What changed in this filing

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2023-04-14 compared with 2022-03-16 · 265 added, 437 removed, 757 unchanged (48% of the section changed)

24 unchanged sentences

dollar LIBOR.

At this time, it is not possible to predict the effect any modification or discontinuation of LIBOR, or the establishment of alternative reference rates such as SOFR, will have on our business and financial condition.

Although regulators and IBA have made clear that the recent announcements should not be read to say that LIBOR has ceased or will cease, in the event LIBOR does cease to exist, our term loan and related agreements would transition from LIBOR to SOFR, which may result in interest rates and/or payments that do not correlate over time with the interest rates and/or payments that would have been made on its obligations if LIBOR was available in its current form.

In Q1 2023, we entered into amendments to our 2021 BSP Term Loan Agreement and our JPMorgan ABL Credit Agreement which changed the interest reference rate on our term loan and revolving line of credit from LIBOR to the Secured Overnight Financing Rate (“SOFR”).

Foreign Currency Risk

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We have audited the accompanying consolidated balance sheets of JAKKS Pacific, Inc.

(the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”).

(the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.

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Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that:

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that:

(1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.

Cost of Revenue for Royalties and Related Liabilities

The communication of the critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Cost of Sales for Royalties and Related Liabilities

As described in Notes 2, 9 and 17 of the consolidated financial statements, the Company enters into various license agreements whereby the Company uses certain characters and intellectual properties in conjunction with its products.

For the year ended December 31, 2021, the cost of revenue related to license agreement royalties was $87.2 million.

As of December 31, 2021, accrued royalties were $18.6 million, respectively.

We identified auditing this cost of revenue for royalties and related liabilities as a critical audit matter.

For the year ended December 31, 2022, the cost of sales related to license agreement royalties was $126.6 million.

As of December 31, 2022, accrued royalties were $18.0 million.

We identified the cost of sales for royalties and related liabilities as a critical audit matter.

The royalty expense calculation includes multiple variables based on various license agreements, including amended and renewed license agreements, and a significant volume of underlying data.

Variables in calculating the royalty expense include the territory of where the sale occurs, a broad range of negotiated royalty rates for the type of product, user/usage measures, and the applicable license holder.

The auditing of cost of revenue for royalties and related liabilities requires management judgment to critically evaluate its forecasts and evaluate its ability to fully utilize minimum guaranteed royalties, as well as incorporating the significant and unusual impacts of the COVID-19 pandemic.

The cost of sales for royalties and related liabilities requires judgment to critically evaluate its forecasts and evaluate its ability to fully utilize minimum guaranteed royalties.

Auditing management’s royalty expense and associated liabilities involved especially challenging auditor judgment and audit effort due to the nature and extent of effort required to address these matters.

The primary procedure we performed to address this critical audit matter included:

Evaluating the reasonableness of management’s forecasts, which included:

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Recalculating royalty costs, agreeing calculation variables to the underlying agreements, and evaluating the reasonableness of royalty expense and related liabilities based on existing, amended and renewed license agreements during the year.

Accounting for Income Taxes

As described in Notes 2 and 13 of the consolidated financial statements, the Company’s benefit from income taxes for the fiscal year ended December 31, 2022 was $41.0 million, which included a discrete tax benefit of $49.8 million primarily comprised of the release of a majority of the Company’s valuation allowance related to the deferred tax assets.

We identified the Company’s assessment of the realizability of its deferred tax assets as a critical audit matter.

The principal considerations for this determination were complex and subjective judgements involved in management’s assessment of the realizability of its deferred tax assets, including the evaluation of assumptions that may be affected by future operations of the Company, market or economic conditions and assessing the weight of all existing positive and negative available evidence such as forecasts of future profitability, current and cumulative financial reporting results, and reversal of temporary differences.

Auditing these elements involved especially complex and subjective auditor judgement, including the extent of specialized skills and knowledge needed.

The primary procedures we performed to address this critical audit matter included:

Testing mathematical accuracy and computation of the tax provision and agreeing to relevant source information.

Assessing the reasonableness of management’s projections in the context of other audit evidence obtained during the audit, historical performance, allocations by tax jurisdiction, and the inherent uncertainty in the projections to determine whether it was contradictory to the conclusion reached by management.

Utilizing personnel with specialized knowledge and skills in accounting for income taxes to assist in evaluating the reasonableness of certain assumptions related to the timing of the release of the valuation allowance and the Company’s consideration of the weight of both positive and negative evidence supporting the potential use of projections of future taxable income to support the realizability of the deferred tax assets.

/s/ BDO USA, LLP

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Los Angeles, California

March 16, 2022

April 14, 2023

JAKKS PACIFIC, INC.

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Other long-term assets

Deferred income tax assets, net

Intangible assets, net

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Accounts payable

Payable to Meisheng

Accounts Payable - Meisheng (related party)

Accrued expenses

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Income taxes payable

Deferred income taxes, net

Deferred income taxes liabilities, net

Total liabilities

Commitments and contingencies (Note 17)

Preferred stock accrued dividends, $ 0.001 par value;

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Total liabilities, preferred stock and stockholders' equity

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

See accompanying notes to consolidated financial statements.

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Depreciation and amortization

Selling, general and administrative expense

Intangible asset impairment

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Pandemic related charges

Acquisition related and other

Income (loss) from operations

Income from operations

Income from joint ventures

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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

Loss per share - basic and diluted*

Shares used in loss per share - basic and diluted*

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

Provision for (benefit from) income taxes

Net income (loss)

Net income (loss) attributable to non-controlling interests

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

Net income (loss) attributable to common stockholders

Earnings (loss) per share - basic*

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

Earnings (loss) per share - diluted*

Shares used in earnings (loss) per share - diluted*

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

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AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

Year Ended December 31,

(In thousands)

Net income (loss)

Other comprehensive income (loss):

Foreign currency translation adjustment

Comprehensive loss

Comprehensive income attributable to non-controlling interests

Comprehensive loss attributable to JAKKS Pacific, Inc.

Comprehensive income (loss)

Comprehensive income (loss) attributable to non-controlling interests

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

See accompanying notes to consolidated financial statements.

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CONSOLIDATED STATEMENTS OF STOCKHOLDERS ’ EQUITY

Comprehensive

Pacific, Inc.

Comprehensive

Stockholders’

Non-Controlling

Stockholders’

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Stock-based compensation expense

Common stock issuance

Treasury shares retirement

Retirement of restricted stock

Conversion of convertible senior notes

Repurchase of common stock for employee tax withholding

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Foreign currency translation adjustment

Adjustment to additional paid in capital

Balance, December 31, 2020

Stock-based compensation expense

RSA to RSU conversion

Conversion of convertible senior notes

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Foreign currency translation adjustment

Adjustment to additional paid in capital

Balance, December 31, 2021

Stock-based compensation expense

RSA to RSU conversion

Conversion of convertible senior notes

Repurchase of common stock for employee tax withholding

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Year Ended December 31,

(In thousands)

Cash flows from operating activities

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

Net income (loss)

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

Provision for (recovery of) doubtful accounts

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Payment-in-kind interest

Amortization of debt discount

Write-off and amortization of debt discount

(Gain) loss on disposal of property and equipment

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Prepaid expenses and other assets

Accounts payable and payable to Meisheng

Account payable

Account payable - Meisheng (related party)

Accrued expenses

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Proceeds from loan under the Paycheck Protection Program

Proceeds from credit facility borrowings

Retirement of convertible senior notes

Repayment of credit facility borrowings

Deferred issuance costs

Repayment of 2019 Recap Term Loan

Proceeds from credit facility borrowings

Repayment of 2021 BSP Term Loan

Term loan prepayment penalty

Net proceeds from issuance of long-term debt

Deferred issuance costs

Repayment of 2019 Recap Term Loan

Net cash used in financing activities

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As of December 31, 2020, there was $ 2.1 million of property and equipment included in accounts payable.

The Company received income tax refunds of $ 0.3 million, $ 0.6 million and $ 1.8 million for the year ended December 31, 2021, 2020 and 2019, respectively, and has included these amounts in cash paid during the period for income taxes, net.

See Note 20 for additional supplemental information to consolidated statements of cash flows.

The Company received income tax refunds of $ 0.3 million, $ 0.3 million and $ 0.6 million for the years ended December 31, 2022, 2021 and 2020, respectively, and has included these amounts in cash paid during the period for income taxes, net.

See accompanying notes to consolidated financial statements.

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The Company is incorporated under the laws of the State of Delaware.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

During the year ended December 31, 2021 and 2020, the Company recorded $ 2.1 million and $ 0.3 million, respectively, related to the ERC as an offset within selling, general and administrative expenses on the Company’s consolidated statements of operations and within prepaid expenses and other assets on the Company's consolidated balance sheet (See Note 5 – Prepaid Expenses and Other Assets).

As of December 31, 2021 and 2020, the Company held cash and cash equivalents, including restricted cash, of $ 45.3 million and $ 92.7 million, respectively.

Cash, and cash equivalents, including restricted cash held outside of the United States in various foreign subsidiaries totaled $ 30.7 million and $ 48.7 million as of December 31, 2021 and 2020, respectively.

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

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

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

Any such repatriation may result in foreign withholding taxes, which the Company expects would not be significant as of December 31, 2021.

The Company’s primary sources of working capital are cash flows from operations and borrowings under its credit facility (see Note 11 - Credit Facilities).

Cash flow from operating activities used net cash of $ 5.9 million in 2021.

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

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

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

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

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

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

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

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

The JPMorgan ABL Facility matures in June 2026.

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

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

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

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

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

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

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

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

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

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

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

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

The 2021 BSP Term Loan matures in June 2027.

The 2021 BSP Term Loan Agreement contains negative covenants that, subject to certain exceptions, limit the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, make restricted payments, pledge its assets as security, make investments, loans, advances, guarantees and acquisitions, undergo fundamental changes and enter into transactions with affiliates.

Commencing with the fiscal quarter ending June 30, 2021, the Company is required to maintain a Net Leverage Ratio of 4:00x, with step-downs occurring each fiscal year starting with the quarter ending March 31, 2022 through the quarter ending September 30, 2024 in which the Company is required to maintain a Net Leverage Ratio of 3:00x.

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

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

The terms and covenants are described in more detail in the 2021 BSP Term Loan Agreement.

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

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

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

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

As of December 31, 2021, the Company had $ 98.5 million of outstanding indebtedness under the 2021 BSP Term Loan Agreement and no outstanding indebtedness under its amended and extended JPMorgan ABL Credit Agreement with JPM Chase aside from utilizing $ 9.8 million in letters of credit.

On June 2, 2021, the Company repaid in full and terminated the First Lien Term Loan Facility Credit Agreement (the “2019 Recap Term Loan Agreement,” formerly known as the “New Term Loan Agreement” in prior filings), dated as of August 9, 2019, with Cortland Capital Market Services LLC, as agent.

The Wells Fargo ABL Credit Facility Agreement was also terminated as of June 2, 2021.

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

The Company’s consolidated financial statements for the year ended December 31, 2021 have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business.

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

Note 2 — Summary of Significant Accounting Policies

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All intercompany transactions have been eliminated.

The Company entered into a joint venture with Meisheng Culture & Creative Corp., for the purpose of providing certain JAKKS licensed and non-licensed toys and consumer products to agreed-upon territories of the People’s Republic of China.

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

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

Effective July 9, 2020, the Company completed a 1 for 10 reverse stock split of its $ 0.001 par value common stock reducing the issued and outstanding shares of common stock from 42,395,782 to 4,239,578 (“Reverse Stock Split”).

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The Company believes it is not exposed to any significant credit risk of cash and cash equivalents.

Cash, and cash equivalents, including restricted cash held outside of the United States in various foreign subsidiaries totaled $ 39.4 million and $ 30.7 million as of December 31, 2022 and 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.

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 December 31, 2022.

Restricted cash

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Specifically, the Company occasionally grants discretionary credits to facilitate markdowns and sales of slow-moving merchandise, and consequently accrues an allowance based on historic credits and management estimates.

The Company also participates in cooperative advertising arrangements with some customers, whereby it allows a discount from invoiced product amounts in exchange for customer purchased advertising that features the Company’s products.

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

Such allowances are accrued when the related revenue is recognized.

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

Further, while the Company generally does not allow product returns, the Company does make occasional exceptions to this policy and consequently records a sales return allowance based upon historic return amounts and management estimates.

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The variable consideration is not constrained as the Company has sufficient history on the related estimates and does not believe there is a risk of significant revenue reversal.

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

Such allowances are accrued when the related revenue is recognized.

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

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

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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.

For the twelve months ended December 31, 2022, 2021, and 2020, shipping and handling costs were $ 7.7 million, $ 5.4 million, and $ 4.0 million, respectively.

The Company’s reserve for sales returns and allowances amounted to $ 51.9 million as of December 31, 2022 and $ 46.3 million as of December 31, 2021.

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

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

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

Raw materials

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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.

The Company determines if an arrangement is a lease at inception.

Operating leases are included in operating lease right-of-use (“ROU”) assets and operating lease liabilities in its consolidated balance sheets.

The Company does not have any finance leases.

ROU assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease.

Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term.

As most of the Company’s leases do not provide an implicit interest rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.

The operating lease ROU asset also includes any prepaid lease amounts and excludes lease incentives.

The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that it will exercise that option.

Lease expense for lease payments is recognized on a straight-line basis over the lease term.

The Company excludes right-of-use ("ROU") assets and lease liabilities for leases with an initial term of 12 months or less from the balance sheet.

Deferred Financing Charges

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The carrying value of property and equipment is reviewed when events or changes in circumstances indicate that the carrying value of an asset may not be recoverable.

No impairment charges were recorded for the year ended December 31, 2021, 2020 and 2019.

For the year ended December 31, 2021, 2020 and 2019, the Company’s aggregate depreciation expense related to property and equipment was $9.2 million, $ 9.8 million and $ 12.9 million, respectively.

For the year ended December 31, 2021, 2020 and 2019, the Company recorded a (gain) loss on disposal of tools and molds of ($ 34,100 ), $ 0.1 million and $ 1.0 million, respectively, which is included in cost of sales in the consolidated statements of operations.

No impairment charges were recorded for the years ended December 31, 2022, 2021 and 2020.

For the years ended December 31, 2022, 2021 and 2020, the Company’s aggregate depreciation expense related to property and equipment was $ 9.6 million, $ 9.2 million and $ 9.8 million, respectively.

For the years ended December 31, 2022, 2021 and 2020, the Company recorded a (gain) loss on disposal of tools and molds of ($ 43,850 ), ($ 34,100 ) and $ 0.1 million, respectively, which is included in cost of sales in the consolidated statements of operations.

Other Comprehensive Income (Loss)

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The costs of other advertising, promotion and marketing programs are charged to operations in the period incurred.

Advertising expense for the year ended December 31, 2021, 2020 and 2019, was approximately $ 12.2 million, $ 10.1 million and $ 13.8 million, respectively.

Advertising expense for the years ended December 31, 2022, 2021 and 2020, was approximately $ 14.3 million, $ 12.2 million and $ 10.1 million, respectively.

The Company does not file a consolidated return with its foreign subsidiaries.

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Any accrued interest and penalties are included within the related tax liability.

Revision of Previously Disclosed Amounts

During the course of preparing the Company’s financial statements as of and for the year ended December 31, 2022, the Company completed an Internal Revenue Code Section 382 and 383 analysis of its historical net operating loss and tax credit carryforward amounts.

As a result, a portion of the prior year net operating loss and tax credit carryforwards were determined to be limited.

See Note 13 – Income Taxes, for further details.

Foreign Currency Translation Exposure

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Goodwill and other indefinite-lived intangible assets

Goodwill and indefinite-lived intangible assets are not amortized, but are tested for impairment at least annually at the reporting unit level and asset level, respectively.

Losses in value are recorded when material impairment has occurred in the underlying assets or when the benefits of the identified intangible assets are realized.

Goodwill and indefinite-lived intangible assets are not amortized, but are tested for impairment at least annually at the reporting unit level and asset level.

The annual goodwill test is performed in the second quarter and whenever events or changes in circumstances indicate that the carrying amount of a reporting unit may exceed its fair value, the Company may assess goodwill for impairment using a qualitative assessment.

Qualitative factors and their impact on critical inputs are assessed to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value.

If the Company determines that a reporting unit has an indication of impairment based on the qualitative assessment, it is required to perform a quantitative assessment.

The Company may bypass the qualitative assessment and perform a quantitative assessment.

Impairment is recognized in the amount by which, if any, the carrying value of the reporting unit exceeds the fair value, not to exceed the carrying value of goodwill.

Indefinite-lived intangible assets other than goodwill consist of trademarks.

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Share-based Compensation

The Company measures all employee share-based compensation awards using a fair value method and records such expense in its consolidated financial statements.

Income (Loss) per share

A reconciliation of the amounts used to calculate basic and diluted income (loss) per share for the year ended December 31, 2021, 2020, and 2019 follows (in thousands, except per share data):

The Company measures all employee share-based compensation awards using a fair value method and records such expense in its consolidated statements of operations.

Earnings (Loss) per share

A reconciliation of the amounts used to calculate basic and diluted income (loss) per share for the years ended December 31, 2022, 2021, and 2020 follows (in thousands, except per share data):

Year Ended December 31,

Net income attributable to non-controlling interests

Net loss attributable to JAKKS Pacific, Inc.

Net income (loss)

Net income (loss) attributable to non-controlling interests

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

Preferred stock dividend*

Net loss attributable to common stockholders

Weighted average common shares outstanding - basic and diluted

Net loss per share available to common stockholders - basic and diluted

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

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

For the year ended December 31, 2021, 2020 and 2019, the convertible senior notes interest and related weighted common share equivalent of 1,735,938 , 5,758,365 and 2,907,498 , respectively, were excluded from the diluted income (loss) per share calculation since they would have been anti-dilutive.

Potentially dilutive restricted stock awards and units of 122,371 , 185,455 and 142,350 for each of the year ended December 31, 2021, 2020 and 2019, respectively, were excluded from the computation of diluted income (loss) per share since they would have been anti-dilutive.

The Company effectively repurchased 311,284 shares of its common stock at an average cost of $ 77.10 per share for an aggregate amount of $ 24.0 million pursuant to a prepaid forward share repurchase agreement entered into with Merrill Lynch International (“ML”) on June 9, 2014.

These repurchased shares were treated as retired for basic and diluted income (loss) per share purposes although they remained legally outstanding.

The Company reflected the aggregate purchase price of its common shares repurchased as a reduction to stockholders’ equity allocated to treasury stock.

On September 13, 2019, ML returned the shares to the Company.

The Company subsequently retired the shares which had no impact to the Company’s stockholder’s equity.

Net income (loss) attributable to common stockholders**

Weighted average common shares outstanding - basic

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

Weighted average common shares outstanding - diluted

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

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

** Net income (loss) attributable to common stockholders was computed by deducting preferred dividends of $ 1.4 million, $ 1.3 million and $ 1.3 million for the years ended December 31, 2022, 2021 and 2020 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 years ended December 31, 2021 and 2020, the convertible senior notes interest and related weighted common share equivalent of 1,735,938 and 5,758,365 , respectively, were excluded from the diluted earnings (loss) per share calculation since they would have been anti-dilutive.

Potentially dilutive restricted stock awards and units of nil , 122,371 and 185,455 for each of the years ended December 31, 2022, 2021 and 2020, respectively, were excluded from the computation of diluted earnings (loss) per share since they would have been anti-dilutive.

Recent Accounting Pronouncements

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As a result, the effective date for the standard is fiscal years beginning after December 15, 2022, and interim periods therein, and early adoption is permitted.

The Company is currently evaluating the impact of the adoption of ASU 2016-13 on its consolidated financial statements.

Based on the Company’s preliminary evaluation, the Company does not expect the adoption of ASU 2016-13 to have a material impact on its consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes,” which simplifies the accounting for income taxes related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax assets for investments.

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The new standard is effective for the Company for fiscal years beginning after December 15, 2024, including interim periods within these fiscal years, with early adoption permitted.

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

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

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):

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The Company adopted ASU 2021-10 during the fiscal period December 31, 2021.

(See Note 1 – Principal Industry, Note 5 – Prepaid Expenses and Other Assets and Note 10 – Debt, for disclosures related to government assistance received by the Company).

(See Note 5 – Prepaid Expenses and Other Assets and Note 10 – Debt, 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 consolidated financial statements.

Note 3 — Business Segments, Geographic Data and Sales by Major Customers

The Company is a worldwide producer and marketer of children’s toys and other consumer products, principally engaged in the design, development, production, marketing and distribution of its diverse portfolio of products.

The Company’s segments are (i) Toys/Consumer Products and (ii) Costumes (formerly known as “Halloween”).

The Toys/Consumer Products segment includes action figures, vehicles, play sets, plush products, dolls, electronic products, construction toys, infant and pre-school toys, child-sized and hand-held role play toys and everyday costume play, foot-to-floor ride-on vehicles, wagons, novelty toys, seasonal and outdoor products, kids’ indoor and outdoor furniture, and related products, and makeup and skincare products under the C'est Moi™ brand.

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

The Costumes segment, under its Disguise branding, designs, develops, markets and sells a wide range of every-day and special occasion dress-up costumes and related accessories in support of Halloween, Carnival, Children’s Day, Book Day/Week, and every-day/any-day costume play.

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

Long-lived Assets

United States

United Kingdom

Year Ended December 31,

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Middle East and Africa

Long-lived Assets

United States

United Kingdom

Major Customers

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Note 4 — Joint Ventures

On December 16, 2009, the Company entered into a joint venture agreement with the U.S.

entertainment subsidiary of a leading Japanese advertising and animation production company in which it owned fifty percent interest.

The joint venture (“Pacific Animation Partners”) was created to develop and produce an animated television show, which it licensed worldwide for television broadcast as well as consumer products.

The Company produced toys based upon the television program under a license from the joint venture which also licensed certain other merchandising rights to third parties.

The joint venture has since ceased production of the television show.

The joint venture was terminated on December 2, 2020.

For the year ended December 31, 2020 and 2019, the Company recognized income from the joint venture of $ 2,341 and nil , respectively.

As of December 31, 2021 and 2020, the balance of the investment in the Pacific Animation Partners joint venture is nil .

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

In November 2014, the Company entered into a joint venture with Meisheng Culture & Creative Corp.

Ltd., (“MC&C”), for the purpose of providing certain JAKKS licensed and non-licensed toys and consumer products to agreed-upon territories of the People’s Republic of China.

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

The non-controlling interest’s share of the income (loss) from the joint venture for the year ended December 31, 2021, 2020 and 2019 was $ 120 ,000, $ 130 ,000 and $ 169 ,000, respectively.

The non-controlling interest’s share of the income (loss) from the joint venture for the years ended December 31, 2022, 2021 and 2020 was ($ 330 ,000), $ 120 ,000 and $ 130 ,000, respectively.

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

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The non-controlling interest’s share of the income (loss) from the joint venture for the years ended December 31, 2022, 2021 and 2020 was nil .

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

Note 5 — Prepaid Expenses and Other Assets

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There were no changes in the carrying amount of goodwill by reporting unit for the year ended December 31, 2022 and 2021.

The Company applies a fair value-based impairment test to the carrying value of goodwill and indefinite-lived intangible assets on an annual basis and, on an interim basis, if certain events or circumstances indicate that an impairment loss may have been incurred.

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

In the second quarter of 2021, the Company performed a qualitative assessment to determine whether it was more likely than not that the book value of each reporting unit exceeded its fair value.

As a result of the Company’s qualitative assessment, it was determined that goodwill was not impaired.

In the second quarter of 2022, the Company performed a quantitative assessment and determined that goodwill was not impaired as the fair value of the reporting units exceeded the carrying value.

There were no events or changes in circumstances subsequent to the second quarter assessment that indicate that the carrying value of a reporting unit may exceed its fair value as of December 31, 2022.

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December 31, 2021

Amortization/

Amortized Intangible Assets:

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Total amortized intangible assets

December 31, 2022

December 31, 2021

Unamortized Intangible Assets:

In 2019, the Company assessed the recoverability of the Maui product lines and determined that the fair value was less than its carrying amount.

As a result, the Company recorded an impairment charge of $ 9.4 million.

The fair value determination is categorized as Level 3 in the fair value hierarchy due to its use of internal projections and unobservable measurement inputs.

For the year ended December 31, 2021, 2020 and 2019, the Company’s aggregate amortization expense related to intangible assets was $ 1.0 million, $ 1.2 million and $ 4.7 million, respectively.

The Company expects to amortize the remaining carrying value of $ 1.0 million in 2022.

For the years ended December 31, 2022, 2021 and 2020, the Company’s aggregate amortization expense related to intangible assets was $ 1.0 million, $ 1.0 million and $ 1.2 million, respectively.

Note 8 — Concentration of Credit Risk

Financial instruments that subject the Company to concentration of credit risk are cash and cash equivalents and accounts receivable.

Cash equivalents consist principally of short-term money market funds.

Cash equivalents consist primarily of overnight funds.

These instruments are short-term in nature and bear minimal risk.

The Company maintains certain cash balances in excess of Federal Deposit Insurance Corporation (“FDIC”) insured limits.

The Company has not experienced any losses in such accounts and believes that the credit risk to the Company’s cash is minimal.

The Company performs ongoing credit evaluations of its customers’ financial conditions, but does not require collateral to support domestic customer accounts receivable.

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Accrued expenses consist of the following (in thousands):

Salaries and employee benefits

Inventory liabilities

Professional fees

Goods in transit

Salaries and employee benefits

Unearned revenue

Third-party warehouse

Professional fees

Unearned revenue

Sales commissions

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Convertible senior notes

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

December 31, 2021

December 31, 2020

3.25 % convertible senior notes due 2023 *

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

The principal amount of these notes is $ 22.9 million as of December 31, 2020.

The accrued, but unpaid, payment-in-kind interest is $ 0.9 million as of December 31, 2020.

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

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

The Company’s Term Loan Agreement entered into with Great American Capital Partners (See Note 11 – Credit Facilities) was paid in full and terminated in connection with the Recapitalization Transaction.

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

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The New Oasis Notes mature 91 days after the amounts outstanding under the 2019 Recap Term Loan are paid in full, and in no event later than July 3, 2023.

Excluding the impact of the Reverse Stock Split, the New Oasis Notes provide, among other things, that the initial conversion price is $ 1.00 .

Excluding the impact of the Reverse Stock Split in July of 2020, the New Oasis Notes provide, among other things, that the initial conversion price is $ 1.00 .

The conversion price will be reset on each February 9 and August 9, starting on February 9, 2020 (each, a “reset date”) to a price equal to 105 % of the 5-day VWAP preceding the applicable reset date.

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The Company may redeem the New Oasis Notes in cash if a person, entity or group acquires shares of the Company’s Common Stock, par value $ 0.001 per share (the “Common Stock”), and as a result owns at least 49 % of the Company’s issued and outstanding Common Stock.

In connection with the issuance of the New Oasis Notes, the Company recognized a loss on extinguishment of the Existing Oasis Notes of approximately $ 10.4 million.

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

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

During 2020, $ 15.1 million of the New Oasis Notes (including $ 0.5 million in PIK interest) were converted for 2,126,780 shares of common stock.

As a result, the Company recorded an increase to additional paid-in capital of $ 20.2 million.

During 2021, $ 24.0 million of the New Oasis Notes (including $ 1.2 million in PIK interest) were converted for 4,246,828 shares of common stock.

During 2021, $ 24.0 million of the New Oasis Notes (including $ 1.2 million in payment in-kind interest) were converted for 4,246,828 shares of common stock.

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

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

The Company has elected to measure and present the New Oasis Notes at fair value using Level 3 inputs and as a result, recognized a loss of $ 16.4 million, $ 2.3 million and $ 5.1 million for the year ended December 31, 2021, 2020 and 2019, respectively, related to changes in the fair value of the 3.25% convertible senior notes due 2023.

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

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

Excluding the impact of the Reverse Stock Split, the initial conversion rate for the 2020 Notes was 103.7613 shares of the Company’s common stock per $ 1,000 principal amount of notes, equivalent to an initial conversion price of approximately $ 9.64 per share of common stock, subject to adjustment in certain events.

In January 2016, the Company repurchased and retired an aggregate of $ 2.0 million principal amount of the 2020 Notes.

In addition, approximately $ 0.1 million of the unamortized debt issuance costs were written off and a $ 0.1 million gain was recognized in conjunction with the retirement of the 2020 Notes.

In connection with the Recapitalization Transaction, the 2020 Notes with a face amount of $ 111.1 million of the total $ 113.0 million that were outstanding at the time of the Recapitalization Transaction were refinanced and the maturity dates were extended.

Of the refinanced amount, $ 103.8 million was refinanced with the Investor Parties through the issuance of the New Common Equity (as defined below), the New Preferred Equity (as defined below) (see Note 15 - Common Stock and Preferred Stock) and new secured term debt that matures in February 2023 (see Term Loan section below).

Additionally, $ 1.0 million of accrued interest was refinanced with the Investor Parties.

The remaining refinanced amount of $ 7.3 million was exchanged into the new $8.0 million Oasis Note discussed above.

In connection with the issuance of the new secured term loan, as well as the New Common Equity and the New Preferred Equity, the Company recognized a loss on extinguishment of the 2020 Notes refinanced with the Investor Parties of approximately $ 2.4 million, and wrote off $ 0.7 million of unamortized debt issuance costs related to the 2020 Notes during the year ending December 31, 2019.

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

As a result of the conversion 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 $ 16.4 million and $ 2.3 million for the years ended December 31, 2021 and 2020, 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 12 – Related Party Transactions).

The transaction closed on February 8, 2021.

As of December 31, 2021, Benefit Street Partners held nil in principal amount of the New Oasis Notes.

Key components of the 4.875% convertible senior notes due 2020 consist of the following (in thousands):

Year ended December 31,

Contractual interest expense

Amortization of debt issuance costs recognized as interest expense

Key components of the 3.25% convertible senior notes due 2020 consist of the following (in thousands):

Year ended December 31,

Contractual interest expense

As of December 31, 2022 and 2021, Benefit Street Partners held nil in principal amount of the New Oasis Notes.

Key components of the 3.25% convertible senior notes due 2023 consist of the following (in thousands):

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Debt Discount/

2019 Recap Term Loan

2021 BSP Term Loan

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

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

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

The Company also issued common stock and preferred stock (see Note 15 - Common Stock and Preferred Stock) to the Investor Parties.

Amounts outstanding under the 2019 Recap Term Loan accrue interest at 10.50 % per annum, payable semi-annually (with 8 % per annum payable in cash and 2.5 % per annum payable in kind).

The 2019 Recap Term Loan Agreement contains negative covenants that, subject to certain exceptions, limit the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, make restricted payments, pledge assets as security, make investments, loans, advances, guarantees and acquisitions, undergo fundamental changes and enter into transactions with affiliates.

The original terms of the 2019 Recap Term Loan Agreement required the Company to maintain a trailing 12-month EBITDA (as defined and adjusted therein) of not less than $ 34.0 million and a minimum liquidity of not less than $ 10.0 million commencing with the fiscal quarter ended September 30, 2020.

On October 16, 2020, the Company reached an agreement (the “Amendment”) with holders of its 2019 Recap Term Loan and Wells Fargo, holder of its revolving credit facility, to amend its 2019 Recap Term Loan Agreement and defer its EBITDA covenant calculation until March 31, 2022.

Under the Amendment, the trailing 12-month EBITDA requirement was reduced to $ 25.0 million, which will not be calculated earlier than March 31, 2022.

The Amendment also required the Company to pre-pay $ 15.0 million of the 2019 Recap Term Loan immediately and, under certain conditions, pre-pay up to an additional $ 5.0 million no later than the third quarter of fiscal year 2021.

In connection with the amendment, on October 20, 2020, the Company paid $ 15.0 million of its outstanding principal amount and $ 0.3 million in related interest and PIK interest.

As of December 31, 2021, the Company had nil outstanding under the 2019 Recap Term Loan Agreement.

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

The 2019 Recap Term Loan Agreement contains events of default that are customary for a facility of this nature, including nonpayment of principal, nonpayment of interest, fees or other amounts, material inaccuracy of representations and warranties, violation of covenants, cross-default to other material indebtedness, bankruptcy or insolvency events, material judgment defaults and a change of control as specified in the 2019 Recap Term Loan Agreement.

If an event of default occurs, the maturity of the amounts owed under the 2019 Recap Term Loan Agreement may be accelerated.

The obligations under the 2019 Recap Term Loan Agreement are guaranteed by the Company, the subsidiary borrowers thereunder and certain of the other existing and future direct and indirect subsidiaries of the Company and are secured by substantially all of the assets of the Company, the subsidiary borrowers thereunder and such other subsidiary guarantors, in each case, subject to certain exceptions and permitted liens.

Amortization expense classified as interest expense related to the $ 3.8 million of debt issuance costs associated with the issuance of the 2019 Recap Term Loan was $ 0.4 million, $ 1.0 million and $ 0.4 million for the year ended December 31, 2021, 2020 and 2019, respectively.

Amortization expense classified as interest expense related to the $ 10.1 million debt discount associated with the issuance of the 2019 Recap Term Loan was $ 1.2 million, $ 2.8 million and $ 1.1 million for the year ended December 31, 2021, 2020 and 2019, respectively.

The fair value of the Company’s 2019 Recap Term Loan is considered Level 3 fair value (see Note 16 – Fair Value Measurements for further discussion of the fair value hierarchy) and are measured using the discounted future cash flow method.

In addition to the debt terms, the valuation methodology includes an assumption of a discount rate that approximates the current yield on a debt security with comparable risk.

This assumption is considered an unobservable input in that it reflects the Company’s own assumptions about the inputs that market participants would use in pricing the asset or liability.

The Company believes that this is the best information available for use in the fair value measurement.

The estimated fair value of the 2019 Recap Term Loan as of December 31, 2020 was $ 129.6 million compared to a carrying value of $ 116.0 million.

On June 2, 2021, the Company repaid in full and terminated the 2019 Recap Term Loan Agreement, dated as of August 9, 2019, with Cortland Capital Market Services LLC, as agent.

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.

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

Proceeds from the Initial Term Loan, together with available cash from the Company, were used to repay the Company’s 2019 Recap Term Loan under the agreement dated as of August 9, 2019 with Cortland Capital Market Services LLC, as agent for certain investor parties.

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 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 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.

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

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

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, 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;

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.

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.

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

Amortization expense classified as interest expense related to the $ 1.0 million of debt issuance costs associated with the issuance of the 2021 BSP Term Loan was $ 0.1 million for the year ended December 31, 2021.

Amortization expense classified as interest expense related to the $ 2.3 million debt discount associated with the issuance of the 2021 BSP Term Loan was $ 0.2 million for the year ended December 31, 2021.

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

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 $ 0.2 million and $ 0.1 million for the years ended December 31, 2022 and 2021, respectively.

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 $ 0.3 million and $ 0.2 million for the years ended December 31, 2022 and 2021, respectively.

The fair value of the Company’s 2021 BSP Term Loan is considered Level 3 fair value and are measured using the discounted future cash flow method.

In addition to the debt terms, the valuation methodology includes an assumption of a discount rate that approximates the current yield on a debt security with comparable risk.

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The estimated fair value of the 2021 BSP Term Loan as of December 31, 2022 was $ 69.3 million compared to a carrying value of $ 68.9 million.

The estimated fair value of the 2021 BSP Term Loan as of December 31, 2021 was $ 97.3 million compared to a carrying value of $ 95.5 million.

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

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Loan under Paycheck Protection Program

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

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

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.

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

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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.

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

Note 11 — Credit Facilities

In March 2014, the Company and its domestic subsidiaries entered into a secured credit facility with General Electric Capital Corporation (“GECC”).

The credit facility, as amended and subsequently assigned to Wells Fargo Bank pursuant to its acquisition of GECC, provides for a $ 75.0 million revolving credit facility subject to availability based on prescribed advance rates on certain domestic accounts receivable and inventory amounts used to compute the borrowing base (the “Credit Facility”).

The Credit Facility includes a sub-limit of up to $ 35.0 million for the issuance of letters of credit.

The amounts outstanding under the Credit Facility, as amended, were payable in full upon maturity of the facility on September 27, 2019, except that the Credit Facility would mature on June 15, 2018 if the Company did not refinance or extend the maturity of the convertible senior notes that mature in 2018, provided that any such refinancing or extension shall have a maturity date that is no sooner than six months after the stated maturity of the Credit Facility (i.e., on or about September 27, 2019).

On June 14, 2018, the Company entered into a Term Loan Agreement with Great American Capital Partners Finance Co., LLC (“GACP”) to provide the necessary capital to refinance the 2018 convertible senior notes (see additional details regarding the Term Loan Agreement below).

In addition, on June 14, 2018, the Company revised certain of the Credit Facility documents (and entered into new ones) so that certain of its Hong Kong based subsidiaries became additional parties to the Credit Facility.

As a result, the receivables of these subsidiaries can now be included in the borrowing base computation, subject to certain limitations, thereby effectively increasing the amount of funds the Company can borrow under the Credit Facility.

Any additional borrowings under the Credit Facility will be used for general working capital purposes.

In August 2019, in connection with the Recapitalization Transaction (See Note 10 - Debt), the Company entered into an amended and extended revolving credit facility with Wells Fargo (the “Amended ABL Credit Agreement” or “Amended ABL facility”).

The Amended ABL Credit Agreement amends and restates the Company’s existing Credit Facility, dated as of March 27, 2014, as amended, with GECC and subsequently assigned to Wells Fargo, to, among other things, decrease the borrowing capacity from $ 75.0 million to $ 60.0 million and extend the maturity to August 9, 2022.

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

As of December 31, 2020, the amount of outstanding borrowings was nil , the amount of outstanding stand-by letters of credit totaled $ 10.8 million and the total excess borrowing capacity was $ 37.3 million.

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

The Company was also required to maintain a fixed charge coverage ratio of not less than 1.1 to 1.0 under certain circumstances, and a minimum liquidity of $ 25.0 million and a minimum availability of at least $ 9.0 million.

As of December 31, 2020, the Company was in compliance with the financial covenants under the Amended ABL Facility and the previous Credit Facility, as applicable.

Any amounts borrowed under the Amended ABL Facility accrue interest, at either (i) LIBOR plus 1.50 % - 2.00 % (determined by reference to a fixed charge coverage ratio-based pricing grid) or (ii) base rate plus 0.50 % - 1.00 % (determined by reference to a fixed charge coverage ratio-based pricing grid).

As of December 31, 2020, the weighted average interest rate on the credit facility with Wells Fargo was nil .

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

In the event of a default, all of the obligations of the Company and its subsidiaries under the Amended ABL Facility may be declared immediately due and payable.

For certain events of default relating to insolvency, all outstanding obligations become due and payable.

As described in Note 10 – Debt, on October 16, 2020, the Company amended its 2019 Recap Term Loan to reduce the amount and defer the calculation of its EBITDA covenant, with Wells Fargo as party to the agreement.

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

Great American Capital Partners

On June 14, 2018, the Company entered into a Term Loan Agreement, Term Note, Guaranty and Security Agreement and other ancillary documents and agreements (the “Term Loan”) with GACP, for itself as a Lender (as defined below) and as the Agent (in such capacity, “Agent”) for the Lenders from time to time party to the Term Loan (collectively, “Lenders”) and the other “Secured Parties” under and as defined therein, with respect to the issuance to the Company by Lenders of a $ 20.0 million term loan.

To secure the Company’s obligations under the Term Loan, the Company granted to Agent, for the benefit of the Secured Parties, a security interest in a substantial amount of the Company’s consolidated assets and a pledge of the majority of the capital stock of various of its subsidiaries.

The Term Loan was a secured obligation, second only to the Credit Facility with Wells Fargo, except with respect to certain of the Company’s inventory in which GACP has a priority secured position.

The Term Loan required the repayment of principal in the amount of 10 % of the outstanding Term Loan per year (payable monthly) beginning after the first anniversary.

All then-outstanding borrowings under the Term Loan would be due, and the Term Loan would terminate, no later than June 14, 2021, unless sooner terminated in accordance with its terms, which included the date of termination of the Wells Fargo Credit Facility and the date that is 91 days prior to the maturity of the Company’s various convertible senior notes due in 2020 (See Note 10 - Debt).

The Company was permitted to prepay the Term Loan, which would have required a prepayment fee (i) in year one of up to any unearned and unpaid interest that would have become due and payable in year one had the prepayment not occurred plus 2 % of the initial amount of the Term Loan (i.e., $ 20.0 million), (ii) in year two of 2 % of the initial amount of the Term Loan and (iii) in year three of 1 % of the initial amount of the Term Loan.

In August 2019, in connection with the Recapitalization Transaction (See Note 10 - Debt), the Company repaid in full and terminated the Term Loan Agreement.

Amortization of debt issuance costs was $ 0.2 million, $ 0.4 million and $ 0.6 million for the year ended December 31, 2021, 2020 and 2019, respectively.

JPMorgan Chase

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.

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The JPMorgan ABL Facility matures in June 2026.

As of December 31, 2021, the weighted average interest rate on the credit facility with JPMorgan Chase Bank was 1.88 %.

As of December 31, 2022 and 2021, the weighted average interest rate on the credit facility with JPMorgan Chase Bank was 1.88 %.

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

Amortization expense classified as interest expense related to the $ 1.6 million of debt issuance costs associated with the transaction that closed on June 2, 2021 (i.e., JPMorgan ABL Credit Agreement) was $ 0.2 million for the year ended December 31, 2021.

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 was $ 0.3 million and $ 0.2 million for the years ended December 31, 2022 and 2021, respectively.

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

Note 12 — Related Party Transactions

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

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

The non-controlling interest’s share of the income from the joint venture for the year ended December 31, 2021, 2020 and 2019 was $ 120 ,000, $ 130 ,000 and $ 169 ,000, respectively.

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

JAKKS and Meisheng each own fifty percent of the joint venture and will jointly own the content.

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

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

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

The non-controlling interest’s share of the income (loss) from the joint venture for the years ended December 31, 2021, 2020 and 2019 was nil .

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

In March 2017, the Company entered into an agreement with a Hong Kong affiliate of its China joint venture partner.

After their shareholder and China regulatory approval, the transaction closed on April 27, 2017.

In 2018, the Company issued 4,158 shares of restricted stock at a value of $ 0.1 million to the non-employee director, which vested in January 2019.

In 2019, the Company issued 5,471 shares of restricted stock at a value of $ 0.1 million to the non-employee director, which vested in January 2020.

In 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 (see Note 4 – Joint Ventures).

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 (see Note 4 – Joint Ventures).

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.

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Meisheng also serves as a significant manufacturer of the Company.

For the year ended December 31, 2021, 2020 and 2019, the Company made inventory-related payments to Meisheng of approximately $ 77.7 million, $ 64.8 million and $ 94.3 million respectively.

For the years ended December 31, 2022, 2021 and 2020, the Company made inventory-related payments to Meisheng of approximately $ 120.5 million, $ 77.7 million and $ 64.8 million respectively.

As of December 31, 2022 and 2021, amounts due to Meisheng for inventory received by the Company, but not paid totaled $ 9.8 million and $ 15.9 million, respectively.

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

(see Note 10 - Debt)

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

(see Note 10 - Debt)

The 2021 BSP Term Loan matures in June 2027.

The 2021 BSP Term Loan Agreement contains negative covenants, events of default, and the obligations under the 2021 BSP Term Loan Agreement are guaranteed by the Company.

The terms, covenants, events of default, and Company obligations are described in more detail in Note 10 – Debt, as well as in the 2021 BSP Term Loan Agreement.

As of December 31, 2021, Benefit Street Partners held $ 98.5 million in principal amount of the 2021 BSP Term Loan.

Beginning August 9, 2019 and continuing until September 27, 2021, the managing partner and portfolio manager at Axar Capital Management was a director at the Company.

As of December 31, 2020, Axar Capital Management held $ 24.3 million in principal amount (including $ 0.9 million in payment-in-kind interest) of the 2019 Recap Term Loan.

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 15 – Common Stock and Preferred Stock).

As of December 31, 2022, a division of Benefit Street Partners held $ 68.9 million in principal amount of the 2021 BSP Term Loan (see Note 10 - Debt).

Note 13 — Income Taxes

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The Company files federal and state returns and its foreign subsidiaries file returns in their respective jurisdiction.

For the years ended 2021, 2020 and 2019, the provision for income taxes, which included federal, state and foreign income taxes, was an expense of $ 0.2 million, $ 0.7 million and $ 1.9 million, respectively, reflecting effective tax provision rates of ( 4.0 %), ( 5.5 %) and ( 3.6 %) respectively.

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

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

For the years ended 2022, 2021 and 2020, the provision for income taxes, which included federal, state and foreign income taxes, was a benefit of $ 41.0 million, an expense of $ 0.2 million, and an expense of $ 0.7 million, respectively, reflecting effective tax provision rates of ( 81.9 %), ( 4.0 %), and ( 5.5 %), respectively.

The 2022 tax benefit of $41.0 million included a discrete tax benefit of $ 49.8 million primarily comprised of the 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.

For the years ended 2021 and 2020, provision for income taxes includes federal, state and foreign income taxes at effective tax rates of (4.0%) and (5.5%).

Exclusive of discrete items, the effective tax provision rate would be ( 10.7 %) in 2021 and ( 7.7 %) in 2020.

As of December 31, 2021 and 2020, the Company had net deferred tax liabilities of approximately $ 51,000 and $ 0.1 million, primarily related to foreign jurisdictions.

As of December 31, 2022 and 2021, the Company had net deferred tax assets of $ 57.8 million related to the U.S.

and foreign jurisdictions and net deferred tax liabilities of approximately $ 51,000 primarily related to foreign jurisdictions, respectively.

Provision for income taxes reflected in the accompanying consolidated statements of operations are comprised of the following (in thousands):

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Credit carryforwards

Research & development capitalization

Valuation allowance

Total net deferred tax liabilities

Total net deferred tax assets (liabilities)

Provision for income taxes varies from the U.S.

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Change in tax rate

Foreign derived intangible income

Non-deductible expenses

Foreign tax credit

Unrealized Loss

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Internal Revenue Code (“IRC”), and certain items accrued for financial reporting purposes in the year incurred but not deductible for tax purposes until paid.

The Company has established a valuation allowance on net deferred tax assets in the United States since, in the opinion of management, it is not more likely than not that the U.S.

net deferred tax assets will be realized.

The components of income (loss) before provision for income taxes are as follows (in thousands):

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The Company uses a recognition threshold and measurement process for recording in the consolidated financial statements uncertain tax positions (“UTP”) taken or expected to be taken in a tax return.

Approximately $ 0.8 million of the current year reduction was related to a settlement of an audit examination in Hong Kong in 2021.

During 2020, approximately $ 0.6 million of the liability for UTP related to foreign withholding taxes and audit examination in Hong Kong was derecognized.

Current interest on uncertain income tax liabilities is recognized as a component of the income tax provision recognized in the consolidated statements of operations.

During 2021 and 2020, the Company did not recognize any interest expense relating to UTPs.

The following table provides further information of UTPs that would affect the effective tax rate, if recognized, as of December 31, 2022 (in millions):

Balance, December 31, 2019

Current year additions

Balance, December 31, 2020

Current year reduction

Balance, December 31, 2021

Current year reduction

Additions based on tax positions related to the current year

Additions for tax positions of prior years

Balance, December 31, 2022

Current interest on uncertain income tax liabilities is recognized as a component of the income tax provision recognized in the consolidated statements of operations.

During 2022, the Company recognized $ 0.2 million of interest expense related to UTPs.

The Company did not recognize any interest expense relating to UTPs in 2021.

The Company does not expect its gross unrecognized tax benefits to significantly change within the next 12 months.

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deferred tax assets and record a charge to income if Management determines, based upon available evidence at the time the determination is made, that it is more likely than not that some portion or all of the deferred tax assets may not be realized.

Based on our evaluation of all positive and negative evidence, as of December 31, 2021, a valuation allowance of $ 84.7 million has been recorded against the deferred tax assets that more likely than not will not be realized.

Based on the Company’s 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.

For the year ended December 31, 2022, the valuation allowance decreased from $67.3 million at December 31, 2021.

The release of the valuation allowance as of December 31, 2022 was primarily due to a pattern of sustained profitability such that it is more likely than not that the deferred income tax assets will be realized.

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

The net deferred tax liabilities of $51,000 in 2021 represent the net deferred tax liabilities in the foreign jurisdiction, where the Company is in a cumulative income position.

The net deferred tax liabilities of $0.1 million in 2020 represent the net deferred tax liabilities in the foreign jurisdiction, where the Company is in a cumulative income position.

Pursuant to the Internal Revenue Code of 1986, as amended (the “Code”) Sections 382 and 383, annual use of a company’s NOL and tax credit carryforwards may be limited if there is a cumulative change in ownership of greater than 50% within a three-year period.

The amount of the annual limitation is determined based on the value of the company immediately prior to the ownership change.

Subsequent ownership changes may further affect the limitation in future years.

If limited, the related tax asset would be removed from the deferred tax asset schedule with a corresponding reduction in the valuation allowance.

The Company had established a valuation allowance as the realization of such deferred tax assets had not met the more likely than not threshold requirement.

Due to the existence of the valuation allowance, further changes in the Company’s unrecognized tax benefits did not impact the Company’s effective tax rate for 2021.

During 2022, the Company completed an assessment of the available net operating loss and tax credit carryforwards under Section 382 and 383 and determined that the Company underwent two ownership changes during the period from 2019 to 2021.

As a result, net operating loss and tax credit carryforwards attributable to the pre-ownership changes are subject to substantial annual limitations under Section 382 and 383 of Code due to the ownership changes.

The Company has adjusted their previously reported net operating loss and tax credit carryforwards to address the impact of the ownership changes.

This resulted in a net reduction of available gross federal and state net operating loss carryforwards of approximately $ 53 million and $ 85 million, respectively which related to the year ended December 31, 2021 and prior.

The tax effected federal and state net operating loss carryforwards (“NOL”) reduction amounts were $ 16.8 million.

This also resulted in a reduction of federal tax credit carryforwards of approximately $ 0.6 million related to the years ended December 31, 2021 and prior.

Accordingly, the net operating loss and tax credit carryforwards presented above for the year ending December 31, 2021 were reduced by $ 16.8 million and $ 0.6 million, respectively, with a corresponding reduction to the valuation allowance of $ 17.4 million.

At December 31, 2022, the Company has U.S.

federal net operating loss carryforwards, or "NOLs", of approximately $ 181 million, which will begin to expire in 2033.

At December 31, 2021, the Company has state NOLs of approximately $ 302 million.

The majority of the Company's state NOLs were from California, which will begin to expire in 2031.

At December 31, 2021, the Company had foreign tax credit carryforwards of approximately $ 0.1 million, which will begin to expire in 2027.

At December 31, 2021, the Company had federal research and development tax credit carryforwards ("credit carryforwards") of approximately $ 0.5 million, which will begin to expire in 2029.

At December 31, 2021, the Company had state research and development tax credits of approximately $ 0.1 million, which carry forward indefinitely.

Utilization of certain NOLs and research credit carryforwards may be subject to an annual limitation due to ownership change limitations set forth in Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, and comparable state income tax laws.

Any future annual limitation may result in the expiration of NOLs and credit carryforwards before utilization.

federal net NOLs, of approximately $ 136 million, which will begin to expire in 2033.

At December 31, 2022, the Company has state NOLs of approximately $ 40 million, which will begin to expire in 2023.

Note 14 — Leases

The Company determines if an arrangement is a lease at inception.

Operating leases are included in operating lease right-of-use (“ROU”) assets and operating lease liabilities in its consolidated balance sheets.

The Company does not have any finance leases.

ROU assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease.

Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term.

The operating lease ROU asset also includes any prepaid lease amounts and excludes lease incentives.

The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that it will exercise that option.

Lease expense for lease payments is recognized on a straight-line basis over the lease term.

The Company has lease agreements with lease and non-lease components, which are generally accounted for separately.

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As of December 31, 2022, the Company’s weighted average remaining lease term is approximately 2 years and the weighted average discount rate used to calculate the Company’s lease liability is approximately 5.22 %.

The Company adopted ASC 842 effective January 1, 2019.

The Company also elected the practical expedients to exclude right-of-use ("ROU") assets and lease liabilities for leases with an initial term of 12 months or less from the balance sheet.

Under ASC 842, total operating lease costs for the year ended December 31, 2021 and 2020 were $ 10.3 million and $ 11.7 million, respectively.

As of December 31, 2021, the Company’s weighted average remaining lease term is approximately 2 years and the weighted average discount rate used to calculate the Company’s lease liability is approximately 5.09 %.

Under ASC 842, total operating lease costs for the years ended December 31, 2022, 2021 and 2020 were $ 19.1 million, 10.3 million, and $ 11.7 million, respectively.

Of the $19.1 million for the year ended December 31, 2022, $ 10.7 million related to short-term and variable lease costs, including common area maintenance charges, management fees, taxes and storage fees.

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Sublease rental income was $ 2.2 million in 2021.

The Company had a cash outflow of $ 11.4 million, $ 11.1 million and $ 11.8 million related to operating leases for the year ended December 31, 2021, 2020 and 2019, respectively.

Of the $11.7 million for the year ended December 31, 2020, $ 2.0 million related to short-term and variable lease costs, including common area maintenance charges, management fees, taxes and storage fees.

Sublease rental income was $ 0.8 million in 2020.

The Company had a cash outflow of $ 11.5 million, $ 11.4 million and $ 11.1 million related to operating leases for the years ended December 31, 2022, 2021 and 2020, respectively.

The following table represents a reconciliation of the Company’s undiscounted future minimum lease payments under operating leases to the lease liability excluding minimum lease payments for executed and legally enforceable leases that have not yet commenced as of December 31, 2022 (in thousands):

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Less imputed interest

As of December 31, 2021 and 2020, the minimum lease payments for executed and legally enforceable leases that have not yet commenced were nil and $ 0.1 million, respectively.

As of December 31, 2022 and 2021, the minimum lease payments for executed and legally enforceable leases that have not yet commenced were nil .

Note 15 — Common Stock and Preferred Stock

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

In January 2019, the Company was obligated to issue an aggregate of 306,122 shares of restricted stock at a value of approximately $ 4.5 million to two executive officers pursuant to the applicable employment contracts.

The shares were not issued at that time due to insufficient shares available in the 2002 Stock Award and Incentive Plan.

Such shares were subsequently approved by the Company's shareholders and issued in July 2019.

In addition, an aggregate of 32,823 shares of restricted stock at an aggregate value of approximately $ 0.5 million were issued to its six non-employee directors.

In August 2019, the Board resolved to accelerate and immediately vest upon closing of the Recapitalization Transaction, 16,417 shares of the annual stock compensation granted to resigning members of the Board on January 1, 2019.

Each resigning Board member forfeited the remaining balance of the annual stock compensation granted on January 1, 2019, or an aggregate of 5,470 shares.

The remaining 10,936 shares of restricted stock vested in January 2020.

During 2019, certain employees, including executive officers, surrendered an aggregate of 19,098 shares of restricted stock for $ 273,000 to cover income taxes due on the vesting of restricted shares.

On August 9, 2019, in connection with the Recapitalization Transaction (see Note 10 - Debt), the Company issued to the Investor Parties, in the aggregate, 585,300 shares of Common Stock valued at $ 4.2 million on the date of issuance (the "New Common Equity").

In January 2021, the Company issued an aggregate of 113,896 shares of restricted stock at a value of approximately $ 0.6 million to two executive officers, which vest in four equal annual installments over four years .

During 2021, certain employees, including two executive officers, surrendered an aggregate of 32,846 shares of restricted stock for $ 163,573 to cover income taxes due on the vesting of restricted shares.

Additionally, an aggregate of 52,428 shares of restricted stock granted in 2017 with a value of approximately $ 433,000 was forfeited during 2020.

In January 2021, the Company issued an aggregate of 113,896 shares of restricted stock at a value of approximately $ 0.6 million to two executive officers, which vest, in four equal annual installments over four years .

Additionally, an aggregate of 93,352 shares of restricted stock granted in 2018 with a value of approximately $ 0.5 million was forfeited during 2021.

During 2022, certain employees, including three executive officers, surrendered an aggregate of 113,162 shares of restricted stock units for $ 1.4 million to cover income taxes due on the vesting of restricted shares.

Additionally, an aggregate of 149,238 shares of restricted stock granted in 2019 with a value of approximately $ 2.2 million was forfeited during 2022.

No dividend was declared or paid in 2022 and 2021.

Preferred Stock

At the Market Offering

On July 1, 2022, the Company entered into an At the Market Issuance Sales Agreement (“ATM Agreement”) with B.

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

During the year ended December 31, 2022, the Company did not sell any shares of common stock under the ATM Agreement.

The Company has on file with the SEC an effective registration statement pursuant to which it 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 the Company will determine at the time of the offering.

During the year ended December 31, 2022, the Company has not sold any securities pursuant to its shelf registration statement.

Redeemable Preferred Stock

On August 9, 2019, in connection with the Recapitalization Transaction (see Note 10 - Debt), the Company issued 200,000 shares of Series A Senior Preferred Stock (the “Series A Preferred Stock”), $ 0.001 par value per share, to the Investor Parties (the “New Preferred Equity”).

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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 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.

In 2022, an agreement was reached with the preferred shareholders to eliminate their ability to elect members to the Company’s Board of Directors on a going-forward basis.

The Series A Preferred Stock redemption amount is contingent upon certain events with no stated redemption date as of the reporting date, although may become redeemable in the future.

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

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

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

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

On August 9, 2019, the Company determined that the fair value of the redemption provision upon a change of control was $ 4.9 million and recorded as a long term liability.

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

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

The value of the redemption provision explicitly considered the present value of the potential premium that would be paid related to, and the probability of, an event that would trigger its payment.

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

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

As of December 31, 2022, the Series A Preferred Stock is recorded in temporary equity at the amount of accrued, but unpaid dividends of $ 4.5 million, and the redemption provision, as a bifurcated derivative, is recorded as a long-term liability with an estimated value of $ 21.9 million.

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

Carrying Amount as of

Fair Value Measurements

Carrying Amount as of

As of December 31, 2022

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Preferred stock derivative liability

Carrying Amount as of

Fair Value Measurements

Carrying Amount as of

As of December 31, 2021

December 31, 2021

3.25% convertible senior notes due in 2023

Preferred stock derivative liability

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Change in fair value

Payment in-kind

Balance at December 31,

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Balance at December 31,

The Company’s derivative liability is classified within Level 3 of the fair value hierarchy because unobservable inputs were used in estimating the fair value.

The fair value of the redemption provision embedded in the Series A Preferred Stock is estimated based on a discounted cash flow model and probability assumptions based on management’s estimates of a change of control event occurring.

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

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

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

As a result, these notes are re-measured each reporting period using Level 3 inputs (Monte Carlo simulation model and inputs for stock price, risk-free rate and volatility), with changes in fair value reflected in current period earnings in its consolidated statements of operations.

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

The Company’s Series A Preferred derivative liability is classified within Level 3 of the fair value hierarchy because unobservable inputs were used in estimating the fair value.

The value of the redemption provision explicitly considered the present value of the potential premium that would be paid related to, and the probability of, an event that would trigger its payment.

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

The Company’s accounts receivable, accounts payable and accrued expenses represent financial instruments.

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

The following table provides quantitative information of liabilities measured at fair value and the significant unobservable inputs (Level 3), the range of the significant unobservable inputs, and the valuation techniques.

As of December 31, 2022

(Weighted Average)

(In thousands)

Preferred Stock Derivative Liability

Discounted Cash Flow

Change-in-control probability assumptions

10 % to 40 % ( 27.3 %)

Timing of change-in-control assumptions

1 to 10 years ( 4.19 years)

Discount Rate

17.48 % to 18.23 % ( 17.70 %)

Implied yield*

As of December 31, 2021

(Weighted Average)

(In thousands)

Preferred Stock Derivative Liability

Discounted Cash Flow

Change-in-control probability assumptions

5 % to 45 % ( 30.7 %)

Timing of change-in-control assumptions

1 to 10 years ( 3.67 years)

Discount Rate

13.71 % to 19.46 % ( 15.16 %)

Implied yield*

* Represents the implied yield of the 2021 BSP Term Loan

The Company’s cash and cash equivalents including restricted cash, accounts receivable, accounts payable and accrued expenses represent financial instruments.

The carrying value of these financial instruments is a reasonable approximation of fair value due to the short-term nature of the instruments.

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Generally, such license agreements provide for royalties to be paid ranging from 1 % to 22 % of net sales with minimum guarantees and advance payments.

These license agreements are subject to audits by the licensor, which can result in additional payments due to the licensor.

In the event the Company estimates that a shortfall in achieving the minimum guarantee is probable, a liability is recorded for the estimated shortfall and charged to royalty expense.

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Compensation expense for performance-awards is measured based on the amount of shares ultimately expected to vest, estimated at each reporting date based on management expectations regarding the relevant performance criteria.

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

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

As of December 31, 2022, 943,633 shares were available for future grant.

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As of December 31, 2022, there was nil of total unrecognized compensation cost related to non-vested restricted stock.

As of December 31, 2020, there was $ 2.1 million of total unrecognized compensation cost related to non-vested restricted stock, which is expected to be recognized over a weighted-average period of 1.96 years.

As of December 31, 2021, there was nil of total unrecognized compensation cost related to non-vested restricted stock.

On September 27, 2021, the Company amended the employment agreements with certain executives.

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As of December 31, 2022, there was $ 15 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 2.6 years.

As of December 31, 2020, there was $ 0.4 million of total unrecognized compensation cost related to non-vested restricted stock units, which is expected to be recognized over a weighted-average period of 2.67 years.

Share-Based Compensation Expense

The following table summarizes the total share-based compensation expense and related tax benefits recognized (in thousands):

The following table summarizes the total share-based compensation expense (in thousands):

Year Ended December 31,

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The Plan provided that employees may defer up to 50 % of their annual compensation subject to annual dollar limitations, and that the Company would make a matching contribution equal to 100 % of each employee’s deferral, up to 5 % of the employee’s annual compensation.

The Company eliminated the match on March 31, 2019.

Company matching contributions, which vested immediately, totaled $ 1.9 million, nil and $ 1.1 million for the year ended December 31, 2021, 2020 and 2019, respectively.

The Company resumed the match on contributions effective January 1, 2021.

Note 20 — Supplemental Information to Consolidated Statements of Cash Flows

In 2019, two executive officers surrendered an aggregate of 14,391 shares of restricted stock at a value of less than $ 0.1 million to cover income taxes due on the 2019 vesting of the restricted shares granted to them in 2016, 2017, and 2018.

The Company determined that the fair value of the redemption provision upon a change of control was $ 4.9 million.

In 2020, certain employees, including two executive officers, surrendered an aggregate of 16,886 shares of restricted stock for $ 173,526 to cover income taxes due on the vesting of restricted shares.

In 2021, certain employees, including two executive officers, surrendered an aggregate of 32,846 shares of restricted stock for $ 163,573 to cover income taxes due on the vesting of restricted shares.

Note 21 — Selected Quarterly Financial Data (Unaudited)

Selected unaudited quarterly financial data for the years 2021 and 2020 are summarized below.

The Company has derived this data from the unaudited consolidated interim financial statements that, in the Company's opinion, have been prepared on substantially the same basis as the audited financial statements contained elsewhere in this report and include all normal recurring adjustments necessary for a fair presentation of the financial information for the periods presented.

These unaudited quarterly results should be read in conjunction with the financial statements and notes thereto included elsewhere in this report.

The operating results in any quarter are not necessarily indicative of the results that may be expected for any future period.

(in thousands, except per share data)

Income (loss) from operations

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

Net income (loss)

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

Net income (loss) attributable to common stockholders

Basic income (loss) per share

Weighted average shares outstanding

Diluted income (loss) per share

Weighted average shares and equivalents outstanding

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

Therefore, the sum of the per-share amounts for the quarters may not agree with the per share amounts for the year.

Company-matching contributions, which vests immediately, totaled $ 2.1 million, $ 1.9 million and nil for the year ended December 31, 2022, 2021 and 2020, respectively.

The Company eliminated the match on March 31, 2019, and resumed the match on contributions effective January 1, 2021.

Note 20 — Litigation and Contingencies

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

A purported class action lawsuit was filed on November 10, 2020 in the United States District Court for the District of Delaware (Brown v.

JAKKS Pacific, Inc.

et al) alleging that the Proxy Statement issued in connection with the shareholder meeting held in June 2020 contained misstatements regarding the manner in which broker votes would be counted and that such votes were improperly included in approving the Company’s Reverse Stock Split at the meeting.

The purported class action seeks damages in an unspecified amount, alleging breach of fiduciary duties by the Company’s directors.

On April 30, 2021, the Company held a Special Meeting of the Shareholders to obtain shareholder ratification of the filing of the Certificate of Amendment to its Certificate of Incorporation effecting the Reverse Stock Split, in accordance with ratification procedures under Delaware law, which approval was obtained.

The Company settled this matter on December 14, 2021, paying only legal fees to plaintiff’s attorneys, and the case was dismissed.

A putative class action lawsuit was filed on May 18, 2021 in the Superior Court of the State of California for the County of Los Angeles (Isaiah Villarica v.

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The lawsuit further alleges derivative wage and hour claims for failure to timely pay all wages owed at separation of employment, failure to provide accurate wage statements, and unfair business practices.

Plaintiff seeks to represent a class consisting of all individuals who have worked for the Company—either directly or through a staffing agency—in California since November 19, 2016 and who were classified as non-exempt.

Plaintiff seeks unpaid wages, meal and rest period premiums, interest, various statutory penalties, attorneys’ fees, and costs, all in unspecified amounts.

Workforce Enterprises has also been named as a defendant in this matter, but we cannot determine if a Complaint was served on them.

No formal discovery has commenced, and so the Company cannot be assured of the outcome of the action and cannot estimate the range of any potential damage award.

In addition, the same counsel in the Villarica matter filed a related lawsuit on February 15, 2022 in the same court (Matthew Cordova v.

The same counsel in the Villarica matter also filed a related lawsuit on February 15, 2022 in the same court (Matthew Cordova v.

Jakks Pacific, Inc).

Plaintiff also formerly worked in one of the Company’s warehouses and was retained via Workforce Enterprises, a provider of temporary employees.

Plaintiff also formerly worked in one of the Company’s warehouses and was retained via Workforce Enterprises.

The lawsuit alleges that the Company committed wage and hour violations under the California Private Attorneys General Act, including failing to provide compliant meal and rest periods, properly calculate and pay all minimum and overtime wages, provide accurate wage statements, provide all wages due at separation of employment, provide sick leave, maintain accurate payroll records, or reimburse business expenses.

Plaintiff seeks to collect civil penalties on behalf of the State of California under the Private Attorneys General Act for each violation experienced by “aggrieved employees,” defined as all individuals who have worked for the Company—either directly or through a staffing agency—in California since December 8, 2020 and who were classified as non-exempt.

No formal discovery has commenced, and so the Company cannot be assured of the outcome of the action and cannot estimate the range of any potential damage award.

The Company has demanded indemnification for both of these matters from the temporary employee providers who supplied temporary employees to the Company during the relevant time periods at issue in the lawsuits.

A mediation between the Company and counsel for both matters is scheduled for March 24, 2022.

Both of these matters were settled at mediation in March 2022, and the Court in November 2022 approved the settlements, the proceeds of which have been tendered to the settlement administrator to distribute to the State of California, plaintiff’s counsel, and class members.

The Company’s temporary employee service providers provided the bulk of the settlement funds, and the matter had no material impact on the Company.

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

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Other than certain liabilities recorded in the normal course of business related to royalty payments due to the Company's licensors, no liabilities have been recorded for indemnifications and/or other commitments.

Note 21 — Subsequent Events

On January 3, 2023, as permitted by the terms within the 2021 BSP Term Loan Agreement, the Company made a voluntary $ 15.0 million prepayment towards the outstanding principal amount of the 2021 BSP Term Loan and incurred a $ 0.2 million prepayment penalty.

On March 3, 2023, as required by the terms within the 2021 BSP Term Loan Agreement under the ECF Sweep provision, the Company made a mandatory $ 23.1 million prepayment towards the outstanding principal amount of the 2021 BSP Term Loan.

In Q1 2023, the Company entered into amendments to its 2021 BSP Term Loan Agreement and its JPMorgan ABL Credit Agreement, which changed the interest reference rate on its term loan and revolving line of credit from LIBOR to the Secured Overnight Financing Rate (“SOFR”).

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 7A. Quantitative and Qualitative Disclosures About Market Risk