What changed in this filing

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Item 5. Market for Registrant’s Common Equity

2023-04-14 compared with 2022-03-16 · 74 added, 81 removed, 211 unchanged (42% of the section changed)

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Security Holders

To the best of our knowledge, as of March 15, 2022, there were 89 holders of record of our common stock.

To the best of our knowledge, as of April 13, 2023, there were 79 holders of record of our common stock.

We believe there are numerous beneficial owners of our common stock whose shares are held in “street name.”

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(c) other than securities to be issued upon the exercise of such outstanding options, warrants and rights, the number of securities remaining available for future issuance under the plans.

Plan Category

Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights

Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights

Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans, Excluding Securities

Reflected in Column (a)

Plan Category

Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans, Excluding Securities Reflected in Column (c)

Equity compensation plans approved by security holders

Equity compensation plans not approved by security holders

Equity compensation plans approved by our stockholders consists of the 2002 Stock Award and Incentive Plan.

Equity compensation plans approved by our stockholders consist of the 2002 Stock Award and Incentive Plan.

An additional 1.0 million, 3.6 million, 2.5 million and 1.4 million shares were added to the number of total issuable shares under the Plan and approved by the Board in 2021, 2019, 2017, and 2013, respectively.

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You should read this section in conjunction with our consolidated financial statements and the related notes included in Item 8 “ Consolidated Financial Statements and Supplementary Data.

Critical Accounting Policies

Critical Accounting Estimates

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

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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:

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

Allowance for Doubtful Accounts.

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

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

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

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

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

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

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

Revenue Recognition.

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

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

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

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

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

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

Toys/Consumer Products and Costumes.

We further disaggregate revenues by major geographic regions (see Item 8 "Consolidated Financial Statements and Supplementary Data Note 3 - Business Segments, Geographic Data, and Sales by Major Customers” for further information).

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

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

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

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

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

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

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

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

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

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

Such allowances are accrued when the related revenue is recognized.

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

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

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

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

Our reserve for sales returns and allowances amounted to $46.3 million as of December 31, 2021 and $42.1 million as of December 31, 2020.

Management believes the accounting estimate related to the allowance for doubtful account is a “critical accounting policy” because significant judgement is required to evaluate the creditworthiness of its customers when estimating the collectability of its accounts receivable.

In addition, the allowance requires a high degree of judgement since it involves estimation of the impact of both current and future economic factors in relation to its customers’ ability to pay amounts due to us.

Significant changes in the assumptions used to develop the estimates could materially affect key financial measures, including other selling and administrative expenses, net income and accounts receivable.

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

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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.

On a quarterly basis, we evaluate the recoverability of minimum guarantee amounts based on forecasted revenues to be received for the products and record a shortfall reserve for expected un-recoverable amounts.

If our actual revenue generated differs from our projections, recoverability of our minimum guarantees would be impacted and could materially affect key financial measures, including gross profit, net income and prepaid assets.

Fair value measurements.

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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.

Significant changes in the assumptions used to develop the estimate could materially affect key financial measures, including gross profit, net income and inventories.

Reserve for Sales Returns and Allowances .

We routinely enter into arrangements with our customers to provide sales incentives, support customer promotions and provide allowances for returns and defective merchandise.

Such programs are based primarily on customer purchases, customer performance of specified promotional activities and other specified factors such as sales to consumers.

Management believes that the accounting estimates related to sales adjustments are “critical accounting policies” because significant judgment is required to estimate related accruals, such as estimating volumes of defective products to support reserves for defective merchandise and estimating future customer performance and consumer preferences that could impact the discretionary sales promotions.

Significant changes in the assumptions used to develop the estimates could materially affect key financial measures, such as net sales, gross profit, net income, and reserve for sales returns and allowances.

Income Allocation for Income Taxes .

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

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

Income taxes.

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

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We consider all available positive and negative evidence when assessing whether it is more likely than not that deferred tax assets are recoverable.

We consider evidence such as our past operating results, the existence of cumulative losses in previous periods and our forecast of future taxable income.

We consider evidence such as our past operating results, the existence of cumulative losses or cumulative income in previous periods and our forecast of future taxable income.

We believe this to be a critical accounting policy because should there be a change in our ability to recover our deferred tax assets, our tax provision would increase in the period in which we determine that the recovery is not likely, as well as decrease in the period in which the assessment of the recoverability of the deferred tax assets reverses, which could have a material impact on our results of operations.

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

As of December 31, 2021, our income tax reserves were approximately $0.2 million and relates to the potential tax settlement in Hong Kong.

As of December 31, 2022, our income tax reserves were approximately $2.9 million and relates to federal and state taxes.

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

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Cost of sales:

Cost of goods

Royalty expense

Amortization of tools and molds

Cost of sales

Direct selling expenses

General and administrative expenses

Depreciation and amortization

Selling, general and administrative expenses

Restructuring charge

Pandemic related charges

Income from operations

Income from joint ventures

Other income (expense), net

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Loss on debt extinguishment

Interest income

Interest expense

Loss before provision for income taxes

Provision for income taxes

Net income attributable to non-controlling interests

Net loss attributable to JAKKS Pacific, Inc.

Net loss attributable to common stockholders

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

Provision for (benefit from) income taxes

Net income (loss)

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

Net income (loss) attributable to common stockholders

The following table summarizes, for the periods indicated, certain statement of operations data by segment (in thousands).

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Net sales of our Toys/Consumer Products segment were $647.3 million in 2022, compared to $513.5 million in 2021, representing an increase of $133.8 million, or 26.1%.

The increase in net sales was primarily due to higher sales of Disney Style Collection and Disney Encanto™.

In addition, net sales from video game properties, Nintendo® and Sonic the Hedgehog®, also added to the yearly increase in net sales.

The increase in net sales was primarily due to higher sales of Disney Encanto™.

In addition, net sales from video game properties, Sonic the Hedgehog® and Nintendo®, also added to the yearly increase in net sales.

Net sales of our Costumes segment were $148.9 million in 2022, compared to $107.6 million in 2021, representing an increase of $41.3 million, or 38.4%.

The increase in net sales was primarily driven by the Disney® and Microsoft® lines of costumes.

The increase in net sales was primarily driven by the Disney® and Microsoft® lines of costumes and expanded retail distribution.

Cost of Sales

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Cost of sales of our Toys/Consumer Products segment was $465.4 million, or 71.9% of related net sales in 2022 compared to $357.2 million, or 69.6% of related net sales in 2021 representing an increase of $108.2 million or 30.3%.

The increase in dollars is due to higher overall sales in 2021, while the increase in percentage of net sales, year-over-year is due to increased freight costs offset by product margin improvements.

The increase in dollars is due to higher overall sales in 2022, while the increase in percentage of net sales, year-over-year is due to a higher average royalty rate and higher freight charges.

Cost of sales of our Costumes segment was $119.5 million, or 80.3% of related net sales for 2022 compared to $80.9 million, or 75.2% of related net sales for 2021 representing an increase of $38.6 million, or 47.7%.

The increase in dollars is due to higher overall sales in 2022.

The decrease as a percentage of net sales, year-over-year, is due to a lower overall royalty rate in 2021 as well as product margin improvements.

The increase as a percentage of net sales, year-over-year, is due to higher freight charges.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $150.0 million in 2022 and $144.2 million in 2021, constituting 18.8% and 23.2% of net sales, respectively.

Selling, general and administrative expenses increased from the prior year primarily driven by higher compensation expense, media spend, and temporary help related to higher domestic shipping.

Restructuring Charge

In 2020, we recognized $1.6 million.

The restructuring charges are primarily related to employee severance.

Pandemic Related Charges

In 2020, we recognized $0.4 million in spending directly attributable to making necessary accommodations related to the COVID-19 pandemic.

Selling, general and administrative expenses increased from the prior year primarily driven by higher outbound freight and warehouse expenses related to higher domestic shipping, as well as higher compensation expense.

Gain on loan forgiveness

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Interest expense was $11.2 million for the year ended December 31, 2022, as compared to $14.1 million in the prior year period.

In 2022, we recorded interest expense of $9.3 million related to our 2021 BSP Term Loan, $0.6 million related to our revolving credit facility and $1.3 million related to other borrowing costs.

In 2021, we booked interest expense of $7.3 million related to our 2019 Recap Term Loan, $5.4 million related to our 2021 BSP Term Loan, $0.8 million related to our revolving credit facility and $0.6 million related to our convertible senior notes due in 2023.

In 2020, we booked interest expense of $2.0 million related to our convertible senior notes due in 2020 and 2023, $18.2 million related to our 2019 Recap Term Loan, which includes $3.4 million of payment-in-kind interest, and $3.9 million related to amortization of the debt discount and deferred financing fees, and $1.2 million related to our revolving credit facility.

Provision for Income Taxes

Our income tax expense, which includes federal, state and foreign income taxes and discrete items, was $0.2 million, or an effective tax rate of (4.0%) for 2021.

Our income tax benefit, which includes federal, state and foreign income taxes and discrete items, was $41.0 million, or an effective tax rate of (81.9%) for 2022.

During 2021, the income tax expense was $0.2 million, or an effective tax rate of (4.0%).

The 2021 tax expense of $0.2 million included a discrete tax benefit of ($0.4) million primarily comprised of return to provision and uncertain tax position adjustments.

Absent these discrete tax expenses, our effective tax rate for 2021 was (10.7%), primarily due to the various state taxes and taxes on foreign income.

The 2022 tax benefit of $41.0 million included a discrete tax benefit of $49.8 million primarily comprised of a valuation allowance release.

Absent these discrete tax benefits, our effective tax rate for 2022 was 17.6%, primarily due to taxes on federal, state, and foreign income.

The 2021 tax expense of $0.2 million included a discrete tax benefit of ($0.4) million primarily comprised of return to provision and uncertain tax position adjustments.

Absent these discrete tax benefits, our effective tax rate for 2020 was (7.7%), primarily due to the various state taxes and taxes on foreign income.

Absent these discrete tax benefits, our effective tax rate for 2021 was (10.7%), primarily due to state taxes and taxes on foreign income.

We assess the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets by jurisdiction.

Based on our evaluation of all positive and negative evidence, as of December 31, 2022, a valuation allowance of $0.7 million has been recorded against the deferred tax assets that more likely than not will not be realized.

The net deferred tax liabilities of $51,000 consists of the net deferred tax liabilities in the foreign jurisdiction, where we are in a cumulative income position.

The net deferred tax assets of $57.8 million consists of the net deferred tax assets in the US and foreign jurisdictions, where we are in a cumulative income position.

Uncertainties that may have a significant impact on net sales and income (loss) from operations

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As a % of net sales

Net income attributable to non-controlling interests

Net income (loss) attributable to non-controlling interests

As a % of net sales

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As a % of net sales

Diluted income (loss) per share

Diluted earnings (loss) per share

Weighted average shares and equivalents outstanding

Consistent with the seasonality of our business, the first, second and fourth quarters of 2021 and 2020, experienced seasonally low sales which coupled with fixed overhead resulted in significant net losses.

Quarterly and year-to-date computations of income (loss) per share amounts are made independently.

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As of December 31, 2022, we had working capital of $101.9 million compared to $114.5 million as of December 31, 2021.

Operating activities used net cash of $5.9 million in 2021 and provided net cash of $43.6 million in 2020.

The decrease in cash flows provided by operating activities was primarily due to higher working capital usage driven by an increase in accounts receivable due to higher Q4 sales and a higher inventory balance resulting from an increase in freight-in-transit, partially offset by a lower net loss and higher non-cash charges related to valuation adjustments for our convertible senior notes and preferred stock derivative liability.

Operating activities provided net cash of $86.1 million in 2022 and used net cash of $5.9 million in 2021.

The increase in cash flows provided by operating activities, year-over-year, was 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, and an increase in deferred income tax assets due to the release of the valuation allowance, offset by other deferred tax activities.

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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Of this $74.7 million future minimum royalty guarantee, $38.1 million is due over the next twelve months.

Investing activities used net cash of $8.2 million and $8.2 million for the year ended December 31, 2021 and 2020, respectively, and consisted primarily of cash paid for the purchase of molds and tooling used in the manufacture of our products.

Investing activities used net cash of $10.4 million and $8.2 million for the years ended December 31, 2022 and 2021, respectively, and consisted primarily of cash paid for the purchase of molds and tooling used in the manufacture of our products.

Financing activities used net cash of $31.0 million in 2022 and $32.8 million in 2021.

The cash used in 2022 primarily consists of the repayment of our 2021 BSP Term loan of $29.6 million and repurchase of common stock for employee tax withholding of $1.4 million.

The cash used in 2021 primarily consists of the repayment of our 2019 Recap Term Loan of $125.8 million, as well as, debt issuance costs of $2.6 million incurred in connection with the refinancing of our debt (see Item 8 “Consolidated Financial Statements and Supplementary Data Note 10 – Debt”), partially offset by the net proceeds from the issuance of our 2021 BSP Term Loan of $96.3 million.

The cash used in 2020 primarily consists of the repayment of our 2019 Recap Term Loan of $15.1 million and retirement of our 2020 convertible senior notes of $1.9 million, partially offset by the proceeds from the loan under the Paycheck Protection Program (the “PPP Loan”) secured under the Coronavirus Aid Relief and Economic Security Act (the “CARES Act”).

The following is a summary of our significant contractual cash obligations for the periods indicated that existed as of December 31, 2022 and is based upon information appearing in the notes to the consolidated financial statements (in thousands):

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

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

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

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

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

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

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

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

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

provided, however, that 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, 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.

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

During the last three fiscal years ending December 31, 2021, we do not believe that inflation has had a material impact on our net sales and on income from continuing operations.

On July 1, 2022, we entered into an ATM Agreement with B.

Riley, as agent pursuant to which we may, from time to time, sell shares of our common stock, up to $75 million in common stock, in one or more offerings in amounts, at prices and in the terms that we will determine at the time of the offering.

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

333-266009) with the SEC.

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

As of April 14, 2023, we have not sold any shares of common stock under the ATM Agreement.

We have on file with the SEC an effective registration statement pursuant to which we may issue, from time to time, up to an additional $75 million of securities consisting of, or any combination of, common stock, preferred stock, debt securities, warrants, rights and/or units, in one or more offerings in amounts, prices and at terms that we will determine at the time of the offering.

As of April 14, 2023, we have not sold any securities pursuant to our shelf registration statement.

The nature of our business is a number of factors influence the price we offer product to our customers, and by extension they sell to our end customer.

Our products are manufactured by third-party vendors who deal with increases in labor rates as a normal course of their respective businesses.

The costing of the plastic components of our toys can be sensitive to sudden swings in oil prices.

Currency exchange can also create a degree of volatility, although the majority of our products are sourced in USD or Hong Kong Dollars.

Increased volumes ideally generate increased scale at various points in the value chain.

Often times, in the toy industry when cost pressures result in price increases, the development teams will reengineer subsequent year refreshes to cost-reduce the items down to support traditional price points and preserve historical margins.

With those considerations in mind as well as others, during the last three fiscal years ending December 31, we do not believe that inflation has had a material impact on our net sales and income from continuing operations.

Exchange Rates

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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-K

Item 5. Market for Registrant’s Common Equity