts receivable balances are actually written off.

Major customers’ accounts are monitored on an ongoing basis and more in-depth reviews are performed based upon changes in a customer’s financial condition and/or the level of credit being extended.

When a significant event occurs, such as a bankruptcy filing by a specific customer, and on a quarterly basis, the allowance is reviewed for adequacy and the balance or accrual rate is adjusted to reflect current risk prospects.

When certain shocks to the market occur, customers are unilaterally reviewed to assess the potential impact of that shock on their financial stability.

Many retailers have been operating under financial duress for several years.

Ultimately, we assess the risk of liquidation bankruptcy by a customer and the associated likelihood that we will not be paid for product shipped.

To that end, it is not only outstanding accounts receivable balances but the decisions to design and develop account-specific product and ultimately ship product on a go-forward basis that plays into our attempts to maximize profitability while minimizing uncollectable accounts receivable.

Revenue Recognition.

Our contracts with customers only include one performance obligation (i.e., sale of our products).

Revenue is recognized in the gross amount at a point in time when delivery is completed and control of the promised goods is transferred to the customers.

Revenue is measured as the amount of consideration we expect to be entitled to in exchange for those goods.

Our contracts do not involve financing elements as payment terms with customers are less than one year.

Further, because revenue is recognized at the point in time goods are sold to customers, there are no contract assets or contract liability balances.

We disaggregate our revenues from contracts with customers by reporting segment:

Toys/Consumer Products and Costumes.

We further disaggregate revenues by major geographic region.

See Note 2 to the condensed consolidated financial statements for further information.

We offer various discounts, pricing concessions, and other allowances to customers, all of which are considered in determining the transaction price.

Certain discounts and allowances are fixed and determinable at the time of sale and are recorded at the time of sale as a reduction to revenue.

Other discounts and allowances can vary and are determined at management’s discretion (variable consideration).

Specifically, we occasionally grant discretionary credits to facilitate markdowns and sales of slow moving merchandise, and consequently accrue an allowance based on historic credits and management estimates.

We also participate in cooperative advertising arrangements with some customers, whereby we allow a discount from invoiced product amounts in exchange for customer purchased advertising that features our products.

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

Such allowances are accrued when the related revenue is recognized.

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

Further, while we generally do not allow product returns, we do make occasional exceptions to this policy, and consequently record a sales return allowance based upon historic return amounts and management estimates.

These allowances (variable consideration) are estimated using the expected value method and are recorded at the time of sale as a reduction to revenue.

We adjust our estimate of variable consideration at least quarterly or when facts and circumstances used in the estimation process may change.

The variable consideration is not constrained as we have sufficient history on the related estimates and do not believe there is a risk of significant revenue reversal.

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

As a result, these costs are recorded as direct selling expenses, as incurred.

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

Our reserve for sales returns and allowances amounted to $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.

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

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

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

Fair value measurements.

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

In determining fair value, we use various methods including market, income and cost approaches.

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

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

We utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.

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

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

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

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

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

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

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

See Note 16 to the condensed consolidated financial statements included within for further information.

Reserve for Inventory Obsolescence.

We value our inventory at the lower of cost or net realizable value.

Based upon a consideration of quantities on hand, actual and projected sales volume, anticipated product selling prices and product lines planned to be discontinued, slow-moving and obsolete inventory is written down to its net realizable value.

Failure to accurately predict and respond to consumer demand could result in us under-producing popular items or over-producing less popular items.

Furthermore, significant changes in demand for our products would impact management’s estimates in establishing our inventory provision.

Management’s estimates are monitored on a quarterly basis, and a further adjustment to reduce inventory to its net realizable value is recorded as an increase to cost of sales when deemed necessary under the lower of cost or net realizable value standard.

When unexpected shocks to market demand occur, we review whether that shock has materially impacted the value of our owned inventory.

In some cases where customers have cancelled orders, accommodation can be reached that the product will be reordered when the customer has restarted operations (in the event of store closures) or the customer agrees to minimize/eliminate requests for product line refreshment (in the event of Halloween order cancellations) which allows the inventory and, in some cases, raw materials to be held through to the following calendar year without incurring any additional obsolescence.

Income Allocation for Income Taxes.

Our annual income tax provision and related income tax assets and liabilities are based upon actual income as allocated to the various tax jurisdictions based upon our transfer pricing study, US and foreign statutory income tax rates and tax regulations and planning opportunities in the various jurisdictions in which we operate.

Significant judgment is required in interpreting tax regulations in the U.S.

and foreign jurisdictions, and in evaluating worldwide uncertain tax positions.

Actual results could differ materially from those judgments, and changes from such judgments could materially affect our condensed consolidated financial statements.

Discrete Items for Income Taxes.

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.

We do not file a consolidated return for our foreign subsidiaries.

We file federal and state returns and our foreign subsidiaries each file returns as required.

Deferred taxes are provided on an asset and liability method, whereby deferred tax assets are recognized as deductible temporary differences and operating loss and tax credit carry-forwards and deferred tax liabilities are recognized for taxable temporary differences.

Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases.

Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some or all of the deferred tax assets will not be realized.

Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

Management employs a threshold and measurement process for recording in the financial statements uncertain tax positions taken or expected to be taken in a tax return.

Tax benefits that are subject to challenge by tax authorities are analyzed and accounted for in the income tax provision.

We accrue a tax reserve for additional income taxes, which may become payable in future years as a result of audit adjustments by tax authorities.

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

As of 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.

Our income tax reserves are included in income tax payable on the condensed consolidated balance sheets and within provision for (benefit from) income taxes on the condensed consolidated statements of operations.

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.

Our critical accounting policies and estimates are included in the 2021 Annual Report on Form 10-K and did not materially change during the first nine months of 2022.

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 June 30,

Six Months Ended June 30,

Three Months Ended

September 30,

Nine Months Ended

September 30,

Cost of sales:

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Intangibles impairment

Income (loss) from operations

Income from operations

Other income (expense), net

Loss on debt extinguishment

Change in fair value of preferred stock derivative liability

Change in fair value of convertible senior notes

Gain on loan forgiveness

Loss on debt extinguishment

Interest income

Interest expense

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

Provision for (benefit from) income taxes

Income (loss) before provision for income taxes

Provision for income taxes

Net income (loss)

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

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended

September 30,

Nine Months Ended

September 30,

Toys/Consumer Products

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Toys/Consumer Products

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

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

Toys/Consumer Products.

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%.

Net sales of our Toys/Consumer Products segment were $269.6 million for the three months ended September 30, 2022 compared to $173.0 million for the prior year period, representing an increase of $96.6 million, or 55.8%.

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

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.

Net sales of our Costumes segment were $53.4 million for the three months ended September 30, 2022 compared to $64.0 million for the prior year period, representing a decrease of $10.6 million, or 16.6%.

The decrease in sales was related to earlier customer shipments in the second quarter to mitigate possible supply chain issues experienced a year ago.

Cost of Sales

Toys/Consumer Products.

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%.

Cost of sales of our Toys/Consumer Products segment was $186.3 million, or 69.1% of related net sales for the three months ended September 30, 2022 compared to $115.1 million, or 66.5% of related net sales for the prior year period, representing an increase of $71.2 million, or 61.9%.

The increase in dollars is related to higher overall sales.

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 driven by lower product costs and a lower average royalty rate.

Cost of sales of our Costumes segment was $44.8 million, or 83.9% of related net sales for the three months ended September 30, 2022, compared to $46.9 million, or 73.3% of related net sales for the prior year period, representing a decrease in dollars of $2.1 million, or 4.5%.

The decrease in dollars is related to lower overall sales.

The increase as a percentage of net sales was driven by higher product cost and a higher average royalty rate.

Selling, General and Administrative Expenses

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.

Selling, general and administrative expenses were $38.2 million for the three months ended September 30, 2022 compared to $38.2 million for the prior year period constituting 11.8% and 16.1% of net sales, respectively.

Selling, general and administrative expenses were flat versus prior year due to lower selling costs offset by higher general and administrative costs.

Interest Expense

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

Interest expense was $4.4 million for the three months ended September 30, 2022, as compared to $2.7 million in the prior year period.

During the three months ended September 30, 2022, we incurred interest expense of $3.4 million related to our 2021 BSP Term Loan, $0.2 million related to our revolving credit facility and $0.8 million related to other borrowing costs.

During the three months ended September 30, 2021, we incurred interest expense of $2.4 million related to our 2021 BSP Term Loan, $0.2 million related to our revolving credit facility and $0.1 million related to our convertible senior notes due in 2023.

Provision For Income Taxes

Our income tax expense, which includes federal, state and foreign income taxes and discrete items, was $11.6 million, or an effective tax rate of 27.4%, for the three months ended September 30, 2022.

During the comparable period in 2021, our income tax expense was $0.3 million, or an effective tax rate of 0.8%.

Comparison of the Nine Months Ended September 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%.

Net sales of our Toys/Consumer Products segment were $529.6 million for the nine months ended September 30, 2022 compared to $334.4 million for the prior year period, representing an increase of $195.2 million, or 58.4%.

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.

Net sales of our Costumes segment were $134.7 million for the nine months ended September 30, 2022 compared to $98.8 million for the prior year period, representing an increase of $35.9 million, or 36.3%.

The increase in sales was related to increased points of distribution in both the North America and International markets.

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%.

Cost of sales of our Toys/Consumer Products segment was $375.0 million, or 70.8% of related net sales for the nine months ended September 30, 2022 compared to $225.3 million, or 67.4% of related net sales for the prior year period, representing an increase of $149.7 million, or 66.4%.

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%.

Cost of sales of our Costumes segment was $106.6 million, or 79.1% of related net sales for the nine months ended September 30, 2022, compared to $75.0 million, or 75.9% of related net sales for the prior year period, representing an increase in dollars of $31.6 million, or 42.1%.

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.

The increase as a percentage of net sales was driven by higher product cost and a higher 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 were $105.8 million for the nine months ended September 30, 2022 compared to $97.1 million for the prior year period constituting 15.9% and 22.4% 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.

Interest expense was $8.9 million for the nine months ended September 30, 2022, as compared to $11.9 million in the prior year period.

During the nine months ended September 30, 2022, we incurred interest expense of $7.4 million related to our 2021 BSP Term Loan, $0.5 million related to our revolving credit facility and $1.0 million related to other borrowing costs.

During the nine months ended September 30, 2021, we incurred interest expense of $7.3 million related to our 2019 Recap Term Loan, $3.3 million related to our 2021 BSP Term Loan, $0.7 million related to our convertible senior notes due in 2023 and $0.6 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%.

Our income tax expense, which includes federal, state and foreign income taxes and discrete items, was $13.3 million, or an effective tax rate of 20.1%, for the nine months ended September 30, 2022.

During the comparable period in 2021, our income tax expense was $0.3 million, or an effective tax rate of (11.7%).

Seasonality and Backlog

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Liquidity and Capital Resources

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.

As of September 30, 2022, we had working capital (inclusive of cash, cash equivalents and restricted cash) of $135.8 million, compared to $114.5 million as of December 31, 2021, representing an increase in working capital of $21.3 million during the nine-month period ended September 30, 2022.

Operating activities provided net cash of $75.3 million during the nine months ended September 30, 2022, as compared to net cash used of $26.9 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 and lower working capital usage, partially offset by 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 June 30, 2022, these agreements required future aggregate minimum royalty guarantees of $86.4 million exclusive of $3.2 million in advances already paid.

As of September 30, 2022, these agreements required future aggregate minimum royalty guarantees of $71.4 million exclusive of $1.1 million in advances already paid.

Of this $71.4 million future minimum royalty guarantee, $25.4 million is due over the next twelve months.

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.

Investing activities used net cash of $8.1 million and $6.3 million for the nine months ended September 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 $30.3 million and $32.5 million for the nine months ended September 30, 2022 and 2021, respectively.

The cash used in financing activities during the nine months ended September 30, 2022, primarily consists of the repayment of our 2021 BSP Term Loan of $29.0 million, and the repurchase of common stock for employee tax withholding of $1.3 million.

The cash used in financing activities during the nine months ended September 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 $2.6 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 September 30, 2022, we have $69.5 million of outstanding indebtedness under our first-lien secured term loan (the “2021 BSP Term Loan Agreement”) and we have no outstanding indebtedness under our senior secured revolving credit facility (the “JPMorgan ABL Facility”), aside from utilizing $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.

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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.

On September 28, 2022, as permitted by the terms within the 2021 BSP Term Loan Agreement, we made a voluntary $17.5 million prepayment towards the outstanding principal amount of the 2021 BSP Term Loan and incurred a $0.5 million prepayment penalty.

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 June 30, 2022.

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

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

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.

As of September 30, 2022 and December 31, 2021, we held cash and cash equivalents, including restricted cash, of $76.6 million and $45.3 million, respectively.

Cash, and cash equivalents, including restricted cash held outside of the United States in various foreign subsidiaries totaled $72.3 million and $30.7 million as of September 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 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.

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

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

As of September 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