JAKKS Pacific(JAKK) - 2022 Q1 - Quarterly Report

Part I – Financial Information Item 1. Financial Statements This section presents JAKKS Pacific's unaudited condensed consolidated financial statements for Q1 2022, including balance sheets, statements of operations, equity, and cash flows, with detailed notes Condensed Consolidated Balance Sheets This section provides a snapshot of the company's financial position, detailing assets, liabilities, and equity as of March 31, 2022 | Metric | March 31, 2022 (Unaudited) | December 31, 2021 | | :----------------------------------- | :-------------------------- | :------------------ | | Cash and cash equivalents | $39,225 | $44,521 | | Total current assets | $245,673 | $287,557 | | Total assets | $315,769 | $357,047 | | Total current liabilities | $136,615 | $173,072 | | Total liabilities | $259,141 | $296,074 | | Total stockholders' equity | $53,208 | $57,899 | - Total assets decreased from $357.0 million at December 31, 2021, to $315.8 million at March 31, 2022. Total liabilities also decreased from $296.1 million to $259.1 million during the same period[8] Condensed Consolidated Statements of Operations and Comprehensive Loss This section outlines the company's financial performance, including net sales, gross profit, and net loss for the three months ended March 31, 2022 | Metric | Three Months Ended March 31, 2022 (Unaudited) | Three Months Ended March 31, 2021 (Unaudited) | | :------------------------------------------ | :------------------------------------------ | :------------------------------------------ | | Net sales | $120,881 | $83,843 | | Cost of sales | $90,964 | $57,749 | | Gross profit | $29,917 | $26,094 | | Selling, general and administrative expenses | $30,651 | $28,817 | | Loss from operations | $(734) | $(2,723) | | Net loss attributable to JAKKS Pacific, Inc. | $(3,809) | $(24,086) | | Loss per share - basic and diluted | $(0.43) | $(4.54) | - Net sales increased by 44.2% to $120.9 million for the three months ended March 31, 2022, compared to $83.8 million in the prior year. The company significantly reduced its net loss attributable to JAKKS Pacific, Inc. from $(24.1) million in Q1 2021 to $(3.8) million in Q1 2022, and improved loss per share from $(4.54) to $(0.43)[11] Condensed Consolidated Statements of Stockholders' Equity (Deficit) This section details changes in stockholders' equity, including common stock, additional paid-in capital, and accumulated deficit for the period | Metric | Balance, December 31, 2021 | Balance, March 31, 2022 | | :----------------------------------- | :------------------------- | :---------------------- | | Common Stock | $10 | $10 | | Additional Paid-in Capital | $272,941 | $272,821 | | Accumulated Deficit | $(203,431) | $(207,240) | | Accumulated Other Comprehensive Loss | $(12,952) | $(13,614) | | Total JAKKS Pacific, Inc. Stockholders' Equity | $56,568 | $51,977 | | Total Stockholders' Equity | $57,899 | $53,208 | - Total stockholders' equity decreased from $57.9 million at December 31, 2021, to $53.2 million at March 31, 2022, primarily due to net loss, preferred stock accrued dividends, and foreign currency translation adjustments[13] Condensed Consolidated Statements of Cash Flows This section presents the cash inflows and outflows from operating, investing, and financing activities for the three months ended March 31, 2022 | Cash Flow Activity | Three Months Ended March 31, 2022 (Unaudited) | Three Months Ended March 31, 2021 (Unaudited) | | :--------------------------------- | :------------------------------------------ | :------------------------------------------ | | Net cash used in operating activities | $(2,736) | $(6,961) | | Net cash used in investing activities | $(1,817) | $(1,451) | | Net cash used in financing activities | $(892) | $(164) | | Net decrease in cash, cash equivalents and restricted cash | $(5,445) | $(8,576) | | Cash, cash equivalents and restricted cash, end of period | $39,225 | $84,059 | - Net cash used in operating activities decreased from $(7.0) million in Q1 2021 to $(2.7) million in Q1 2022, reflecting improved operational performance. Overall, cash, cash equivalents, and restricted cash decreased by $5.4 million in Q1 2022, ending the period at $39.2 million[17] Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the condensed consolidated financial statements, covering accounting policies and specific accounts Note 1 — Basis of Presentation This note outlines the basis for preparing the unaudited interim financial statements, including accounting policies and recent accounting pronouncements - The financial statements are unaudited and prepared in accordance with SEC rules, with certain disclosures condensed or omitted. Interim results are not necessarily indicative of full-year results due to seasonality[21][22] - The company is evaluating the impact of ASU 2016-13 (Credit Losses) effective for fiscal years beginning after December 15, 2022, and ASU 2020-04/2021-01 (Reference Rate Reform) effective for fiscal years beginning after December 15, 2022[25][27] - The full amount of the $6.2 million PPP Loan received in June 2020 was forgiven on September 10, 2021. The company recorded $1.9 million related to the Employee Retention Credit (ERC) as an offset to SG&A expenses for the three months ended March 31, 2021[36][37][39] - As of March 31, 2022, cash and cash equivalents, including restricted cash, totaled $39.2 million, with $33.3 million held in foreign subsidiaries[40] - The company believes its cash, projected cash flow from operations, and credit facility borrowings are sufficient to meet working capital and capital expenditure requirements for the next 12 months[59] Note 2 — Business Segments, Geographic Data, and Sales by Major Customers This note details the company's operating segments, geographic sales distribution, and revenue concentration from major customers - The company operates in two segments: Toys/Consumer Products and Costumes. Segment performance is measured at the operating income (loss) level[60][63] Net Sales by Segment (in thousands) | Segment | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :---------------------- | :-------------------------------- | :-------------------------------- | | Toys/Consumer Products | $111,123 | $79,875 | | Costumes | $9,758 | $3,968 | | Total Net Sales | $120,881 | $83,843 | Income (Loss) from Operations by Segment (in thousands) | Segment | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :---------------------- | :-------------------------------- | :-------------------------------- | | Toys/Consumer Products | $2,007 | $356 | | Costumes | $(2,741) | $(3,079) | | Total | $(734) | $(2,723) | Net Sales by Major Customer (in thousands, except percentages) | Customer | March 31, 2022 Amount | March 31, 2022 % of Net Sales | March 31, 2021 Amount | March 31, 2021 % of Net Sales | | :--------- | :-------------------- | :---------------------------- | :-------------------- | :---------------------------- | | Target | $35,670 | 29.5% | $22,753 | 27.1% | | Wal-Mart | $23,020 | 19.0% | $21,638 | 25.8% | | Amazon | $14,016 | 11.6% | $8,034 | 9.6% | | Total | $72,706 | 60.1% | $52,425 | 62.5% | Note 3 — Inventory This note provides a breakdown of inventory components and the reserve for obsolescence as of March 31, 2022 Inventory (in thousands) | Category | March 31, 2022 | December 31, 2021 | | :----------- | :------------- | :---------------- | | Raw materials | $84 | $106 | | Finished goods | $85,222 | $83,848 | | Total | $85,306 | $83,954 | - The inventory obsolescence reserve increased from $4.6 million at December 31, 2021, to $6.4 million at March 31, 2022[70] Note 4 — Revenue Recognition and Reserve for Sales Returns and Allowances This note describes the company's revenue recognition policies and the reserve for sales returns and allowances - Revenue is recognized at the point of sale when control of goods is transferred to customers. The company offers various discounts, pricing concessions, and allowances, which are considered in determining the transaction price and recorded as a reduction to revenue[71][73] - The reserve for sales returns and allowances decreased from $46.3 million at December 31, 2021, to $39.4 million at March 31, 2022[75] Note 5 — Debt This note details the company's debt obligations, including the 2021 BSP Term Loan and compliance with financial covenants - During 2021, $24.0 million of New Oasis Notes (including PIK interest) were converted into 4.2 million shares of common stock, resulting in a $50.8 million increase to additional paid-in capital[80] - The 2021 BSP Term Loan, totaling $99.0 million, matures in June 2027 and bears interest at LIBOR plus 6.50%-7.00% (or base rate plus 5.50%-6.00%), subject to floors. As of March 31, 2022, $98.3 million was outstanding[49][56][85] - The company was in compliance with the financial covenants under the 2021 BSP Term Loan Agreement as of March 31, 2022[92] - The $6.2 million PPP Loan received in June 2020 was fully forgiven on September 10, 2021[93] Note 6 — Credit Facilities This note describes the company's JPMorgan ABL Credit Agreement, including borrowing availability and covenant compliance - The company entered into a $67.5 million JPMorgan ABL Credit Agreement in June 2021, maturing in June 2026. Interest rates are variable, based on Eurodollar spread or Alternate Base Rate plus a margin[94] - As of March 31, 2022, there were no outstanding borrowings under the JPMorgan ABL Facility, with $49.4 million in total excess borrowing availability and $17.2 million in letters of credit[99][100] - The company was in compliance with the financial covenants under the JPMorgan ABL Credit Agreement as of March 31, 2022[100] Note 7 — Income Taxes This note outlines the company's income tax expense and effective tax rate, primarily related to foreign income taxes Income Tax Expense and Effective Tax Rate | Period | Income Tax Expense | Effective Tax Rate | | :-------------------------------- | :----------------- | :----------------- | | Three Months Ended March 31, 2022 | $0.4 million | (11.9)% | | Three Months Ended March 31, 2021 | $0.1 million | (0.4)% | - The tax expense for both periods primarily relates to foreign income taxes and discrete items[102] Note 8 — Loss Per Share This note presents the calculation of basic and diluted loss per share for the three months ended March 31, 2022 and 2021 Loss Per Share (in thousands, except per share data) | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :--------------------------------------- | :-------------------------------- | :-------------------------------- | | Net loss attributable to common stockholders | $(4,155) | $(24,412) | | Weighted average common shares outstanding | 9,588 | 5,379 | | Loss per share - basic and diluted | $(0.43) | $(4.54) | - Potentially dilutive restricted stock awards and units were excluded from diluted EPS calculation for both periods as they were anti-dilutive[105] Note 9 — Common Stock and Preferred Stock This note details the company's common and preferred stock, including dividends, share-based payments, and derivative liabilities - During 2022, employees surrendered 63.3 thousand restricted stock units for $0.6 million to cover income taxes on vesting. No dividends were declared or paid on common stock in Q1 2022 or Q1 2021[108][109] - 200,000 shares of Series A Preferred Stock were outstanding as of March 31, 2022, and December 31, 2021. Dividends accrue at 6.0% per annum, payable in cash or by accretion. $0.3 million in preferred stock dividends were recorded for Q1 2022 and Q1 2021[110][112] - The Series A Preferred Stock is classified as temporary equity due to a contingent redemption feature. An embedded derivative related to a change of control redemption provision is recorded as a long-term liability, valued at $21.9 million as of March 31, 2022[117][119][122] Note 10 — Joint Ventures This note describes the company's joint ventures for toy distribution and content creation, including their consolidation - The company has a 51% owned joint venture with Meisheng Culture & Creative Corp. for toy distribution in China, which is consolidated. The non-controlling interest's share of loss was $(0.1) million for Q1 2022[124] - Another 50/50 joint venture with Hong Kong Meisheng Cultural Company Limited focuses on creating original multiplatform content for children, with results consolidated[125] Note 11 — Goodwill This note discusses the company's goodwill and the annual impairment testing process - The company applies an annual fair value-based impairment test to goodwill. No events or circumstances indicated an impairment loss for the three months ended March 31, 2022[126] Note 12 — Intangible Assets Other Than Goodwill This note provides a breakdown of the company's amortized and unamortized intangible assets Intangible Assets (in thousands) | Category | March 31, 2022 Net Amount | December 31, 2021 Net Amount | | :-------------------------- | :-------------------------- | :--------------------------- | | Amortized Intangible Assets | $761 | $1,015 | | Unamortized Intangible Assets (Trademarks) | $300 | $300 | | Total | $1,061 | $1,315 | - Amortized intangible assets primarily consist of product lines, with a net amount of $0.8 million as of March 31, 2022[128] Note 13 — Comprehensive Loss This note presents the components of comprehensive loss, including net loss and foreign currency translation adjustments Comprehensive Loss (in thousands) | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | | Net loss | $(3,909) | $(24,051) | | Foreign currency translation adjustment | $(662) | $(58) | | Comprehensive loss | $(4,571) | $(24,109) | | Comprehensive loss attributable to JAKKS Pacific, Inc. | $(4,471) | $(24,144) | - The foreign currency translation adjustment contributed $(0.7) million to comprehensive loss in Q1 2022, a significant increase from $(0.1) million in Q1 2021[129] Note 14 — Litigation and Contingencies This note outlines the company's involvement in class action lawsuits and the status of their settlement - The company is involved in two putative class action lawsuits (Isaiah Villarica v. JAKKS Pacific, Inc. and Matthew Cordova v. JAKKS Pacific, Inc.) alleging California Labor Code violations related to wage and hour requirements for temporary employees[132][133] - Following mediation in March 2022, the company agreed to settlement terms for both cases and expects to incur only a nominal amount, with indemnification sought from temporary employee providers[134] Note 15 — Share-Based Payments This note details the company's share-based compensation expense and unrecognized compensation cost Share-Based Compensation Expense (in thousands) | Period | Share-based compensation expense | | :-------------------------------- | :------------------------------- | | Three Months Ended March 31, 2022 | $870 | | Three Months Ended March 31, 2021 | $382 | - As of March 31, 2022, there was $8.5 million of total unrecognized compensation cost related to non-vested restricted stock units, expected to be recognized over a weighted-average period of 2.39 years[139] Note 16 — Fair Value Measurements This note describes the company's fair value hierarchy for financial liabilities, including the preferred stock derivative liability - The company uses a fair value hierarchy (Level 1, 2, 3) for financial liabilities. The preferred stock derivative liability is classified within Level 3, using unobservable inputs and a discounted cash flow model with probability assumptions for a change of control event[140][142][144] Preferred Stock Derivative Liability (in thousands) | Metric | March 31, 2022 | December 31, 2021 | | :------------------------------ | :------------- | :---------------- | | Preferred stock derivative liability | $21,927 | $21,282 | Note 17 — Related Party Transactions This note discloses transactions and relationships with related parties, including joint ventures and debt holders - The company has joint ventures with Meisheng Cultural & Creative Corp. and Hong Kong Meisheng Cultural Company Limited. Meisheng also serves as a significant manufacturer[147][148][150] - Inventory-related payments to Meisheng were approximately $15.5 million for Q1 2022, up from $7.5 million in Q1 2021. Amounts due to Meisheng were $15.5 million as of March 31, 2022[150] - A director is a portfolio manager at Oasis Management and another is a director at Benefit Street Partners, which held $98.3 million of the 2021 BSP Term Loan as of March 31, 2022[151] Note 18 — Prepaid Expenses and Other Assets This note provides a breakdown of prepaid expenses and other assets, including royalty advances and employee retention credit Prepaid Expenses and Other Assets (in thousands) | Category | March 31, 2022 | December 31, 2021 | | :------------------------ | :------------- | :---------------- | | Royalty advances | $6,690 | $2,619 | | Prepaid expenses | $6,780 | $4,151 | | Employee retention credit | $2,390 | $2,390 | | Income taxes receivable | $1,432 | $1,527 | | Other assets | $120 | $190 | | Total | $17,412 | $10,877 | Note 19 — Subsequent Events This note describes significant events occurring after the balance sheet date, including amendments to the BSP Term Loan Agreement - On April 26, 2022, the company amended the 2021 BSP Term Loan Agreement, adjusting the required minimum Qualified Cash balance to $15.0 million through June 30, 2022, and $17.5 million (potentially $20.0 million) from July 1, 2022, through September 30, 2022[152] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition, operational results, critical accounting policies, and liquidity, including COVID-19 impacts and Q1 2022 performance Explanatory Note (COVID-19 Impact) This note explains the ongoing impact of the COVID-19 pandemic on the company's operations, supply chains, and financial condition - The COVID-19 pandemic continues to impact consumer behavior, production, supply chains, and overall economic stability, with uncertain future effects on the company's financial condition and operations[155] - The company has returned to an in-office operating model in its US offices as of March 31, 2022, and is slowly increasing employee attendance at industry events[157] Disclosure Regarding Forward-Looking Statements This section clarifies that the report contains forward-looking statements subject to risks and uncertainties, which the company does not update - The report contains forward-looking statements, which are subject to risks and uncertainties, and are qualified by factors disclosed in the report, including the 'Explanatory Note' and 'Risk Factors'. The company does not undertake to publicly update or revise these statements[158] Critical Accounting Policies & Estimates This section outlines key accounting policies and estimates requiring significant management judgment, such as revenue recognition and fair value measurements - Key accounting policies requiring significant management estimates and judgments include Allowance for Doubtful Accounts, Revenue Recognition, Royalties, Fair Value Measurements, Reserve for Inventory Obsolescence, and Income Allocation for Income Taxes[159][161][166][167][168][172] - The allowance for doubtful accounts is based on assessment of business environment, customer financial condition, historical collection experience, and specific account collectability[159] - The reserve for sales returns and allowances was $39.4 million as of March 31, 2022, and $46.3 million as of December 31, 2021[165] Results of Operations This section analyzes the company's financial performance for Q1 2022 compared to Q1 2021, detailing changes in sales, gross profit, and expenses Statement of Income Data as a Percentage of Net Sales | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | | Net sales | 100.0% | 100.0% | | Cost of sales | 75.3% | 68.9% | | Gross profit | 24.7% | 31.1% | | Selling, general and administrative expenses | 25.4% | 34.4% | | Loss from operations | (0.7)% | (3.3)% | | Net loss attributable to JAKKS Pacific, Inc. | (3.1)% | (28.7)% | - Net sales increased by 44.2% to $120.9 million in Q1 2022, driven by a 39.0% increase in Toys/Consumer Products sales (led by Disney Encanto™ and Sonic the Hedgehog®) and a 145% increase in Costumes sales due to delayed Q4 2021 shipments[181][182] - Gross profit margin decreased from 31.1% in Q1 2021 to 24.7% in Q1 2022, primarily due to higher freight costs in the Toys/Consumer Products segment, partially offset by a lower average royalty rate in the Costumes segment[179][183][184] - Selling, general and administrative expenses increased to $30.7 million in Q1 2022 from $28.8 million in Q1 2021, mainly due to higher payroll costs, but decreased as a percentage of net sales from 34.4% to 25.4%[179][185] - Interest expense decreased from $4.9 million in Q1 2021 to $2.2 million in Q1 2022, reflecting lower interest costs associated with the 2021 BSP Term Loan and revolving credit facility compared to prior year debt[186] Seasonality and Backlog This section discusses the seasonal nature of the toy industry and the limited reliability of backlog as a sales indicator - The retail toy industry is highly seasonal, with highest sales typically in the third and fourth quarters, and highest working capital needs in the second and third quarters due to royalty advances and inventory purchases[188] - Orders are generally cancelable until shipment, making accurate forecasting difficult and backlog an unreliable indicator of future sales[189] Liquidity and Capital Resources This section examines the company's working capital, cash flows, debt obligations, and ability to meet future financial requirements - Working capital decreased by $5.4 million to $109.1 million as of March 31, 2022, from $114.5 million at December 31, 2021[190] - Operating activities used $2.7 million net cash in Q1 2022, an improvement from $7.0 million used in Q1 2021, primarily due to a lower net loss[191] - As of March 31, 2022, the company had $98.3 million outstanding under the 2021 BSP Term Loan and no outstanding indebtedness under the JPMorgan ABL Facility, aside from $17.2 million in letters of credit[194] - The company was in compliance with all financial covenants under its debt agreements as of March 31, 2022[198] - Primary sources of working capital are cash flows from operations and borrowings under the JPMorgan ABL Facility. Future minimum royalty guarantees total $61.4 million, with $26.6 million due in the next twelve months[191][201] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section details the company's exposure to market risks, including interest rate fluctuations and foreign currency exchange rate changes Interest Rate Risk This section discusses the company's exposure to interest rate fluctuations on its variable-rate debt and the transition from LIBOR - The company is exposed to interest rate fluctuations on its $98.3 million BSP Term Loan and JPMorgan ABL Facility, both bearing variable interest rates tied to LIBOR or Alternate Base Rate[204] - The future of LIBOR is uncertain, with plans to cease publication for most USD LIBOR tenors by June 2023. The company's term loan and related agreements would transition to SOFR, which may result in different interest rates[205][206] Foreign Currency Risk This section addresses the company's exposure to foreign currency exchange rate changes from international operations - The company has foreign subsidiaries in multiple countries, with local operating expenses denominated in local currencies, creating exposure to exchange rate changes[207] - The Hong Kong dollar is linked to the U.S. dollar, mitigating exchange risk. The company does not currently enter into foreign currency hedging transactions, expecting near-term changes to not materially affect earnings[207] Item 4. Controls and Procedures The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of March 31, 2022, with no material changes in internal control over financial reporting identified during the period - The CEO and CFO concluded that disclosure controls and procedures were effective as of March 31, 2022[208] - No material changes in internal control over financial reporting were identified during the period covered by the report[208] Part II – Other Information Item 1. Legal Proceedings This section outlines the company's involvement in class action lawsuits related to wage and hour violations and their settlement status - The company is a defendant in two putative class action lawsuits (Isaiah Villarica v. JAKKS Pacific, Inc. and Matthew Cordova v. JAKKS Pacific, Inc.) alleging violations of California Labor Code provisions regarding wage and hour requirements for temporary employees[211][212] - Following mediation in March 2022, the company agreed to settlement terms for both cases and expects to incur only a nominal amount, as it is seeking indemnification from the temporary employee providers[213] Item 1A. Risk Factors This section refers to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2021, stating that there have been no material changes to these risks - There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2021[215] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications from the Chief Executive Officer and Chief Financial Officer, and various Inline XBRL documents Exhibits Filed | Number | Description | | :----- | :---------------------------------------------------------------- | | 31.1 | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer | | 31.2 | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer | | 32.1 | Section 1350 Certification of Chief Executive Officer | | 32.2 | Section 1350 Certification of Chief Financial Officer | | 101.INS | Inline XBRL Instance Document | | 104 | Cover Page Interactive Data File | Signatures This section contains the required signatures, confirming the due authorization and filing of the report by JAKKS Pacific, Inc.'s Executive Vice President and Chief Financial Officer - The report was signed on May 10, 2022, by John Kimble, Executive Vice President and Chief Financial Officer, as a duly authorized officer and principal financial officer[219]