What changed in this filing

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Item 1. Financial Statements

2023-11-14 compared with 2023-08-14 · 184 added, 139 removed, 613 unchanged (35% of the section changed)

4 unchanged sentences

(In thousands, except share amounts)

September 30,

Current assets

1 unchanged sentence

Restricted cash

Accounts receivable, net of allowances for credit losses of $ 3,022 and $ 2,865 at June 30, 2023 and December 31, 2022, respectively

Accounts receivable, net of allowances for credit losses of $ 3,712 and $ 2,865 at September 30, 2023 and December 31, 2022, respectively

Prepaid expenses and other assets

20 unchanged sentences

Long term operating lease liabilities

Accrued expenses - long term

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

4 unchanged sentences

5,000,000 shares authorized;

200,000 shares issued and outstanding at June 30, 2023 and December 31, 2022

200,000 shares issued and outstanding at September 30, 2023 and December 31, 2022

Stockholders' Equity

1 unchanged sentence

100,000,000 shares authorized;

9,870,927 and 9,742,236 shares issued and outstanding at June 30, 2023 and December 31, 2022, respectively

10,073,264 and 9,742,236 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively

Additional paid-in capital

11 unchanged sentences

(In thousands, except per share data)

Three Months Ended June 30,

Six Months Ended June 30,

Ended September 30,

Cost of sales:

31 unchanged sentences

(In thousands)

Three and Six Months Ended June 30, 2023

Three and Nine Months Ended September 30, 2023

Pacific, Inc.

13 unchanged sentences

Balance, June 30, 2023

Three and Six Months Ended June 30, 2022

Share-based compensation expense

Repurchase of common stock for employee tax withholding

Preferred stock accrued dividends

Net income (loss)

Foreign currency translation adjustment

Balance, September 30, 2023

Three and Nine Months Ended September 30, 2022

Pacific, Inc.

13 unchanged sentences

Balance, June 30, 2022

Share-based compensation expense

Repurchase of common stock for employee tax withholding

Preferred stock accrued dividends

Net income (loss)

Foreign currency translation adjustment

Balance, September 30, 2022

See accompanying notes to condensed consolidated financial statements.

3 unchanged sentences

(In thousands)

Six Months Ended June 30,

Nine Months Ended September 30,

Cash flows from operating activities

8 unchanged sentences

Intangibles impairment

Deferred income taxes

Change in fair value of preferred stock derivative liability

20 unchanged sentences

Net cash used in financing activities

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

Net increase in cash, cash equivalents and restricted cash

Effect of foreign currency translation

4 unchanged sentences

Cash paid for interest

As of June 30, 2023 and 2022, there was $ 4.7 million and $ 4.4 million, respectively, of property and equipment purchases included in accounts payable.

As of September 30, 2023 and 2022, there was $ 3.9 million and $ 4.7 million, respectively, of property and equipment purchases included in accounts payable.

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

3 unchanged sentences

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2023

September 30, 2023

Note 1 — Basis of Presentation

33 unchanged sentences

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2023

September 30, 2023

No new additional accounting pronouncements were issued or adopted for the nine months ended September 30, 2023 that materially impacted the Company.

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

8 unchanged sentences

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

Information by segment and a reconciliation to reported amounts for the three and six months ended June 30, 2023 and 2022 and as of June 30, 2023 and December 31, 2022 are as follows (in thousands):

Information by segment and a reconciliation to reported amounts for the three and nine months ended September 30, 2023 and 2022 and as of September 30, 2023 and December 31, 2022 are as follows (in thousands):

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Toys/Consumer Products

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Income from Operations

1 unchanged sentence

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Depreciation and Amortization Expense

Toys/Consumer Products

September 30,

Toys/Consumer Products

2 unchanged sentences

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2023

September 30, 2023

Net revenues are categorized based upon location of the customer, while long-lived assets are categorized based upon the location of the Company’s assets.

The following tables present information about the Company by geographic area as of June 30, 2023 and December 31, 2022 and for the three and six months ended June 30, 2023 and 2022 (in thousands):

The following tables present information about the Company by geographic area as of September 30, 2023 and December 31, 2022 and for the three and nine months ended September 30, 2023 and 2022 (in thousands):

September 30,

Long-lived Assets

2 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Net Sales by Customer Area

4 unchanged sentences

Major Customers

Net sales to major customers for the three and six months ended June 30, 2023 and 2022 were as follows (in thousands, except for percentages):

Three Months Ended June 30,

Six Months Ended June 30,

Net sales to major customers for the three and nine months ended September 30, 2023 and 2022 were as follows (in thousands, except for percentages):

Three Months Ended September 30,

Nine Months Ended June 30,

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

4 unchanged sentences

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2023

September 30, 2023

Note 3 — Inventory

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

September 30,

Raw materials

Finished goods

As of June 30, 2023 and December 31, 2022, the inventory obsolescence reserve was $ 10.6 million and $ 9.0 million, respectively.

The inventory obsolescence reserve was $ 9.0 million as of September 30, 2023 and December 31, 2022.

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

21 unchanged sentences

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

For the three and nine months ended September 30, 2023, sales commissions were $ 1.2 million and $ 2.4 million, respectively.

For the three and nine months ended September 30, 2022, sales commissions were $ 1.1 million and $ 2.2 million, respectively.

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 three and six months ended June 30, 2023, shipping and handling costs were $ 1.7 million and $ 3.6 million, respectively.

For the three and six months ended June 30, 2022, shipping and handling costs were $ 2.2 million and $ 3.7 million, respectively.

The Company’s reserve for sales returns and allowances amounted to $ 37.9 million as of June 30, 2023, compared to $ 51.9 million as of December 31, 2022.

For the three and nine months ended September 30, 2023, shipping and handling costs were $ 2.6 million and $ 6.1 million, respectively.

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

The Company’s reserve for sales returns and allowances amounted to $ 43.5 million as of September 30, 2023, compared to $ 51.9 million as of December 31, 2022.

The Company’s net accounts receivable as of September 30, 2023, December 31, 2022 and December 31, 2021 were $ 206.8 million, $ 102.8 million and $ 147.4 million, respectively.

JAKKS PACIFIC, INC.

1 unchanged sentence

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2023

September 30, 2023

Note 5 — Debt

Term loan consists of the following (in thousands):

June 30, 2023

September 30, 2023

December 31, 2022

25 unchanged sentences

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2023

September 30, 2023

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.

17 unchanged sentences

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2023

September 30, 2023

Note 6 — Credit Facilities

5 unchanged sentences

The JPMorgan ABL Facility matures in June 2026.

As of June 30, 2023, the weighted average interest rate on the credit facility with JPMorgan Chase Bank was 6.8 %.

As of September 30, 2023, the weighted average interest rate on the credit facility with JPMorgan Chase Bank was 6.8 %.

In March 2023, the Company entered into a first amendment for its JPMorgan ABL Credit Agreement, which transitioned the interest reference rate on its JPMorgan ABL Facility from LIBOR to the Secured Overnight Financing Rate (“SOFR”).

6 unchanged sentences

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

As of June 30, 2023, the amount of outstanding borrowings was nil and the total excess borrowing availability was $ 54.9 million.

As of June 30, 2023, off-balance sheet arrangements include letters of credit issued by JPMorgan of $ 9.3 million.

Amortization expense classified as interest expense related to the $ 1.6 million of debt issuance costs associated with the transaction that closed on June 2, 2021 (i.e., JPMorgan ABL Credit Agreement) was $ 0.1 million and $ 0.2 million for the three and six months ended June 30, 2023, respectively.

As of June 30, 2023, the Company was in compliance with the financial covenants under the JPMorgan ABL Credit Agreement.

As of September 30, 2023, the amount of outstanding borrowings was nil and the total excess borrowing availability was $ 53.7 million.

As of September 30, 2023, off-balance sheet arrangements include letters of credit issued by JPMorgan of $ 9.3 million.

Amortization expense classified as interest expense related to the $ 1.6 million of debt issuance costs associated with the transaction that closed on June 2, 2021 (i.e., JPMorgan ABL Credit Agreement) was $ 0.1 million and $ 0.3 million for the three and nine months ended September 30, 2023, respectively.

As of September 30, 2023, the Company was in compliance with the financial covenants under the JPMorgan ABL Credit Agreement.

JAKKS PACIFIC, INC.

1 unchanged sentence

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2023

September 30, 2023

Note 7 — Income Taxes

The Company’s income tax expense of $ 1.5 million for the three months ended June 30, 2023 reflects an effective tax rate of 19.3 %.

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

The tax expense for the three months ended June 30, 2023 primarily relates to federal, state and foreign income taxes and discrete items.

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

The Company’s income tax expense of $ 0.1 million for the six months ended June 30, 2023 reflects an effective tax rate of 9.9 %.

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

The majority of the tax expense for the six months ended June 30, 2023 primarily relates to federal, state and foreign income taxes offset by discrete items.

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

The Company’s income tax expense of $ 12.4 million for the three months ended September 30, 2023, reflects an effective tax rate of 20.5 %.

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

The tax expense for the three months ended September 30, 2023 primarily relates to U.S.

and foreign income taxes and discrete items.

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

and foreign income taxes and discrete items.

The Company’s income tax expense of $ 12.5 million for the nine months ended September 30, 2023 reflects an effective tax rate of 20.3 %.

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

The majority of the tax expense for the nine months ended September 30, 2023 primarily relates to U.S.

and foreign income taxes offset by discrete items.

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

and foreign income taxes and discrete items.

Note 8 — Earnings Per Share

1 unchanged sentence

Three Months Ended

Six Months Ended

September 30,

Nine Months Ended

September 30,

Earnings per share - basic and diluted

8 unchanged sentences

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

** Net income attributable to common stockholders was computed by deducting preferred dividends of $ 0.4 million and $ 0.7 million for the three and six months ended June 30, 2023, respectively.

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

** Net income attributable to common stockholders was computed by deducting preferred dividends of $ 0.4 million and $ 1.1 million for the three and nine months ended September 30, 2023, respectively.

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

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

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

No restricted stock units were excluded from the computation of diluted earnings per share for the three and six months ended June 30, 2023 and 2022.

No restricted stock units were excluded from the computation of diluted earnings per share for the three and nine months ended September 30, 2023 and 2022.

Note 9 — Common Stock and Preferred Stock

3 unchanged sentences

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2023

September 30, 2023

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.

2 unchanged sentences

Additionally, an aggregate of 2,206 shares of restricted stock granted in 2019 with the value of approximately $ 41,000 was forfeited during 2023.

No dividend was declared or paid in the three months ended June 30, 2023 and 2022.

No dividend was declared or paid in the three and nine months ended September 30, 2023 and 2022.

At the Market Offering

1 unchanged sentence

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.

As of June 30, 2023, the Company has not sold any shares of common stock under the ATM Agreement.

As of September 30, 2023, the Company has not sold 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.

As of June 30, 2023, the Company has not sold any securities pursuant to its shelf registration statement.

As of September 30, 2023, the Company has not sold any securities pursuant to its shelf registration statement.

Redeemable Preferred Stock

1 unchanged sentence

In connection with the Recapitalization Transaction, the Company issued 200,000 shares of Series A Senior Preferred Stock (the “Series A Preferred Stock”), $ 0.001 par value per share, to the Investor Parties (the “New Preferred Equity”).

As of June 30, 2023 and December 31, 2022, 200,000 shares of Series A Preferred Stock were outstanding.

As of September 30, 2023 and December 31, 2022, 200,000 shares of Series A Preferred Stock were outstanding.

Each share of Series A Preferred Stock has an initial value of $ 100 per share, which is automatically increased for any accrued and unpaid dividends (the “Accreted Value”).

1 unchanged sentence

No cash dividends have been declared or paid.

For the three and six months ended June 30, 2023, the Company recorded $ 0.4 million and $ 0.7 million, respectively, of preferred stock dividends as an increase in the value of the Series A Preferred Stock.

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

For the three and nine months ended September 30, 2023, the Company recorded $ 0.4 million and $ 1.1 million, respectively, of preferred stock dividends as an increase in the value of the Series A Preferred Stock.

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

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

3 unchanged sentences

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2023

September 30, 2023

The Company has the right, but is not required, to repurchase all or a portion of the Series A Preferred Stock at its Liquidation Preference at any time after payment in full of the 2019 Recap Term Loan.

18 unchanged sentences

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

As of June 30, 2023, the Series A Preferred Stock is recorded in temporary equity at the amount of accrued, but unpaid dividends of $ 5.2 million, and the redemption provision, as a bifurcated derivative, is recorded as a long-term liability with an estimated value of $ 27.8 million.

As of September 30, 2023, the Series A Preferred Stock is recorded in temporary equity at the amount of accrued, but unpaid dividends of $ 5.6 million, and the redemption provision, as a bifurcated derivative, is recorded as a long-term liability with an estimated value of $ 28.6 million.

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.

As of June 30, 2023, the Series A Preferred Stock had a carrying value of $ 25.2 million and a liquidation value of $ 37.8 million.

As of September 30, 2023, the Series A Preferred Stock had a carrying value of $ 25.6 million and a liquidation value of $ 38.4 million.

As of December 31, 2022, the Series A Preferred Stock had a carrying value of $ 24.5 million and a liquidation value of $ 36.7 million.

2 unchanged sentences

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2023

September 30, 2023

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

Balance, January 1,

$ 4,490 $ 3,074

Preferred stock accrued dividends

2 unchanged sentences

Balance, June 30,

Preferred stock accrued dividends

Balance, September 30,

$ 5,608 $ 4,128

Note 10 — Joint Ventures

2 unchanged sentences

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

The non-controlling interest’s share of the loss was $ 0.3 million each for the three and six months ended June 30, 2023.

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

The non-controlling interest’s share of the loss was $ 11 ,000 and $ 289 ,000 for the three and nine months ended September 30, 2023.

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

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

3 unchanged sentences

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

The non-controlling interest’s share of the loss from the joint venture for the three months ended June 30, 2023 and 2022 was nil .

The non-controlling interest’s share of the loss from the joint venture for the three months and nine months ended September 30, 2023 and 2022 was nil .

Note 11 — Goodwill

1 unchanged sentence

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

For the three and six months ended June 30, 2023, there were no events or circumstances that indicated that an impairment loss may have been incurred.

For the three and nine months ended September 30, 2023, there were no events or circumstances that indicated that an impairment loss may have been incurred.

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

No goodwill impairment was determined to have occurred for the six months ended June 30, 2023 and June 30, 2022.

No goodwill impairment was determined to have occurred for the nine months ended September 30, 2023 and 2022.

JAKKS PACIFIC, INC.

1 unchanged sentence

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2023

September 30, 2023

Note 12 — Comprehensive Income

The table below presents the components of the Company’s comprehensive income for the three and six months ended June 30, 2023 and 2022 (in thousands):

The table below presents the components of the Company’s comprehensive income for the three and nine months ended September 30, 2023 and 2022 (in thousands):

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Other comprehensive income:

17 unchanged sentences

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

The following table summarizes the total share-based compensation expense recognized for the three and six months ended June 30, 2023 and 2022 (in thousands)

The following table summarizes the total share-based compensation expense recognized for the three and nine months ended September 30, 2023 and 2022 (in thousands)

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Share-based compensation expense

2 unchanged sentences

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2023

September 30, 2023

Restricted Stock Units

Restricted stock unit activity (including those with performance-based vesting criteria) for the six months ended June 30, 2023 is summarized as follows:

Restricted stock unit activity (including those with performance-based vesting criteria) for the nine months ended September 30, 2023 is summarized as follows:

Restricted Stock Units

3 unchanged sentences

Outstanding, December 31, 2022

Outstanding, June 30, 2023

As of June 30, 2023, there was $ 15.3 million of total unrecognized compensation cost related to non-vested restricted stock units, which is expected to be recognized over a weighted-average period of 2.3 years.

Outstanding, September 30, 2023

As of September 30, 2023, there was $ 13.2 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 2.1 years.

Note 15 — Fair Value Measurements

15 unchanged sentences

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2023

The following tables summarize the Company's financial liabilities measured at fair value on a recurring basis as of June 30, 2023 and December 31, 2022 (in thousands):

September 30, 2023

The following tables summarize the Company's financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2023 and December 31, 2022 (in thousands):

Fair Value Measurements

as of June 30, 2023

as of September 30, 2023

Carrying Amount as of

June 30, 2023

September 30, 2023

Money market funds

Preferred stock derivative liability

4 unchanged sentences

Preferred stock derivative liability

The following tables provide a reconciliation of the beginning and ending balances of liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) (in thousands):

The following table provides a reconciliation of the beginning and ending balances of liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) (in thousands):

Preferred stock derivative liability

1 unchanged sentence

Change in fair value

Balance, June 30,

Balance, September 30,

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.

5 unchanged sentences

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2023

September 30, 2023

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 June 30, 2023

As of September 30, 2023

(Weighted Average)

29 unchanged sentences

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2023

September 30, 2023

Meisheng also serves as a significant manufacturer of the Company.

For the three and six months ended June 30, 2023, the Company made inventory-related payments to Meisheng of approximately $ 19.1 million and $ 28.4 million, respectively.

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

As of June 30, 2023 and December 31, 2022, amounts due to Meisheng for inventory received by the Company, but not paid totaled $ 18.6 million and $ 9.8 million, respectively.

For the three and nine months ended September 30, 2023, the Company made inventory, molds and tooling related payments to Meisheng of approximately $ 35.2 million and $ 65.1 million, respectively.

For the three and nine months ended September 30, 2022, the Company made inventory, molds and tooling related payments to Meisheng of approximately $ 44.1 million and $ 111.0 million, respectively.

As of September 30, 2023 and December 31, 2022, amounts due to Meisheng for inventory, molds and tooling received by the Company, but not paid totaled $ 27.9 million and $ 9.8 million, respectively.

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

Note 17 — Prepaid Expenses and Other Assets

Prepaid expenses and other assets as of June 30,2023 and December 31, 2022 consist of the following (in thousands):

Prepaid expenses

Royalty advances

Prepaid expenses and other assets as of September 30, 2023 and December 31, 2022 consist of the following (in thousands):

September 30,

Income tax receivable

Royalty advances

Prepaid expenses

Employee retention credit

11 unchanged sentences

Critical Accounting Estimates

Our critical accounting policies and estimates are included in the 2022 Annual Report on Form 10-K and did not materially change during the first six months of 2023.

Our critical accounting policies and estimates are included in the 2022 Annual Report on Form 10-K and did not materially change during the first nine months of 2023.

New Accounting Pronouncements

2 unchanged sentences

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

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

Cost of sales:

21 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Toys/Consumer Products

2 unchanged sentences

Toys/Consumer Products

Comparison of the Three Months Ended June 30, 2023 and 2022

Comparison of the Three Months Ended September 30, 2023 and 2022

Toys/Consumer Products.

Net sales of our Toys/Consumer Products segment were $117.9 million for the three months ended June 30, 2023 compared to $148.9 million for the prior year period, representing a decrease of $31.0 million, or 20.8%.

The decrease was primarily driven by lower sales in North America, which were down $33.3 million, or 25.7%, as well as, customers placing FOB orders earlier in the prior year to get ahead of supply chain issues experienced a year ago.

Now that the supply chain has returned to historical normal patterns, retailers have moved back to the pre-pandemic ordering patterns.

Net sales of our Costumes segment were $49.0 million for the three months ended June 30, 2023 compared to $71.6 million for the prior year period, representing a decrease of $22.6 million, or 31.6%.

The decrease in net sales was primarily related to earlier customer shipments versus a year ago to get ahead of supply chain issues experienced a year ago.

Net sales of our Toys/Consumer Products segment were $246.0 million for the three months ended September 30, 2023 compared to $269.6 million for the prior year period, representing a decrease of $23.6 million, or 8.8%.

The decrease was primarily driven by lower sales in North America, which were down $21.3 million, or 9.7%, consistent with the year-to-date trend and in part attributable to our retail customers looking to reduce their inventory levels, again consistent with the full-year trend.

Net sales of our Costumes segment were $63.7 million for the three months ended September 30, 2023 compared to $53.4 million for the prior year period, representing an increase of $10.3 million, or 19.3%.

The increase in net sales was primarily driven by a return to more normal ordering patterns versus a year ago when customers placed more costume orders in Q2.

Retailers moved back to the pre-pandemic ordering pattern which existed prior to the 2021 importation bottleneck and related spike in container costs.

Cost of Sales

Toys/Consumer Products.

Cost of sales of our Toys/Consumer Products segment was $77.6 million, or 65.8% of related net sales for the three months ended June 30, 2023 compared to $105.7 million, or 71.0% of related net sales for the prior year period, representing a decrease of $28.1 million, or 26.6%.

Cost of sales of our Toys/Consumer Products segment was $156.9 million, or 63.8% of related net sales for the three months ended September 30, 2023 compared to $186.3 million, or 69.1% of related net sales for the prior year period, representing a decrease of $29.4 million, or 15.8%.

The decrease in dollars is related to lower overall sales.

The decrease as a percentage of net sales, year over year, is primarily due to lower freight costs.

Cost of sales of our Costumes segment was $38.1 million, or 77.8% of related net sales for the three months ended June 30, 2023, compared to $53.8 million, or 75.1% of related net sales for the prior year period, representing a decrease in dollars of $15.7 million, or 29.2%.

The decrease in dollars is related to lower overall sales.

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

Cost of sales of our Costumes segment was $45.9 million, or 72.1% of related net sales for the three months ended September 30, 2023, compared to $44.8 million, or 83.9% of related net sales for the prior year period, representing an increase in dollars of $1.1 million, or 2.5%.

The increase in dollars is related to higher overall sales.

The decrease as a percentage of net sales, year over year, is primarily due to lower freight costs.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $34.8 million for the three months ended June 30, 2023 compared to $36.9 million for the prior year period constituting 20.8% and 16.8% of net sales, respectively.

The decrease in selling, general and administrative expenses as a percentage of net sales was primarily due to lower sales a year ago.

Selling, general and administrative expenses were $44.6 million for the three months ended September 30, 2023 compared to $38.2 million for the prior year period constituting 14.4% and 11.8% of net sales, respectively.

The increase in selling, general and administrative expenses as a percentage of net sales was primarily due to an increase in media spend and headcount.

Interest Expense

Interest expense was $1.3 million for the three months ended June 30, 2023, as compared to $2.3 million in the prior year period.

During the three months ended June 30, 2023, we incurred interest expense of $0.7 million related to our 2021 BSP Term Loan, $0.3 million related to our revolving credit facility and $0.3 million related to other borrowing costs.

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

Interest expense was $1.4 million for the three months ended September 30, 2023, as compared to $4.4 million in the prior year period.

During the three months ended September 30, 2023, we incurred interest expense of $1.3 million related to discounting of some receivables and $0.1 million related to our revolving credit facility.

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

Provision for (Benefit From) Income Taxes

Our income tax expense, which includes federal, state and foreign income taxes and discrete items, was $1.5 million, or an effective tax rate of 19.3%, for the three months ended June 30, 2023.

Our income tax expense, which includes federal, state, and foreign income taxes and discrete items, was $12.4 million, or an effective tax rate of 20.5%, for the three months ended September 30, 2023.

During the comparable period in 2022, our income tax expense was $11.6 million, or an effective tax rate of 27.4%.

The effective tax rate increased primarily due to the expectation of taxes owed in higher tax jurisdictions.

Comparison of the Six Months Ended June 30, 2023 and 2022

Comparison of the Nine Months Ended September 30, 2023 and 2022

Toys/Consumer Products.

Net sales of our Toys/Consumer Products segment were $215.8 million for the six months ended June 30, 2023 compared to $260.0 million for the prior year period, representing a decrease of $44.2 million, or 17.0%.

The decrease in net sales was primarily related to customers placing FOB orders earlier in the prior year in order to get ahead of supply chain issues experienced a year ago.

Now that the supply chain has returned to historical normal patterns, retailers have moved back to the pre-pandemic ordering patterns.

Net sales of our Costumes segment were $58.6 million for the six months ended June 30, 2023 compared to $81.3 million for the prior year period, representing a decrease of $22.7 million, or 27.9%.

Similar to Toys/Consumer Products, the decrease in net sales was primarily related to earlier customer shipments versus a year ago to get ahead of supply chain issues experienced a year ago.

Net sales of our Toys/Consumer Products segment were $461.8 million for the nine months ended September 30, 2023 compared to $529.6 million for the prior year period, representing a decrease of $67.8 million, or 12.8%.

The decrease was primarily driven by lower sales in North America attributable to typical lifecycle of declining toy sales behind a 2021 film release as well as retail customers desire to reduce their inventory levels over the course of calendar year 2023.

Net sales of our Costumes segment were $122.3 million for the nine months ended September 30, 2023 compared to $134.7 million for the prior year period, representing a decrease of $12.4 million, or 9.2%.

The reduction in year-to-date costume sales is primarily attributable to some customers recalibrating their purchase levels downward as a result of Halloween 2022 sell-through.

Cost of Sales

Toys/Consumer Products.

Cost of sales of our Toys/Consumer Products segment was $146.3 million, or 67.8% of related net sales for the six months ended June 30, 2023 compared to $188.7 million, or 72.6% of related net sales for the prior year period, representing a decrease of $42.4 million, or 22.5%.

Cost of sales of our Toys/Consumer Products segment was $303.1 million, or 65.6% of related net sales for the nine months ended September 30, 2023 compared to $375.0 million, or 70.8% of related net sales for the prior year period, representing a decrease of $71.9 million, or 19.2%.

The decrease in dollars is related to lower overall sales.

The decrease as a percentage of net sales, year over year, is due to lower freight costs.

Cost of sales of our Costumes segment was $45.5 million, or 77.6% of related net sales for the six months ended June 30, 2023, compared to $61.8 million, or 76.0% of related net sales for the prior year period, representing a decrease in dollars of $16.3 million, or 26.4%.

Cost of sales of our Costumes segment was $91.4 million, or 74.7% of related net sales for the nine months ended September 30, 2023, compared to $106.6 million, or 79.1% of related net sales for the prior year period, representing a decrease in dollars of $15.2 million, or 14.3%.

The decrease in dollars is related to lower overall sales.

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

The decrease as a percentage of net sales, year over year, is due to lower freight costs.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $70.6 million for the six months ended June 30, 2023 compared to $67.6 million for the prior year period constituting 25.7% and 19.8% of net sales, respectively.

Selling, general and administrative expenses were $115.2 million for the nine months ended September 30, 2023 compared to $105.8 million for the prior year period constituting 19.8% and 15.9% of net sales, respectively.

Selling, general and administrative expenses increased as a result of higher professional services and employee related expenses.

Interest Expense

Interest expense was $4.3 million for the six months ended June 30, 2023, as compared to $4.5 million in the prior year period.

During the six months ended June 30, 2023, we incurred interest expense of $3.2 million related to our 2021 BSP Term Loan, $0.4 million related to our revolving credit facility and $0.7 million related to other borrowing costs.

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

Interest expense was $5.7 million for the nine months ended September 30, 2023, as compared to $8.9 million in the prior year period.

Expense is lower due to our aggressively paying down loan principal in calendar year 2022 and 2023, due to increases in cash flow and in response to rising market interest rates.

During the nine months ended September 30, 2023, we incurred interest expense of $3.2 million related to our 2021 BSP Term Loan, $2.1 million related to discounting of some receivables and $0.4 million related to our revolving credit facility.

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

Provision for (Benefit From) Income Taxes

Our income tax expense, which includes federal, state and foreign income taxes and discrete items, was $0.1 million, or an effective tax rate of 9.9%, for the six months ended June 30, 2023.

Our income tax expense, which includes federal, state, and foreign income taxes and discrete items, was $12.5 million, or an effective tax rate of 20.3%, for the nine months ended September 30, 2023.

During the comparable period in 2022, our income tax expense was $13.3 million, or an effective tax rate of 20.1%.

The effective tax rate increased primarily due to the expectation of taxes owed in higher tax jurisdictions.

Seasonality and Backlog

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Liquidity and Capital Resources

As of June 30, 2023, we had working capital (inclusive of cash, cash equivalents and restricted cash) of $65.5 million, compared to $97.4 million as of December 31, 2022, representing a decrease in working capital of $31.9 million during the six-month period ended June 30, 2023.

The decrease in working capital is primarily attributable to the $30.2 million principal payment made during the quarter related to our 2021 BSP Term Loan.

Operating activities provided net cash of $20.8 million during the six months ended June 30, 2023, as compared to net cash provided of $36.5 million in the prior year period.

The decrease in net cash provided by operating activities year-over-year is primarily due to lower overall sales and higher working capital usage, partially offset by higher non-cash charges related to the valuation adjustment for our preferred stock derivative liability.

As of September 30, 2023, we had working capital (inclusive of cash, cash equivalents and restricted cash) of $123.4 million, compared to $97.4 million as of December 31, 2022, representing an increase in working capital of $26.0 million during the nine-month period ended September 30, 2023.

Operating activities provided net cash of $87.7 million during the nine months ended September 30, 2023, as compared to net cash provided of $75.3 million in the prior year period.

The increase in net cash provided by operating activities year-over-year is primarily due to lower working capital usage and higher non-cash charges related to the valuation adjustment for our preferred stock derivative liability.

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

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

As of June 30, 2023, these agreements required future aggregate minimum royalty guarantees of $70.8 million exclusive of $3.9 million in advances already paid.

As of September 30, 2023, these agreements required future aggregate minimum royalty guarantees of $65.3 million exclusive of $2.1 million in advances already paid.

Of this $65.3 million future minimum royalty guarantee, $44.0 million is due over the next twelve months.

Investing activities used net cash of $4.9 million and $5.3 million for the six months ended June 30, 2023 and 2022, respectively, and consisted primarily of cash paid for the purchase of molds and tooling used in the manufacture of our products.

Financing activities used net cash of $70.4 million and $11.5 million for the six months ended June 30, 2023 and 2022, respectively.

The cash used in financing activities during the six months ended June 30, 2023, primarily consists of the repayment of our 2021 BSP Term Loan of $69.2 million and the repurchase of common stock for employee tax withholding of $1.2 million.

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

As of June 30, 2023, we have no outstanding indebtedness under our first-lien secured term loan (the “2021 BSP Term Loan Agreement”) and under our senior secured revolving credit facility (the “JPMorgan ABL Facility”), aside from utilizing $9.3 million in letters of credit.

Investing activities used net cash of $5.7 million and $8.1 million for the nine months ended September 30, 2023 and 2022, respectively, and consisted primarily of cash paid for the purchase of molds and tooling used in the manufacture of our products.

Financing activities used net cash of $71.7 million and $30.3 million for the nine months ended September 30, 2023 and 2022, respectively.

The cash used in financing activities during the nine months ended September 30, 2023, primarily consists of the repayment of our 2021 BSP Term Loan of $69.2 million and the repurchase of common stock for employee tax withholding of $2.5 million.

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

As of September 30, 2023, we have no outstanding indebtedness under our first-lien secured term loan (the “2021 BSP Term Loan Agreement”) and under our senior secured revolving credit facility (the “JPMorgan ABL Facility”), aside from utilizing $9.3 million in letters of credit.

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

As of June 30, 2023 and December 31, 2022, we held cash and cash equivalents, including restricted cash, of $32.4 million and $85.5 million, respectively.

Cash, and cash equivalents, including restricted cash held outside of the United States in various foreign subsidiaries totaled $25.8 million and $39.4 million as of June 30, 2023 and December 31, 2022, respectively.

As of September 30, 2023 and December 31, 2022, we held cash and cash equivalents, including restricted cash, of $96.4 million and $85.5 million, respectively.

Cash, and cash equivalents, including restricted cash held outside of the United States in various foreign subsidiaries totaled $37.6 million and $39.4 million as of September 30, 2023 and December 31, 2022, respectively.

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

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

Any such repatriation may result in foreign withholding taxes, which we expect would not be significant as of June 30, 2023.

Any such repatriation may result in foreign withholding taxes, which we expect would not be significant as of September 30, 2023.

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

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

As of June 30, 2023 off-balance sheet arrangements include letters of credit issued by JPMorgan of $9.3 million.

As of September 30, 2023 off-balance sheet arrangements include letters of credit issued by JPMorgan of $9.3 million.

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

What changed 10-Q

Item 1. Financial Statements