UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the Fiscal Year Ended December 31, |
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TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ____________ to ____________
Commission File Number 0-28104
JAKKS PACIFIC, INC.
(Exact name of registrant as specified in its charter)
Delaware | 95-4527222 |
(State or other jurisdiction of | (I.R.S. Employer |
incorporation or organization) | Identification No.) |
2951 | |
Santa Monica, California | 90405 |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (424) 268-9444
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class | TradingSymbol(s) | Name of each exchange on which registered |
Common Stock $.001 | JAKK | The NASDAQ Global Select Market |
Securities registered pursuant to Section 12(g) of the Exchange Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
☐Large Accelerated Filer | ☐ Accelerated Filer | ☒ Non-Accelerated Filer | ☒ Smaller Reporting Company | ☐ Emerging |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the voting and non-voting common equity (the only such common equity being Common Stock, $.001 par value per share) held by non-affiliates of the registrant (computed by reference to the closing sale price of the Common Stock on June 30, 20192020 of $0.70)$8.20 is $14,316,560.$25,233,237.
The number of shares outstanding of the registrant’s Common Stock, $.001 par value (being the only class of its common stock), is 35,548,4566,077,548 as of May 12, 2020.March 16, 2021.
Documents Incorporated by Reference
None.
JAKKS PACIFIC, INC.
TABLE OF CONTENTS TO ANNUAL REPORT ON FORM 10-K
For the Fiscal Year ended December 31, 2019
Items in Form 10-K
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Item 1B. | Unresolved Staff Comments | None |
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Item 9. | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure | None |
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Item 9B. | Other Information | None |
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Certifications |
EXPLANATORY NOTE
As of the date of filing of this Annual Report on Form 10-K (this “Report”), there are many uncertainties regarding the current Novel Coronavirus (“COVID-19”) pandemic, including the scope of scientific and health issues, the possibleanticipated duration of the pandemic, and the extent of local and worldwide social, political, and economic disruption it may cause. To date, the COVID-19 pandemic has had far-reaching impacts on many aspects of the operations of JAKKS Pacific, Inc. (the “Company,”“Company”, “we,” “our” or “us”), directly and indirectly, including on consumer behavior, customer store traffic, production capabilities, timing of product availability, our employees’ personal and business lives,people, and the market generally. The scope and nature of these impacts continue to evolve each day. The COVID-19 pandemic has resulted in, and may continue to result in, regional and local quarantines, labor stoppages and shortages, changes in consumer purchasing patterns, mandatory or elective shut-downs of retail locations, disruptions to supply chains, including the inability of our suppliers and service providers to deliver materials and services on a timely basis, or at all, severe market volatility, liquidity disruptions, and overall economic instability, which, in many cases, have had, and we expect will continue to have, adverse impacts on our business, financial condition and results of operations. This situation is changing rapidly, and additional impacts may arise that we are not aware of currently.
In light of the uncertain and rapidly evolving situation relating to the COVID-19 pandemic, we have taken certain precautionary measures intended to help minimize the risk to our Company, employees, and customers, including the following:
● | On March 23, 2020, we encouraged all members of our headquarter’s staff in Santa Monica, CA to begin working from home. We expect that to be our operating model for an undetermined period of time, and |
● | We identified expense reductions that we |
● | Although our distribution center |
● | We have suspended all non-essential travel for our employees; and |
● | We are discouraging employee attendance at industry events and in-person work-related meetings. |
Each of the remedial measures taken by the Company has had, and we expect will continue to have, adverse impacts on our current business, financial condition and results of operations, and may create additional risks for our Company. While we anticipate that the foregoing measures are temporary, we cannot predict the specific duration for which these precautionary measures will stay in effect, and we may elect or need to take additional measures as the information available to us continues to develop, including with respect to our employees, inventory receipts, and relationships with our lenders and licensors. We expect to continue to assess the evolving impact of the COVID-19 pandemic on our customers, consumers, employees, supply chain, and operations, and intend to make adjustments to our responses accordingly. However, the extent to which the COVID-19 pandemic and our precautionary measures in response thereto may impact our business, financial condition, and results of operations will depend on how the COVID-19 pandemic and its impact continuesimpacts to continue to develop, in the United States and elsewhere in the world, which remainsare highly uncertain and cannot be predicted at this time.
In light of these uncertainties, for purposes of this report, except where otherwise indicated, the descriptions of our business, our strategies, our risk factors, and any other forward-looking statements, including regarding us, our business and the market generally, do not reflect the potential impact of the COVID-19 pandemic or our responses thereto. In addition, the disclosures contained in this report are made only as of the date hereof, and we undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law. For further information, see “Disclosure Regarding Forward-Looking Statements”Statements.” and “Risk Factors.”
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Reportreport includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. For example, statements included in this Reportreport regarding our financial position, business strategy and other plans and objectives for future operations, and assumptions and predictions about future product demand, supply, manufacturing, costs, marketing and pricing factors are all forward-looking statements. When we use words like “intend,” “anticipate,” “believe,” “estimate,” “plan” or “expect,” or other words of a similar import, we are making forward-looking statements. We believe that the assumptions and expectations reflected in such forward-looking statements are reasonable, based upon information available to us on the date hereof, (but excluding the impact of COVID-19, as described above in “Explanatory Note”), but we cannot assure you that these assumptions and expectations will prove to have been correct or that we will take any action that we may presently be planning. We have disclosed certain important factors (e.g., see “Explanatory Note” and “Risk Factors”) that could cause our actual results to differ materially from our current expectations elsewhere in this Report.report. You should understand that forward-looking statements made in this Reportreport are necessarily qualified by these factors. We are not undertaking to publicly update or revise any forward-looking statement if we obtain new information or upon the occurrence of future events or otherwise.
PART I
Item 1.
BusinessIn this report, “JAKKS,” the “Company,” “we,” “us” and “our” refer to JAKKS Pacific, Inc., its subsidiaries and our majority ownedmajority-owned joint venture.
Company Overview
We are a leading multi-line, multi-brand toy company that designs, produces, markets and distributes toys and related products, consumables and related products, electronics and related products, kids indoor and outdoor furniture, and other consumer products. We focus our business on acquiring or licensing well-recognized intellectual property (“IP”), trademarks andand/or brand names, most with long product histories (“evergreen brands”). We seek to acquire these evergreen brands because we believe they are less subject to market fads or trends. We also develop proprietary products marketed under our own trademarks and brand names, and have historically acquired complementary businesses to further grow our portfolio. For accounting purposes, our products have been divided into threetwo segments: (i) U.S.Toys/Consumer Products and Canada, (ii) International and (iii) Halloween. Segment information with respect to revenues, assets and profits or losses attributable to each segment is contained in Note 3 to the audited consolidated financial statements contained below in Item 8. Our products include:
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● | Action figures and accessories, including licensed characters based on the | |
● | Toy vehicles, including | |
● | Dolls and accessories, including small dolls, large dolls, fashion dolls and baby dolls based on licenses, including Disney Frozen | |
● | Private label products | |
● | Foot-to-floor ride-on products, including those based on Fisher-Price®, | |
● | Role play, dress-up, pretend play and novelty products for boys and girls based on well-known brands and entertainment properties such as Disney Frozen, Black & Decker®, Disney Princess, and | |
● | Indoor and outdoor kids’ furniture, activity trays and tables and room décor; kiddie pools, seasonal and outdoor products, including those based onDisney characters, Nickelodeon, and Hasbro/Entertainment One licenses; | |
● | Halloween and everyday costumes for all ages based on licensed and proprietary non-licensed brands, including Super Mario Bros.®, Microsoft’s | |
● | Outdoor activity toys including |
We continually review the marketplace to identify and evaluate popular and evergreen brands and product categories that we believe have the potential for growth. We endeavor to generate growth within these lines by:
● | creating innovative products under our established licenses and brand names; |
● | adding new items to the branded product lines that we expect will enjoy greater popularity; |
● | infusing innovation and technology when appropriate to make products more appealing to today’s kids; and |
● | expanding our international product offering either sold directly to retailers or via third party distributors. |
Our Business Strategy
In addition to developing our own proprietary brands, properties and marks, licensing popular trademarksIP enables us to use these high-profile marks at a lower cost than we would incur if we purchased these marks or developedfunded the development of comparable marks on our own. Beyond the investment profile, we have an appreciation of the challenges and expertise required to break through the noise in a world filled with high-budget, content-centric consumer choices either based on well-known pre-existing IP or the even higher hurdle to launch new IP in the aforementioned marketplace. By licensing IP and trademarks from world-class brand owners and content creators, we have access to a far greater range of marks than would be available for purchase. It also helps to credibly assure licensors that we will prioritize their brands, properties and IP rather than explicitly competing with them with a broad-range of self-developed content-led offerings. We also license technology developed by unaffiliated inventors and product developers to enhance the design, innovation and functionality of our products.
We sell our products through our in-house sales staff and independent sales representatives to toy and mass-market retail chain stores, department stores, office supply stores, drug and grocery store chains, club stores, value-oriented dollar stores, toy specialty stores and wholesalers. Our two largest customers are Wal-MartWal-Mart® and Target,Target®, which accounted for 29.6%29.1% and 20.8%25.7%, respectively, of our net sales in 2019.2020. No other customer accounted for more than 10% of our net sales in 2019.2020.
Our Growth Strategy
Key elements of our growth strategy include:
●
Expand Core●
Enter New Product Categories. We use our extensive experience in the toy and other consumer product industries to evaluate products and licenses in new product categories and to develop additional product lines. We began marketing licensed classic video games for simple plug-in use with television sets and expanded into several related categories by infusing additional technologies such as motion gaming and through the licensing of this category from our current licensors, such as Disney. We recently entered the skateboard space at a retailer’s request and are now expanding into related protective gear and accessories.●
Pursue Strategic Acquisitions. We supplement our internal growth with selected strategic acquisitions. In October 2016, we acquired the operating assets of the●
Acquire Additional Character and Product Licenses. We have acquired the rights to use many familiar brand and character names and logos from third parties that we use with our primary trademarks and brands. Currently, among others, we have license agreements with●Expand International Sales. We believe that foreign markets, especiallynon-US markets: Europe, Australia, Canada, Latin America and Asia, offer us significant growth opportunities. In 2019,2020, our sales generated outside the United States were approximately $117.3$94.7 million, or 19.6%18.4% of total net sales. We intendIn 2020, we migrated from a distributor model to selling direct in Spain, Italy, France and Mexico. Third-party distributors remain a core component of our international business, and we are constantly assessing how to expand our international sales and further expand distribution agreements in Europe to capitalizemutual businesses. Although the COVID-19 pandemic had a significantly negative impact on our experience and our relationships with foreign distributors and retailers. We expect these initiatives to contribute to our international growth in 2020.business, we remain focused on international being a source of revenue growth.
●
Capitalize On Our Operating Efficiencies. We believe that our current infrastructure and operating model can accommodate growth without a proportionate increase in our operating and administrative expenses, thereby increasing our operating margins.The execution of our growth strategy, however, is subject to several risks and uncertainties and we cannot assure you that we will continue to experience growth in, or maintain our present level of net sales (see “Risk Factors,” in Item 1A). For example, our growth strategy will place additional demands upon our management, operational capacity and financial resources and systems. The increased demand upon management may necessitate our recruitment and retention of additional qualified management personnel. We cannot assure you that we will be able to recruit and retain qualified personnel or expand and manage our operations effectively and profitably. To effectively manage future growth, we must continue to expand our operational, financial and management information systems and to train, motivate and manage our work force. While we believe that our operational, financial and management information systems will be adequate to support our future growth, no assurance can be given they will be adequate without significant investment in our infrastructure. Failure to expand our operational, financial and management information systems or to train, motivate or manage employees could have a material adverse effect on our business, financial condition and results of operations.
Moreover, implementation of our growth strategy is subject to risks beyond our control, including competition,including: competition; market acceptance of new products,products; changes in economic conditions,conditions; changes in the media & entertainment landscape disrupting the traditional model of capturing consumer attention for new entertainment-led offerings; our ability to obtain or renew licenses on commercially reasonable termsterms; and, our ability to finance increased levels of accounts receivable and inventory necessary to support our sales growth, if any.
Furthermore, we cannot assure you that we can identify attractive acquisition candidates or negotiate acceptable acquisition terms, and our failure to do so may adversely affect our results of operations and our ability to sustain growth.
Finally, our acquisition strategy involves a number of risks, each of which could adversely affect our operating results, including difficulties in integrating acquired businesses or product lines, assimilating new facilities and personnel and harmonizing diverse business strategies and methods of operation; diversion of management attention from operation of our existing business; loss of key personnel from acquired companies; and failure of an acquired business to achieve targeted financial results.
Industry Overview
According to Toy Association, Inc., the leading toy industry trade group, the United States is the world’s largest toy market, followed by China, Japan and Western Europe. Total retail sales of toys, excluding video games, in the United States, were approximately $20.9$25.1 billion in 2019.2020. We believe the two largest United States toy companies, MattelHasbro and Hasbro,Mattel, collectively hold a dominant share of the domesticU.S. toy market. In addition, hundreds of smaller companies compete in the design and development of new toys, the procurement of character and product licenses, and the improvement, expansion and expansionre-introduction of previously introducedestablished products and product lines.
Over the past several years, the toy industry has experienced substantial consolidation among both toy companies and toy retailers. We believe that the ongoing consolidation of toy companies provides us with increased growth opportunities due to retailers’ desire to not be entirely dependent upon a few dominant toy companies. Retailer concentration also enables us to ship products, manage account relationships and track point of sale information more effectively and efficiently.
Products
We focus our business on acquiring or licensing well-recognized properties, trademarks and/or brand names, and we seek to acquire evergreen brands which are less subject to market fads or trends. Generally, our license agreements for products and concepts call for royalties ranging from 1% to 23%25% of net sales, and some may require minimum royalty guarantees and advances.up-front or advance royalty payments. Our principal products include:
Sales, Marketing and Distribution
We sell all of our products through our own in-house sales staff and independent sales representatives to toy and mass-market retail chain stores, department stores, office supply stores, drug and grocery store chains, club stores, dollar stores, toy specialty stores and wholesalers. In 2018, our two largest customers, Wal-Mart and Target, accounted for 25.3% and 21.5%, respectively, of our net sales. In 2019, our two largest customers, Wal-Mart and Target, accounted for 29.6% and 20.8%, respectively, of our net sales. In 2020, our two largest customers, Wal-Mart and Target, accounted for 29.1% and 25.7%, respectively, of our net sales. No other customer accounted for more than 10% of our net sales in 2019.2020. We generally sell products to our customers on open account with payment terms typically varying from 30 to 90 days or, in some cases, pursuant to letters of credit. For sales outside of the United States, we may also purchase credit insurance to mitigate the risk, if any, of nonpayment.non-payment. From time to time, we allow our customers credits against future purchases from us in order to facilitate their retail markdown and sales of slow-moving inventory. We also sell our products through e-commerce sites, including Walmart.com, Target.com and Amazon.com®.
We contract the manufacture of most of our products to unaffiliated manufacturers located in The People’s Republic of China (“China”). We sell the finished products to our customers, many of whom take title to the goods in Hong Kong or China. These methods allow us to reduce certain operating costs and working capital requirements. We also contract the manufacture of certain products from Hong Kong Meisheng Cultural Company Limited (“Meisheng”), which involved payment to Meisheng of approximately $36.2$64.8 million and $94.3 million for the yearsyear ended December 31, 20182020 and December 31, 2019, respectively. As of December 31, 2020, Meisheng owns 14.7%9.2% of our outstanding common stock, and Zhao Xiaoqiang, one of our directors, is executive director of Meisheng. A portion of our sales originate in the United States, so we hold certain inventory in our warehouses and fulfillment facilities. To date, a majority of all of our sales has been to customers based in the United States. We intend to continue expanding distribution of our products into foreign territories and, accordingly, we have:
● | entered into a joint venture in China; |
● | engaged representatives to oversee sales in certain foreign territories; |
● | engaged distributors in certain foreign territories; |
● | established direct relationships with retailers in certain foreign territories; |
● | opened sales offices in Canada, Europe and Mexico; and |
● | opened distribution centers in the UK and Europe. |
Outside of the United States, we currently sell our products primarily in Europe, Australia, Canada, Latin America and Asia. Sales of our products abroad accounted for approximately $94.7 million, or 18.4% of our net sales in 2020 and approximately $117.3 million, or 19.6% of our net sales in 2019 and approximately $127.8 million, or 22.5% of our net sales in 2018.2019. We believe that foreign markets present an attractive opportunity, and we plan to intensify our marketing efforts and further expand our distribution channels abroad.
We establish reserves for allowances provided to our customers, including discounts, pricing concessions, promotional allowances and allowances for anticipated breakage or defective product, at the time of shipment. The reserves are determined as a percentage of sales based upon either historical experience or upon estimates or programs agreed upon with our customers.
We obtain, directly, or through our sales representatives, orders for our products from our customers and arrange for the manufacture of these products as discussed below. Cancellations generally are made in writing, and we take appropriate steps to notify our manufacturers of these cancellations. We may incur costs or other losses as a result of cancellations.
We maintain a full-time sales and marketing staff, many of whom make on-site visits to customers for the purpose of showing productproducts and soliciting orders for products. We also retain a number of independent sales representatives to sell and promote our products, both domestically and internationally. Together with retailers, we occasionally test the consumer acceptance of new products in selected markets before committing resources to large-scale production.
We publicize and advertise our products online, in trade and consumer magazines and other publications, market our products at international, national and regional toy and other specialty trade shows, conventions and exhibitions and carry on cooperative advertising programs with toy and mass market retailers and other customers which include the use of print, online and television ads and via in-store displays. We also produce and broadcast television commercials for several of our product lines, if we expect that the resulting increase in our net sales will justify the relatively high cost of television advertising.
Product Development
Each of our product lines has an in-house manager responsible for product development. The in-house manager identifies and evaluates inventor products and concepts and other opportunities to enhance or expand existing product lines or to enter new product categories. In addition, we create proprietary products to fully exploit our concept and character licenses. Although we have the capability to create and develop products from inception to production, we also use third-parties to provide a portion of the sculpting, sample making, illustration and package design required for our products in order to accommodate our increasing product innovations and introductions.introductions as well as accelerate our speed-to-market. Typically, the development process takes from threenine to nineeighteen months from concept to production and shipment to our customers.customers, but given our Company’s size and structure, we have demonstrated the ability to shrink that down to three to nine months successfully when the opportunity requires.
We employ a staff of designers for all of our product lines. We occasionally acquire other product concepts from unaffiliated third-parties.third parties. If we accept and develop a third-party’s concept for new toys, we generally pay a royalty on the sale of the toys developed from this concept, and may, on an individual basis, guarantee a minimum royalty. Royalties payable to inventors and developers generally range from 1% to 5%4% of the wholesale sales price for each unit of a product sold by us. We believe that utilizing experienced third-party inventors gives us access to a wide range of development talent. We currently work with numerous toy inventors and designers for the development of new products and the enhancement of existing products.
Safety testing of our products is done at the manufacturers’ facilities by quality control personnel employed by us or by independent third-party contractors engaged by us. Safety testing is designed to meet or exceed regulations imposed by federal and state, as well as applicable international governmental authorities, our retail partners, licensors and the Toy Association. We also closely monitor quality assurance procedures for our products for safety purposes. In addition, independent laboratories engaged by some of our larger customers and licensors test certain of our products.
Manufacturing and Supplies
Most of our products are currently produced by overseas third-party manufacturers, which we choose on the basis of quality, reliability and price. Consistent with industry practice, the use of third-party manufacturers enables us to avoid incurring fixed manufacturing costs, while maximizing flexibility, capacity and the latest production technology. Substantially all of the manufacturing services performed overseas for us are paid for on open account with the manufacturers. To date, we have not experienced any material delays in the delivery of our products; however, delivery schedules are subject to various factors beyond our control, and any delays in the future could adversely affect our sales. The COVID-19 pandemic, in particular, created some short-term delays as manufacturing capacity both dropped during the peak of the China outbreak and then again was stretched when consumer demand for different categories of products spiked as a result of the unprecedented level of households operating under confined-to-home/social distancing guidelines. Currently, we have ongoing relationships with over seventy different manufacturers. We believe that alternative sources of supply are available to us although we cannot be assured that we can obtain adequate supplies of manufactured products.products on short notice. We may also incur costs or other losses as a result of not placing orders consistent with our forecasts for product to be manufactured by our suppliers or manufacturers for a variety of reasons including customer order cancellations or a decline in demand.
Although we do not conduct the day-to-day manufacturing of our products, we are extensively involved in the design of product prototypes and production tools, dies and molds for our products and we seek to ensure quality control by actively reviewing the production process and testing the products produced by our manufacturers. We employ quality control inspectors who rotate among our manufacturers’ factories to monitor the production of substantially all of our products.
The principal raw materials used in the production and sale of our toy products are plastics, zinc alloy, plush, printed fabrics, paper products and electronic components, all of which are currently available at reasonable prices from a variety of sources. Although we do not directly manufacture our products, we own the majority of the tools, dies and molds used in the manufacturing process, and these are transferable among manufacturers if we choose to employ alternative manufacturers. Tools, dies and molds represent a substantial portion of our property and equipment with a net book value of $15.8$10.8 million in 20182020 and $11.4 million in 2019; substantially all of these assets are located in China.
Patents, Trademarks, Copyrights and Licenses
We routinely pursue protection of our products through some form or combination of intellectual property right(s). We file patent applications where appropriate to protect our innovations arising from new development and design, and as a result, possess a portfolio of issued patents in the U.S. and abroad. Most of our products are produced and sold under trademarks owned by or licensed to us. In recent years, our rate of filing new trademark applications has increased. We also register certain aspects of some of our products with the U.S. Copyright Office. In the same vein, we enforce our rights against infringers because we recognize our intellectual property rights are significant assets that contribute to our success. Accordingly, while we believe we are sufficiently protected and the duration of our rights are aligned with the lifecycle of our products, the loss of some of these rights could have an adverse effect on our financial growth expectations and business operations.
Competition
Competition in the toy industry is intense. Globally, certain of our competitors have greater financial resources, larger sales and marketing and product development departments, stronger name recognition, wholly-owned brands and properties with high consumer awareness and appeal, longer operating histories and benefit from greater economies of scale. These factors, among others, may enable our competitors to market their products at lower prices or on terms more advantageous to customers than those we could offer for our competitive products. Competition often extends to the procurement of entertainment and product licenses, as well as the marketing and distribution of products and the obtaining of adequate shelf space. Competition may result in price reductions, reduced gross margins and loss of market share, any of which could have a material adverse effect on our business, financial condition and results of operations. In eachmany of our product lines we compete directly against one or both of the toy industry’s two dominant companies, Mattel and Hasbro. In addition, we compete in our Halloween costume lines with Rubies.Rubies II. We also compete with numerous smaller domestic and foreign toy manufacturers, importers and marketers in each of our product categories.
Seasonality and Backlog
In 2019, 72.3%2020, 71.8% of our net sales were made in the third and fourth quarters. Generally, the first quarter is the period of lowest shipments and sales in our business and in the toy industry and therefore it is also the least profitable quarter due to various fixed costs. Seasonality factors may cause our operating results to fluctuate significantly from quarter to quarter. However, our seasonal products are primarily sold in the spring and summer seasons. Our results of operations may also fluctuate as a result of factors such as the timing of new products (and related expenses) introduced by us or our competitors, the theatricaltheatrical/entertainment-led releases of licensed brands, the advertising activities of our competitors, delivery schedules set by our customers and the emergence of new market entrants. We believe, however, that the low retail price of most of our products may be less subject to seasonal fluctuations than higher pricedhigher-priced toy products.
We ship products in accordance with delivery schedules specified by our customers, who generally request delivery of products within three to six months of the date of their orders for orders shipped FOB China or Hong Kong and within three days for orders shipped domestically (i.e., from one of our warehouses). Because customer orders may be canceled at any time, often without penalty, our backlog may not accurately indicate sales for any future period.
Government and Industry Regulation
Our products are subject to the provisions of the Consumer Product Safety Act (“CPSA”), the Federal Hazardous Substances Act (“FHSA”), the Flammable Fabrics Act (“FFA”) and the regulations promulgated there under,thereunder, and various other regulations in the European Union and other jurisdictions. The CPSA and the FHSA enable the Consumer Products Safety Commission (“CPSC”) to exclude from the market consumer products that fail to comply with applicable product safety regulations or otherwise create a substantial risk of injury, and articles that contain excessive amounts of a banned hazardous substance. The FFA enables the CPSC to regulate and enforce flammability standards for fabrics used in consumer products. The CPSC may also require the repurchase by the manufacturer of articles. Similar laws exist in some states and cities and in various international markets. We maintain a quality control program designed to ensure compliance with all applicable laws.
Human Capital
Our success comes from recruiting, retaining and motivating talented individuals around the world. JAKKS Pacific, Inc. continuously strives to create a safe, productive and harmonious work environment.
As of May 1,December 31, 2020, we employed 477 people,had approximately 626 employees (including temporary and seasonal employees) working in over 8 countries worldwide to create innovative products and experiences that inspire, entertain, and develop children through play, with approximately 204 employees (33% of the total workforce) located outside the U.S.
The remaining workforce focuses on design, development, marketing, sales, finance, and other aspects of our business.
Employee Engagement
One of our main focuses is employee retention. We empower our management to identify top performers and mentor them. We encourage all employees to take advantage of whomin-house and external training programs and continuing education. Our Human Resources department has an open-door policy that encourages employees to seek career advancement advice. We utilize an “Employee Development Plan” which outlines both short-term and long-term career plans. Holding various events and workshops throughout the year, employees are full-timeencouraged to voice any concerns and/or to bring forth their ideas and suggestions.
Diversity and Inclusion
We are committed to fostering, cultivating and preserving a culture of diversity, equity and inclusion.
The collective sum of the individual differences, life experiences, knowledge, inventiveness, innovation, self-expression, unique capabilities and talent that our employees including three executive officers. invest in their work represents a significant part of the culture.
We employed 272 peopleembrace and encourage employees’ differences in age, color, ability, ethnicity, family or marital status, gender identity or expression, language, national origin, physical and mental ability, political affiliation, race, religion, sexual orientation, socio-economic status, veteran status, and other characteristics.
Our diversity initiatives are applicable—but not limited—to practices and policies on recruitment and selection; compensation and benefits; professional development and training; promotions and transfers.
Training and Development
We take pride in offering the United States, 114 people in Hong Kong, 26 people inopportunity for employees to continuously learn and to grow their careers. Annually, employees are offered various types of training and the United Kingdom, 53 people in China, 5 people in Mexico, 3 people in Germany, 3 people in Canada,opportunity to continue their education. This includes both online and 1 person in France. instructor-led training covering a variety of topics including: career-related, federally- and locally-mandated, JAKKS Pacific, Inc. Company policy and legal, financial services and health/wellness-related. Nearly all employees take advantage of these learning opportunities. In 2020, all courses and trainings were held online with excellent participation.
Health and Safety
We believe that we have good relationships with our employees. Noneare committed to providing a safe, healthy and productive working environment for all of our employees are represented byglobally.
In 2020 with the impact of the COVID-19 pandemic, our number one priority was the health and safety of all of our employees, worldwide. The immediate and continuous response was to provide a union.remote work environment for employees (when available), implement enhanced protocols to provide a safe and sanitary working environment and offer on-site Covid-19 testing at no cost to employees and their dependents.
Environmental Issues
We may be subject to legal and financial obligations under environmental, health and safety laws in the United States and in other jurisdictions where we operate. We are not currently aware of any material environmental liabilities associated with any of our operations.
Available Information
We make available free of charge on or through our Internet website, www.jakks.com, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The contents of our website are not incorporated in or deemed to be a part of any such report.
Our Corporate Information
We were formed as a Delaware corporation in 1995. Our principal executive offices are located at 2951 28
Item 1A.Risk Factors
From time to time, including in this Annual Report on Form 10-K, we publish forward-looking statements, as disclosed in our Disclosure Regarding Forward-Looking Statements, immediately following the Table of Contents of this Annual Report. We note that a variety of factors could cause our actual results and experience to differ materially from the anticipated results or other expectations expressed or anticipated in our forward-looking statements. The factors listed below are risks and uncertainties that may arise and that may be detailed from time to time in our public announcements and our filings with the Securities and Exchange Commission, such as on Forms 8-K, 10-Q and 10-K. We undertake no obligation to make any revisions to the forward-looking statements contained in this Annual Report on Form 10-K to reflect events or circumstances occurring after the date of the filing of this report.
Our inability to redesign, restyle and extend our existing core products and product lines as consumer preferences evolve, and to develop, introduce and gain customer acceptance of new products and product lines, may materially and adversely impact our business, financial condition and results of operations.
Our business and operating results depend largely upon the appeal of our products. Our continued success in the toy industry will depend upon our ability to redesign, restyle and extend our existing core products and product lines as consumer preferences evolve, and to develop, introduce and gain customer acceptance of new products and product lines. Several trends in recent years have presented challenges for the toy industry, including:
● | the phenomenon of children outgrowing toys at younger ages, particularly in favor of interactive and high technology products; |
● | increasing use of |
● | shorter life cycles for individual products; |
● | higher consumer expectations for product quality, functionality and |
● | a wider array of content offerings and platforms attracting a viable audience that enables a meaningful consumer products opportunity, and |
● | the evolving media landscape increases the cost and complexity of advertising our products directly to |
● | consumer shopping habits migrating from traditional “brick & mortar” browsing to more online experiences. We cannot be assured that this change will not adversely impact our historical ability to have our newest product offerings discovered, evaluated and appreciated sufficiently to motivate purchase and ultimately build word-of-mouth endorsement about the value of our offerings. |
We cannot assure you that:
● | our current products will continue to be popular with consumers; |
● | the products that we introduce will achieve any significant degree of market acceptance; |
● | our support of customers with an online shopping proposition is expected to lead to a comparable degree of sales or margins through the offline shopping experience should consumer behavior migrate more of our business in that direction; | |
● | the life cycles of our products will be sufficient to permit us to recover our inventory costs, and licensing, design, manufacturing, marketing and other costs associated with those products; or |
● | our inclusion of new technology will result in higher sales or increased profits. |
Any or all of the foregoing factors may adversely affect our business, results of operations and financial condition.
There are risks associated with our license agreements.
● | Our current licenses require us to pay minimum |
Sales of products under trademarks or trade or brand names licensed from others account for substantially all of our net sales. Product licenses allow us to capitalize on characters, designs, concepts and inventions owned by others or developed by toy inventors and designers. Our license agreements generally require us to make specified minimum royalty payments, even if we fail to sell a sufficient number of units to covergenerate these amounts.dollar amounts under the percentage of sales basis under which most agreements are written. Some of our license agreements have additional requirements for marketing spend for the brands licensed. Some of our license agreements disallow certain retailer credits and deductions from the sales base on which royalties are calculated.calculated, including in some cases uncollectable accounts. In addition, under certain of our license agreements, if we fail to achieve certain prescribed sales targets, we may be unable to retain or renew these licenses which may adversely impact our business, results of operations and financial condition. Many of our license agreements, although multi-year in duration,total, require us to pay a minimum level of royalties annually that cannot be recouped following expirationoutside of the applicable salesselling during that time period (often 12 months). There may also be minimum commitments assigned to specific geographic regions or countries. As a result, sudden shocks to the market, such as have occurredhas been the case with the COVID-19 pandemic or when a foundational retailer becomesgoes bankrupt, wouldmight leave us with such minimum royalty obligationsthese fixed expenses unless the relevant licensors are willing to renegotiate terms bearing in mindconsideration for the unexpected nature of the market shock. Contractual minimal royalty payments are generallyalmost always fixed and determined upon signing, the license agreement, so these marketsorts of shocks could have a negative impact on our business, results of operations and financial condition for multiple years given the nature timing and effecttiming of the shock.
● | Some of our licenses are restricted as to use and include other restrictive |
Under the majority of our license agreements, the licensors have the right to review and approve our use of their licensed products, designs or materials before we may make any sales. If a licensor refuses to permit our use of any licensed property in the way we propose, or if their review process is delayed or not timely, our development, manufacturing and/or sale of new products could be impeded. Our licensing agreements include other restrictive provisions, such as limitations of the time period in which we have to sell existing inventory upon expiration of the license, requiring licensor approval of contract manufacturers and approval of marketing and promotional materials, limitations on channels of distribution, including internet sales, change of ownership clauses that require licensor approval of such change and may require a fee to be paid under certain circumstances and various other provisions that may have an adverse impact on our business, results of operations and financial condition.
● | New licenses can be difficult and expensive to obtain and in some cases, |
Our continued success will substantially depend upon our ability to maintain existing relevant and obtain new additional licenses. Intense competition exists for desirable licenses in our industry. We cannot assure you that we will be able to secure or renew significant licenses on terms acceptable to us. In addition, as we add licenses, the need to fund additional capital expenditures, royalty advances and guaranteed minimum royalty payments may strain our cash resources. Licensors oftenOften times, licensors require cash advance payments upon signing agreements to be applied against future minimum royalty obligations, which requirerequires us to pay out cash several quarters prior to our ability to ship, invoice and ultimately collect revenue from the related product sales.
● | A limited number of licensors account for a large portion of our net |
We derive a significant portion of our net sales from a limited number of licensors, one of which accounts for over 40%62% of our net sales. If one or more of these licensors were to terminate or fail to renew our licenselicenses or not grant us new licenses, our business, results of operationoperations and financial condition could be adversely affected.
The failure of our character-related and theme-related products to become and/or remain popular with children may materially and adversely impact our business, results of operations and financial condition.
The success of many of our character-related and theme-related products depends upon the popularity of characters in movies, television programs, live sporting exhibitions, and other media and events. By extension, any sudden disruption in that calendar can have negative repercussions to our business, both in terms of recouping our investments to date, as well as, monetizing those investments at the profit margins we have planned. As we generally have a 9-18 month9-18-month concept-to-market timeline depending on the product category, there is a degree of exposure given our dependence on third-partiesthird parties to adhere to suchtheir planned schedules. We cannot assure you that:
● | entertainment content associated with our character-related and theme-related product lines will be released at the times we expect, via the media we expected and/or will |
● | the success of |
● | we will be successful in renewing licenses upon expiration of terms that are favorable to us; |
● | we will be successful in obtaining licenses to produce new character-related and theme-related products in the future; |
● | we will continue to be able to assess effectively |
● | we will continue to be able to effectively assess the longevity and market appetite for consumer products for pre-existing licensor brands given the ever-increasing competition for |
Our failure to achieve any or all of the foregoing benchmarks may cause the infrastructure of our operations to fail, thereby adversely affecting our business, results of operations and financial condition.
A limited number of customers account for a large portion of our net sales, so that if one or more of our major customers were to experience difficulties in fulfilling their obligations to us, cease doing business with us, significantly reduce the amount of their purchases from us or return substantial amounts of our products, it could have a materialmaterially adverse effect on our business, results of operations and financial condition.
Our two largest customers, Wal-Mart and Target, accounted for 50.4%54.8% of our net sales in 2019.2020. Except for outstanding purchase orders for specific products, we do not have written contracts with, or commitments from, any of our customers, and pursuant to the terms of certain of our vendor agreements, even some purchase orders may be cancelled without penalty up until delivery. A substantial reduction in or termination of orders from any of our largest customers would adversely affect our business, results of operations and financial condition. In addition, pressure by large customers seeking price reductions, financial incentives and changes in other terms of sale or for us to bear the risks and the cost of carrying inventory could also adversely affect our business, results of operations and financial condition. For example, the recent bankruptcy and liquidation of Toys “R” Us (“TRU”) in the United States, and in certain other jurisdictions around the world, had a material, adverse impact on the toy industry and our business, results of operations and financial condition. In 2017, TRU was our third largest customer with net sales of $69.5 million. In 2018, net sales to TRU declined by over 76.1% to $16.6 million. In addition to the reduction in net sales, we also recorded significant bad debt charges in 2017 and 2018 as a result of the TRU bankruptcy and liquidation.
If one or more of our major customers were to experience difficulties in fulfilling their obligations to us resulting from bankruptcy or other deterioration in their financial condition or ability to meet their obligations, cease doing business with us, significantly reduce the amount of their purchases from us, or return substantial amounts of our products, it could have a material adverse effect on our business, results of operations and financial condition. In light of the recentThe COVID-19 pandemic has left many customers outside of our largest customers are under varying degrees of financial duress.distress, and it seems some of our largest customers are facing increases in their operating costs. Customers may request extended payment terms which may require us to take on increased credit risk or to reduce or forgo sales entirely in an attempt to mitigate financial risk associated with customer bankruptcy risk.
Restrictions under or the loss of availability under our term loan and revolving credit line could adversely impact our business and financial condition.
In August 2019, we entered into and consummated multiple, binding definitive agreements among Wells Fargo Bank, National Association, Oasis Investments II Master Fund Ltd. and an ad hoc group of holders of our 4.875% convertible senior notes due 2020 to recapitalize our balance sheet, including the extension to us of incremental liquidity and at least three-year extensions of substantially all of our outstanding convertible debt obligations and revolving credit facility.
All outstanding borrowings under the revolving credit line and term loan are accelerated and become immediately due and payable (and the revolving credit line and term loan terminate) in the event of a default, which includes, among other things, failure to comply with certain financial covenants or breach of representations contained in the credit line and term loan documents, defaults under other loans or obligations, involvement in bankruptcy proceedings, an occurrence of a change of control or an event constituting a material adverse effect on us (as such terms are defined in the credit line and term loan documents). We are also subject to negative covenants which, during the life of the credit line and term loan, prohibit and/or limit us from, among other things, incurring certain types of other debt, acquiring other companies, making certain expenditures or investments, and changing the character of our business. An outbreak of infectious disease, a pandemic or a similar public health threat, such as the 2019 Novel Coronavirus outbreak (see below), or a fear of any of the foregoing, could adversely impact our ability to comply with such covenants. Our failure to comply with such covenants or any other breach of the credit line or term loan agreements could cause a default and we may then be required to repay borrowings under our credit line and term loan with capital from other sources. We could also be blocked from future borrowings or obtaining letters of credit under the revolving credit line, and the credit line agreement and the term loan could be terminated by the lenders. Under these circumstances, other sources of capital may not be available or may be available only on unfavorable terms. In the event of a default, it is possible that our assets and certain of our subsidiaries’ assets may be attached or seized by the lenders. Any (i) failure by us to comply with the covenants or other provisions of the credit line and term loan, (ii) difficulty in securing any required future financing, or (iii) any such seizure or attachment of assets could have a material adverse effect on our business and financial condition. Our revolving credit line and term loan mature in August 2022 and February 2023, respectively.
We may not have the funds necessary to purchase our outstanding convertible senior notes upon a fundamental change or other purchase date, as required by the indenture governing the notes.
In June 2014, we sold an aggregate of $115.0 million principal amount of 4.875% convertible senior notes due on June 1, 2020 (the “4.875% 2020 Notes”). In July 2013, we sold an aggregate of $100.0 million principal amount of 4.25% convertible senior notes due on August 1, 2018, of which no amounts are currently outstanding, but $29.6 million were exchanged for new notes due on November 1, 2020 (the “3.25% 2020 Notes” and collectively with the 4.875% 2020 Notes, the “Notes”). In August 2019, the 3.25% 2020 Notes were amended and, among other changes, now mature on the earlier of (i) 91 days after the repayment in full of the newly issued secured term loan that matures in February 2023 or (ii) July 2023 (the “3.25% 2023 Notes”). In addition, a portion of the 4.875% 2020 Notes was exchanged for additional 3.25% 2023 Notes. As of December 2019,31, 2020, approximately $37.6$22.9 million of the 3.25% 2023 Notes are outstanding. Holders of the Notes may require us to repurchase for cash all or some of their notes upon the occurrence of a fundamental change (as defined in the Notes). Holders of the Notes may convert their notes upon the occurrence of specified events. Upon conversion, the Notes will be settled in shares of our common stock and/or in cash. Restrictions on borrowings under or loss of our revolving credit line could result in our not having the funds necessary to pay the Notes upon a fundamental change or other purchase date, as required by the indenture governing the Notes.
The agreement governing our outstanding preferred stock includes terms and conditions that may adversely impact our business and cash flows.
In August 2019, we issued a series of preferred stock with a face amount of $20.0 million. The preferred stock (i) is senior to our common stock, (ii) not convertible into common stock, (iii) earns a dividend at an annual rate of 6% (which may or may not be paid in cash), (iv) includes a liquidation preference of up to 150% of the accrued amount, and (v) includes the right to elect up to two members to the Company’s Board of Directors, among other rights, terms and conditions. In addition, the series of preferred stock includes other protective rights and provisions, such as amendments to the Company’s bylaws to restrict changes that may adversely impact the rights of the preferred stockholders, engaging in businesses that are not permitted businesses, as defined, limitations on assets dispositions and entering into a change of control transaction without the approval of the preferred stockholders. Some of these rights, restrictions and other terms and conditions may prevent us from taking advantageous actions with respect to our business, result in our inability to respond effectively to competitive pressures and industry developments, and/or adversely affect our cash flows or operations.
We depend upon ourChief Executive Officerand any loss or interruption of his services could adversely affect our business, results of operations and financial condition.
Our success has been largely dependent upon the experience and continued services of Stephen G. Berman, our PresidentChairman and Chief Executive Officer. WeThough Mr. Berman is under contract through 2024, we cannot assure you that we would be able to find an appropriate replacement for Mr. Berman should the need arise, and any loss or interruption of the services of Mr. Berman could adversely affect our business, results of operations and financial condition.
Market conditions and other third-party conduct could negatively impact our margins and implementation of other business initiatives.
Economic conditions, such as decreased consumer confidence or a recession, may adversely impact our business, results of operations and financial condition. In addition, general economic conditions were significantly and negatively affected by the September 11th terrorist attacks and could be similarly affected by any future attacks. We are beginningThe COVID-19 pandemic had a negative impact to experience negative effectsour business in 2020 by disrupting consumer behavior, spending patterns and ultimately the play patterns and events that often motivate purchasing of our products. Furthermore, restrictions on economic conditions fromnearly all of our customers’ operating hours at one point in the global spreadyear or another, limited consumers’ ability to discover our products thru traditional in-store browsing and unplanned purchase. Continuation of the novel strain of coronavirus that was recently declared a global pandemic by the World Health Organization. Suchsuch a weakened economic and business climate, as well as consumer uncertainty created by such a climate, could further adversely affect our sales and profitability. Other conditions, such as the unavailability of electronic components or other raw materials, for example, may impede our ability to manufacture, source and ship new and continuing products on a timely basis. Significant and sustained increases in the price of oil, for example, could adversely impact the cost of the raw materials used in the manufacture of certain of our products, such as plastic.
We face risks related to health epidemics and other widespread outbreaks of contagious disease, which could significantly disrupt our supply chain and impact our operating results.
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 has takentook 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.
The COVID-19 virus was ultimately declared a global pandemic by the World Health Organization in March 2020 and has been spreading throughout the world, including the United States, and the rest of the world, resulting in emergency measures, including travel bans, closure of retail stores, and other businesses, and restrictions on gatherings of more than a maximum number of people. These outbreaks are disruptive to local economies and commercial activity, and create 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 predict with any certainty the further duration and depth of the impact of the COVID-19 pandemic in the United States or other places worldwide where we sell our products or manufacture our products. Accordingly, it is extremely challenging to estimate the extent by which we will be negatively impacted by this disease. In the relatively short period of time with which the world has been dealing with this pandemic, significant economic turmoil has already impacted world markets. Numerous nationally recognized economists are predicting that the disease will lead to a worldwide recession. Should that occur, we can expect that our sales, net income and cash flows will be negatively impacted. While the governmental organizations of the United States, as well as governments across the world, have implemented emergency economic measures and announced the evaluation and implementationconsideration of additional emergency economic assistance packages, it is unclear what impact they are having, and will have, on the economy in the United States and worldwide. Great uncertaintyUncertainty surrounds the length of time this disease will continue to spread, and the extent governments will continue to impose, or add additional, quarantines, curfews, travel restrictions and closures of retail stores. In addition, even following control of the disease and the end of the pandemic, the economic dislocation caused by the disease to so many people may linger and be so significant that consumers’ focus could be directed away from consumer discretionary spending for products such as ours for an extended period of time. For all of these reasons, at this time we cannot quantify the extent of the impact this disease will have on our sales, net income and cash flows, but it could be quite significant.
Our business is seasonal and therefore our annual operating results will depend, in large part, on our sales during the relatively brief holiday shopping season. This seasonality is exacerbated by retailers’retailers’ quick response to inventory management techniques.
Sales of our products at retail are extremely seasonal, with a majority of retail sales occurring during the period from September through December in anticipation of the holiday season. Further, ecommerce is growing significantly and accounts for a higher portion of the ultimate sales of our products. Ecommerce retailers tend to hold less inventory and take inventory closer to the time of sale to consumers than traditional retailers. As a result, customers are timing their orders so that they are being filled by suppliers, such as us, closer to the time of purchase by consumers. For our products, a majority of retail sales for the entire year generally occur in the fourth quarter, close to the holiday season. As a consequence, the majority of our sales to our customers occur in the third and fourth quarters, as our customers do not want to maintain large on-hand inventories throughout the year, ahead of consumer demand. While these techniques reduce a retailer’s investment in inventory, they increase pressure on suppliers like us to fill orders promptly and thereby shift a significant portion of inventory risk and carrying costs to the supplier. The level of inventory carried by retailers may also reduce or delay retail sales resulting in lower revenues for us. If we or our customers determine that one of our products is more popular at retail than was originally anticipated, we may not have sufficient time to produce and ship enough additional products to fully meet consumer demand. Additionally, the logistics of supplying more and more product within shorter time periods increases the risk that we will fail to achieve tight and compressed shipping schedules and quality control, which also may reduce our sales and harm our results of operations. This seasonal pattern requires significant use of working capital, mainly to manufacture or acquire inventory during the portion of the year prior to the holiday season, and it requires accurate forecasting of demand for products during the holiday season in order to avoid losing potential sales of popular products or producing excess inventory of products that are less popular with consumers. Our failure to accurately predict and respond to consumer demand, resulting in under-producing popular items and/or overproducing less popular items, could significantly reduce our total sales, negatively impact our cash flows, increase the risk of inventory obsolescence, and harm our results of operations and financial condition. In addition, as a result of the seasonal nature of our business, we would be significantly and adversely affected, in a manner disproportionate to the impact on a company with sales spread more evenly throughout the year, by unforeseen events such as a terrorist attack or economic shock that harm the retail environment or consumer buying patterns during our key selling season, or by events such as strikes or port delays that interfere with the shipment of goods, during the critical months leading up to the holiday shopping season.
The COVID-19 pandemic has also accelerated consumers’ shift to ecommerce transactions with traditional brick & mortar retailers. Some of these transactions are for “Ship-to-home” purchases and some are for local pick-up by the consumer at the brick & mortar location. In either case, the consumer’s path to discovery of new items changes to a digital medium. It remains to be seen whether this change has a negative adverse impact on consumers’ ability to discover the breadth and depth of our product range or whether it discourages adding incremental unplanned purchases to the shopping cart. Either scenario could have a negative impact on our overall business performance.
Our Halloween (Disguise) business is even more seasonal than our core Toy/Consumer Products business. This seasonality is further exacerbated by consumer migration to online shopping as the style and size attributes of the Halloween business (i.e., we make the same costume in multiple sizes, and the same item “costume” across a very wide range of brands and properties) in part behaves like an apparel-driven transaction rather than “one-size-for-all”“one-size-for-all” toy/consumer product transaction.
In the event that some2020, COVID-19 was an unexpected shock to the market, (like the COVID-19 pandemic) were to makemaking the traditional Halloween experience either less relevant or less feasible to celebrate in theits traditional manner, it could havemanner. It had a material impact on our sales of related product. Any similar event that suddenly makes the holiday less relevant or infeasible to celebrate can and likely will have a negative impact on that segment of business. Given that securing licenses, product design and development and ultimately sourcing of the product taketakes place months in advance of the actual Halloween selling season, we have limited ability to recover invested expense if the market demand for those products were to suddenly be reduced. Although some product could be held in inventory or materials rolled forward to the next manufacturing and sales season, these events would in turn incrementally tie up our invested capital until the following year at best.best, and/or put added strain on our third-party manufacturers.
We depend upon third-party manufacturers, and if our relationship with any of them is harmed or if they independently encounter difficulties in their manufacturing processes, we could experience product defects, production delays, unplanned costs or higher product costs, or the inability to fulfill orders on a timely basis, any of which could adversely affect our business, results of operations and financial condition.
We depend upon many third-party manufacturers who develop, provide and use the tools, dies and molds that we generally own to manufacture our products. However, we have limited control over the manufacturing processes themselves. As a result, any difficulties encountered by the third-party manufacturers that result in product defects, production delays, cost overruns or the inability to fulfill orders on a timely basis, could adversely affect our business, results of operations and financial condition.
We do not have long-term contracts with our third-party manufacturers. Although we believe we could secure other third-party manufacturers to produce our products, our operations would be adversely affected if we suddenly lost our relationship with any of our current suppliers or if our current suppliers’ operations or sea or air transportation with our overseas manufacturers were disrupted or terminated even for a relatively short period of time. Our tools, dies and molds are located at the facilities of our third-party manufacturers. Although we own the majority of those tools, dies and molds, our ability to retrieve them and move them to a new manufacturer might be limited by lack of manufacturing equipment compatibility. In addition, the current COVID-19 pandemic has made on-site engagement of our vendor base more challenging.
Although we do not purchase the raw materials used to manufacture our products, we are potentially subject to variations in the prices we pay our third-party manufacturers for products, depending upon what they pay for their raw materials. We may also incur costs or other losses as a result of not placing orders consistent with our forecasts for product manufactured by our suppliers or manufacturers for a variety of reasons including customer order cancellations or a decline in demand. In the event that some unexpected shock to the market (like the COVID-19 pandemic) were to suddenly drastically change demand for product anticipated to be procured from our third-party manufacturers, we may incur some costs relating to raw materials they have ordered on our behalf, and/or finished goods that were not shipped due to last-minute cancelled orders from our customers buying FOB from China.
The toy industry is highly competitive and our inability to compete effectively may materially and adversely impact our business, results of operations and financial condition.
The toy industry is highly competitive. Globally, certain of our competitors have financial and strategic advantages over us, including:
● | greater financial resources; |
● | larger sales, marketing and product development departments; |
● | stronger brand name recognition and/or well-established owned brands/trademark; | |
● | broader international sales and marketing infrastructure; |
● | longer operating histories; and |
● | greater economies of scale. |
In addition, the toy industry has no significant barriers to entry. Competition is based primarily upon the ability to design and develop new toys, procure licenses for popular characters and trademarks, and successfully market products. Many of our competitors offer similar products or alternatives to our products. Our competitors have obtained and are likely to continue to obtain licenses that overlap our licenses with respect to products, geographic areas and markets.retail channels. We cannot assure you that we will be able to obtain adequate shelf space in retail stores to support our existing products, expand our products and product lines or continue to compete effectively against current and future competitors.
Our corporate headquarters, fulfillment center and information technology systems are in Southern California, and if these operations are disrupted, we may not be able to operate our core functions and/or ship merchandise to our customers, which would adversely affect our business.
Our corporate headquarters, distribution center and information technology systems are in Santa Monica and the City of Industry, California, and the overwhelming majority of our U.S.-based staff lives in Southern California. If we encounter any disruptions to our operations within these buildings, or if they were to shut down for any reason, including by fire or other natural disaster, or as a result of the COVID-19 pandemic, then we may be prevented from effectively operating, shipping and processing our merchandise. Furthermore, the risk of disruption or shut down at these buildings and/or within the Southern California community is greater than it might be if they were located in another region as Southern California is prone to natural disasters such as earthquakes and wildfires. Any disruption or shutdownshut down at these locations could significantly impact our operations and have a material adverse effect on our financial condition and results of operations.
We have substantial sales and manufacturing operations outside of the United States, subjecting us to risks common to international operations.
We sell products and operate facilities in numerous countries outside the United States. Sales to our international customers comprised approximately 19.6%18.4% of our net sales for the year ended 20192020 and approximately 22.5%19.6% of our net sales for year ended 2018. We2019. Although COVID-19 disproportionately negatively impacted our international business in 2020, we expect our sales to international customers to account for a greater portion of our revenues in future fiscal periods. Additionally, we use third-party manufacturers, located principally in China, and are subject to the risks normally associated with international operations, including:
● | currency conversion risks and currency fluctuations; |
● | limitations, including taxes, on the repatriation of earnings; |
● | political instability, civil unrest and economic instability; |
● | greater difficulty enforcing intellectual property rights and weaker laws protecting such rights; |
● | complications in complying with laws in varying jurisdictions and changes in governmental policies; |
● | greater difficulty and expenses associated with recovering from natural disasters, such as earthquakes, hurricanes and floods; |
● | transportation delays and interruption, inclusive of raw |
● | work stoppages; |
● | the potential imposition of tariffs; and |
● | the pricing of intercompany transactions may be challenged by taxing authorities in both foreign jurisdictions and the United States, with potential increases in income and other taxes. |
Our reliance upon external sources of manufacturing can be shifted, over a period of time, to alternative sources of supply, should such changes be necessary. However, if we were prevented from obtaining products or components for a material portion of our product line due to regulatory, political, labor or other factors beyond our control, our operations would be disrupted while alternative sources of products were secured. Also, the imposition of trade sanctions by the United States against a class of products imported by us from, or the loss of “normal trade relations” status by China could significantly increase our cost of products imported from that nation. Because of the importance of international sales and international sourcing of manufacturing to our business, our results of operations and financial condition could be significantly and adversely affected if any of the risks described above were to occur.
Legal proceedings may harm our business, results of operations, and financial condition.
We are a party to lawsuits and other legal proceedings in the normal course of our business. Litigation and other legal proceedings can be expensive, lengthy, and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. We cannot provide assurance that we will not be a party to additional legal proceedings in the future. To the extent legal proceedings continue for long time periods or are adversely resolved, our business, results of operations, and financial condition could be significantly harmed.
Our business is subject to extensive government regulation and any violation by us of such regulations could result in product liability claims, loss of sales, diversion of resources, damage to our reputation, increased warranty costs or removal of our products from the market, and we cannot assure you that our product liability insurance for the foregoing will be sufficient.
Our business is subject to various laws, including the Federal Hazardous Substances Act, the Consumer Product Safety Act, the Flammable Fabrics Act and the rules and regulations promulgated under these acts. These statutes are administered by the Consumer Product Safety Commission (“CPSC”), which has the authority to remove from the market products that are found to be defective and present a substantial hazard or risk of serious injury or death. The CPSC can require a manufacturer to recall, repair or replace these products under certain circumstances. We cannot assure you that defects in our products will not be alleged or found. Any such allegations or findings could result in:
● | product liability claims; |
● | loss of sales; |
● | diversion of resources; |
● | damage to our reputation; |
● | increased warranty and insurance costs; and |
● | removal of our products from the market. |
Any of these results may adversely affect our business, results of operationoperations and financial condition. There can be no assurance that our product liability insurance will be sufficient to avoid or limit our loss in the event of an adverse outcome of any product liability claim.
We depend upon our proprietary rights, and our inability to safeguard and maintain the same, or claims of third-parties that we have violated their intellectual property rights, could have a material adverse effect on our business, results of operations and financial condition.
We rely upon trademark, copyright and trade secret protection, nondisclosure agreements and licensing arrangements to establish, protect and enforce our proprietary rights in our products. The laws of certain foreign countries may not protect intellectual property rights to the same extent or in the same manner as the laws of the United States. We cannot assure you that we or our licensors will be able to successfully safeguard and maintain our proprietary rights. Further, certain parties have commenced legal proceedings or made claims against us based upon our alleged patent infringement, misappropriation of trade secrets or other violations of their intellectual property rights. We cannot assure you that other parties will not assert intellectual property claims against us in the future. These claims could divert our attention from operating our business or result in unanticipated legal and other costs, which could adversely affect our business, results of operations and financial condition.
Restructuring our workforce can be disruptive and harm our results of operations and financial condition.
We have in the past restructured or made other adjustments to our workforce in response to the economic environment, performance issues, acquisitions, and other internal and external considerations. Restructurings can among other things result in a temporary lack of focus, reductions in net sales and reduced productivity. In addition, we may be unable to realize the anticipated cost savings from our previously announced restructuring efforts or may incur additional and/or unexpected costs in order to realize the anticipated savings. The amounts of anticipated cost savings and anticipated expenses-related restructurings are based on our current estimates, but they involve risks, uncertainties, assumptions and other factors that may cause actual results, performance or achievements to be materially different from those previously planned. These impacts, among others, could occur in connection with previously announced restructuring efforts, or related to future acquisitions and other restructurings and, as a result, our results of operations and financial condition could be negatively affected. In particular, in April 2020 the company executed a restructuring of its workforce to mitigate costs in light of reduced revenue expectations attributable to the COVID-19 pandemic. In addition, a temporary reduction in base pay is scheduled to begin in May 2020. There is risk associated in our ability to seamlessly adapt to a smaller organizational structure, manage any morale issues associated with the temporary reduction in pay and effectively capture the net positive cash and expense impact anticipated by these activities.
The inability to successfully defend claims from taxing authorities or the adoption of new tax legislation could adversely affect our results of operations and financial condition.
We conduct business in many countries, which requires us to interpret the income tax laws and rulings in each of those jurisdictions. Due to the complexity of tax laws in those jurisdictions as well as the subjectivity of factual interpretations, our estimates of income tax liabilities may differ from actual payments or assessments. Claims from tax authorities related to these differences could have an adverse impact on our results of operations and financial condition. In addition, legislative bodies in the various countries in which we do business may from time to time adopt new tax legislation that could have a material adverse effect on our business, results of operations and financial condition.
We may not be able to sustain or manage our product line growth, which may prevent us from increasing our net revenues.
Historically, we experienced growth in our product lines through acquisitions of businesses, products and licenses. This growth in product lines has contributed significantly to our total revenues over the last few years. Even though we have had no significant acquisitions since 2012, comparing our future period-to-period operating results may not be meaningful and results of operations from prior periods may not be indicative of future results. We cannot assure that we will continue to experience growth in, or maintain our present level of, net sales.
Our growth strategy calls for us to continuously develop and diversify our toy business by acquiring other companies, entering into additional license agreements, refining our product lines, expanding into adjacent Toys/Consumer Products/Costume categories and expanding into international markets, which will place additional demands upon our management, operational capacity and financial resources and systems. The increased demand upon management may necessitate our recruitment and retention of qualified management personnel. We cannot assure that we will be able to recruit and retain qualified personnel or expand and manage our operations effectively and profitably. To effectively manage future growth, we must continue to expand our operational, financial and management information systems and to train, motivate and manage our work force. There can be no assurance that our operational, financial and management information systems will be adequate to support our future operations. Failure to expand our operational, financial and management information systems or to train, motivate or manage employees could have a material adverse effect on our business, results of operations and financial condition.
In addition, implementation of our growth strategy is subject to risks beyond our control, including competition, market acceptance of new products, changes in economic conditions, our ability to obtain or renew licenses on commercially reasonable terms, our ability to identify acquisition candidates and conclude acquisitions on acceptable terms, and our ability to obtain the required consents from certain lenders and finance increased levels of accounts receivable and inventory necessary to support our sales growth, if any. Accordingly, we cannot assure that our growth strategy will be successful.
We rely extensively on information technology in our operations, and any material failure, inadequacy, interruption, or security breach of that technology could have a material adverse impact on our business.
We rely extensively on information technology systems across our operations, including for management of our supply chain, sale and delivery of our products and services, reporting our results of operations, collection and storage of consumer data, data of customers, employees and other stakeholders, and various other processes and transactions. Many of these systems are managed by third-party service providers. We use third-party technology and systems for a variety of reasons, including, without limitation, encryption and authentication technology, employee email, content delivery to customers, back-office support, and other functions. AIn any given year, a small volume of our consumer products and services may rely on a component or element which is internet-enabled, and some aremay be offered in conjunction with business partners or such third-party service providers. We, our business partners and third-party service providers may collect, process, store and transmit consumer data, including personal information, in connection with those products and services. Failure to follow applicable regulations related to those activities, or to prevent or mitigate data loss or other security breaches, including breaches of our business partners’ technology and systems, could expose us or our customers to a risk of loss or misuse of such information, which could adversely affect our results of operations, result in regulatory enforcement, other litigation and could be a potential liability for us, and otherwise significantly harm our business. Our ability to effectively manage our business and coordinate the production, distribution, and sale of our products and services depends significantly on the reliability and capacity of these systems and third-party service providers.
Although we have developed systems and processes that are designed to protect customer information and prevent data loss and other security breaches, including systems and processes designed to reduce the impact of a security breach at a third-party provider, such measures cannot provide absolute security. We have exposureexposures to similar security risks faced by other large companies that have data stored on their information technology systems. To our knowledge, we have not experienced any material breach of our cybersecurity systems. If our systems or our third-party service providers' systems fail to operate effectively or are damaged, destroyed, or shut down, or there are problems with transitioning to upgraded or replacement systems, or there are security breaches in these systems, any of the aforementioned could occur as a result of natural disasters, human error, software or equipment failures, telecommunications failures, loss or theft of equipment, acts of terrorism, circumvention of security systems, or other cyber-attacks, including denial-of-service attacks, we could experience delays or decreases in product sales, and reduced efficiency of our operations. Additionally, any of these events could lead to violations of privacy laws, loss of customers, or loss, misappropriation or corruption of confidential information, trade secrets or data, which could expose us to potential litigation, regulatory actions, sanctions or other statutory penalties, any or all of which could adversely affect our business, and cause it to incur significant losses and remediation costs.
The sudden onset of the COVID-19 pandemic has required most of our employees to work remotely, putting unprecedented strain on our information technology resources and infrastructure. We cannot be sure how long the work-from-home model will stay in place and how mandates around social distancing and extensive remote work will generate new and unforeseen risks of business disruption and increased complexity across the range of functions that comprise the Company’s daily activities. In addition, by rapidly deploying the work-from-home model, we are increasingincrease our vulnerability to hacking and other nefarious activities as employees adjust to new hardware/software infrastructure and resources as well as close the gap created by no longer being in close physical proximity to their colleagues. Although all employees are required to use work infrastructure and our secure VPN, we cannot be completely certain that we will not have increased exposure to security considerations in this new environment.
If we are unable to acquire and integrate companies and new product lines successfully, we will be unable to implement a significant component of our growth strategy.
Our growth strategy depends, in part, upon our ability to acquire companies and new product lines. Future acquisitions, if any, may succeed only if we can effectively assess characteristics of potential target companies and product lines, such as:
● | attractiveness of products; |
● | suitability of distribution channels; |
● | management ability; |
● | financial condition and results of operations; |
● | the degree to which acquired operations can be integrated with our | |
● | appropriate valuation and our ability to create substantially more value post-acquisition. |
We cannot assure you that we can identify attractive acquisition candidates or negotiate acceptable acquisition terms, and our failure to do so may adversely affect our results of operations and our ability to sustain growth. Our acquisition strategy involves a number of risks, each of which could adversely affect our operating results, including:
● | difficulties in integrating acquired businesses or product lines, assimilating new facilities and personnel and harmonizing diverse business strategies and methods of operation; |
● | diversion of management attention from operation of our existing business; |
● | loss of key personnel from acquired companies; |
● | failure of an acquired business to achieve targeted financial results; |
● | limited capital to finance |
● | inability to maintain or secure relevant licenses to maintain or expand the net sales of acquired business. |
We may engage in strategic transactions that could negatively impact our liquidity, increase our expenses and present significant distractions to our management.
We may consider strategic transactions and business arrangements, including, but not limited to, acquisitions, asset purchases, partnerships, joint ventures, restructurings, divestitures and investments. Any such transaction may require us to incur non-recurring or other charges, may increase our near and long-term expenditures and may pose significant integration challenges or disrupt our management or business, which could harm our operations and financial results.
If securities or industry analysts publish inaccurate or unfavorable research about our business, the price and trading volume of our common stock could decline.
The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about us or our business. If one or more of the analysts who covers us downgrades our common stock or publishes inaccurate or unfavorable research about our business, the price of our common stock would likely decline. If one or more of these analysts’analysts cease coverage of us or fails to publish reports on us regularly, demand for our common stock could decrease, which could cause the price of our common stock and trading volume to decline.
We have a small public float compared to other larger publicly-traded companies, which may result in price swings in our common stock or make it difficult to acquire or dispose of our common stock.
This small public float can result in large swings in our stock price with relatively low trading volume. In addition, a purchaser that seeks to acquire a significant number of shares may be unable to do so without increasing our common stock price, and conversely, a seller that seeks to dispose of a significant number of shares may experience a decreasing stock price.
Our stock price has been volatile over the past several years and could decline in the future, resulting in losses for our investors.
All the factors discussed in this section, disclosures made in other parts of this Annual Report on Form 10-K, or any other material announcements or events could affect our stock price. In addition, quarterly fluctuations in our operating results, changes in investor and analyst perception of the business risks and conditions of our business, our ability to meet earnings estimates and other performance expectations of financial analysts or investors, unfavorable commentary or downgrades of our stock by research analysts, fluctuations in the stock prices of our peerother toy companies or in stock markets in general, and general economic or political conditions could also cause the price of our stock to change. A significant drop in the price of our stock could expose us to the risk of securities class action lawsuits, which could result in substantial costs and divert management’s attention and resources, adversely affecting our business.
We have a valuation allowanceon the deferred taxes on our books since their future realization is uncertain.
Deferred tax assets are realized by prior and future taxable income of appropriate character. Current accounting standards require that a valuation allowance be recorded if it is not likely that sufficient taxable income of appropriate character will be generated to realize the deferred tax assets. We currently believe that based on the available information, it is more likely than not that our deferred tax assets will not be realized, and accordingly we have recorded a valuation allowance against our U.S.US federal and state deferred tax assets. Certain of our net operating losses and tax credit carry-forwards can expire if unused, and the utilization of our net operating losses and tax credit carry-forwards could be substantially limited in the event of an "ownership change," as defined in Section 382 of the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code.
We have a material amount of goodwill which, if it becomes impaired, would result in a reduction in our net earnings.
Goodwill is the amount by which the cost of an acquisition exceeds the fair value of the net assets we acquire. Goodwill is not amortized and is required to be evaluated for impairment at least annually. At December 31, 2019,2020, $35.1 million, or 9.6%10.7%, of our total assets represented goodwill. Declines in our profitability may impact the fair value of our reporting units, which could result in a write-down of our goodwill and consequently harm our results of operations. We did not record any goodwill impairment charges during 2018 and 2019.2020, 2019 or 2018. In the future, if we do not achieve our profitability and growth targets the carrying value of our goodwill may become further impaired, resulting in additional impairment charges.
Item 2.Properties
The following is a listing of the principal leased offices maintained by us as of May 5, 2020:
Property | Location | Approximate Square Feet | LeaseExpiration Date |
US and Canada * | |||
Distribution Center | City of Industry, California | 800,000 | April 30, 2023 |
Disguise Office | Poway, California | 24,200 | June 30, 2024 |
Corporate Headquarters/Showroom | Santa Monica, California | 65,858 | January 31, 2024 |
International * | |||
Europe Office | Bracknell, United Kingdom | 8,957 | January 19, 2027 |
Hong Kong Headquarters | Kowloon, Hong Kong | 18,500 | June 30, 2022 |
*The Halloween segment is included in the properties listed above.
Item3.LegalProceedings
For information regarding our legal proceedings, see Item 8 “Consolidated Financial Statements and Supplementary Data Note 22 to the consolidated financial statements included in this Form 10-K.– Litigation and Contingencies.”
Item 4.
Mine Safety DisclosuresNot applicable.
PART II
Item 5.
Market forMarket Information
Our common stock is traded on the Nasdaq Global Select exchange under the symbol “JAKK.”
December 31, 2015 | December 31, 2016 | December 31, 2017 | December 31, 2018 | December 31, 2019 | ||||||||||
JAKKS Pacific | 17.1 | % | (35.3 | )% | (54.4 | )% | (37.5 | )% | (29.9 | )% | ||||
Peer Group | 39.4 | 7.0 | 42.8 | (20.2 | ) | 30.4 | ||||||||
Russell 2000 | (4.4 | ) | 21.3 | 14.7 | (11.0 | ) | 25.5 |
January 1, 2015 | December 31, 2015 | December 31, 2016 | December 31, 2017 | December 31, 2018 | December 31, 2019 | ||||||||||||||||||
JAKKS Pacific | $ | 100.0 | $ | 117.1 | $ | 75.7 | $ | 34.6 | $ | 21.6 | $ | 15.1 | |||||||||||
Peer Group | 100.0 | 139.4 | 149.2 | 213.0 | 170.1 | 221.7 | |||||||||||||||||
Russell 2000 | 100.0 | 95.6 | 116.0 | 132.9 | 118.3 | 148.5 |
Security Holders
To the best of our knowledge, as of March 10, 2020,2021, there were 94136 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.”
Dividends
The payment of dividends on common stock is at the discretion of the Board of Directors and is subject to customary limitationsand 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.
Compensation Plan Information
The table below sets forth the following information as of the year ended December 31, 20192020 for (i) all compensation plans previously approved by our stockholders and (ii) all compensation plans not previously approved by our stockholders, if any:
(a) the number of securities to be issued upon the exercise of outstanding options, warrants and rights;
(b) the weighted-average exercise price of such outstanding options, warrants and rights; and
(c) other than securities to be issued upon the exercise of such outstanding options, warrants and rights, the number of securities remaining available for future issuance under the plans.
PlanCategory | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (a) | Weighted- Average Exercise Price of Outstanding Options, Warrants and Rights (b) | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans, Excluding Securities Reflected in Column (a) (c) | |||||||||
Equity compensation plans approved by security holders | — | — | 1,180,266 | |||||||||
Equity compensation plans not approved by security holders | — | — | — | |||||||||
Total | — | — | 1,180,266 |
Equity compensation plans approved by our stockholders consists of the 2002 Stock Award and Incentive Plan. An additional 1.4 million, 2.5 million, and 3.6 million shares were added to the number of total issuable shares under the Plan and approved by the Board in 2013, 2017, and 2019, respectively. Additionally, 5,593,069507,867 shares of restricted stock awards remained unvested as of December 31, 2019.2020. 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.
Issuer Purchases of Equity Securities
There were no issuer purchases of equity securities in the fourth quarter of 2019.2020.
Issuer Unregistered Sale of Equity Securities
There were no issuer sales of unregistered equity securities in the fourth quarter of 2019.2020.
Item 6.
Selected Financial DataThe following table presents selected financial data that should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (included in Item 7) and our consolidated financial statements and the related notes (included in Item 8).
Year Ended December 31, | ||||||||||||||||||||
2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||
(In thousands, except per share data) | ||||||||||||||||||||
Consolidated Statements of Operations Data: | ||||||||||||||||||||
Net sales | $ | 515,872 | $ | 598,649 | $ | 567,810 | $ | 613,111 | $ | 706,603 | ||||||||||
Cost of sales | 366,107 | 439,304 | 412,094 | 457,430 | 483,582 | |||||||||||||||
Gross profit | 149,765 | 159,345 | 155,716 | 155,681 | 223,021 | |||||||||||||||
Selling, general and administrative expenses | 134,860 | 161,210 | 185,142 | 205,223 | 205,915 | |||||||||||||||
Goodwill and other intangibles impairment | — | 9,379 | — | 13,536 | — | |||||||||||||||
Restructuring charge | 1,631 | 341 | 1,114 | 1,080 | — | |||||||||||||||
Pandemic related charges | 366 | — | — | — | — | |||||||||||||||
Acquisition related and other | — | 6,204 | 1,633 | — | — | |||||||||||||||
Income (loss) from operations | 12,908 | (17,789 | ) | (32,173 | ) | (64,158 | ) | 17,106 | ||||||||||||
Income from joint ventures | 2 | — | 227 | 105 | 889 | |||||||||||||||
Other income (expense), net | 301 | (1,158 | ) | 152 | 342 | 305 | ||||||||||||||
Loss on extinguishment of debt | — | (13,205 | ) | (453 | ) | (611 | ) | — | ||||||||||||
Change in fair value of preferred stock derivative liability | (2,815 | ) | (353 | ) | — | — | — | |||||||||||||
Change in fair value of convertible senior notes | (2,265 | ) | (5,112 | ) | 2,948 | (308 | ) | — | ||||||||||||
Write-off of investment in DreamPlay, LLC | — | — | — | (7,000 | ) | — | ||||||||||||||
Interest income | 22 | 85 | 68 | 37 | 51 | |||||||||||||||
Interest expense | (21,562 | ) | (15,935 | ) | (10,243 | ) | (9,829 | ) | (12,975 | ) | ||||||||||
Income (loss) before provision for income taxes | (13,409 | ) | (53,467 | ) | (39,474 | ) | (81,422 | ) | 5,376 | |||||||||||
Provision for income taxes | 735 | 1,912 | 2,951 | 1,606 | 4,127 | |||||||||||||||
Net income (loss) | (14,144 | ) | (55,379 | ) | (42,425 | ) | (83,028 | ) | 1,249 | |||||||||||
Net income (loss) attributable to non-controlling interests | 130 | 169 | (57 | ) | 57 | 6 | ||||||||||||||
Net income (loss) attributable to JAKKS Pacific, Inc. | $ | (14,274 | ) | $ | (55,548 | ) | $ | (42,368 | ) | $ | (83,085 | ) | $ | 1,243 | ||||||
Net income (loss) attributable to common stockholders | $ | (15,531 | ) | $ | (56,031 | ) | $ | (42,368 | ) | $ | (83,085 | ) | $ | 1,243 | ||||||
Basic earnings (loss) per share | $ | (4.27 | ) | $ | (21.57 | ) | $ | (18.34 | ) | $ | (38.93 | ) | $ | 0.75 | ||||||
Diluted earnings (loss) per share | $ | (4.27 | ) | $ | (21.57 | ) | $ | (18.34 | ) | $ | (38.93 | ) | $ | 0.75 | ||||||
Dividends declared per common share | $ | — | $ | — | $ | — | $ | — | $ | — |
Year Ended December 31, | |||||||||||||||||||
2015 | 2016 | 2017 | 2018 | 2019 | |||||||||||||||
(In thousands, except per share data) | |||||||||||||||||||
Consolidated Statements of Operations Data: | |||||||||||||||||||
Net sales | $ | 745,741 | $ | 706,603 | $ | 613,111 | $ | 567,810 | $ | 598,649 | |||||||||
Cost of sales | 517,172 | 483,582 | 457,430 | 412,094 | 439,304 | ||||||||||||||
Gross profit | 228,569 | 223,021 | 155,681 | 155,716 | 159,345 | ||||||||||||||
Selling, general and administrative expenses | 198,039 | 205,915 | 205,223 | 185,142 | 161,210 | ||||||||||||||
Goodwill and other intangibles impairment | — | — | 13,536 | — | 9,379 | ||||||||||||||
Restructuring charge | — | — | 1,080 | 1,114 | 341 | ||||||||||||||
Acquisition related and other | — | — | — | 1,633 | 6,204 | ||||||||||||||
Income (loss) from operations | 30,530 | 17,106 | (64,158 | ) | (32,173 | ) | (17,789 | ) | |||||||||||
Change in fair value of business combination liability | 5,642 | — | — | — | — | ||||||||||||||
Income from joint ventures | 2,761 | 889 | 105 | 227 | — | ||||||||||||||
Other income (expense), net | — | 305 | 342 | 152 | (1,158 | ) | |||||||||||||
Loss on extinguishment of debt | — | — | (611 | ) | (453 | ) | (13,205 | ) | |||||||||||
Change in fair value of preferred stock derivative liability | — | — | — | — | (353 | ) | |||||||||||||
Change in fair value of convertible senior notes | — | — | (308 | ) | 2,948 | (5,112 | ) | ||||||||||||
Write-off of investment in DreamPlay, LLC | — | — | (7,000 | ) | — | — | |||||||||||||
Interest income | 62 | 51 | 37 | 68 | 85 | ||||||||||||||
Interest expense | (12,402 | ) | (12,975 | ) | (9,829 | ) | (10,243 | ) | (15,935 | ) | |||||||||
Income (loss) before provision for income taxes | 26,593 | 5,376 | (81,422 | ) | (39,474 | ) | (53,467 | ) | |||||||||||
Provision for income taxes | 3,423 | 4,127 | 1,606 | 2,951 | 1,912 | ||||||||||||||
Net income (loss) | 23,170 | 1,249 | (83,028 | ) | (42,425 | ) | (55,379 | ) | |||||||||||
Net income (loss) attributable to non-controlling interests | (84 | ) | 6 | 57 | (57 | ) | 169 | ||||||||||||
Net income (loss) attributable to JAKKS Pacific, Inc. | $ | 23,254 | $ | 1,243 | $ | (83,085 | ) | $ | (42,368 | ) | $ | (55,548 | ) | ||||||
Net income (loss) attributable to common stockholders | $ | 23,254 | $ | 1,243 | $ | (83,085 | ) | $ | (42,368 | ) | $ | (56,031 | ) | ||||||
Basic earnings (loss) per share | $ | 1.20 | $ | 0.08 | $ | (3.89 | ) | $ | (1.83 | ) | $ | (2.16 | ) | ||||||
Diluted earnings (loss) per share | $ | 0.71 | $ | 0.07 | $ | (3.89 | ) | $ | (1.83 | ) | $ | (2.16 | ) | ||||||
Dividends declared per common share | $ | — | $ | — | $ | — | $ | — | $ | — |
Net sales reported during 2018 and 2019through 2020 were recognized under ASC 606 and net sales reported during 2015 through2016 and 2017 were recognized under ASC 605.
During the second quarter of 2020, we incurred restructuring charges of $1.6 million as a result of a Company-wide restructuring initiative. During 2020, we recognized a loss of $2.3 million related to changes in the fair value of the 3.25% convertible senior notes due in 2023 and a loss of $2.8 million related to changes in fair value of the preferred stock derivative liability.
During the third quarter of 2019, we recognized a $13.2 million loss related to the extinguishment of debt. During the fourth quarter of 2019, we assessed the recoverability of the Maui product lines and determined that the fair value was less than its carrying amount. As a result, we recorded an intangibles impairment charge of $9.4 million. During 2019, we recognized a $2.5 million loss related to changes in the fair value of the 3.25% convertible senior notes due in 2020, and a loss of $2.6 million related to changes in the fair value of the 3.25% convertible senior notes due in 2023. We also recognized $6.2 million in acquisition related and other charges related to strategic and/or refinancing transactions, including a transaction whereby we entered into, and consummated multiple, binding definitive agreements among Wells Fargo Bank, National Association, Oasis Investments II Master Fund Ltd. and an ad hoc group of holders of the 4.875% convertible senior notes due 2020 that closed in August 2019 (See2019. See Note 10 to the Consolidated Financial Statements included within Item 8 for further information). information.
During the first quarter of 2018, we recorded a charge of $3.5 million related to the write-down of license advances and minimum guarantees that are not expected to be earned through sales of the licensed products. During the third quarter of 2018, we recognized a $0.5 million loss related to the extinguishment of $8.0 million face amount of our 4.25% convertible senior notes due in 2018. During the fourth quarter of 2018, we incurred restructuring charges of $1.1 million as a result of a Company-wide restructuring initiative. During 2018, we recognized a net bad debt write-off of $8.7 million related to the Toys “R” Us bankruptcy filing, $1.6 million in acquisition related and other charges as a result of the Hong Kong Meisheng Cultural Company Limited’s expression of interest in acquiring additional shares of our common stock, and recorded a $2.9 million gain related to the fair market value adjustment for the 3.25% convertible senior notes due in 2020.
During the third quarter of 2017, we recorded impairment charges of $8.3 million to write off goodwill, $2.9 million to write off the remaining unamortized technology rights related to DreamPlay, LLC, and $2.3 million to write down several underutilized trademarks and trade names that were determined to have no value. Additionally, we wrote off our investment in DreamPlay, LLC in the amount of $7.0 million. During the third and fourth quarters of 2017, we recorded a charge of $9.6 million related to the write-down of certain excess and impaired inventory, recognized a bad debt write off of $8.9 million related to the Toys “R” Us bankruptcy filing on September 18, 2017, recorded a charge of $20.5 million related to the write-down of license advances and minimum guarantees that are not expected to be earned through sales of the licensed products and incurred restructuring charges of $1.1 million as a result of a Company-wide restructuring initiative. During the fourth quarter of 2017, we recognized a $0.6 million loss related to the extinguishment of $21.6 million face amount of our 4.25% convertible senior notes due in 2018 and we recognized a $0.3 million loss related to the fair market value adjustment for the 3.25% convertible senior notes due in 2020.
During the second quarter of 2016, we recorded income of $0.7 million related to Pacific Animation Partners and $0.2 million for funds received related to our former video game joint venture, which is included in income (loss) from joint ventures.
At December 31, | ||||||||||||||||||||
2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Consolidated Balance Sheet Data: | ||||||||||||||||||||
Cash and cash equivalents | $ | 87,953 | $ | 61,613 | $ | 53,282 | $ | 64,977 | $ | 86,064 | ||||||||||
Working capital | 112,562 | 107,461 | 106,041 | 146,911 | 236,569 | |||||||||||||||
Total assets | 329,369 | 365,222 | 342,841 | 370,349 | 464,303 | |||||||||||||||
Short-term debt | 5,950 | 1,905 | 27,211 | 26,075 | 10,000 | |||||||||||||||
Long-term debt | 150,410 | 174,962 | 139,792 | 133,497 | 203,007 | |||||||||||||||
Total stockholders' equity | 12,938 | 4,021 | 51,649 | 94,513 | 135,200 |
At December 31, | |||||||||||||||||||
2015 | 2016 | 2017 | 2018 | 2019 | |||||||||||||||
(In thousands) | |||||||||||||||||||
Consolidated Balance Sheet Data: | |||||||||||||||||||
Cash and cash equivalents | $ | 102,528 | $ | 86,064 | $ | 64,977 | $ | 53,282 | $ | 61,613 | |||||||||
Working capital | 254,967 | 236,569 | 146,911 | 106,041 | 107,461 | ||||||||||||||
Total assets | 499,620 | 464,303 | 370,349 | 342,841 | 365,222 | ||||||||||||||
Short-term debt | — | 10,000 | 26,075 | 27,211 | 1,905 | ||||||||||||||
Long-term debt | 209,166 | 203,007 | 133,497 | 139,792 | 174,962 | ||||||||||||||
Total stockholders' equity | 153,406 | 135,200 | 94,513 | 51,649 | 4,021 |
Item 7.
The following Management’sManagement’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors. You should read this section in conjunction with our consolidated financial statements and the related notes (includedincluded in Item 8).8 “Consolidated Financial Statements and Supplementary Data.”
Critical Accounting Policies
The accompanying consolidated financial statements and supplementary information were prepared in accordance with accounting principles generally accepted in the United States of America. Significant accounting policies are discussed in Note 2 to the Consolidated Financial Statements, included within Item 8. Inherent in the application of many of these accounting policies is the need for management to make estimates and judgments in the determination of certain revenues, expenses, assets and liabilities. As such, materially different financial results can occur as circumstances change and additional information becomes known. The policies with the greatest potential effect on our results of operations and financial position include:
Allowance for Doubtful Accounts.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.
Major customers’ accounts are monitored on an ongoing basis;basis and more in-depth reviews are performed based upon changes in a customer’s financial condition and/or the level of credit being extended. When a significant event occurs, such as a bankruptcy filing by a specific customer, and on a quarterly basis, the allowance is reviewed for adequacy and the balance or accrual rate is adjusted to reflect current risk prospects. When certain shocks to the market occur, customers are unilaterally reviewed to assess the potential impact of that shock on their financial stability. Many retailers have been operating under financial duress for several years. Ultimately, we assess the risk of liquidation and/or bankruptcy by a customer and the associated risklikelihood that we will not be paid for product shipped. To that end, it is not only outstanding accounts receivable balances but the decisions to design and develop account-specific product and ultimately ship product on a go-forward basis that plays into our goalattempts to maximize profitability while minimizing uncollectable accounts receivable.
Revenue Recognition for 2018 and 2019.Recognition. Our contracts with customers only include one performance obligation (i.e., sale of our products). Revenue is recognized in the gross amount at a point in time when delivery is completed and control of the promised goods is transferred to the customers. Revenue is measured as the amount of consideration we expect to be entitled to in exchange for those goods. Our contracts do not involve financing elements as payment terms with customers are less than one year. Further, because revenue is recognized at the point in time goods are sold to customers, there are no contract assets or contract liability balances.
We disaggregate our revenues from contracts with customers by reporting segment: U.S. and Canada, International,Toys/Consumer Products and Halloween. We further disaggregate revenues by major geographic region. Seeregions (see Item 8 "Consolidated Financial Statements and Supplementary Data Note 3 to the Consolidated Financial Statements included within Item 8- Business Segments, Geographic Data, and Sales by Major Customers” for further information.information).
We offer various discounts, pricing concessions, and other allowances to customers, all of which are considered in determining the transaction price. Certain discounts and allowances are fixed and determinable at the time of sale and are recorded at the time of sale as a reduction to revenue. Other discounts and allowances can vary and are determined at management’s discretion (variable consideration). Specifically, we occasionally grant discretionary credits to facilitate markdowns and sales of slow moving merchandise, and consequently accrue an allowance based on historic credits and management estimates. Further, while we generally do not allow product returns, we do make occasional exceptions to this policy, and consequently record a sales return allowance based upon historic return amounts and management estimates. These allowances (variable consideration) are estimated using the expected value method and are recorded at the time of sale as a reduction to revenue. We adjust our estimate of variable consideration at least quarterly or when facts and circumstances used in the estimation process may change. The variable consideration is not constrained as we have sufficient history on the related estimates and do not believe there is a risk of significant revenue reversal.
We also participate in cooperative advertising arrangements with some customers, whereby we allow a discount from invoiced product amounts in exchange for customer purchased advertising that features our products. Generally, these allowances range from 1% to 20% of gross sales, and are generally based upon product purchases or specific advertising campaigns. Such allowances are accrued when the related revenue is recognized. These cooperative advertising arrangements provide a distinct benefit at fair value, and are accounted for as direct selling expenses.
Sales commissions are expensed when incurred as the related revenue is recognized at a point in time and therefore the amortization period is less than one year. As a result, these costs are recorded as direct selling expenses, as incurred.
Shipping and handling activities are considered part of our obligation to transfer the products and therefore are recorded as direct selling expenses, as incurred.
Our reserve for sales returns and allowances amounted to $29.4$42.1 million as of December 31, 20182020 and $38.4 million as of December 31, 2019.
Fair value measurements.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, we use various methods including market, income and cost approaches. Based upon these approaches, we often utilize certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market-corroborated, or unobservable inputs. We utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based upon observable inputs used in the valuation techniques, we are required to provide information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values into three broad levels as follows:Level 1: | Valuations for assets and liabilities traded in active markets from readily available pricing sources for market transactions involving identical assets or liabilities. |
Level 2: | Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third-party pricing services for identical or similar assets or liabilities. |
Level 3: | Valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities. |
In instances where the determination of the fair value measurement is based upon inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based upon the lowest level input that is significant to the fair value measurement in its entirety. Our 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. Seeliability (see Item 8 "Consolidated Financial Statements and Supplementary Data Note 16 to the Consolidated Financial Statements included within Item 8- Fair Value Measurements” for further information.information).
Goodwill and other indefinite-lived intangible assets. Goodwill and indefinite-lived intangible assets are not amortized, but are tested for impairment at least annually at the reporting unit level.
Factors we consider important that could trigger an impairment review include the following:
● | Significant underperformance relative to expected historical or projected future operating results; |
● | Significant changes in the manner of our use of the acquired assets or the strategy for our overall business; |
● | Significant negative industry or economic trends. |
Due to the subjective nature of the impairment analysis, significant changes in the assumptions used to develop the estimate could materially affect the conclusion regarding the future cash flows necessary to support the valuation of long-lived assets, including goodwill. The valuation of goodwill involves a high degree of judgment and uncertainty related to our key assumptions. Any changes in our key projections or estimates could result in a reporting unit either passing or failing the first step of the impairment model, which could significantly change the amount of any impairment ultimately recorded.
Based upon the assumptions underlying the valuation, impairment is determined by estimating the fair value of a reporting unit and comparing that value to the reporting unit’s book value. Goodwill is tested for impairment annually, and on an interim basis if certain events or circumstances indicate that an impairment loss may have been incurred. If the fair value is more than the carrying value of the reporting unit, an impairment loss is not indicated. If a reporting unit's carrying value exceeds its fair value, an impairment charge would be recognized for the excess amount, not to exceed the carrying amount of goodwill.
We performed our annual assessment of goodwill for impairment as of our annual testing date, on April 1, 2019,2020, for each of our reporting units by evaluating qualitative factors, including, but not limited to, the performance of each reporting unit, general economic conditions, access to capital, the industry and competitive environment, and the interest rate environment. Based on our assessment, we determined that the fair values of our reporting units were not less than the carrying amounts. No goodwill impairment was determined to have occurred for the year ended December 31, 2019.2020.
Impairment of Long-Lived Assets. When facts and circumstances indicate that the carrying values of long-lived assets, including buildings, equipment and amortizable intangible assets, may be impaired, we perform an evaluation of recoverability by comparing the carrying values of the net assets to their related projected undiscounted future cash flows, in addition to other quantitative and qualitative analysis. Our estimates are subject to uncertainties and may be impacted by various external factors such as economic conditions and market competition. While we believe the inputs and assumptions utilized in our analysis of future cash flows are reasonable, events or circumstances may change, which could cause us to revise these estimates.
Reserve for Inventory Obsolescence.Obsolescence. We value our inventory at the lower of cost or net realizable value. Based upon a consideration of quantities on hand, actual and projected sales volume, anticipated product selling prices and product lines planned to be discontinued, slow-moving and obsolete inventory is written down to its net realizable value.
Failure to accurately predict and respond to consumer demand could result in us under-producing popular items or over-producing less popular items. Furthermore, significant changes in demand for our products would impact management’s estimates in establishing our inventory provision.
Management’s estimates are monitored on a quarterly basis, and a further adjustment to reduce inventory to its net realizable value is recorded as an increase to cost of sales when deemed necessary under the lower of cost or net realizable value standard.
When unexpected shocks to market demand occur, (such as the COVID-19 pandemic market shock), we review whether that shock mighthas materially impactimpacted the value of our owned inventory. In some cases where customers have cancelled orders, accommodation can be reached that the product will be reordered when the customer has restarted operations (in the event of store closures) or the customer agrees to minimize/eliminate requests for product line refreshment (such as in(in the event of Halloween order cancellations) which allows the inventory and in some cases raw materials to be held through to the following calendar year without incurring any additional obsolescence.
Income Allocation for Income Taxes.
Our annual income tax provision and related income tax assets and liabilities are based upon actual income as allocated to the various tax jurisdictions based upon our transfer pricing study, US and foreign statutory income tax rates and tax regulations and planning opportunities in the various jurisdictions in which we operate. Significant judgment is required in interpreting tax regulations in the U.S. and foreign jurisdictions, and in evaluating worldwide uncertain tax positions. Actual results could differ materially from those judgments, and changes from such judgments could materially affect our consolidated financial statements.Income taxes and interest and penalties related to income tax payable.
We do not file a consolidated returnWe must assess the likelihood that we will be able to recover our deferred tax assets. Deferred tax assets are reduced by a valuation allowance, if, based upon the weight of available evidence, it is more likely than not that we will not realize some portion or all of the deferred tax assets. We consider all available positive and negative evidence when assessing whether it is more likely than not that deferred tax assets are recoverable. We consider evidence such as our past operating results, the existence of cumulative losses in previous periods and our forecast of future taxable income. We believe this to be a critical accounting policy because should there be a change in our ability to recover our deferred tax assets, our tax provision would increase in the period in which we determine that the recovery is not likely, as well as a decrease in the period in which the assessment of the recoverability of the deferred tax assets reverse,reverses, which could have a material impact on our results of operations.
We accrue a tax reserve for additional income taxes and interest, which may become payable in future years as a result of audit adjustments by tax authorities. 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, 2019,2020, our income tax reserves were approximately $1.6$1.0 million and relaterelates to the potential tax settlement in Hong Kong and adjustments in the area of withholding taxes.Kong.
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.
Share-Based Compensation. We grant restricted stock units and awards to our employees (including officers) and to non-employee directors under our 2002 Stock Award and Incentive Plan (the “Plan”), as amended. The benefits provided under the Plan are share-based payments. We amortize over a requisite service period, the net total deferred stock expense based upon the fair value of the underlying common stock on the date of the grants. In certain instances, the service period may differ from the period in which each award will vest. Additionally, certain groups of grants are subject to performance criteria or an expected forfeiture rate calculation.
Recent Accounting Pronouncements.
See Item 8 "Consolidated Financial Statements and Supplementary Data Note 2 to the Consolidated Financial Statements included within Item 8.- Summary of Significant Accounting Policies.”
Results of Operations
The following table sets forth, for the periods indicated, certain statement of operations data as a percentage of net sales.
Year Ended December 31, | ||||||||
2020 | 2019 | |||||||
Net sales | 100.0 | % | 100.0 | % | ||||
Cost of sales | 71.0 | 73.4 | ||||||
Gross profit | 29.0 | 26.6 | ||||||
Selling, general and administrative expenses | 26.1 | 26.9 | ||||||
Intangible asset impairment | — | 1.6 | ||||||
Restructuring charge | 0.3 | 0.1 | ||||||
Pandemic related charges | 0.1 | — | ||||||
Acquisition related and other | — | 1.0 | ||||||
Income (loss) from operations | 2.5 | (3.0 | ) | |||||
Income from joint ventures | — | — | ||||||
Other income (expense), net | — | (0.2 | ) | |||||
Loss on extinguishment of debt | — | (2.2 | ) | |||||
Change in fair value of preferred stock derivative liability | (0.5 | ) | (0.1 | ) | ||||
Change in fair value of convertible senior notes | (0.4 | ) | (0.9 | ) | ||||
Interest income | — | — | ||||||
Interest expense | (4.2 | ) | (2.6 | ) | ||||
Loss before provision for income taxes | (2.6 | ) | (9.0 | ) | ||||
Provision for income taxes | 0.2 | 0.3 | ||||||
Net loss | (2.8 | ) | (9.3 | ) | ||||
Net income (loss) attributable to non-controlling interests | — | — | ||||||
Net loss attributable to JAKKS Pacific, Inc. | (2.8 | )% | (9.3 | )% | ||||
Net loss attributable to common stockholders | (3.0 | )% | (9.4 | )% |
Year Ended December 31, | ||||||||
2017 | 2018 | 2019 | ||||||
Net sales | 100.0 | % | 100.0 | % | 100.0 | % | ||
Cost of sales | 74.6 | 72.6 | 73.4 | |||||
Gross profit | 25.4 | 27.4 | 26.6 | |||||
Selling, general and administrative expenses | 33.5 | 32.6 | 26.9 | |||||
Goodwill and other intangibles impairment | 2.2 | — | 1.6 | |||||
Restructuring charge | 0.2 | 0.2 | 0.1 | |||||
Acquisition related and other | — | 0.3 | 1.0 | |||||
Loss from operations | (10.5 | ) | (5.7 | ) | (3.0 | ) | ||
Income from joint ventures | — | — | — | |||||
Other income (expense), net | 0.1 | — | (0.2 | ) | ||||
Loss on extinguishment of debt | (0.1 | ) | (0.1 | ) | (2.2 | ) | ||
Change in fair value of preferred stock derivative liability | — | — | (0.1 | ) | ||||
Change in fair value of convertible senior notes | (0.1 | ) | 0.5 | (0.9 | ) | |||
Write-off of investment in DreamPlay, LLC | (1.1 | ) | — | — | ||||
Interest income | — | — | — | |||||
Interest expense | (1.6 | ) | (1.8 | ) | (2.6 | ) | ||
Loss before provision for income taxes | (13.3 | ) | (7.1 | ) | (9.0 | ) | ||
Provision for income taxes | 0.2 | 0.5 | 0.3 | |||||
Net loss | (13.5 | ) | (7.6 | ) | (9.3 | ) | ||
Net income (loss) attributable to non-controlling interests | 0.1 | — | — | |||||
Net loss attributable to JAKKS Pacific, Inc. | (13.6 | )% | (7.6 | )% | (9.3 | )% | ||
Net loss attributable to common stockholders | (13.6 | )% | (7.6 | )% | (9.4 | )% |
The following table summarizes, for the periods indicated, certain statement of operations data by segment (in thousands).
Year Ended December 31, | ||||||||
2020 | 2019 | |||||||
Net Sales | ||||||||
Toys/Consumer Products | $ | 427,122 | $ | 479,038 | ||||
Halloween | 88,750 | 119,611 | ||||||
515,872 | 598,649 | |||||||
Cost of Sales | ||||||||
Toys/Consumer Products | 294,792 | 344,481 | ||||||
Halloween | 71,315 | 94,823 | ||||||
366,107 | 439,304 | |||||||
Gross Profit | ||||||||
Toys/Consumer Products | 132,330 | 134,557 | ||||||
Halloween | 17,435 | 24,788 | ||||||
$ | 149,765 | $ | 159,345 |
Year Ended December 31, | |||||||||||
2017 | 2018 | 2019 | |||||||||
Net Sales | |||||||||||
U.S. and Canada | $ | 406,411 | $ | 364,313 | $ | 384,585 | |||||
International | 107,231 | 101,873 | 94,453 | ||||||||
Halloween | 99,469 | 101,624 | 119,611 | ||||||||
613,111 | 567,810 | 598,649 | |||||||||
Cost of Sales | |||||||||||
U.S. and Canada | 297,115 | 260,281 | 275,831 | ||||||||
International | 81,381 | 69,580 | 68,650 | ||||||||
Halloween | 78,934 | 82,233 | 94,823 | ||||||||
457,430 | 412,094 | 439,304 | |||||||||
Gross Profit | |||||||||||
U.S. and Canada | 109,296 | 104,032 | 108,754 | ||||||||
International | 25,850 | 32,293 | 25,803 | ||||||||
Halloween | 20,535 | 19,391 | 24,788 | ||||||||
$ | 155,681 | $ | 155,716 | $ | 159,345 |
Comparison of the Years Ended December 31, 20192020 and 20182019
Net Sales
Toys/Consumer Products. Net sales of our U.S. and CanadaToys/Consumer Products segment were $384.6$427.1 million in 2020, compared to $479.0 million in 2019, compared to $364.3 million in 2018, representing an increasea decrease of $20.3$51.9 million, or 5.6%10.8%. The increasedecrease in net sales was primarily due to lower sales of Frozen 2, which was not soldlaunched in 2019. In addition, the prior year period, in additionSeasonal business was down due to increasedreduced sales of Nintendoour Morf scooter business and Frozen, partially offset by lower salesthe discontinuation of Incredibles 2, Fancy Nancy, Moana and Squish-Dee-Lish. The liquidation of Toys “R” Us in the U.S. at the end of the 2018 first quarter also had an impact on the increase in net sales year over year.our Funnoodle pool noodle product line to improve margin.
Halloween. Net sales of our InternationalHalloween segment were $94.5$88.8 million in 2019,2020, compared to $101.9$119.6 million in 2018,2019, representing a decrease of $7.4$30.8 million, or 7.3%25.8%. The decrease in net sales was primarily driven by lower salesthe impact of Incredibles 2, Disney Princess products,COVID-19 and Squish-Dee-Lish, partially offset by higher sales of Frozen 2, which was not sold inrelated social distancing restrictions on the prior year period.
Cost of Sales
Toys/Consumer Products. Cost of sales of our U.S. and CanadaToys/Consumer Products segment was $275.8$294.8 million, or 71.7%69.0% of related net sales in 2020 compared to $344.5 million, or 71.9% of related net sales in 2019 compared to $260.3representing a decrease of $49.7 million or 71.5% of related net sales in 2018, representing an increase of $15.5 million, or 6.0%14.4%. The increasedecrease in dollars is due to higherlower overall sales in 2019.2020. The decrease in percentage of net sales, year-over-year is due to product margin improvement and lower product obsolescence and tooling expenses.
Halloween.Cost of sales of our InternationalHalloween segment was $68.7$71.3 million, or 72.7%80.3% of related net sales for 2020 compared to $94.8 million, or 79.3% of related net sales in 2019 compared to $69.6 million, or 68.3% of related net sales in 2018, representing a decrease of $0.9$23.5 million, or 1.3%24.8%. The decrease in dollars is primarily driven bydue to lower overall sales in 2019.2020. The increase as a percentage of net sales, year-over-year, is due to a higher averageoverall royalty rate in 2019, as well as, lower average selling prices in 2019 on certain older products, such as Incredibles 2, partially2020 slightly offset by higherlower product margins for Frozen 2.obsolescence expenses.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $134.9 million in 2020 and $161.2 million in 2019, constituting 26.1% and $185.1 million in 2018, constituting 26.9% and 32.6% of net sales, respectively. Selling, general and administrative expenses decreased by $23.9 million, from the prior year period primarily driven by lower compensation, in part, due to a Company-wide COVID restructuring initiative, lower advertising expenses,travel, and lower product development costs and a bad debt charge of $9.6 million due to the Toys “R” Us liquidation in the U.S. in 2018.direct selling expenses.
Intangible Asset Impairment
Intangible asset impairment was nil in 2020, as compared to $9.4 million in 2019, as compared to nil in 2018.2019. In 2019, we recorded impairment charges of $9.4 million related to the Maui product lines because its fair value was determined to be less than its carrying amount.
Restructuring Charge
In 20192020 and 2018,2019, we recognized $1.6 million and $0.3 million, and $1.1 million, respectively, of restructuring charges as a result of a Company-wide restructuring initiative in the 2018 fourth quarter.respectively. The restructuring charges are primarily related to employee severance costs.severance.
Pandemic Related Charges
In 2020, we recognized $0.4 million in spending directly attributable to making necessary accommodations related to the COVID-19 pandemic.
Acquisition Related and Other
In 2019, and 2018, we recognized $6.2 million and $1.6 million, respectively, in acquisition related and other charges related to strategic and/or refinancing transactions, including the Recapitalization Transaction closed in August 2019.
Other Income (Expense), net
Other income (expense), net was $0.3 million in 2020, as compared to ($1.2) million in 2019, as compared to $0.2 million in 2018.2019. In 2019, we recognized a $1.2 million loss in other expense primarily related to a Delaware unclaimed property liability settlement.
Interest Expense
Interest expense was $15.9$21.6 million for the year ended December 31, 2019,2020, as compared to $10.2$15.9 million in the prior year period. In 2020, we booked interest expense of $2.0 million related to our convertible senior notes due in 2020 and 2023, $18.2 million related to our Term Loan, which includes $3.4 million of payment-in-kind interest, and $3.9 million related to amortization of the debt discount and deferred financing fees, and $1.2 million related to our revolving credit facility. In 2019, we booked interest expense of $5.3 million related to our convertible senior notes, and $10.6 million primarily related to our revolving credit and term loan facilities, which includes $1.7 million of payment-in-kind interest, and $1.5 million related to amortization of the debt discount and deferred financing fees. In 2018, we recorded interest expense of $7.6 million related to our convertible senior notes due in 2018 and 2020 and $2.6 million related to our GACP term loan, as well as our revolving credit facility.
Provision for Income Taxes
Our income tax expense, which includes federal, state and foreign income taxes and discrete items, was $0.7 million, or an effective tax rate of (5.5%) for 2020. During 2019, the income tax expense was $1.9 million, or an effective tax rate of (3.6%) for 2019. During 2018, the income.
The 2020 tax expense was $3.0of $0.7 million or anincluded a discrete tax benefit of ($0.3) million primarily comprised of return to provision and uncertain tax position adjustments. Absent these discrete tax benefits, our effective tax rate of (7.5%for 2020 was (7.7%)., primarily due to the various state taxes and taxes on foreign income.
The 2019 tax expense of $1.9 million included a discrete tax expense of $0.2 million primarily comprised of return to provision and uncertain tax position adjustments. Absent these discrete tax expenses, our effective tax rate for 2019 was (3.1%), primarily due to the various 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, 2019,2020, a valuation allowance of $92.8 million has been recorded against the deferred tax assets that more likely than not will not be realized. The net deferred tax liabilities of $14,000 consists of the net deferred tax liabilities in the foreign jurisdiction, where we are in a cumulative income position, partially offset by the deferred tax assets in the US related to the AMT credit carryforward, which are fully realizable.
Uncertainties that may have asignificantimpact 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 has takentook 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 recently 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 will likely createcreates 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 predict with any certainty the severity with which this disease will strike the United States or other places worldwide where we sell our products or manufacture our products. Accordingly, we cannot estimate the extent by which we will be negatively impacted by this disease. In the relatively short period with which the world has been dealing with this pandemic, significant economic turmoil has already impacted world markets. Numerous nationally recognized economists are predicting that the disease will lead to a worldwide recession. Should that occur, we can expect that our sales, net income and cash flows will be negatively impacted. While the governmental organizations of the United States, as well as governments across the world, are implementing emergency economic measures and announcing the consideration of additional emergency economic assistance packages, it is unclear what impact they are having, and will have, on the economy in the United States and worldwide. Great uncertainty surrounds the length of time this disease will continue to spread, the number of people it will impact, directly and indirectly, and the extent governments will continue to impose, or add additional, quarantines, curfews, travel restrictions and closures of retail stores. In addition, even following control of the disease and the end of the pandemic, the economic dislocation caused by the disease to so many people may linger and be so significant that consumers’ focus could be directed away from consumer discretionary spending for products such as ours for an extended period of time. For all of these reasons, at this time we cannot quantify the extent of the impact this disease will have on our sales, net income and cash flows, but it could be significant.
Quarterly Fluctuations and Seasonality
We have experienced significant quarterly fluctuations in operating results and anticipate these fluctuations in the future. The operating results for any quarter are not necessarily indicative of results for any future period. Our first quarter is typically expected to be the least profitable as a result of lower net sales but substantially similar fixed operating expenses. This is consistent with the performance of many companies in the toy industry.
The following table presents our unaudited quarterly results for the years indicated. The seasonality of our business is reflected in this quarterly presentation.
2020 | 2019 | |||||||||||||||||||||||||||||||
(unaudited) | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||||||||||||||||||||||||
Net sales | $ | 66,557 | $ | 78,758 | $ | 242,290 | $ | 128,267 | $ | 70,826 | $ | 95,182 | $ | 280,130 | $ | 152,511 | ||||||||||||||||
As a % of full year | 12.9 | % | 15.2 | % | 47.0 | % | 24.9 | % | 11.8 | % | 15.9 | % | 46.8 | % | 25.5 | % | ||||||||||||||||
Gross profit | $ | 16,350 | $ | 16,770 | $ | 74,616 | $ | 42,029 | $ | 14,340 | $ | 17,746 | $ | 80,859 | $ | 46,400 | ||||||||||||||||
As a % of full year | 10.9 | % | 11.2 | % | 49.8 | % | 28.1 | % | 9.0 | % | 11.1 | % | 50.8 | % | 29.1 | % | ||||||||||||||||
As a % of net sales | 24.6 | % | 21.3 | % | 30.8 | % | 32.8 | % | 20.2 | % | 18.6 | % | 28.9 | % | 30.4 | % | ||||||||||||||||
Income (loss) from operations | $ | (15,986 | ) | $ | (9,746 | ) | $ | 37,513 | $ | 1,127 | $ | (24,041 | ) | $ | (18,649 | ) | $ | 35,662 | $ | (10,761 | ) | |||||||||||
As a % of full year | (123.8 | )% | (75.5 | )% | 290.6 | % | 8.7 | % | 135.1 | % | 104.8 | % | (200.4 | )% | 60.5 | % | ||||||||||||||||
As a % of net sales | (24.0 | )% | (12.4 | )% | 15.5 | % | 0.9 | % | (33.9 | )% | (19.6 | )% | 12.7 | % | (7.1 | )% | ||||||||||||||||
Income (loss) before provision for (benefit from) income taxes | $ | (11,722 | ) | $ | (22,996 | ) | $ | 32,164 | $ | (10,855 | ) | $ | (29,372 | ) | $ | (21,896 | ) | $ | 17,430 | $ | (19,629 | ) | ||||||||||
As a % of net sales | (17.6 | )% | (29.2 | )% | 13.3 | % | (8.5 | )% | (41.5 | )% | (23.0 | )% | 6.2 | % | (12.9 | )% | ||||||||||||||||
Net income (loss) | $ | (11,998 | ) | $ | (23,268 | ) | $ | 32,431 | $ | (11,309 | ) | $ | (29,127 | ) | $ | (22,485 | ) | $ | 16,414 | $ | (20,181 | ) | ||||||||||
As a % of net sales | (18.0 | )% | (29.5 | )% | 13.4 | % | (8.8 | )% | (41.1 | )% | (23.6 | )% | 5.9 | % | (13.2 | )% | ||||||||||||||||
Net income (loss) attributable to non-controlling interests | $ | 40 | $ | 8 | $ | 49 | $ | 33 | $ | 31 | $ | 57 | $ | (31 | ) | $ | 112 | |||||||||||||||
As a % of net sales | 0.1 | % | — | % | — | % | — | % | — | % | 0.1 | % | — | % | 0.1 | % | ||||||||||||||||
Net income (loss) attributable to JAKKS Pacific, Inc. | $ | (12,038 | ) | $ | (23,276 | ) | $ | 32,382 | $ | (11,342 | ) | $ | (29,158 | ) | $ | (22,542 | ) | $ | 16,445 | $ | (20,293 | ) | ||||||||||
As a % of net sales | (18.1 | )% | (29.6 | )% | 13.4 | % | (8.8 | )% | (41.2 | )% | (23.7 | )% | 5.9 | % | (13.3 | )% | ||||||||||||||||
Net income (loss) attributable to common stockholders | $ | (12,345 | ) | $ | (23,588 | ) | $ | 32,066 | $ | (11,664 | ) | $ | (29,158 | ) | $ | (22,542 | ) | $ | 16,265 | $ | (20,596 | ) | ||||||||||
As a % of net sales | (18.5 | )% | (29.9 | )% | 13.2 | % | (9.1 | )% | (41.2 | )% | (23.7 | )% | 5.8 | % | (13.5 | )% | ||||||||||||||||
Diluted earnings (loss) per share | $ | (4.09 | ) | $ | (7.70 | ) | $ | 3.19 | $ | (2.55 | ) | $ | (12.38 | ) | $ | (9.55 | ) | $ | 5.08 | $ | (6.95 | ) | ||||||||||
Weighted average shares and equivalents outstanding | 3,021 | 3,064 | 9,307 | 4,575 | 2,356 | 2,360 | 6,035 | 2,962 |
2018 | 2019 | ||||||||||||||||||||||||||||||
(unaudited) | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | |||||||||||||||||||||||
Net sales | $ | 93,004 | $ | 105,781 | $ | 236,699 | $ | 132,326 | $ | 70,826 | $ | 95,182 | $ | 280,130 | $ | 152,511 | |||||||||||||||
As a % of full year | 16.4 | % | 18.6 | % | 41.7 | % | 23.3 | % | 11.8 | % | 15.9 | % | 46.8 | % | 25.5 | % | |||||||||||||||
Gross profit | $ | 22,959 | $ | 27,941 | $ | 64,330 | $ | 40,486 | $ | 14,340 | $ | 17,746 | $ | 80,859 | $ | 46,400 | |||||||||||||||
As a % of full year | 14.7 | % | 18.0 | % | 41.3 | % | 26.0 | % | 9.0 | % | 11.1 | % | 50.8 | % | 29.1 | % | |||||||||||||||
As a % of net sales | 24.7 | % | 26.4 | % | 27.2 | % | 30.6 | % | 20.2 | % | 18.6 | % | 28.9 | % | 30.4 | % | |||||||||||||||
Income (loss) from operations | $ | (35,658 | ) | $ | (12,140 | ) | $ | 20,043 | $ | (4,418 | ) | $ | (24,041 | ) | $ | (18,649 | ) | $ | 35,662 | $ | (10,761 | ) | |||||||||
As a % of full year | 110.8 | % | 37.8 | % | (62.3 | )% | 13.7 | % | 135.1 | % | 104.8 | % | (200.4 | )% | 60.5 | % | |||||||||||||||
As a % of net sales | (38.3 | )% | (11.5 | )% | 8.5 | % | (3.3 | )% | (33.9 | )% | (19.6 | )% | 12.7 | % | (7.1 | )% | |||||||||||||||
Income (loss) before provision for (benefit from) income taxes | $ | (38,529 | ) | $ | (16,497 | ) | $ | 17,652 | $ | (2,100 | ) | $ | (29,372 | ) | $ | (21,896 | ) | $ | 17,430 | $ | (19,629 | ) | |||||||||
As a % of net sales | (41.4 | )% | (15.6 | )% | 7.5 | % | (1.6 | )% | (41.5 | )% | (23.0 | )% | 6.2 | % | (12.9 | )% | |||||||||||||||
Net income (loss) | $ | (36,193 | ) | $ | (18,588 | ) | $ | 15,699 | $ | (3,343 | ) | $ | (29,127 | ) | $ | (22,485 | ) | $ | 16,414 | $ | (20,181 | ) | |||||||||
As a % of net sales | (38.9 | )% | (17.6 | )% | 6.6 | % | (2.5 | )% | (41.1 | )% | (23.6 | )% | 5.9 | % | (13.2 | )% | |||||||||||||||
Net income (loss) attributable to non-controlling interests | $ | 51 | $ | (29 | ) | $ | 17 | $ | (96 | ) | $ | 31 | $ | 57 | $ | (31 | ) | $ | 112 | ||||||||||||
As a % of net sales | 0.1 | % | — | % | — | % | (0.1 | )% | — | % | 0.1 | % | — | % | 0.1 | % | |||||||||||||||
Net income (loss) attributable to JAKKS Pacific, Inc. | $ | (36,244 | ) | $ | (18,559 | ) | $ | 15,682 | $ | (3,247 | ) | $ | (29,158 | ) | $ | (22,542 | ) | $ | 16,445 | $ | (20,293 | ) | |||||||||
As a % of net sales | (39.0 | )% | (17.5 | )% | 6.6 | % | (2.5 | )% | (41.2 | )% | (23.7 | )% | 5.9 | % | (13.3 | )% | |||||||||||||||
Net income (loss) attributable to common stockholders | $ | (36,244 | ) | $ | (18,559 | ) | $ | 15,682 | $ | (3,247 | ) | $ | (29,158 | ) | $ | (22,542 | ) | $ | 16,265 | $ | (20,596 | ) | |||||||||
As a % of net sales | (39.0 | )% | (17.5 | )% | 6.6 | % | (2.5 | )% | (41.2 | )% | (23.7 | )% | 5.8 | % | (13.5 | )% | |||||||||||||||
Diluted earnings (loss) per share | $ | (1.57 | ) | $ | (0.80 | ) | $ | 0.38 | $ | (0.14 | ) | $ | (1.24 | ) | $ | (0.96 | ) | $ | 0.51 | $ | (0.70 | ) | |||||||||
Weighted average shares and equivalents outstanding | 23,100 | 23,106 | 45,686 | 23,106 | 23,557 | 23,600 | 60,345 | 29,617 |
Consistent with the seasonality of our business, the first, second and fourth quarters of 20182020 and 2019, experienced seasonally low sales which coupled with fixed overhead resulted in significant net losses.
Quarterly and year-to-date computations of income (loss) per share amounts are made independently. Therefore, the sum of the per share amounts for the quarters may not agree with the per share amounts for the year.
Liquidity and Capital Resources
As of December 31, 2019,2020, we had working capital of $107.5$112.6 million compared to $106.0$107.5 million as of December 31, 2018.2019.
Operating activities provided net cash of $11.4$43.6 million in 2017, used net cash of $0.6 million in 2018,2020 and provided net cash of $21.8 million in 2019. The increase in net cash provided by operating activities in 2020 was primarily impacted by the net loss, excluding the impact of non-cash charges, and a decrease in accounts receivable, inventory, and prepaid expenses and other assets, partially offset by a decrease in accounts payable. Net cash provided by operating activities in 2019 was primarily impacted by an increase in accounts payable, accrued expenses and reserve for sales returnreturns and allowances. In 2018, net cash used in operating activities was primarily impacted by a decrease in accrued expenses and an increase in prepaid expenses and other assets due, in part, to an increase in advance royalty payments. In 2017, net cash was favorably impacted primarily by decreases in accounts receivable and inventory. 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. However, we may incur costs or other losses as a result of not placing orders consistent with our forecasts for product manufactured by our suppliers or manufacturers for a variety of reasons including customer order cancellations or a decline in demand. As part of our strategy to develop and market new products, we have entered into various character and product licenses with royaltiesroyalties/obligations generally ranging from 1% to 21%25% payable on net sales of such products. As of December 31, 2019,2020, these agreements required future aggregate minimum royalty guarantees of $53.0$35.2 million, exclusive of $33.2$14.5 million in advances already paid. Of this $53.0$35.2 million future minimum royalty guarantee, $39.7$32.1 million is due over the next twelve months.
Investing activities used net cash of $14.8 million, $11.6$8.2 million and $9.4 million for the yearsyear ended December 31, 2017, 20182020 and 2019, 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 $21.4$10.9 million for the years ended December 31, 2017, provided $8.0 million for the year ended December 31, 2018in 2020 and used $5.8 million forin 2019. The cash used in 2020 primarily consists of the year ended December 31, 2019.repayment of our term loan facility of $15.1 million and retirement of our 2020 convertible senior notes of $1.9 million, partially offset by the proceeds from the loan under the Paycheck Protection Program (the “PPP Loan”) secured under the Coronavirus Aid Relief and Economic Security Act (the “CARES Act”). The cash used in 2019 primarily consists of the repayment of our GACP term loan of $20.0 million and net payments of $7.5 million, as well as, debt issuance costs incurred in connection with the Recapitalization Transaction (see Item 8 "Consolidated Financial Statements and Supplementary Data Note 10 - Debt)Debt”), partially offset by the net proceeds included as a part of our New Term Loan agreement of $27.4 million. The cash provided in 2018 consists primarily of the net proceeds from our term loan facility of $18.7 million and credit facility net borrowings of $2.5 million, partially offset by the retirement of $13.2 million of the 2018 convertible senior notes. The cash used in 2017 consists primarily of the cash portion of $35.6 million in the exchange of $51.1 million principal amount of our 2018 convertible senior notes, partially offset by the issuance of approximately 3.7 million shares of common stock for cash in the amount of $19.3 million.
The following is a summary of our significant contractual cash obligations for the periods indicated that existed as of December 31, 20192020 and is based upon information appearing in the notes to the consolidated financial statements (in thousands):
2021 | 2022 | 2023 | 2024 | 2025 | Thereafter | Total | ||||||||||||||||||||||
Short-term debt | $ | 5,950 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 5,950 | ||||||||||||||
Long-term debt | — | 5,256 | 137,683 | — | — | — | 142,939 | |||||||||||||||||||||
Interest on debt | 10,992 | 10,848 | 16,028 | * | — | — | — | 37,868 | ||||||||||||||||||||
Operating leases | 11,082 | 10,603 | 6,049 | 590 | 281 | 258 | 28,863 | |||||||||||||||||||||
Minimum guaranteed license/royalty payments | 32,106 | 2,696 | 350 | 20 | — | — | 35,172 | |||||||||||||||||||||
Employment contracts | 5,040 | 2,344 | 2,362 | 2,410 | — | — | 12,156 | |||||||||||||||||||||
Total contractual cash obligations | $ | 65,170 | $ | 31,747 | $ | 162,472 | $ | 3,020 | $ | 281 | $ | 258 | $ | 262,948 |
2020 | 2021 | 2022 | 2023 | 2024 | Thereafter | Total | |||||||||||||||||||||
Short-term debt | $ | 1,905 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 1,905 | |||||||||||||
Long-term debt | — | — | — | 172,351 | — | — | 172,351 | ||||||||||||||||||||
Interest on debt | 12,238 | 12,510 | 12,828 | 16,683 | * | — | — | 54,259 | |||||||||||||||||||
Operating leases | 11,111 | 10,802 | 10,143 | 5,681 | 397 | 521 | 38,655 | ||||||||||||||||||||
Minimum guaranteed license/royalty payments | 39,653 | 12,779 | 535 | 10 | 20 | — | 52,997 | ||||||||||||||||||||
Employment contracts | 6,948 | 4,050 | — | — | — | — | 10,998 | ||||||||||||||||||||
Total contractual cash obligations | $ | 71,855 | $ | 40,141 | $ | 23,506 | $ | 194,725 | $ | 417 | $ | 521 | $ | 331,165 |
* Includes $14.7$2.5 million of payment-in-kind interest for the 3.25% convertible senior notes due 2023 (Seeand $11.5 million of payment-in-kind interest for the New Term Loan (see Item 8 "Consolidated Financial Statements and Supplementary Data Note 10 to the Consolidated Financial Statements included within Item 8)- Debt”).
The above table excludes any potential uncertain income tax liabilities that may become payable upon examination of our income tax returns by taxing authorities. Such amounts and periods of payment cannot be reliably estimated. Seeestimated (see Item 8 "Consolidated Financial Statements and Supplementary Data Note 13 to the consolidated financial statements- Income Taxes” for further explanation of our uncertain tax positions.positions).
As of December 31, 2019,2020, we have substantial indebtedness including $134.8$124.5 million (including $4.7 million in payment-in-kind interest) of outstanding indebtedness under a First Lien Term Loan Facility Credit Agreement (the “New Term Loan Agreement). As of December 31, 2019,Agreement”) and we have no outstanding indebtedness under anour amended and extended Credit Agreement (the “Amended ABL Credit Agreement” or “Amended Wells Fargo Credit Agreement”) with Wells Fargo Bank, National Association (“Wells Fargo”). We also have a $6.2 million PPP loan under the PPP secured under the CARES Act.
The New Term Loan Agreement and Amended ABL Credit Agreement each contain negative covenants that, subject to certain exceptions, limit theour ability, of the Company and its subsidiaries to, among other things, to incur additional indebtedness, make restricted payments, pledge their assets as security, make investments, loans, advances, guarantees and acquisitions, undergo fundamental changes and enter into transactions with affiliates, as well as cross-default provisions. Commencing with the fiscal quarter ending September 30, 2020, we are also required underThe original terms of the New Term Loan Agreement required us to maintain a minimum EBITDAtrailing 12-month Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) (as defined and adjusted therein) of not less than $34.0 million over the previous twelve months and a minimum liquidity of not less than $10.0 million.million commencing with the fiscal quarter ending September 30, 2020.
On October 16, 2020, we reached an agreement (the “Amendment”) with holders of our term loan and Wells Fargo Bank, National Association (“Wells Fargo”), holder of our revolving credit facility, to amend our New Term Loan Agreement and defer the EBITDA covenant calculation until March 31, 2022. Under the Amendment, the trailing 12-month EBITDA requirement was reduced to $25.0 million, which will not be calculated earlier than March 31, 2022. The Amendment also required us to pre-pay $15.0 million of the New Term Loan immediately and, under certain conditions, pre-pay up to an additional $5.0 million no later than the third quarter of fiscal year 2021. In connection with the Amendment on October 20, 2020, we paid $15.0 million of our outstanding principal amount and $0.3 million in related interest and PIK interest.
The New Term Loan Agreement contains events of default that are customary for a facility of this nature, including nonpayment of principal, nonpayment of interest, fees or other amounts, material inaccuracy of representations and warranties, violation of covenants, cross-default to other material indebtedness, bankruptcy or insolvency events, material judgment defaults and a change of control as specified in the New Term Loan Agreement, and cross-default provisions with the Amended Wells Fargo Credit Agreement. If an event of default occurs under either Agreement, the maturity of the amounts owed under the New Term Loan Agreement and the Amended Wells Fargo Credit Agreement may be accelerated.
We were in compliance with the financial covenants under the New Term Loan Agreement as of December 31, 2019. Given the current uncertainties created by the COVID-19 pandemic, as discussed further in Note 1 "Principal Industry," there can be no assurance as to our ability to achieve the minimum EBITDA threshold required under the New Term Loan Agreement. Failure to satisfy such requirement would constitute an event of default under the New Term Loan Agreement and Amended ABL Credit Agreement unless the lenders agreed to waive compliance with such requirement.2020.
Debt and Credit Facilities
Convertible Senior Notes
In July 2013, we sold an aggregate of $100.0 million principal amount of 4.25% convertible senior notes due 2018 (the “2018 Notes”). The 2018 Notes, which were senior unsecured obligations, paid interest semi-annually in arrears on August 1 and February 1 of each year at a rate of 4.25% per annum and matured on August 1, 2018. TheExcluding the impact of the 1 for 10 reverse stock split, the initial conversion rate for the 2018 Notes was 114.3674 shares of our common stock per $1,000 principal amount of notes, equivalent to an initial conversion price of approximately $8.74 per share of common stock, subject to adjustment in certain events. In 2016, we repurchased and retired an aggregate of approximately $6.1 million principal amount of the 2018 Notes. During the first quarter of 2017, we exchanged and retired $39.1 million principal amount of the 2018 Notes at par for $24.1 million in cash and approximately 2.9 million290,000 shares of our common stock. During the second quarter of 2017, we exchanged and retired $12.0 million principal amount of the 2018 Notes at par for $11.6 million in cash and 112,40011,240 shares of our common stock.
In August 2017, we agreed with Oasis Management and Oasis Investments II Master Fund Ltd., (collectively, “Oasis”) the holder of approximately $21.6 million face amount of our 4.25% convertible senior notes due in 2018 Notes, to extend the maturity date of these notes to November 1, 2020. In addition, the interest rate was reduced to 3.25% per annum, and excluding the impact of the 1 for 10 reverse stock split, the conversion rate was increased to 328.0302 shares of our common stock per $1,000 principal amount of notes, among other things. After execution of a definitive agreement for the modification and final approval by the other members of our Board of Directors and Oasis’ Investment Committee, the transaction closed on November 7, 2017. On July 26, 2018, we closed a transaction with Oasis to exchange $8.0 million face amount of the 2018 Notes with convertible senior notes similar to those issued to Oasis in November 2017. The July 26, 2018 $8.0 million Oasis notes mature on November 1, 2020, accrue interest at an annual rate of 3.25%, and excluding the impact of the 1 for 10 reverse stock split, are convertible into shares of our common stock at an initiala rate of 322.2688 shares per $1,000 principal amount of the new notes. The conversion price for the 3.25% convertible senior notes due 2020 was reset on November 1, 2018 and November 1, 2019 (each, a “reset date”) to a price equal to 105% above the 5-day Volume Weighted Average Price ("VWAP") preceding the reset date; provided, however, among other reset restrictions, that if the conversion price resulting from such reset is lower than 90 percent of the average VWAP during the 90 calendar days preceding the reset date, then the reset price shall be the 30-day VWAP preceding the reset date. TheExcluding the impact of the 1 for 10 reverse stock split, the conversion price of the 3.25% convertible senior notes due 2020 reset on November 1, 2018 to $2.54 per share and the conversion rate was increased to 393.7008 shares of our common stock per $1,000 principal amount of notes.
The remaining $13.2 million of 2018 Notes were redeemed at par at maturity on August 1, 2018.
In August 2019, we entered into and consummated multiple, binding definitive agreements (collectively, the “Recapitalization Transaction”) among Wells Fargo, Oasis Investments II Master Fund Ltd. and an ad hoc group of holders of the 4.875% convertible senior notes due 2020 ( the "Investor Parties") to recapitalize our balance sheet, including the extension to us of incremental liquidity and at least three-year extensions of substantially all of our outstanding convertible debt obligations and revolving credit facility. Our term loan agreement entered into with Great American Capital Partners (see Item 8 "Consolidated Financial Statements and Supplementary Data Note 11 - Credit Facilities”) was paid in full and terminated in connection with the Recapitalization Transaction.
In connection with the Recapitalization Transaction, we issued (i) amended and restated notes with respect to the $21.6 million Oasis Note issued on November 7, 2017, and the $8.0 million Oasis Note issued on July 26, 2018 (together, the “Existing Oasis Notes”), and (ii) a new $8.0 million convertible senior note having the same terms as such amended and restated notes (the "New $8.0 million Oasis Note" and collectively, the “New Oasis Notes” or the "3.25% convertible senior notes due 2023"). Interest on the New Oasis Notes is payable on each May 1 and November 1 until maturity and accrues at an annual rate of (i) 3.25% if paid in cash or 5.00% if paid in stock plus (ii) 2.75% payable in kind. The New Oasis Notes mature 91 days after the amounts outstanding under the New Term Loan are paid in full, and in no event later than July 3, 2023.
Excluding the impact of the 1 for 10 reverse stock split, the New Oasis Notes provide, among other things, that the initial conversion price is $1.00. The conversion price will be reset on each February 9 and August 9, starting on February 9, 2020 (each, a “reset date”) to a price equal to 105% of the 5-day VWAP preceding the applicable reset date. Under no circumstances shall the reset result in a conversion price be below the greater of (i) the closing price on the trading day immediately preceding the applicable reset date and (ii) 30% of the stock price as of the Transaction Agreement Date, or August 7, 2019, and will not be greater than the conversion price in effect immediately before such reset. We may trigger a mandatory conversion of the New Oasis Notes if the market price exceeds 150% of the conversion price under certain circumstances. We may redeem the New Oasis Notes in cash if a person, entity or group acquires shares of our Common Stock, par value $0.001 per share (the “Common Stock”), and as a result owns at least 49% of our issued and outstanding Common Stock. TheOn February 9, 2020, excluding the impact of the 1 for 10 reverse stock split, the conversion price of the newNew Oasis Notes reset on February 9, 2020 to $1.00 per share.share ($10.00 per share after reverse stock split). On August 9, 2020, the conversion price of the New Oasis Notes reset to $5.647. On February 9, 2021, the conversion price of the New Oasis Notes recalculated and remained unchanged at $5.647.
In June 2020, $7.1 million of the New Oasis Notes (including $0.2 million in payment-in-kind interest) were converted for 710,100 shares of common stock. As a result, we recorded an increase to additional paid-in capital of $9.5 million. In August 2020, $1.0 million of the New Oasis Notes (including $27,288 in payment-in-kind interest) were converted for 177,085 shares of common stock. As a result, we recorded an increase to additional paid-in capital of $1.3 million. In October 2020, $2.0 million of the New Oasis Notes (including $63,225 in payment-in-kind interest) were converted for 354,170 shares of common stock. As a result, we recorded an increase to additional paid-in capital of $2.6 million. In November 2020, $4.0 million of the New Oasis Notes (including $138,248 in payment-in-kind interest) were converted for 708,340 shares of common stock. As a result, we recorded an increase to additional paid-in capital of $5.4 million. In December 2020, $1.0 million of the New Oasis Notes (including $36,528 in payment-in-kind interest) were converted for 177,085 shares of common stock. As a result, we recorded an increase to additional paid-in capital of $1.4 million. On March 2, 2021, $1.0 million of the New Oasis Notes (including $42,009 in payment-in-kind interest) were converted for 177,085 shares of common stock. On March 9, 2021, $1.0 million of the New Oasis Notes (including $42,516 in payment-in-kind interest) were converted for 177,085 shares of common stock.
On February 5, 2021, Benefit Street Partners and Oasis Investment II Master Funds Ltd, both related parties, entered into a purchase and sale agreement wherein Benefit Street Partners purchased $11.0 million of principal amount, plus all accrued and unpaid interest thereon, of the New Oasis Notes from Oasis Investment II Master Funds Ltd (see Item 8 "Consolidated Financial Statements and Supplementary Data Note 12 – Related Party Transactions”). The transaction closed on February 8, 2021 (see Item 8 "Consolidated Financial Statements and Supplementary Data Note 10 – Debt”).
In June 2014, we sold an aggregate of $115.0 million principal amount of 4.875% convertible senior notes due 2020 (the “2020 Notes”). The 2020 Notes are senior unsecured obligations paying interest semi-annually in arrears on June 1 and December 1 of each year at a rate of 4.875% per annum and will mature on June 1, 2020. TheExcluding the impact of the 1 for 10 reverse stock split, the initial and still current conversion rate for the 2020 Notes is 103.7613 shares of our common stock per $1,000 principal amount of notes, equivalent to an initial conversion price of approximately $9.64 per share of common stock, subject to adjustment in certain events. Upon conversion, the 2020 Notes will be settled in shares of our common stock. Holders of the 2020 Notes may require that we repurchase for cash all or some of their notes upon the occurrence of a fundamental change (as defined in the 2020 Notes). In January 2016, we repurchased and retired an aggregate of $2.0 million principal amount of the 2020 Notes.
In connection with the Recapitalization Transaction, the 2020 Notes outstanding with a face amount of $111.1 million of the total $113.0 million that were outstanding at the time of the Recapitalization Transaction were refinanced and the maturity dates effectivelywere extended. Of the refinanced amount, $103.8 million was refinanced with the Investor Parties through the issuance of the New Common Equity, the New Preferred Equity (see Item 8 "Consolidated Financial Statements and Supplementary Data Note 15 - Common Stock and Preferred Stock)Stock”) and new secured term debt that matures in February 2023 (see Term Loan section below). Additionally, $1.0 million of accrued interest was refinanced with the Investor Parties. The remaining refinanced amount of $7.3 million was exchanged into the Newnew $8.0 million Oasis Note discussed above.
The remaining $1.9 million principal amount of the 2020 Notes are due and payablewere redeemed at par at maturity on June 1, 2020.2020.
Term Loan
On August 9, 2019, in connection with the Recapitalization Transaction, we entered into a First Lien Term Loan Facility Credit Agreement, (the “New Term Loan Agreement”), with certain holders of the 2020 Notes, or the Investor Parties, and Cortland Capital Market Services LLC, as agent, for a $134.8 million first-lien secured term loan (the “New Term Loan”). We also issued common stock and preferred stock (see Item 8 "Consolidated Financial Statements and Supplementary Data Note 15 - Common Stock and Preferred Stock)Stock”) to the Investor Parties.
Amounts outstanding under the New Term Loan accrue interest at 10.50% per annum, payable semi-annually (with 8% per annum payable in cash and 2.5% per annum payable in kind). The New Term Loan matures on February 9, 2023.
The New Term Loan Agreement contains negative covenants that, subject to certain exceptions, limit our ability, and the ability of our subsidiaries to, among other things, incur additional indebtedness, make restricted payments, pledge their assets as security, make investments, loans, advances, guarantees and acquisitions, undergo fundamental changes and enter into transactions with affiliates. Commencing withThe original terms of the fiscal quarter ending September 30, 2020, we are alsoNew Term Loan Agreement required us to maintain a minimumtrailing 12-month EBITDA (as defined and adjusted therein) of not less than $34.0 million and a minimum liquidity of not less than $10.0 million.million commencing with the fiscal quarter ended September 30, 2020.
On October 16, 2020, we reached an agreement (the “Amendment”) with holders of our New Term Loan and Wells Fargo, holder of our revolving credit facility, to amend our New Term Loan Agreement and defer our EBITDA covenant calculation until March 31, 2022. Under the Amendment, the trailing 12-month EBITDA requirement was reduced to $25.0 million, which will not be calculated earlier than March 31, 2022. The Amendment also required us to pre-pay $15.0 million of the New Term Loan immediately and, under certain conditions, pre-pay up to an additional $5.0 million no later than the third quarter of fiscal year 2021. As a result, we reclassified $20.0 million from long term debt to short term debt as of September 30, 2020. In connection with the amendment on October 20, 2020, we paid $15.0 million of our outstanding principal amount and $0.3 million in related interest and PIK interest. As of December 31, 2020, we had $124.5 million (including $4.7 million in payment-in-kind interest) outstanding under the New Term Loan Agreement, $5.0 million of which is recorded as short term debt, and $114.8 million is recorded as long term debt in the consolidated balance sheet.
The New Term Loan Agreement contains events of default that are customary for a facility of this nature, including nonpayment of principal, nonpayment of interest, fees or other amounts, material inaccuracy of representations and warranties, violation of covenants, cross-default to other material indebtedness, bankruptcy or insolvency events, material judgment defaults and a change of control as specified in the New Term Loan Agreement. If an event of default occurs, the maturity of the amounts owed under the New Term Loan Agreement may be accelerated.
The obligations under the New Term Loan Agreement are guaranteed by us, the subsidiary borrowers thereunder and certain of the other existing and future direct and indirect subsidiaries and are secured by substantially all of our assets, the subsidiary borrowers thereunder and such other subsidiary guarantors, in each case, subject to certain exceptions and permitted liens.
Loan under Paycheck Protection Program
On June 12, 2020, we received a $6.2 million PPP Loan under the PPP within the CARES Act. The PPP Loan matures on June 2, 2022 and is subject to the CARES Act terms which include, among other terms, an interest rate of 1.00% per annum and monthly installment payments of $261,275 commencing on September 27, 2021. The PPP Loan may be prepaid at any time prior to maturity with no prepayment penalties. The PPP Loan is subject to events of default and other provisions customary for a loan of this type. The PPP Loan may be forgiven, partially or in full, if certain conditions are met, principally based on having been disbursed for permissible purposes and maintaining certain average levels of employment and payroll as required by the CARES Act. The loan received has been recorded as a liability by the Company as of the date received. We intend to apply for forgiveness of amounts received under the PPP, in accordance with the requirements of the CARES Act, as amended. Any loan amounts forgiven will be removed from liabilities recorded. While we used the proceeds of the PPP Loan only for permissible purposes, there can be no assurance that we will be eligible for forgiveness of the PPP Loan, in full or in part.
Wells Fargo
In March 2014, we and our domestic subsidiaries entered into a secured credit facility with General Electric Capital Corporation (“GECC”). The credit facility, as amended and subsequently assigned to Wells Fargo pursuant to its acquisition of GECC, provides for a $75.0 million revolving credit facility subject to availability based on prescribed advance rates on certain domestic accounts receivable and inventory amounts used to compute the borrowing base (the “Credit Facility”). The Credit Facility includes a sub-limit of up to $35.0 million for the issuance of letters of credit. The amounts outstanding under the Credit Facility, as amended, were payable in full upon maturity of the facility on September 27, 2019, except that the Credit Facility would mature on June 15, 2018 if we did not refinance or extend the maturity of the convertible senior notes that mature in 2018, provided that any such refinancing or extension shall have a maturity date that is no sooner than six months after the stated maturity of the Credit Facility (i.e., on or about September 27, 2019). On June 14, 2018, we entered into a Term Loan Agreement with Great American Capital Partners to provide the necessary capital to refinance the 2018 convertible senior notes (see additional details regarding the Term Loan Agreement below). In addition, on June 14, 2018, we revised certain of the Credit Facility documents (and entered into new ones) so that certain of our Hong Kong based subsidiaries became additional parties to the Credit Facility. As a result, the receivables of these subsidiaries can now be included in the borrowing base computation, subject to certain limitations, thereby effectively increasing the amount of funds we can borrow under the Credit Facility. Any additional borrowings under the Credit Facility will be used for general working capital purposes. In August 2019, in connection with the Recapitalization Transaction (See(see Item 8 "Financial Statements and Supplementary Data Note 10 - Debt)Debt”), we entered into the Amendedan amended and extended revolving credit facility with Wells Fargo (the “Amended ABL Credit Agreement with Wells Fargo.Agreement”). The Amended ABL Credit Agreement, or Amended ABL facility, amends extends and restates our existing Credit Facility, dated as of March 27, 2014, as amended, with GECC and subsequently assigned to Wells Fargo, to, among other things, decrease the borrowing capacity from $75.0 million to $60.0 million and extend the maturity to August 9, 2022.
The obligations under the Amended ABL Credit Agreement are guaranteed by us, the subsidiary borrowers thereunder and certain of the other existing and future direct and indirect subsidiaries and are secured by substantially all of our assets, the subsidiary borrowers thereunder and such other subsidiary guarantors, in each case, subject to certain exceptions and permitted liens. As of December 31, 2020, the amount of outstanding borrowings was nil, the amount of outstanding stand-by letters of credit totaled $10.8 million and the total excess borrowing capacity was $37.3 million. As of December 31, 2019, the amount of outstanding borrowings was nil, the amount of outstanding stand-by letters of credit totaled $9.2 million and the total excess borrowing capacity was $41.8$38.4 million. As of December 31, 2018, the amount of outstanding borrowings under the previous Credit Facility was $7.5 million, outstanding stand-by letters of credit totaled $12.8 million and the total excess borrowing capacity was $40.7 million.
The Amended ABL Credit Agreement contains negative covenants that, subject to certain exceptions, limit our 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. We are also required to maintain a fixed charge coverage ratio of not less than 1.1 to 1.0 under certain circumstances, and a minimum liquidity of $25.0 million and a minimum availability of at least $9.0 million. As of December 31, 20192020 and December 31, 2018,2019, we are in compliance with the financial covenants under the Amended ABL Credit AgreementFacility and the previous Credit Facility, as applicable.
Any amounts borrowed under the Amended ABL Credit AgreementFacility accrue interest, at either (i) LIBOR plus 1.50%-2.00% (determined by reference to a fixed charge coverage ratio-based pricing grid) or (ii) base rate plus 0.50%-1.00% (determined by reference to a fixed charge coverage ratio-based pricing grid). As of December 31, 20192020 and December 31, 2018,2019, the weighted average interest rate on the credit facilityfacilities with Wells Fargo was 4.53%nil and 5.53%4.53%, respectively.
The Amended ABL AgreementFacility also contains customary events of default, including a cross default provision and a change of control provision. In the event of a default, all of our obligations and our subsidiaries obligations under the Amended ABL AgreementFacility may be declared immediately due and payable. For certain events of default relating to insolvency, all outstanding obligations become due and payable.
As described in the aforementioned Term Loan section, on October 16, 2020, we amended the New Term Loan Agreement to reduce the amount and defer the calculation of our EBITDA covenant, with Wells Fargo as party to the agreement.
Great American Capital Partners
On June 14, 2018, we entered into a Term Loan Agreement, Term Note, Guaranty and Security Agreement and other ancillary documents and agreements (the “Term Loan”) with Great American Capital Partners Finance Co., LLC (“GACP”), for itself as a Lender (as defined below) and as the agent (in such capacity, “Agent”) for the Lenders from time to time party to the Term Loan (collectively, “Lenders”) and the other “Secured Parties” under and as defined therein, with respect to the issuance to us by Lenders of a $20.0 million term loan. To secure our obligations under the Term Loan, we granted to Agent, for the benefit of the Secured Parties, a security interest in a substantial amount of our consolidated assets and a pledge of the majority of the capital stock of various of our subsidiaries. The Term Loan was a secured obligation, second only to the Credit Facility with Wells Fargo, except with respect to certain of our inventory in which GACP has a priority secured position.
The Term Loan required the repayment of principal in the amount of 10% of the outstanding Term Loan per year (payable monthly) beginning after the first anniversary. All then-outstanding borrowings under the Term Loan would be due, and the Term Loan would terminate, no later than June 14, 2021, unless sooner terminated in accordance with its terms, which included the date of termination of the Wells Fargo Credit Facility and the date that is 91 days prior to the maturity of our various convertible senior notes due in 2020 (see Item 8 "Financial Statements and Supplementary Data Note 10 - Debt)Debt”). We were permitted to prepay the Term Loan, which would have required a prepayment fee (i) in year one of up to any unearned and unpaid interest that would have become due and payable in year one had the prepayment not occurred plus 2% of the initial amount of the Term Loan (i.e., $20.0 million), (ii) in year two of 2% of the initial amount of the Term Loan and (iii) in year three of 1% of the initial amount of the Term Loan.
In August 2019, in connection with the Recapitalization Transaction (See(see Item 8 "Consolidated Financial Statements and Supplementary Data Note 10 - Debt)Debt”), we repaid in full and terminated the Term Loan Agreement. As of December 31, 2019 and December 31, 2018, the amount outstanding under the Term Loan was nil and $20.0 million, respectively. Borrowings under the Term Loan accrued interest at LIBOR plus 9.00% per annum. As of December 31, 2019 and December 31, 2018, the weighted average interest rate on the Term Loan was approximately 11.5% and 11.1%, respectively.
We are subject to negative covenants which, during the life of the Amended Wells Fargo Credit AgreementFacility and New Term Loan, Agreement, prohibit and/or limit us from, among other things, incurring certain types of other debt, acquiring other companies, making certain expenditures or investments, and changing the character of our business. An outbreak of infectious disease, a pandemic or a similar public health threat, such as the 2019 Novel Coronavirus outbreak (discussed above), or a fear of any of the foregoing, could adversely impact our ability to comply with such covenants. Our failure to comply with such covenants or any other breach of the Amended Wells Fargo Credit AgreementLine or New Term Loan Agreementagreement could cause a default and we may then be required to repay borrowings under our Amended Wells Fargo Credit AgreementLine or New Term Loan Agreement with capital from other sources, or reach some other accommodation with those parties.
As of December 31, 20192020 and December 31, 2018,2019, we held cash and cash equivalents, including restricted cash, of $66.3$92.7 million and $58.2$66.3 million, respectively. Cash, and cash equivalents, including restricted cash held outside of the United States in various foreign subsidiaries totaled $27.0$48.7 million and $33.9$27.0 million as of December 31, 20192020 and December 31, 2018,2019, respectively. The cash and cash equivalents, including restricted cash balances in our foreign subsidiaries have either been fully taxed in the U.S. or tax has been accounted for in connection with the Tax Cuts and Jobs Act, or may be eligible for a full foreign dividends received deduction under such Act, and thus would not be subject to additional U.S. tax should such amounts be repatriated in the form of dividends or deemed distributions. Any such repatriation may result in foreign withholding taxes, which we expect would not be significant as of December 31, 2019. 2020.
Our primary sources of working capital are cash flows from operations and borrowings under our Amended Wells Fargo Credit Agreementcredit facility (see Item 8 "Consolidated Financial Statements and Supplementary Data Note 11 - Credit Facilities)Facilities”).
Typically, cash flows from operations are impacted by the effect on sales of (1) the appeal of our products, (2) the success of our licensed brands in motivating consumer purchase of related merchandise, (3) the highly competitive conditions existing in the toy industry and in securing commercially attractive licenses, (4) dependency on a limited set of large customers, and (5) general economic conditions. A downturn in any single factor or a combination of factors could have a material adverse impact upon our ability to generate sufficient cash flows to operate the business. In addition, our business and liquidity are dependent to a significant degree on our vendors and their financial health, as well as the ability to accurately forecast the demand for products. The loss of a key vendor, or material changes in support by them, or a significant variance in actual demand compared to the forecast, can have a material adverse impact on our cash flows and business. Given the conditions in the toy industry environment in general, vendors, including licensors, may seek further assurances or take actions to protect against non-payment of amounts due to them. Changes in this area could have a material adverse impact on our liquidity.
As of December 31, 2019,2020, off-balance sheet arrangements include letters of credit issued by Wells Fargo of $9.2$10.8 million.
During the last three fiscal years ending December 31, 2019,2020, we do not believe that inflation has had a material impact on our net sales and on income from continuing operations.
Exchange Rates
Sales from our United States and Hong Kong operations are denominated in U.S. dollars and our manufacturing costs are denominated in either U.S. or Hong Kong dollars. Local sales (other than in Hong Kong) and operating expenses of our operations in Hong Kong, the United Kingdom, Germany, Netherlands, France, 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. dollar may positively or negatively affect our operating results. The exchange rate of the Hong Kong dollar to the U.S. 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. 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.
Item 7A.
Quantitative and Qualitative Disclosures About Market RiskMarket risk represents the risk of loss that may impact our financial position, results of operations or cash flows due to adverse changes in financial and commodity market prices and rates. We are exposed to market risk in the areas of changes in United States and international borrowing rates and changes in foreign currency exchange rates. In addition, we are exposed to market risk in certain geographic areas that have experienced or remain vulnerable to an economic downturn, such as China. We purchase substantially all of our inventory from companies in China, and, therefore, we are subject to the risk that such suppliers will be unable to provide inventory at competitive prices. While we believe that, should such events occur we would be able to find alternative sources of inventory at competitive prices, we cannot assure you that we would be able to do so. These exposures are directly related to our normal operating and funding activities. To date, we have not used derivative instruments or engaged in hedging activities to minimize our market risk.
Interest Rate Risk
As of December 31, 2019,2020, we have outstanding convertible senior notes payable of $1.9$23.8 million principal amount due June 2020 with a fixed interest rate of 4.875% per annum, $37.6(including $0.9 million in payment-in-kind interest) principal amount due July 2023 with a fixed interest rate of (i) 3.25% per annum if paid in cash or 5.00% per annum if paid in stock plus (ii) 2.75% per annum payable in kind, as well as a $134.8$124.5 million term loan(including $4.7 million in payment-in-kind interest) New Term Loan due February 2023 with a fixed interest rate of (i) 8.00% per annum plus (ii) 2.5% per annum payable in kind. As the interest rates on the notes and the term loan are at fixed rates, we are not generally subject to any direct risk of loss related to these notes arising from changes in interest rates.
Our exposure to market risk includes interest rate fluctuations in connection with our revolving credit facility under our Amended Wells Fargo Credit Agreement (see Item 8 "Consolidated Financial Statements and Supplementary Data Note 11 - Credit Facilities in the accompanying notes to the consolidated financial statements for additional information)Facilities”). Borrowings under the revolving credit facility bear interest at either (i) LIBOR plus 1.50%-2.00% (determined by reference to a fixed charge coverage ratio-based pricing grid) or (ii) base rate plus 0.50%-1.00% (determined by reference to a fixed charge coverage ratio-based pricing grid). Borrowings under the revolving credit facility are therefore subject to risk based upon prevailing market interest rates. Interest rate risk may result from many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors that are beyond our control. During the year ended December 31, 2019,2020, the maximum amount borrowed under the revolving credit facility was $7.5 millionnil and the average amount of borrowings outstanding was $2.5 million.nil. As of December 31, 2019,2020, the amount of total borrowings outstanding under the revolving credit facility was nil. If the prevailing market interest rates relative to the term loan and credit facility borrowings increased by 10%, our interest expense during the period ended December 31, 2019 would have increased by less than $0.1 million.
Foreign Currency Risk
We have wholly-owned subsidiaries in Hong Kong, China, the United Kingdom, Germany, France, Netherlands, Canada and Mexico. Sales are generally made by these operations on FOB China or Hong Kong terms and are denominated in U.S. dollars. However, purchases of inventory and Hong Kong operating expenses are typically denominated in Hong Kong dollars and local operating expenses in the United Kingdom, Germany, France, Netherlands, Canada, Mexico and China are denominated in local currency, thereby creating exposure to changes in exchange rates. Changes in the U.S. dollar exchange rates may positively or negatively affect our gross margins, operating income and retained earnings. The exchange rate of the Hong Kong dollar to the U.S. dollar has been fixed by the Hong Kong government since 1983 at HK$7.80 to US$1.00 and, accordingly, has not represented a currency exchange risk to the U.S. dollar. We do not believe that near-term changes in these exchange rates, if any, will result in a material effect on our future earnings, fair values or cash flows. Therefore, we have chosen not to enter into foreign currency hedging transactions. We cannot assure you that this approach will be successful, especially in the event of a significant and sudden change in the value of these foreign currencies.
Item 8.Consolidated Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
JAKKS Pacific, Inc.
Santa Monica, California
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of JAKKS Pacific, Inc. (the “Company"“Company”) as of December 31, 20192020 and 2018,2019, the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2019,2020, and the related notes and financial statement schedule listed in the accompanying index (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 20192020 and 2018,2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019,2020, in conformity with accounting principles generally accepted in the United States of America.
Change in Accounting Method Related to Leases and Revenue
As discussed in Notes 2 andNote 14 to the consolidated financial statements, the Company has changed its method of accounting for leases during the year ended December 31, 2019 due to the adoption of Accounting Standards Codification (“ASC”) 842,
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which they relate.
Going Concern
As described in Notes 1 and 11 of the Company’s consolidated financial statements, the Company’s primary sources of working capital are cash flows from operations and borrowings under its credit facility. The Company’s cash flows from operations are primarily impacted by the Company’s sales, which are seasonal, and any change in timing or amount of sales may impact the Company’s operating cash flows. The Company owes $124.5 million on its term loan and has borrowing capacity under its credit facility of $37.3 million as of December 31, 2020. During 2020, the Company reached an agreement with its holders of its term loan and the holder of its revolving credit facility, to amend the New Term Loan Agreement and defer the Company’s EBITDA covenant requirement until March 31, 2022 and reduced the trailing 12-month EBITDA requirement to $25.0 million. Based on the Company’s operating plan, management believes that the current working capital combined with expected operating and financing cashflows to be sufficient to fund the Company’s operations and satisfy the Company’s obligations as they come due for at least one year from the financial statement issuance date.
We identified management’s assessment of the Company’s ability to continue as a going concern as a critical audit matter. The going concern assessment requires management judgment to critically evaluate its forecasts and liquidity projections, incorporating the significant and unusual impacts of the COVID-19 pandemic. Auditing management’s going concern assessment involved especially challenging auditor judgment and audit effort due to the nature and extent of effort required to address these matters.
The primary procedure we performed to address this critical audit matter included:
● | Evaluating the reasonableness of management’s revised forecasts and liquidity projections, which included: (i) obtaining an understanding of management’s process for developing cashflow forecasts, (ii) comparing prior period forecasts to actual results, and (iii) assessing the Company’s ability to meet its trailing twelve months EBITDA covenant for the twelve months from the date of issuance. |
● | Assessing management’s projections in the context of other audit evidence obtained during the audit and historical performance to determine whether it was contradictory to the conclusion reached by management. |
(Signed BDO USA, LLPLLP)
We have served as the Company’sCompany's auditor since 2006.
Los Angeles, California
March 19, 2021
JAKKS PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCESHEETS
Assets | December 31, | |||||||
2020 | 2019 | |||||||
(In thousands, except per share data) | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 87,953 | $ | 61,613 | ||||
Restricted cash | 4,740 | 4,673 | ||||||
Accounts receivable, net of allowance for doubtful accounts of $4,566 and $3,394 in 2020 and 2019, respectively | 102,254 | 117,942 | ||||||
Inventory | 38,642 | 54,259 | ||||||
Prepaid expenses and other assets | 17,239 | 21,898 | ||||||
Total current assets | 250,828 | 260,385 | ||||||
Property and equipment | ||||||||
Office furniture and equipment | 11,795 | 11,678 | ||||||
Molds and tooling | 95,367 | 103,335 | ||||||
Leasehold improvements | 6,883 | 6,808 | ||||||
Total | 114,045 | 121,821 | ||||||
Less accumulated depreciation and amortization | 100,534 | 106,562 | ||||||
Property and equipment, net | 13,511 | 15,259 | ||||||
Operating lease right-of-use assets, net | 24,393 | 32,081 | ||||||
Other long term assets | 3,223 | 18,926 | ||||||
Intangible assets, net | 2,031 | 3,188 | ||||||
Goodwill | 35,083 | 35,083 | ||||||
Trademarks | 300 | 300 | ||||||
Total assets | $ | 329,369 | $ | 365,222 | ||||
Liabilities, Preferred Stock and Stockholders' Equity | ||||||||
Current liabilities | ||||||||
Accounts payable | $ | 40,495 | $ | 61,196 | ||||
Accrued expenses | 39,304 | 39,515 | ||||||
Reserve for sales returns and allowances | 42,108 | 38,365 | ||||||
Income taxes payable | 484 | 2,492 | ||||||
Short term operating lease liabilities | 9,925 | 9,451 | ||||||
Short term debt, net | 5,950 | 1,905 | ||||||
Total current liabilities | 138,266 | 152,924 | ||||||
Long term operating lease liabilities | 16,883 | 25,632 | ||||||
Debt, non-current portion, net of issuance costs and debt discounts | 150,410 | 174,962 | ||||||
Other liabilities | 8,062 | 5,409 | ||||||
Income taxes payable | 947 | 1,565 | ||||||
Deferred income taxes, net | 123 | 226 | ||||||
Total liabilities | 314,691 | 360,718 | ||||||
Preferred stock, $0.001 par value; 5,000,000 shares authorized; 200,000 shares issued and outstanding in 2020 and 2019 | 1,740 | 483 | ||||||
Stockholders' Equity* | ||||||||
Common stock, $0.001 par value; 100,000,000 shares authorized; 5,694,772 and 3,521,037 shares issued and outstanding in 2020 and 2019, respectively* | 6 | 4 | ||||||
Additional paid-in capital * | 221,590 | 200,507 | ||||||
Accumulated deficit | (197,423 | ) | (183,149 | ) | ||||
Accumulated other comprehensive loss | (12,446 | ) | (14,422 | ) | ||||
Total JAKKS Pacific, Inc. stockholders' equity* | 11,727 | 2,940 | ||||||
Non-controlling interests | 1,211 | 1,081 | ||||||
Total stockholders' equity* | 12,938 | 4,021 | ||||||
Total liabilities, preferred stock and stockholders' equity | $ | 329,369 | $ | 365,222 |
December 31, | |||||||
2018 | 2019 | ||||||
(In thousands, except share data) | |||||||
Assets | |||||||
Current assets | |||||||
Cash and cash equivalents | $ | 53,282 | $ | 61,613 | |||
Restricted cash | 4,923 | 4,673 | |||||
Accounts receivable, net of allowance for doubtful accounts of $2,149 and $3,394 in 2018 and 2019, respectively | 122,278 | 117,942 | |||||
Inventory | 53,880 | 54,259 | |||||
Prepaid expenses and other assets | 15,780 | 21,898 | |||||
Total current assets | 250,143 | 260,385 | |||||
Property and equipment | |||||||
Office furniture and equipment | 11,999 | 11,678 | |||||
Molds and tooling | 108,315 | 103,335 | |||||
Leasehold improvements | 7,735 | 6,808 | |||||
Total | 128,049 | 121,821 | |||||
Less accumulated depreciation and amortization | 107,147 | 106,562 | |||||
Property and equipment, net | 20,902 | 15,259 | |||||
Operating lease right-of-use assets, net | — | 32,081 | |||||
Intangible assets, net | 17,312 | 3,188 | |||||
Other long term assets | 19,101 | 18,926 | |||||
Goodwill | 35,083 | 35,083 | |||||
Trademarks | 300 | 300 | |||||
Total assets | $ | 342,841 | $ | 365,222 | |||
Liabilities, Preferred Stock and Stockholders’ Equity | |||||||
Current liabilities | |||||||
Accounts payable | $ | 57,574 | $ | 61,196 | |||
Accrued expenses | 29,914 | 39,515 | |||||
Reserve for sales returns and allowances | 29,403 | 38,365 | |||||
Income taxes payable | — | 2,492 | |||||
Short term operating lease liabilities | — | 9,451 | |||||
Short term debt, net | 27,211 | 1,905 | |||||
Total current liabilities | 144,102 | 152,924 | |||||
Long term operating lease liabilities | — | 25,632 | |||||
Debt, non-current portion, net of issuance costs and debt discounts | 139,792 | 174,962 | |||||
Other liabilities | 4,409 | 5,409 | |||||
Income taxes payable | 1,458 | 1,565 | |||||
Deferred income taxes, net | 1,431 | 226 | |||||
Total liabilities | 291,192 | 360,718 | |||||
Preferred stock, $.001 par value; 5,000,000 shares authorized; nil and 200,000 shares issued and outstanding in 2018 and 2019, respectively | — | 483 | |||||
Stockholders’ equity | |||||||
Common stock, $.001 par value; 100,000,000 shares authorized; 29,169,913 and 35,210,371 shares issued and outstanding in 2018 and 2019, respectively | 30 | 36 | |||||
Treasury stock, at cost; 3,112,840 and nil shares outstanding in 2018 and 2019, respectively | (24,000 | ) | ��� | ||||
Additional paid-in capital | 218,155 | 200,475 | |||||
Accumulated deficit | (127,601 | ) | (183,149 | ) | |||
Accumulated other comprehensive loss | (15,847 | ) | (14,422 | ) | |||
Total JAKKS Pacific, Inc. stockholders’ equity | 50,737 | 2,940 | |||||
Non-controlling interests | 912 | 1,081 | |||||
Total stockholders’ equity | 51,649 | 4,021 | |||||
Total liabilities, preferred stock and stockholders' equity | $ | 342,841 | $ | 365,222 |
* After giving effect to a 1 for 10 reverse stock split effective July 9, 2020.
See accompanying notes to consolidated financial statements.
JAKKS PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, | ||||||||||||
2020 | 2019 | 2018 | ||||||||||
(In thousands, except per share amounts) | ||||||||||||
Net sales | $ | 515,872 | $ | 598,649 | $ | 567,810 | ||||||
Cost of sales | 366,107 | 439,304 | 412,094 | |||||||||
Gross profit | 149,765 | 159,345 | 155,716 | |||||||||
Selling, general and administrative expenses | 134,860 | 161,210 | 185,142 | |||||||||
Intangible asset impairment | 0 | 9,379 | 0 | |||||||||
Restructuring charge | 1,631 | 341 | 1,114 | |||||||||
Pandemic related charges | 366 | 0 | 0 | |||||||||
Acquisition related and other | 0 | 6,204 | 1,633 | |||||||||
Income (loss) from operations | 12,908 | (17,789 | ) | (32,173 | ) | |||||||
Income from joint ventures | 2 | 0 | 227 | |||||||||
Other income (expense), net | 301 | (1,158 | ) | 152 | ||||||||
Loss on extinguishment of debt | 0 | (13,205 | ) | (453 | ) | |||||||
Change in fair value of preferred stock derivative liability | (2,815 | ) | (353 | ) | 0 | |||||||
Change in fair value of convertible senior notes | (2,265 | ) | (5,112 | ) | 2,948 | |||||||
Interest income | 22 | 85 | 68 | |||||||||
Interest expense | (21,562 | ) | (15,935 | ) | (10,243 | ) | ||||||
Loss before provision for income taxes | (13,409 | ) | (53,467 | ) | (39,474 | ) | ||||||
Provision for income taxes | 735 | 1,912 | 2,951 | |||||||||
Net loss | (14,144 | ) | (55,379 | ) | (42,425 | ) | ||||||
Net income (loss) attributable to non-controlling interests | 130 | 169 | (57 | ) | ||||||||
Net loss attributable to JAKKS Pacific, Inc. | $ | (14,274 | ) | $ | (55,548 | ) | $ | (42,368 | ) | |||
Net loss attributable to common stockholders | $ | (15,531 | ) | $ | (56,031 | ) | $ | (42,368 | ) | |||
Loss per share - basic and diluted* | $ | (4.27 | ) | $ | (21.57 | ) | $ | (18.34 | ) | |||
Shares used in loss per share - basic and diluted* | 3,634 | 2,598 | 2,310 |
Year Ended December 31, | |||||||||||
2017 | 2018 | 2019 | |||||||||
(In thousands, except per share amounts) | |||||||||||
Net sales | $ | 613,111 | $ | 567,810 | $ | 598,649 | |||||
Cost of sales | 457,430 | 412,094 | 439,304 | ||||||||
Gross profit | 155,681 | 155,716 | 159,345 | ||||||||
Selling, general and administrative expenses | 205,223 | 185,142 | 161,210 | ||||||||
Goodwill and other intangibles impairment | 13,536 | — | 9,379 | ||||||||
Restructuring charge | 1,080 | 1,114 | 341 | ||||||||
Acquisition related and other | — | 1,633 | 6,204 | ||||||||
Loss from operations | (64,158 | ) | (32,173 | ) | (17,789 | ) | |||||
Income from joint ventures | 105 | 227 | — | ||||||||
Other income (expense), net | 342 | 152 | (1,158 | ) | |||||||
Loss on extinguishment of debt | (611 | ) | (453 | ) | (13,205 | ) | |||||
Change in fair value of preferred stock derivative liability | — | — | (353 | ) | |||||||
Change in fair value of convertible senior notes | (308 | ) | 2,948 | (5,112 | ) | ||||||
Write-off of investment in DreamPlay, LLC | (7,000 | ) | — | — | |||||||
Interest income | 37 | 68 | 85 | ||||||||
Interest expense | (9,829 | ) | (10,243 | ) | (15,935 | ) | |||||
Loss before provision for income taxes | (81,422 | ) | (39,474 | ) | (53,467 | ) | |||||
Provision for income taxes | 1,606 | 2,951 | 1,912 | ||||||||
Net loss | (83,028 | ) | (42,425 | ) | (55,379 | ) | |||||
Net income (loss) attributable to non-controlling interests | 57 | (57 | ) | 169 | |||||||
Net loss attributable to JAKKS Pacific, Inc. | $ | (83,085 | ) | $ | (42,368 | ) | $ | (55,548 | ) | ||
Net loss attributable to common stockholders | $ | (83,085 | ) | $ | (42,368 | ) | $ | (56,031 | ) | ||
Loss per share - basic and diluted | $ | (3.89 | ) | $ | (1.83 | ) | $ | (2.16 | ) | ||
Shares used in loss per share - basic and diluted | 21,341 | 23,104 | 25,980 |
* After giving effect to a 1 for 10 reverse stock split effective July 9, 2020.
See accompanying notes to consolidated financial statements.
JAKKS PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
Year Ended December 31, | ||||||||||||
2020 | 2019 | 2018 | ||||||||||
(In thousands) | ||||||||||||
Net loss | $ | (14,144 | ) | $ | (55,379 | ) | $ | (42,425 | ) | |||
Other comprehensive income (loss): | ||||||||||||
Foreign currency translation adjustment | 1,976 | 1,425 | (2,788 | ) | ||||||||
Comprehensive loss | (12,168 | ) | (53,954 | ) | (45,213 | ) | ||||||
Less: Comprehensive income (loss) attributable to non-controlling interests | 130 | 169 | (57 | ) | ||||||||
Comprehensive loss attributable to JAKKS Pacific, Inc. | $ | (12,298 | ) | $ | (54,123 | ) | $ | (45,156 | ) |
Year Ended December 31, | |||||||||||
2017 | 2018 | 2019 | |||||||||
(In thousands) | |||||||||||
Net loss | $ | (83,028 | ) | $ | (42,425 | ) | $ | (55,379 | ) | ||
Other comprehensive income (loss): | |||||||||||
Foreign currency translation adjustment | 4,148 | (2,788 | ) | 1,425 | |||||||
Comprehensive loss | (78,880 | ) | (45,213 | ) | (53,954 | ) | |||||
Less: Comprehensive income (loss) attributable to non-controlling interests | 57 | (57 | ) | 169 | |||||||
Comprehensive loss attributable to JAKKS Pacific, Inc. | $ | (78,937 | ) | $ | (45,156 | ) | $ | (54,123 | ) |
See accompanying notes to consolidated financial statements.
JAKKS PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’STOCKHOLDERS’ EQUITY
Common Stock | Additional | Accumulated Other | JAKKS Pacific, Inc. | Non- | Total | |||||||||||||||||||||||||||||||
Number of Shares * | Amount * | Treasury Stock | Paid-in Capital * | Accumulated Deficit | Comprehensive Loss | Stockholders’ Equity * | Controlling Interests | Stockholders’ Equity * | ||||||||||||||||||||||||||||
In Thousands | ||||||||||||||||||||||||||||||||||||
Balance, December 31, 2017 | 2,696 | $ | 3 | $ | (24,000 | ) | $ | 215,833 | $ | (85,233 | ) | $ | (13,059 | ) | $ | 93,544 | $ | 969 | $ | 94,513 | ||||||||||||||||
Stock-based compensation expense | 225 | — | — | 2,434 | — | — | 2,434 | — | 2,434 | |||||||||||||||||||||||||||
Repurchase of common stock for employee tax withholding | (4 | ) | — | — | (85 | ) | — | — | (85 | ) | — | (85 | ) | |||||||||||||||||||||||
Net loss | — | — | — | — | (42,368 | ) | — | (42,368 | ) | (57 | ) | (42,425 | ) | |||||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | — | (2,788 | ) | (2,788 | ) | — | (2,788 | ) | ||||||||||||||||||||||||
Balance, December 31, 2018 | 2,917 | 3 | (24,000 | ) | 218,182 | (127,601 | ) | (15,847 | ) | 50,737 | 912 | 51,649 | ||||||||||||||||||||||||
Stock-based compensation expense | 355 | — | — | 2,868 | — | — | 2,868 | — | 2,868 | |||||||||||||||||||||||||||
Common stock issuance | 585 | 1 | — | 4,213 | — | — | 4,214 | — | 4,214 | |||||||||||||||||||||||||||
Treasury shares retirement | (311 | ) | — | 24,000 | (24,000 | ) | — | — | — | — | — | |||||||||||||||||||||||||
Retirement of restricted stock | (6 | ) | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
Repurchase of common stock for employee tax withholding | (19 | ) | — | — | (273 | ) | — | — | (273 | ) | — | (273 | ) | |||||||||||||||||||||||
Preferred stock accrued dividends | — | — | — | (483 | ) | — | — | (483 | ) | — | (483 | ) | ||||||||||||||||||||||||
Net income (loss) | — | — | — | — | (55,548 | ) | — | (55,548 | ) | 169 | (55,379 | ) | ||||||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | — | 1,425 | 1,425 | — | 1,425 | |||||||||||||||||||||||||||
Balance, December 31, 2019 | 3,521 | 4 | — | 200,507 | (183,149 | ) | (14,422 | ) | 2,940 | 1,081 | 4,021 | |||||||||||||||||||||||||
Stock-based compensation expense | 64 | — | — | 2,303 | — | — | 2,303 | — | 2,303 | |||||||||||||||||||||||||||
Conversion of convertible senior notes | 2,127 | 2 | — | 20,210 | — | — | 20,212 | — | 20,212 | |||||||||||||||||||||||||||
Repurchase of common stock for employee tax withholding | (17 | ) | — | — | (174 | ) | — | — | (174 | ) | — | (174 | ) | |||||||||||||||||||||||
Preferred stock accrued dividends | — | — | — | (1,257 | ) | — | — | (1,257 | ) | — | (1,257 | ) | ||||||||||||||||||||||||
Net income (loss) | — | — | — | — | (14,274 | ) | — | (14,274 | ) | 130 | (14,144 | ) | ||||||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | — | 1,976 | 1,976 | — | 1,976 | |||||||||||||||||||||||||||
Adjustment to additional paid in capital | — | — | — | 1 | — | — | 1 | — | 1 | |||||||||||||||||||||||||||
Balance, December 31, 2020 | 5,695 | $ | 6 | $ | — | $ | 221,590 | $ | (197,423 | ) | $ | (12,446 | ) | $ | 11,727 | $ | 1,211 | $ | 12,938 |
Common Stock | Treasury Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | JAKKS Pacific, Inc. Stockholders’ Equity | Non- Controlling Interests | Total Stockholders’ Equity | |||||||||||||||||||||||||||
Number of Shares | Amount | |||||||||||||||||||||||||||||||||
Balance, January 1, 2017 | 19,377 | $ | 19 | $ | (24,000 | ) | $ | 177,624 | $ | (2,148 | ) | $ | (17,207 | ) | $ | 134,288 | $ | 912 | $ | 135,200 | ||||||||||||||
Stock-based compensation expense | 981 | 1 | — | 3,111 | — | — | 3,112 | — | 3,112 | |||||||||||||||||||||||||
Retirement of restricted stock | (9 | ) | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Shares issued in exchange for convertible senior notes | 2,977 | 3 | — | 15,521 | — | — | 15,524 | — | 15,524 | |||||||||||||||||||||||||
Repurchase of common stock for employee tax withholding | (30 | ) | — | — | (79 | ) | — | — | (79 | ) | — | (79 | ) | |||||||||||||||||||||
Issuance of common stock to Hong Kong Meisheng Cultural Company Limited | 3,661 | 4 | — | 19,307 | — | — | 19,311 | — | 19,311 | |||||||||||||||||||||||||
Adjustment to additional paid-in capital | — | — | — | 325 | — | — | 325 | — | 325 | |||||||||||||||||||||||||
Net income (loss) | — | — | — | — | (83,085 | ) | — | (83,085 | ) | 57 | (83,028 | ) | ||||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | — | 4,148 | 4,148 | — | 4,148 | |||||||||||||||||||||||||
Balance, December 31, 2017 | 26,957 | 27 | (24,000 | ) | 215,809 | (85,233 | ) | (13,059 | ) | 93,544 | 969 | 94,513 | ||||||||||||||||||||||
Stock-based compensation expense | 2,255 | 3 | — | 2,431 | — | — | 2,434 | — | 2,434 | |||||||||||||||||||||||||
Repurchase of common stock for employee tax withholding | (42 | ) | — | — | (85 | ) | — | — | (85 | ) | — | (85 | ) | |||||||||||||||||||||
Net loss | — | — | — | — | (42,368 | ) | — | (42,368 | ) | (57 | ) | (42,425 | ) | |||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | — | (2,788 | ) | (2,788 | ) | — | (2,788 | ) | ||||||||||||||||||||||
Balance, December 31, 2018 | 29,170 | 30 | (24,000 | ) | 218,155 | (127,601 | ) | (15,847 | ) | 50,737 | 912 | 51,649 | ||||||||||||||||||||||
Stock-based compensation expense | 3,546 | 3 | — | 2,865 | — | — | 2,868 | — | 2,868 | |||||||||||||||||||||||||
Common stock issuance | 5,853 | 6 | — | 4,208 | — | — | 4,214 | — | 4,214 | |||||||||||||||||||||||||
Treasury shares retirement | (3,113 | ) | (3 | ) | 24,000 | (23,997 | ) | — | — | — | — | — | ||||||||||||||||||||||
Retirement of restricted stock | (55 | ) | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Repurchase of common stock for employee tax withholding | (191 | ) | — | — | (273 | ) | — | — | (273 | ) | — | (273 | ) | |||||||||||||||||||||
Preferred stock accrued dividends | — | — | — | (483 | ) | — | — | (483 | ) | — | (483 | ) | ||||||||||||||||||||||
Net income (loss) | — | — | — | — | (55,548 | ) | — | (55,548 | ) | 169 | (55,379 | ) | ||||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | — | 1,425 | 1,425 | — | 1,425 | |||||||||||||||||||||||||
Balance, December 31, 2019 | 35,210 | $ | 36 | $ | — | $ | 200,475 | $ | (183,149 | ) | $ | (14,422 | ) | $ | 2,940 | $ | 1,081 | $ | 4,021 |
* After giving effect to a 1 for 10 reverse stock split effective July 9, 2020.
See accompanying notes to consolidated financial statements.
JAKKS PACIFIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, | ||||||||||||
2020 | 2019 | 2018 | ||||||||||
(In thousands) | ||||||||||||
Cash flows from operating activities | ||||||||||||
Net loss | $ | (14,144 | ) | $ | (55,379 | ) | $ | (42,425 | ) | |||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||||||
Provision for doubtful accounts | 1,619 | 864 | 9,586 | |||||||||
Depreciation and amortization | 10,936 | 17,634 | 17,081 | |||||||||
Write-off and amortization of debt issuance costs | 1,404 | 1,454 | 1,800 | |||||||||
Share-based compensation expense | 2,303 | 2,868 | 2,434 | |||||||||
Payment-in-kind interest | 4,366 | 1,725 | 0 | |||||||||
Amortization of debt discount | 2,800 | 1,077 | 0 | |||||||||
(Gain) loss on disposal of property and equipment | 71 | (65 | ) | (96 | ) | |||||||
Tools and molds disposal | 149 | 972 | 0 | |||||||||
Intangibles impairment | 0 | 9,379 | 0 | |||||||||
Loss on extinguishment of debt | 0 | 13,205 | 453 | |||||||||
Deferred income taxes | (103 | ) | (1,205 | ) | 210 | |||||||
Change in fair value of convertible senior notes | 2,265 | 5,112 | (2,948 | ) | ||||||||
Change in fair value of preferred stock derivative liability | 2,815 | 353 | 0 | |||||||||
Changes in operating assets and liabilities: | ||||||||||||
Accounts receivable | 14,069 | 3,472 | 10,593 | |||||||||
Inventory | 15,617 | (379 | ) | 4,552 | ||||||||
Prepaid expenses and other assets | 20,004 | (6,190 | ) | (11,000 | ) | |||||||
Accounts payable | (20,761 | ) | 4,873 | 9,517 | ||||||||
Accrued expenses | (211 | ) | 9,601 | (12,231 | ) | |||||||
Reserve for sales returns and allowances | 3,743 | 8,962 | 11,781 | |||||||||
Income taxes payable | (2,626 | ) | 2,599 | 197 | ||||||||
Other liabilities | (749 | ) | 894 | (128 | ) | |||||||
Total adjustments | 57,711 | 77,205 | 41,801 | |||||||||
Net cash provided by (used in) operating activities | 43,567 | 21,826 | (624 | ) | ||||||||
Cash flows from investing activities | ||||||||||||
Purchases of property and equipment | (8,268 | ) | (9,415 | ) | (11,770 | ) | ||||||
Proceeds from sale of property and equipment | 78 | 12 | 128 | |||||||||
Net cash used in investing activities | (8,190 | ) | (9,403 | ) | (11,642 | ) | ||||||
Cash flows from financing activities | ||||||||||||
Repurchase of common stock for employee tax withholding | (174 | ) | (273 | ) | (85 | ) | ||||||
Proceeds from loan under the Paycheck Protection Program | 6,206 | 0 | 0 | |||||||||
Net proceeds from credit facility borrowings | 0 | 5,000 | 7,500 | |||||||||
Retirement of convertible senior notes | (1,905 | ) | 0 | (13,178 | ) | |||||||
Repayment of credit facility borrowings | 0 | (12,500 | ) | (5,000 | ) | |||||||
Debt issuance costs | 0 | (4,957 | ) | (1,256 | ) | |||||||
Proceeds from term loan facility | 0 | 0 | 20,000 | |||||||||
Repayment of term loan facility | (15,073 | ) | (20,000 | ) | 0 | |||||||
Term loan prepayment penalty | 0 | (393 | ) | 0 | ||||||||
Net proceeds from issuance of long term debt | 0 | 27,356 | 0 | |||||||||
Net cash provided by (used in) financing activities | (10,946 | ) | (5,767 | ) | 7,981 | |||||||
Net increase (decrease) in cash, cash equivalents and restricted cash | 24,431 | 6,656 | (4,285 | ) | ||||||||
Effect of foreign currency translation | 1,976 | 1,425 | (2,487 | ) | ||||||||
Cash, cash equivalents and restricted cash, beginning of year | 66,286 | 58,205 | 64,977 | |||||||||
Cash, cash equivalents and restricted cash, end of year | $ | 92,693 | $ | 66,286 | $ | 58,205 | ||||||
Cash paid during the period for: | ||||||||||||
Interest | $ | 13,216 | $ | 6,434 | $ | 9,446 | ||||||
Income taxes, net | $ | 3,849 | $ | 29 | $ | 2,096 |
Year Ended December 31, | |||||||||||
2017 | 2018 | 2019 | |||||||||
(In thousands) | |||||||||||
Cash flows from operating activities | |||||||||||
Net loss | $ | (83,028 | ) | $ | (42,425 | ) | $ | (55,379 | ) | ||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | |||||||||||
Provision for doubtful accounts | 11,803 | 9,586 | 864 | ||||||||
Depreciation and amortization | 21,003 | 17,081 | 17,634 | ||||||||
Write-off and amortization of debt issuance costs | 1,990 | 1,800 | 1,454 | ||||||||
Share-based compensation expense | 3,112 | 2,434 | 2,868 | ||||||||
Payment-in-kind interest | — | — | 1,725 | ||||||||
Amortization of debt discount | — | — | 1,077 | ||||||||
Gain on disposal of property and equipment | (71 | ) | (96 | ) | (65 | ) | |||||
Tools and molds disposal | — | — | 972 | ||||||||
Intangibles impairment | 5,248 | — | 9,379 | ||||||||
Write-off of investment in DreamPlay, LLC | 7,000 | — | — | ||||||||
Goodwill impairment | 8,288 | — | — | ||||||||
Loss on extinguishment of debt | 611 | 453 | 13,205 | ||||||||
Deferred income taxes | (1,251 | ) | 210 | (1,205 | ) | ||||||
Change in fair value of convertible senior notes | 308 | (2,948 | ) | 5,112 | |||||||
Change in fair value of preferred stock derivative liability | — | — | 353 | ||||||||
Changes in operating assets and liabilities: | |||||||||||
Accounts receivable | 19,339 | 10,593 | 3,472 | ||||||||
Inventory | 17,003 | 4,552 | (379 | ) | |||||||
Prepaid expenses and other assets | (2,825 | ) | (11,000 | ) | (6,190 | ) | |||||
Accounts payable | (380 | ) | 9,517 | 4,873 | |||||||
Accrued expenses | 3,500 | (12,231 | ) | 9,601 | |||||||
Reserve for sales returns and allowances | 1,198 | 11,781 | 8,962 | ||||||||
Income taxes payable | (987 | ) | 197 | 2,599 | |||||||
Other liabilities | (467 | ) | (128 | ) | 894 | ||||||
Total adjustments | 94,422 | 41,801 | 77,205 | ||||||||
Net cash provided by (used in) operating activities | 11,394 | (624 | ) | 21,826 | |||||||
Cash flows from investing activities | |||||||||||
Purchases of property and equipment | (14,928 | ) | (11,770 | ) | (9,415 | ) | |||||
Proceeds from sale of property and equipment | 145 | 128 | 12 | ||||||||
Net cash used in investing activities | (14,783 | ) | (11,642 | ) | (9,403 | ) | |||||
Cash flows from financing activities | |||||||||||
Repurchase of common stock for employee tax withholding | (79 | ) | (85 | ) | (273 | ) | |||||
Net proceeds from credit facility borrowings | — | 7,500 | 5,000 | ||||||||
Retirement of convertible senior notes | — | (13,178 | ) | — | |||||||
Repayment of credit facility borrowings | (5,000 | ) | (5,000 | ) | (12,500 | ) | |||||
Repurchase of convertible senior notes | (35,614 | ) | — | — | |||||||
Debt issuance costs | — | (1,256 | ) | (4,957 | ) | ||||||
Proceeds from term loan facility | — | 20,000 | — | ||||||||
Repayment of term loan facility | — | — | (20,000 | ) | |||||||
Term loan prepayment penalty | — | — | (393 | ) | |||||||
Proceeds from issuance of common stock | 19,311 | — | — | ||||||||
Net proceeds from issuance of long term debt | — | — | 27,356 | ||||||||
Net cash provided by (used in) financing activities | (21,382 | ) | 7,981 | (5,767 | ) | ||||||
Net increase (decrease) in cash, cash equivalents and restricted cash | (24,771 | ) | (4,285 | ) | 6,656 | ||||||
Effect of foreign currency translation | 3,684 | (2,487 | ) | 1,425 | |||||||
Cash, cash equivalents and restricted cash, beginning of year | 86,064 | 64,977 | 58,205 | ||||||||
Cash, cash equivalents and restricted cash, end of year | $ | 64,977 | $ | 58,205 | $ | 66,286 | |||||
Cash paid during the period for: | |||||||||||
Interest | $ | 8,778 | $ | 9,446 | $ | 6,434 | |||||
Income taxes, net | $ | 4,076 | $ | 2,096 | $ | 29 |
As of December 31, 2017,2020, there was $5.2$2.1 million of property and equipment included in accounts payable. As of December 31, 2019, there was $2.1 million of property and equipment included in accounts payable. As of December 31, 2018, there was $3.3 million of property and equipment included in accounts payable. As of December 31, 2019, there was $2.1 million of property and equipment included in accounts payable.
The Company received income tax refunds of $0.4 million, $0.6 million, $1.8 million, and $1.8$0.6 million for the year ended December 31, 2017,2020, 2019 and 2018, and 2019, respectively, and has included these amounts in cash paid during the period for Income taxes, net.
See Notes 4, 5, 14 and 20 for additional supplemental information to consolidated statements of cash flows.
See accompanying notes to consolidated financial statements.
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 20192020
Note 1—1—Principal Industry
JAKKS Pacific, Inc. (the “Company”) is engaged in the development, production and marketing of consumer products, including toys and related products, electronic products, and other consumer products, many of which are based on highly-recognized character and entertainment licenses. The Company commenced its primary business operations in July 1995 through the purchase of substantially all of the assets of a Hong Kong toy company. The Company markets its product lines domestically and internationally.
The Company was incorporated under the laws of the State of Delaware in January 1995.
Liquidity
On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China (the “COVID-19 outbreak”) and the risks to the international community as the virus spreads globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally.
The full impact of the COVID-19 outbreak continues to evolve as of the date of this report. As such, it is uncertain as to the full magnitude that the pandemic will have on the Company’s financial condition, liquidity, and future results of operations. Management is actively monitoring the global situation and the resulting impact on its financial condition, liquidity, operations, suppliers, industry, and workforce. Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, itthe Company is extremely challenging for the Companyunable to estimate the effects of the COVID-19 outbreak on its results of operations, financial condition, and liquidity for fiscal year 2020. March year-to-date syndicated market data for the United States shows a number of manufacturers’ sell-through at retail substantially up,years 2021 and others down, vs. prior year. How long these trends continue, and whether they represent a pulling forward of future sales or a deferment of intended sales remains to be seen.2022.
In mid-March 2020, the Company began migrating to a work-from-home model in compliance with local guidance. In early April 2020, theThe Company begancontinues to reassess its revenue and expense projections for the year in an attempt to anticipate decreases in customer and consumer demand based on the uncertainty associated with the economic impactoperate under that model as of the pandemic. In parallel, the Company began a reviewdate of worldwide spending to identify both short-term and long-term cost savings measures to preserve both profitability and liquidity in light of the potential for decreased product demand. By late April 2020, the Company had identified new revenue and spending objectives for the year 2020 and synchronized those expectations across the senior leadership team. It is the Company’s intention to carefully monitor the pandemic’s impact across markets, channels and customers and strike the right balance of pursuing opportunity while minimizing risk to the Company’s long-term health.this filing.
On March 27, 2020, President Trump signed into law the Coronavirus“Coronavirus Aid, Relief and Economic Security Act (“CARES Act”). The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer-side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. On December 27, 2020, President Trump signed into law the Consolidated Appropriations Act of 2021 (“CAA”), which includes many tax and health components, as well as CARES Act extensions and modifications. The Company continues to monitor and explore any relevant government assistance programs that could support either cash liquidity or operating results in the short-medium term. As of the filing of this document, the Company continues to have no draw down on its credit facility with Wells Fargo.Fargo Bank, National Association (“Wells Fargo”), aside from utilizing $10.8 million in Letters of Credit.