What changed in this filing

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Item 5. Market for Registrant’s Common Equity

2024-03-15 compared with 2023-04-14 · 59 added, 61 removed, 224 unchanged (35% of the section changed)

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Security Holders

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

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

The payment of dividends on common stock is at the discretion of the Board of Directors and is subject to customary limitations and may be subject to certain restrictions pursuant to the terms of our preferred stock and under our credit facility and term loan.

We currently do not anticipate paying any dividends in the foreseeable future.

To the best of our knowledge, as of March 08, 2024, there were 53 holders of record of our common stock.

The payment of dividends on common stock is at the discretion of the Board of Directors and is subject to customary limitations and may be subject to certain restrictions under our credit facility and through March 10, 2024 were also subject to certain restrictions pursuant to the terms of our preferred stock.

Compensation Plan Information

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

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

Additionally, no shares of restricted stock awards remained unvested as of December 31, 2022.

An additional 1.0 million, 1.0 million, 3.6 million, 2.5 million and 1.4 million shares were added to the number of total issuable shares under the Plan and approved by the Board in 2023, 2021, 2019, 2017, and 2013, respectively.

Additionally, no shares subject to restricted stock awards remained unvested and no restricted stock awards have been issued as of December 31, 2023.

Disclosures with respect to equity issuable to certain of our executive officers pursuant to the terms of their employment agreements are disclosed below under Item 11.

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

Allowance for Doubtful Accounts.

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

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

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

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

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

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

Allowance for Current Expected Credit Losses.

Our allowance for current expected credit losses is based upon management’s assessment of the business environment, customers’ risk profile characteristics, historical collection and loss information, aging of accounts receivables, and other matters specific to customer accounts in the establishment of pools.

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

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

Management believes the accounting estimate related to the allowance for current expected credit losses is a “critical accounting policy” because judgement is required in the establishment of pools based on customer risk profile characteristics and the historical loss rates applied to each pool.

In addition, the allowance requires judgement since it involves estimation of the impact of both current and future economic factors in relation to its customers’ risk profile characteristics.

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

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

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

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

As of December 31, 2023, our income tax reserves were approximately $3.2 million and relate to federal and state income taxes.

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

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The following table sets forth, for the periods indicated, certain statement of operations data as a percentage of net sales.

A discussion of the operating results for 2020 can be found in our Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC on March 16, 2022, in Item 7.

A discussion of the operating results for 2022 can be found in our Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the SEC on April 14, 2023, in Item 7.

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

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Income from operations

Loss from joint ventures

Other income (expense), net

Change in fair value of preferred stock derivative liability

Change in fair value of convertible senior notes

Gain on loan forgiveness

Loss on debt extinguishment

Interest income

Interest expense

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Toys/Consumer Products.

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

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

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

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

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

Net sales of our Toys/Consumer Products segment were $580.7 million in 2023, compared to $647.3 million in 2022, representing a decrease of $66.6 million, or 10.3%.

The decrease in net sales was primarily due to lower sales in our Dolls, Role Play and Dress Up Division, partially offset by increased sales in our Action Play & Collectibles Division.

Net sales of our Costumes segment were $130.9 million in 2023, compared to $148.9 million in 2022, representing a decrease of $18.0 million, or 12.1%.

The decrease in net sales was primarily driven by US customers recalibrating their order levels down based on Halloween 2022 sell-through.

Cost of Sales

Toys/Consumer Products.

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

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

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

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

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

Cost of sales of our Toys/Consumer Products segment was $388.3 million, or 66.9% of related net sales in 2023 compared to $465.4 million, or 71.9% of related net sales in 2022 representing a decrease of $77.1 million or 16.6%.

The decrease in dollars is due to lower overall sales in 2023, while the decrease in percentage of net sales, year-over-year is due to lower inbound freight costs.

Cost of sales of our Costumes segment was $99.9 million, or 76.3% of related net sales for 2023 compared to $119.5 million, or 80.3% of related net sales for 2022 representing a decrease of $19.6 million, or 16.4%.

The decrease in dollars is due to lower overall sales in 2023.

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

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $164.2 million in 2023 and $150.0 million in 2022, constituting 23.1% and 18.8% of net sales, respectively.

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

Gain on loan forgiveness

In 2021, we recognized a gain on loan forgiveness of $6.2 million as a result of the forgiveness of the Paycheck Protection Program Loan secured under the Coronavirus Aid Relief and Economic Security Act.

Selling, general and administrative expenses increased from the prior year primarily driven by higher outbound freight and warehouse expenses for 3 rd party warehouses and less scale at operated warehouses coupled with lower capitalization of such cost, as well as higher compensation expense.

Loss on Debt Extinguishment

In 2021, we recognized a loss on debt extinguishment of $7.4 million in connection with the refinance of the 2019 Recap Term Loan.

In 2023, we recognized a loss on debt extinguishment of $1.0 million in connection with the extinguishment of the 2021 BSP Term Loan in June 2023.

Interest Income

Interest Income was $1.3 million for the year ended December 31, 2023, as compared to $0.1 million in the prior year period.

Interest income earned is primarily due to the Company’s money market investments.

Interest Expense

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In 2023, we recorded interest expense of $3.2 million related to our 2021 BSP Term Loan, $0.7 million related to our revolving credit facility and $2.6 million related to other borrowing costs.

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

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

Provision for Income Taxes

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

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

During 2023, our income tax expense, which includes federal, state and foreign income taxes and discrete items, was $6.8 million, or an effective tax rate of 15.2%.

The 2023 tax expense included a discrete tax benefit of $2.7 million primarily comprised of valuation allowance adjustments.

Absent these discrete tax benefits, our effective tax rate for 2023 was 21.3%, primarily due to taxes on federal, state, and foreign income.

During 2022, our income tax benefit was $41.0 million, or an effective tax rate of (81.9)%.

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

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

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

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

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

Based on our evaluation of all positive and negative evidence, as of December 31, 2023, a valuation allowance of $0.7 million has been recorded against the deferred tax assets that more likely than not will not be realized.

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

The net deferred tax asset change of $10.3 million consists of the net deferred tax asset changes in the US and foreign jurisdictions, where we are in a cumulative income position.

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

Significant outbreaks of contagious diseases, and other adverse public health developments, could have a material impact on our business operations and operating results.

In December 2019, a strain of Novel Coronavirus causing respiratory illness and death emerged in the city of Wuhan in the Hubei province of China.

The Chinese government took certain emergency measures to combat the spread of the virus, including extension of the Lunar New Year holiday, implementation of travel bans and closure of factories and businesses.

The majority of our materials and products are sourced from suppliers located in China.

In 2020, the Novel Coronavirus was declared a global pandemic by the World Health Organization and has been spreading throughout the world, including the United States, resulting in emergency measures, including travel bans, closure of retail stores, and restrictions on gatherings of more than a maximum number of people.

To the extent that these outbreaks are disruptive to local economies and commercial activity, that development creates downward pressure on our ability to make our product line available to consumers or for consumers to purchase our products, even if our products are available.

At this time, we cannot quantify the extent of the impact this disease has had or will have on our sales, net income and cash flows, but it could be significant.

In the first quarter of 2022, Russia and Ukraine were engaged in an armed conflict.

The immediate and lingering impact of the 2019 COVID-19 pandemic added additional risk and complexity to the Company’s operations.

In addition, the history of smaller scale epidemics in Hong Kong/China (e.g., “bird flu”) highlights an additional risk given that substantially all of our product is sourced from China and our Hong Kong operation is foundational to our business model.

We cannot quantify the extent that any new outbreak might have on our sales, net income and cash flows, but it could be significant.

In the first quarter of 2022, Russia and Ukraine engaged in an armed conflict that continues.

We cannot predict at this time the length of this conflict and if it will spread to other countries.

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As of December 31, 2023, we had working capital of $106.1 million compared to $101.9 million as of December 31, 2022.

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

The increase in cash flows provided by operating activities, year-over-year, was primarily due to a higher net income and lower working capital usage, partially offset by lower non-cash charges related to valuation adjustments for our convertible senior notes and preferred stock derivative liability, and an increase in deferred income tax assets due to the release of the valuation allowance, offset by other deferred tax activities.

Operating activities provided net cash of $66.4 million in 2023 and $86.1 million in 2022.

The decrease in cash flows provided by operating activities, year-over-year, was primarily due to a lower net income and higher working capital usage, partially offset by higher non-cash charges related to valuation adjustments for our preferred stock derivative liability and an increase in deferred income tax assets due to inventory cost and other expense capitalization matters, offset by income tax activities payable.

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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Financing activities used net cash of $72.3 million in 2023 and $31.0 million in 2022.

The cash used in 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 $3.1 million.

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

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

The following is a summary of our significant contractual cash obligations for the periods indicated that existed as of December 31, 2023 and is based upon information appearing in the notes to the consolidated financial statements (in thousands):

Short-term debt

Long-term debt

Interest on debt

Operating leases

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Such amounts and periods of payment cannot be reliably estimated (see Item 8 “Consolidated Financial Statements and Supplementary Data Note 12 - Income Taxes” for further explanation of our uncertain tax positions).

As of December 31, 2022, we have $68.9 million of outstanding indebtedness under our first-lien secured term loan (the “2021 BSP Term Loan Agreement”) and we have no outstanding indebtedness under our senior secured revolving credit facility (the “JPMorgan ABL Facility”), aside from utilizing $17.2 million in letters of credit.

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

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

As of December 31, 2023, we had no outstanding indebtedness under our senior secured revolving credit facility (the “JPMorgan ABL Facility”), aside from utilizing $9.4 million in letters of credit.

In June 2023 we had fully paid off our first-lien secured term loan (the “2021 BSP Term Loan Agreement”).

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

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

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

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

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

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

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

On January 3, 2023, as permitted by the terms within the 2021 BSP Term Loan Agreement, we 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 Excess Cash Flow (“ECF”) Sweep provision, we made a mandatory $23.1 million payment towards the outstanding principal amount of the 2021 BSP Term Loan.

On June 5, 2023, we paid in full the 2021 BSP Term Loan and terminated the 2021 BSP Term Loan Agreement by making a $30.2 million prepayment towards the outstanding principal amount.

Additionally, we made a $0.4 million payment towards the outstanding accrued interest, and a $0.3 million payment for the prepayment penalty and other related fees.

In connection with this transaction, we recognized a loss on debt extinguishment of $1.0 million on our consolidated statements of operations.

The JPMorgan ABL 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 each Agreement.

If an event of default occurs under the Agreement, the maturity of the amounts owed under the JPMorgan ABL Agreement may be accelerated.

We were in compliance with the financial covenants under the JPMorgan ABL Agreement as of December 31, 2023.

(See Item 8 “Consolidated Financial Statements and Supplementary Data, Note 9 – Debt and Note 10 – Credit Facilities” for additional information pertaining to our Debt and Credit Facilities.)

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

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

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

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

As of March 15, 2024, we have not sold any shares of common stock under the ATM Agreement.

We have on file with the SEC an effective registration statement pursuant to which we may issue, from time to time, up to $150 million of securities (which will be reduced by any amount of securities sold pursuant to the ATM Agreement) consisting of, or any combination of, common stock, preferred stock, debt securities, warrants, rights and/or units, in one or more offerings in amounts, prices and at terms that we will determine at the time of the offering.

As of March 15, 2024, we have not sold any securities pursuant to our shelf registration statement.

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

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or Hong Kong dollars.

Local sales (other than in Hong Kong) and operating expenses of our operations in Hong Kong, the United Kingdom, Germany, the Netherlands, France, Canada, Mexico and China are denominated in local currency, thereby creating exposure to changes in exchange rates.

Local sales (other than in Hong Kong) and operating expenses of our operations in Hong Kong, the United Kingdom, Germany, the Netherlands, France, Italy, Canada, Mexico and China are denominated in local currency, thereby creating exposure to changes in exchange rates.

Changes in the various exchange rates against the U.S.

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dollar has been linked to the U.S.

dollar by the Hong Kong Monetary Authority at HK$7.75 - HK$7.85 to US$1.00 since 2005 and, accordingly, has not represented a currency exchange risk to the U.S.

dollar by the Hong Kong Monetary Authority at HK$7.75 - HK$7.85 to US$1.00 since 2005 and, accordingly, has not represented a meaningful currency exchange risk to the U.S.

We cannot assure you that the exchange rate between the United States and Hong Kong currencies will continue to be fixed or that exchange rate fluctuations between the United States and Hong Kong, or all other currencies will not have a material adverse effect on our business, financial condition or results of operations.

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

What changed 10-K

Item 5. Market for Registrant’s Common Equity