What changed in this filing

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Item 1. Financial Statements

2024-05-08 compared with 2023-11-14 · 232 added, 357 removed, 440 unchanged (57% 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 $ 3,712 and $ 2,865 at September 30, 2023 and December 31, 2022, respectively

Accounts receivable, net of allowance for credit losses of $ 4,880 and $ 3,743 at March 31, 2024 and December 31, 2023, respectively

Prepaid expenses and other assets

17 unchanged sentences

Short-term operating lease liabilities

Short term debt, net

Total current liabilities

1 unchanged sentence

Accrued expenses – long term

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

Preferred stock derivative liability

3 unchanged sentences

5,000,000 shares authorized;

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

nil and 200,000 shares issued and outstanding at March 31, 2024 and December 31, 2023, respectively

Stockholders' Equity

1 unchanged sentence

100,000,000 shares authorized;

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

10,800,892 and 10,096,197 shares issued and outstanding at March 31, 2024 and December 31, 2023, respectively

Additional paid-in capital

11 unchanged sentences

(In thousands, except per share data)

Ended September 30,

Three Months Ended March 31,

Cost of sales:

7 unchanged sentences

Selling, general and administrative expenses

Intangibles impairment

Income from operations

Loss from joint ventures

Loss from operations

Other income (expense), net

Change in fair value of preferred stock derivative liability

Loss on debt extinguishment

Interest income

Interest expense

Income before provision for income taxes

Provision for income taxes

Net loss attributable to non-controlling interests

Net income attributable to Jakks Pacific, Inc.

Net income attributable to common stockholders

Earnings per share - basic

Shares used in earnings per share - basic

Earnings per share - diluted

Shares used in earnings per share - diluted

Comprehensive income

Comprehensive income attributable to JAKKS Pacific, Inc.

Loss before benefit from income taxes

Benefit from income taxes

Net income (loss) 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

Comprehensive loss

Comprehensive loss attributable to JAKKS Pacific, Inc.

See accompanying notes to condensed consolidated financial statements.

3 unchanged sentences

(In thousands)

Three and Nine Months Ended September 30, 2023

Three Months Ended March 31, 2024

Pacific, Inc.

Comprehensive

Stockholders'

Comprehensive

Stockholders'

Balance, December 31, 2023

Share-based compensation expense

Repurchase of common stock for employee tax withholding

Preferred stock accrued dividends

Foreign currency translation adjustment

Balance, March 31, 2023

Share-based compensation expense

Preferred stock accrued dividends

Net income (loss)

Foreign currency translation adjustment

Balance, June 30, 2023

New stock issuance

Share-based compensation expense

Non-controlling interests – capital reduction

Repurchase of common stock for employee tax withholding

Preferred stock accrued dividends

Preferred stock redemption

Net income (loss)

Foreign currency translation adjustment

Balance, September 30, 2023

Three and Nine Months Ended September 30, 2022

Balance, March 31, 2024

Three Months Ended March 31, 2023

Pacific, Inc.

Comprehensive

Stockholders'

Comprehensive

Stockholders'

5 unchanged sentences

Balance, March 31, 2023

Share-based compensation expense

Preferred stock accrued dividends

Net income (loss)

Foreign currency translation adjustment

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)

Nine Months Ended September 30,

Three Months Ended March 31,

Cash flows from operating activities

Adjustments to reconcile net income to net cash provided by operating activities:

Adjustments to reconcile net loss to net cash used in operating activities:

Provision for credit losses

3 unchanged sentences

Share-based compensation expense

(Gain) loss on disposal of property and equipment

Loss on debt extinguishment

Intangibles impairment

Gain on disposal of property and equipment

Deferred income taxes

10 unchanged sentences

Total adjustments

Net cash provided by operating activities

Net cash used in operating activities

Cash flows from investing activities

Purchases of property and equipment

Investments in employee deferred compensation trusts

Proceeds from sale of property and equipment

2 unchanged sentences

Repurchase of common stock for employee tax withholding

Repayment of credit facility borrowings

Proceeds from credit facility borrowings

Redemption of preferred stock

Repayment of 2021 BSP Term Loan

Net cash used in financing activities

Net increase in cash, cash equivalents and restricted cash

Net decrease in cash, cash equivalents and restricted cash

Effect of foreign currency translation

1 unchanged sentence

Cash, cash equivalents and restricted cash, end of period

Supplemental disclosures of non-cash activities:

Right-of-use assets exchanged for lease liabilities

Supplemental disclosures of cash flow information:

1 unchanged sentence

Cash paid for interest

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.

As of March 31, 2024 and 2023, there was $ 3.1 million and $ 2.6 million, respectively, of property and equipment purchases included in accounts payable.

As of March 31, 2024 and 2023, the Company had accrued $ 5.1 million and nil , respectively, for repurchases of common stock for employee tax withholding.

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

September 30, 2023

March 31, 2024

Note 1 — Basis of Presentation

8 unchanged sentences

The condensed consolidated financial statements also include the accounts of JAKKS Pacific Trading Limited, a joint venture with Meisheng Cultural & Creative Corp., Ltd., and JAKKS Meisheng Animation (HK) Limited, a joint venture with Hong Kong Meisheng Cultural Company Limited.

In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments - Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments,” which require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected.

The new standard was initially effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.

In November 2019, the FASB issued ASU 2019-10 which deferred the effective date of ASU 2016-13 by three years for Smaller Reporting Companies.

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 adopted ASU 2016-13 and its related amendments on January 1, 2023.

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

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848):

12 unchanged sentences

The new standard is effective for the Company for fiscal years beginning after December 15, 2023, 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 adopted ASU 2020-06 on January 1, 2024.

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

In November 2023, the FASB issued ASU 2023-07, “Segment Reporting (Topic 280):

Improvements to Reportable Segment Disclosures.” The amendments in this Update improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses.

The new standard is effective for the Company for fiscal years beginning after December 15, 2023, and interim periods beginning after December 15, 2024.

The Company will adopt ASU 2023-07 in its fourth quarter of 2024.

The Company is currently evaluating the impact that the updated disclosure will have on its condensed consolidated financial statements.

JAKKS PACIFIC, INC.

1 unchanged sentence

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

March 31, 2024

In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740):

Improvements to Income Tax Disclosures.” This ASU provides standardization of tax disclosures, primarily related to the rate reconciliation and income taxes paid information.

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

The Company is currently evaluating the impact that the updated disclosure will have on its condensed consolidated financial statements.

No new additional accounting pronouncements were issued or adopted for the three months ended March 31, 2024 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 nine months ended September 30, 2023 and 2022 and as of September 30, 2023 and December 31, 2022 are as follows (in thousands):

Information by segment and a reconciliation to reported amounts for the three months ended March 31, 2024 and 2023 and as of March 31, 2024 and December 31, 2023 are as follows (in thousands):

Three Months Ended

Nine Months Ended

September 30,

Toys/Consumer Products

Three Months Ended

Nine Months Ended

September 30,

Income from Operations

Loss from Operations

Toys/Consumer Products

Three 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

September 30, 2023

March 31, 2024

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 September 30, 2023 and December 31, 2022 and for the three and nine months ended September 30, 2023 and 2022 (in thousands):

September 30,

The following tables present information about the Company by geographic area as of March 31, 2024 and December 31, 2023 and for the three months ended March 31, 2024 and 2023 (in thousands):

Long-lived Assets

2 unchanged sentences

Three 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 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,

Net sales to major customers for the three months ended March 31, 2024 and 2023 were as follows (in thousands, except for percentages):

Three Months Ended March 31,

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

4 unchanged sentences

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

March 31, 2024

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

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

The inventory obsolescence reserve was $ 10.1 million and $ 7.7 million as of March 31, 2024 and December 31, 2023, respectively.

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.

For the three months ended March 31, 2024 and 2023, sales commissions were $ 0.3 million and $ 0.6 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 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.

For the three months ended March 31, 2024 and 2023, shipping and handling costs were $ 1.6 million and $ 1.9 million, respectively.

The Company’s reserve for sales returns and allowances amounted to $ 27.9 million as of March 31, 2024, compared to $ 38.5 million as of December 31, 2023.

The Company’s net accounts receivable as of March 31, 2024, December 31, 2023 and December 31, 2022 were $ 79.9 million, $ 123.8 million and $ 102.8 million, respectively.

JAKKS PACIFIC, INC.

1 unchanged sentence

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

March 31, 2024

Note 5 — Debt

Term loan consists of the following (in thousands):

September 30, 2023

December 31, 2022

2021 BSP Term Loan

* The term loan was valued using the discounted cash flow method to determine the implied debt discount.

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

On June 2, 2021, the Company and certain of its subsidiaries, as borrowers, entered into 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”).

The Company and certain of its subsidiaries, as borrowers, had entered into a First Lien Term Loan Facility Credit Agreement on June 2, 2021, (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.

3 unchanged sentences

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.

On June 5, 2023, the Company 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, the Company 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, the Company recognized a loss on debt extinguishment of $ 1.0 million on its condensed consolidated statements of operations.

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

Amounts outstanding under the 2021 BSP Term Loan bore 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 was termed to mature in June 2027.

In January 2023, the Company entered into a second amendment for its 2021 BSP Term Loan Agreement, which transitioned the interest reference rate on its 2021 BSP Term Loan from LIBOR to the Secured Overnight Financing Rate (“SOFR”).

The new interest reference rate for the 2021 BSP Term Loan will be effective on April 1, 2023.

In addition to the transition to SOFR, the amendment also includes a constant 0.10 % spread adjustment until the maturity of the 2021 BSP Term Loan.

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.

The new interest reference rate for the 2021 BSP Term Loan was effective on April 1, 2023.

In addition to the transition to SOFR, the amendment also included a constant 0.10 % spread adjustment until the maturity of the 2021 BSP Term Loan.

The 2021 BSP Term Loan Agreement contained negative covenants that, subject to certain exceptions, limited 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 was 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 was required to maintain a Net Leverage Ratio of 3:00x.

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

2 unchanged sentences

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.

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

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 (see Note 6 – Credit Facility).

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 (see Note 16 – Related Party Transactions).

The fair value of the Company’s 2021 BSP Term Loan is considered Level 3 fair value (see Note 15 – 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 2021 BSP Term Loan was $ 69.3 million as of December 31, 2022 compared to a carrying value of $ 68.9 million as of December 31, 2022.

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.

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 Excess Cash Flow (“ECF”) Sweep provision, the Company made a mandatory $ 23.1 million payment towards the outstanding principal amount of the 2021 BSP Term Loan.

On June 5, 2023, the Company 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, the Company made a $ 0.4 million payment towards the outstanding accrued interest, and a $ 0.2 million payment for the prepayment penalty and other related fees.

In connection with this transaction, the Company recognized a loss on debt extinguishment of $ 1.0 million on its condensed consolidated statements of operations.

Notwithstanding the foregoing, the Applicable Minimum Cash Amount was to 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 was in no event to be reduced below $15.0 million.

JAKKS PACIFIC, INC.

1 unchanged sentence

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

March 31, 2024

The 2021 BSP Term Loan Agreement contained 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 occurred, the maturity of the amounts owed under the 2021 BSP Term Loan Agreement might have been accelerated.

The obligations under the 2021 BSP Term Loan Agreement were guaranteed by the Company, the subsidiary borrowers thereunder and certain of the other existing and future direct and indirect subsidiaries of the Company and were 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 (see Note 10 – Credit Facility).

The agent and Sole Lead Arranger under the 2021 BSP Term Loan were 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 (see Note 16 – Related Party Transactions).

The fair value of the Company’s 2021 BSP Term Loan was considered Level 3 fair value (see Note 15 – Fair Value Measurements for further discussion of the fair value hierarchy) and was measured using the discounted future cash flow method.

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

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

The Company believed that this was the best information available for use in the fair value measurement.

Note 6 — Credit Facilities

3 unchanged sentences

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) LIBOR 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).

Any amounts borrowed under the JPMorgan ABL Facility bore interest at either (i) LIBOR 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.

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

of March 31, 2024 the weighted average interest rate on the credit facility with JPMorgan Chase Bank was nil .

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”).

3 unchanged sentences

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.

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

September 30, 2023

March 31, 2024

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.

As of March 31, 2024, the amount of outstanding borrowings was nil and the total excess borrowing availability was $ 57.8 million.

As of March 31, 2024, off-balance sheet arrangements include letters of credit issued by JPMorgan of $ 9.4 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 for the three months ended March 31, 2024 and March 31, 2023.

As of March 31, 2024, the Company was in compliance with the financial covenants under the JPMorgan ABL Credit Agreement.

Note 7 — Income Taxes

The Company’s income tax expense of $ 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

The following table is a reconciliation of the weighted average shares used in the computation of earnings per share for the periods presented (in thousands, except per share data):

The Company’s income tax benefit of $ 6.7 million for the three months ended March 31, 2024, reflects an effective tax (benefit) rate of 32.1 %.

The Company’s income tax benefit of $ 1.4 million for the three months ended March 31, 2023, reflects an effective tax (benefit) rate of 20.6 %.

The tax benefit for the three months ended March 31, 2024 and 2023 primarily relates to discrete items and the tax benefit related to the overall worldwide loss (i.e.

federal, state, and foreign).

Note 8 — Loss Per Share

The following table is a reconciliation of the weighted average shares used in the computation of loss per share for the periods presented (in thousands, except per share data):

Three Months Ended

September 30,

Nine Months Ended

September 30,

Earnings per share - basic and diluted

Net loss attributable to non-controlling interests

Net income attributable to JAKKS Pacific, Inc.

Loss per share - basic and diluted

Net income (loss) attributable to non-controlling interests

Net loss attributable to JAKKS Pacific, Inc.

Preferred stock dividend *

Net income attributable to common stockholders **

Weighed average common shares outstanding - basic

Earnings per share available to common stockholder - basic

Weighed average common shares outstanding - diluted

Earnings per share available to common stockholder - diluted

* 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 $ 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 nine months ended September 30, 2023 and 2022.

Note 9 — Common Stock and Preferred Stock

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

Redemption of preferred stock

Net loss attributable to common stockholders **

Weighted average common shares outstanding - basic and diluted

Loss per share available to common stockholder - basic and diluted

* The 200,000 shares issued and outstanding as of March 31, 2023 are non-participating.

A preferred dividend of $ 0.4 m was accrued for Q1 2024 and included in the preferred stock redemption.

** Net loss attributable to common stockholders was computed by deducting the difference between the fair value of the consideration transferred to the holders of the preferred stock and the carrying amount of the preferred stock and fair value of the related derivative liability of $ 1.3 million for the three months ended March 31, 2024 and the preferred stock dividend of $ 0.4 million for the three months ended March 31, 2023.

JAKKS PACIFIC, INC.

1 unchanged sentence

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

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.

During 2023, certain employees, including two executive officers, surrendered an aggregate of 136,532 shares of restricted stock for $ 2.5 million to cover income taxes due on the vesting of restricted shares.

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 and nine months ended September 30, 2023 and 2022.

March 31, 2024

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

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

Potentially dilutive restricted stock units of 545,145 and 494,106 for the three months ended March 31, 2024 and 2023, respectively, were excluded from the computation of diluted loss per share since they would have been anti-dilutive.

Note 9 — Common Stock and Preferred Stock

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

During 2023, certain employees, including three executive officers, surrendered an aggregate of 157,019 shares of restricted stock units for $ 3.1 million to cover income taxes due for the vesting of restricted shares.

Additionally, an aggregate of 34,588 shares of restricted stock granted in 2021 and 2022 with a value of approximately $ 0.6 million was forfeited during 2023.

During 2024, certain employees, including three executive officers, surrendered an aggregate of 147,612 shares of restricted stock units for $ 5.1 million to cover income taxes due for the vesting of restricted shares.

Additionally, an aggregate of 13,714 shares of restricted stock granted in 2022 and 2023 with a value of approximately $ 0.2 million was forfeited during 2024.

No dividend was declared or paid in 2024 and 2023.

At the Market Offering

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

As of March 31, 2024, 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 $ 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 the Company will determine at the time of the offering.

As of March 31, 2024, 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 September 30, 2023 and December 31, 2022, 200,000 shares of Series A Preferred Stock were outstanding.

On March 11, 2024, the Company redeemed all of the outstanding shares of Series A Senior Preferred Stock for an aggregate price of $ 20.0 million cash and 571,295 of its common shares, representing a value of $ 15.0 million based on a share price of $ 26.26 , settling the preferred stock derivative liability of $ 29.9 million and the preferred stock accrued dividends of $ 6.0 million as of December 31, 2023.

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”).

The Series A Preferred Stock has the right to receive dividends on a quarterly basis equal to 6.0 % per annum, payable in cash or, if not paid in cash, by an automatic accretion of the Series A Preferred Stock.

No cash dividends have been declared or paid.

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.

In addition, upon the occurrence of certain change of control type events, holders of the Series A Preferred Stock are entitled to receive an amount (the “Liquidation Preference”), in preference to holders of Common Stock or other junior stock, equal to (i) 20 % of the Accreted Value in the case of a certain specified transaction, or (ii) otherwise, 150 % of the Accreted value, plus any accrued and unpaid dividends.

JAKKS PACIFIC, INC.

1 unchanged sentence

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

March 31, 2024

No cash dividends had been declared or paid.

Prior to the redemption, for the three months ended March 31, 2024 and 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.

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.

17 unchanged sentences

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 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 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.

JAKKS PACIFIC, INC.

1 unchanged sentence

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

March 31, 2024

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

As of March 31, 2024, the Company had redeemed all of the outstanding shares of the Series A Preferred Stock.

As of December 31, 2023, the Series A Preferred Stock was recorded in temporary equity at the amount of accrued, but unpaid dividends of $ 6.0 million, and the redemption provision, as a bifurcated derivative, was recorded as a long-term liability with an estimated value of $ 29.9 million.

As of December 31, 2023, the Series A Preferred Stock had a carrying value of $ 26.0 million and a liquidation value of $ 39.0 million.

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

Preferred stock redemption

Balance, March 31,

Preferred stock accrued dividends

Balance, June 30,

Preferred stock accrued dividends

Balance, September 30,

$ 5,608 $ 4,128

Note 10 — Joint Ventures

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

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

The non-controlling interest’s share of the loss was $ 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.

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.

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.

On May 10, 2023, the Company dissolved the joint venture with MC&C.

Prior to the dissolution, the Company owned fifty-one percent of the 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 loss from the joint venture for the three months and nine months ended September 30, 2023 and 2022 was nil .

The non-controlling interests incurred a gain of $ 280 ,000 and a loss $ 5 ,000 for the three months ended March 31, 2024 and 2023, respectively.

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 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 nine months ended September 30, 2023 and 2022.

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

Note 12 — Comprehensive Income

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):

For the three months ended March 31, 2024, there were no events or circumstances that indicated that an impairment loss may have been incurred.

Note 12 — Comprehensive Loss

The table below presents the components of the Company’s comprehensive loss for the three months ended March 31, 2024 and 2023 (in thousands):

Three Months Ended

Nine Months Ended

September 30,

Other comprehensive income:

Other comprehensive income (loss):

Foreign currency translation adjustment

Comprehensive income

Comprehensive loss

Comprehensive loss attributable to non-controlling interests

Comprehensive income attributable to JAKKS Pacific, Inc.

Comprehensive loss attributable to JAKKS Pacific, Inc.

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2024

Note 13 — Litigation and Contingencies

10 unchanged sentences

The Company’s 2002 Stock Award and Incentive Plan (the “Plan”), as amended, provides for the awarding of stock options, restricted stock and restricted stock units to certain key employees, executive officers and non-employee directors.

Current awards under the Plan include grants to executive officers and certain key employees of restricted stock units, with vesting contingent upon (a) the completion of specified service periods ranging from one to four years and/or (b) meeting certain financial performance and/or market-based metrics.

Current awards under the Plan include grants to executive officers and certain key employees of restricted stock units, with vesting contingent upon the completion of specified service periods ranging from one to four years and/or (b) meeting certain financial performance and/or market-based metrics.

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 nine months ended September 30, 2023 and 2022 (in thousands)

The following table summarizes the total share-based compensation expense recognized for the three months ended March 31, 2024 and 2023 (in thousands)

Three Months Ended

Nine Months Ended

September 30,

Share-based compensation expense

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

Restricted Stock Units

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 unit activity (including those with performance-based vesting criteria) for the three months ended March 31, 2024 is summarized as follows:

Restricted Stock Units

3 unchanged sentences

Outstanding, December 31, 2023

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.

Outstanding, March 31, 2024

As of March 31, 2024, there was $ 17.1 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 2.2 years.

As of March 31, 2024, the fair market value of non-vested restricted stock units was $ 28.0 million.

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2024

Note 15 — Fair Value Measurements

12 unchanged sentences

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.

JAKKS PACIFIC, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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):

The following tables summarize the Company's financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2024 and December 31, 2023 (in thousands):

Fair Value Measurements

as of September 30, 2023

Carrying Amount as of

September 30, 2023

As of December 31, 2023

March 31, 2024

Money market funds

Preferred stock derivative liability

Investments in employee deferred compensation trusts

Fair Value Measurements

as of December 31, 2022

Carrying Amount as of

As of December 31, 2023

December 31, 2023

Money market funds

Investments in employee deferred compensation trusts

Preferred stock derivative liability

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):

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):

Preferred stock derivative liability

1 unchanged sentence

Change in fair value

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.

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.

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.

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

Extinguishment through redemption of preferred stock

Balance, March 31,

JAKKS PACIFIC, INC.

1 unchanged sentence

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

March 31, 2024

The Company’s Series A Preferred derivative liability was 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.

In subsequent periods, the derivative liability was accounted for at fair value, with changes in fair value recognized as other income (expense) on the Company's condensed 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 September 30, 2023

(Weighted Average)

(In thousands)

Preferred Stock Derivative Liability

Discounted Cash Flow

Change-in-control probability assumptions

Timing of change-in-control assumptions

1 to 10 years

Discount Rate

Market yield*

The preferred stock derivative liability was extinguished on March 11, 2024.

As of December 31, 2023

7 unchanged sentences

Discount Rate

Implied yield**

Market yield*

* Represents the hypothetical market 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.

2 unchanged sentences

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 10 – 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 10 – Joint Ventures).

On December 1, 2023, the Company dissolved the joint venture with Meisheng.

Prior to the dissolution, JAKKS and Meisheng each owned fifty percent of the joint venture.

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.

Xiaoqiang Zhao) for election to the Company’s board of directors.

Meisheng also serves as a significant manufacturer of the Company.

For the three months ended March 31, 2024 and 2023, the Company made inventory-related payments to Meisheng of approximately $ 14.9 million and $ 9.3 million, respectively.

As of March 31, 2024 and December 31, 2023, amounts due to Meisheng for inventory received by the Company, but not paid totaled $ 8.7 million and $ 12.3 million, respectively.

JAKKS PACIFIC, INC.

1 unchanged sentence

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

Meisheng also serves as a significant manufacturer of the Company.

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).

March 31, 2024

Note 17 — Prepaid Expenses and Other Assets

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

Prepaid expenses and other assets as of March 31 ,2024 and December 31, 2023 consist of the following (in thousands):

Royalty advances

Income tax receivable

Prepaid expenses

12 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 nine months of 2023.

Our critical accounting policies and estimates are included in the 2023 Annual Report on Form 10-K and did not materially change during the first three months of 2024.

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 September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

Cost of sales:

7 unchanged sentences

Selling, general and administrative expenses

Intangibles impairment

Income from operations

Loss from joint ventures

Loss from operations

Other income (expense), net

Change in fair value of preferred stock derivative liability

Loss on debt extinguishment

Interest income

Interest expense

Income before provision for income taxes

Provision for income taxes

Loss attributable to non-controlling interests

Net income attributable to JAKKS Pacific, Inc.

Loss before benefit from income taxes

Benefit from income taxes

Net income (loss) attributable to non-controlling interests

Net loss attributable to JAKKS Pacific, Inc.

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

Three Months Ended

Nine Months Ended

September 30,

Three Months Ended March 31,

Toys/Consumer Products

2 unchanged sentences

Toys/Consumer Products

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

Toys/Consumer Products.

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 $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 $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 $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 $1.4 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 $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%.

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

Comparison of the Three Months Ended March 31, 2024 and 2023

Toys/Consumer Products.

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.

Net sales of our Toys/Consumer Products segment were $82.9 million for the three months ended March 31, 2024 compared to $97.9 million for the prior year period, representing a decrease of $15.0 million, or 15.3%.

The decrease was primarily driven by lower sales in North America, which was down $9.3 million, or 12.0%.

Our Dolls, Role-Play/Dress-up division products saw a decline of 15.2%, due to lower Disney sales versus a year ago.

Net sales from the Action Play & Collectibles division were down 12.8% due to lower net sales from the Super Mario Movie TM which was released April 2023.

Net sales of our Costumes segment were $7.2 million for the three months ended March 31, 2024 compared to $9.6 million for the prior year period, representing a decrease of $2.4 million, or 25.0%.

The decrease was primarily due to reduced orders from select recurring costumes.

Cost of Sales

Toys/Consumer Products.

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

Cost of sales of our Toys/Consumer Products segment was $65.1 million, or 78.5% of related net sales for the three months ended March 31, 2024 compared to $68.7 million, or 70.1% of related net sales for the prior year period, representing a decrease of $3.6 million, or 5.3%.

The increase as a percentage of net sales was due to a lower mix of high margin movie-related product as well as increased inventory reserves on slower moving movie-related product.

Cost of sales of our Costumes segment was $4.0 million, or 55.6% of related net sales for the three months ended March 31, 2024, compared to $7.4 million, or 77.1% of related net sales for the prior year period, representing a decrease in dollars of $3.4 million, or 45.9%.

The decrease as a percentage of net sales was due to lower inventory reserves as a result of higher sell thru of reserved product.

Selling, General and Administrative Expenses

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.

Selling, general and administrative expenses were $42.4 million for the three months ended March 31, 2024 compared to $35.8 million for the prior year period constituting 47.1% and 33.3% of net sales, respectively.

The increase in selling, general and administrative expenses was primarily due to higher headcount and salaries as we expand our international presence and associated marketing and travel expenses, as well as additional costs related to IT infrastructure, process and internal control enhancements.

Interest Expense

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.

Interest expense was $0.1 million for the three months ended March 31, 2024, as compared to $3.0 million in the prior year period.

During the three months ended March 31, 2024, we incurred interest expense of $0.1 million related to our revolving credit facility.

During the three months ended March 31, 2023, we incurred interest expense of $2.5 million related to our 2021 BSP Term Loan, $0.1 million related to our revolving credit facility and $0.4 million related to other borrowing costs.

Provision For (Benefit From) Income Taxes

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%.

Our income tax benefit, which includes federal, state and foreign income taxes and discrete items, was $6.7 million, or an effective tax (benefit) rate of 32.1%, for the three months ended March 31, 2024.

During the comparable period in 2023, our income tax benefit was $1.4 million, or an effective tax (benefit) rate of 20.6%.

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 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.

As of March 31, 2024, we had working capital (inclusive of cash, cash equivalents and restricted cash) of $67.1 million, compared to $106.1 million as of December 31, 2023, representing a decrease in working capital of $39.0 million during the three-month period ended March 31, 2024.

The decrease in working capital is primarily attributable to the $20.0 million cash payment made to holders for the redemption of our outstanding preferred stock.

The remaining decrease is mainly attributable to cash used in operating activities and higher working capital usage.

Operating activities used net cash of $12.9 million during the three months ended March 31, 2024, as compared to net cash used of $4.1 million in the prior year period.

The increase in net cash used in operating activities year-over-year is primarily due to a higher net loss.

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

As of March 31, 2024, these agreements required future aggregate minimum royalty guarantees of $60.2 million exclusive of $7.0 million in advances already paid.

Of this $60.2 million future minimum royalty guarantee, $37.6 million is due over the next twelve months.

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.

Investing activities used net cash of $3.6 million and $3.5 million for the three months ended March 31, 2024 and 2023, respectively, and consisted primarily of cash paid for the purchase of molds and tooling used in the manufacture of our products and purchases of investments to fund our obligation to our employees stemming from our non-qualified deferred compensation plan.

Financing activities used net cash of $20.0 million and $39.9 million for the three months ended March 31, 2024 and 2023, respectively.

The cash used in financing activities during the three months ended March 31, 2023, consists of $20.0 million used in the redemption of our outstanding preferred stock.

The cash used in financing activities during the three months ended March 31, 2023, primarily consists of the repayment of our 2021 BSP Term Loan of $38.7 million and the repurchase of common stock for employee tax withholding of $1.2 million.

As of March 31, 2024, we have no outstanding indebtedness under our senior secured revolving credit facility (the “JPMorgan ABL Facility”), aside from utilizing $9.4 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 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.

As of March 31, 2024 and December 31, 2023, we held cash and cash equivalents, including restricted cash, of $35.5 million and $72.6 million, respectively.

Cash, and cash equivalents, including restricted cash held outside of the United States in various foreign subsidiaries totaled $26.9 million and $21.5 million as of March 31, 2024 and December 31, 2023, 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 September 30, 2023.

During the first quarter of 2024, the Company declared a one-time dividend from Canada to the U.S in the amount of $5.9 million, in order to fund the preferred stock redemption that occurred during the quarter, resulting in a 5% withholding tax.

This was a significant one-time event as there are no preferred stock outstanding as of March 31, 2024.

Future cash remittances will come from Hong Kong, which does not impose withholding taxes.

As such, foreign withholding taxes on future repatriations are not expected to be significant.

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

As of March 31, 2024 off-balance sheet arrangements include letters of credit issued by JPMorgan of $9.4 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