SEC Form 10-Q filed by JAKKS Pacific Inc.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
| (Mark one) | |
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended |
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| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to |
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| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
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| (Address of Principal Executive Offices) | (Zip Code) |
Registrant’s Telephone Number, Including Area Code: (
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.
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).
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,” “non-accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | |
| Non-accelerated filer ☐ | Smaller reporting company |
| Emerging growth company |
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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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
Securities registered pursuant to Section 12(g) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
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The number of shares outstanding of the issuer’s common stock is
JAKKS PACIFIC, INC. AND SUBSIDIARIES
TABLE OF CONTENTS TO QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED MARCH 31, 2024
ITEMS IN FORM 10-Q
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Part I |
FINANCIAL INFORMATION |
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Item 1. |
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3 |
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Condensed Consolidated Statements of Operations and Comprehensive Income |
4 |
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5 |
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6 |
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7 |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
21 |
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Item 3. |
25 |
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Item 4. |
25 |
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Part II |
OTHER INFORMATION |
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Item 1. |
26 |
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Item 1A. |
26 |
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Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds |
None |
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Item 3. |
Defaults Upon Senior Securities |
None |
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Item 4. |
Mine Safety Disclosures |
None |
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Item 5. |
Other Information |
None |
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Item 6. |
26 |
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PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
JAKKS PACIFIC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
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Assets |
March 31, |
December 31, |
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2024 |
2023 |
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(Unaudited) |
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Current assets |
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Cash and cash equivalents |
$ | $ | ||||||
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Restricted cash |
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| Accounts receivable, net of allowance for credit losses of $ |
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Inventory |
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Prepaid expenses and other assets |
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Total current assets |
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Property and equipment |
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Office furniture and equipment |
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Molds and tooling |
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Leasehold improvements |
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Total |
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Less accumulated depreciation and amortization |
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Property and equipment, net |
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Operating lease right-of-use assets, net |
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Other long-term assets |
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Deferred income tax assets, net |
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Goodwill |
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Total assets |
$ | $ | ||||||
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Liabilities, Preferred Stock and Stockholders' Equity |
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Current liabilities |
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Accounts payable |
$ | $ | ||||||
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Accounts payable - Meisheng (related party) |
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Accrued expenses |
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Reserve for sales returns and allowances |
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Income taxes payable |
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Short-term operating lease liabilities |
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Total current liabilities |
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Long-term operating lease liabilities |
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Accrued expenses – long term |
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Preferred stock derivative liability |
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Income taxes payable |
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Total liabilities |
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| Preferred stock accrued dividends, $ |
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Stockholders' Equity |
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| Common stock, $ |
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Additional paid-in capital |
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Accumulated deficit |
( |
) | ( |
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Accumulated other comprehensive loss |
( |
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Total JAKKS Pacific, Inc. stockholders' equity |
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Non-controlling interests |
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Total stockholders' equity |
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Total liabilities, preferred stock and stockholders' equity |
$ | $ | ||||||
See accompanying notes to condensed consolidated financial statements.
JAKKS PACIFIC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(In thousands, except per share data)
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Three Months Ended March 31, (Unaudited) |
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2024 |
2023 |
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Net sales |
$ | $ | ||||||
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Cost of sales: |
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Cost of goods |
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Royalty expense |
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Amortization of tools and molds |
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Cost of sales |
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Gross profit |
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Direct selling expenses |
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General and administrative expenses |
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Depreciation and amortization |
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Selling, general and administrative expenses |
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Loss from operations |
( |
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Other income (expense), net |
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Change in fair value of preferred stock derivative liability |
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Interest income |
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Interest expense |
( |
) | ( |
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Loss before benefit from income taxes |
( |
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Benefit from income taxes |
( |
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Net loss |
( |
) | ( |
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Net income (loss) attributable to non-controlling interests |
( |
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Net loss attributable to JAKKS Pacific, Inc. |
$ | ( |
) | $ | ( |
) | ||
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Net loss attributable to common stockholders |
$ | ( |
) | $ | ( |
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Loss per share - basic and diluted |
$ | ( |
) | $ | ( |
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Shares used in loss per share - basic and diluted |
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Comprehensive loss |
$ | ( |
) | $ | ( |
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Comprehensive loss attributable to JAKKS Pacific, Inc. |
$ | ( |
) | $ | ( |
) | ||
See accompanying notes to condensed consolidated financial statements.
JAKKS PACIFIC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
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Three Months Ended March 31, 2024 |
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(Unaudited) |
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JAKKS |
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Accumulated |
Pacific, Inc. |
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Additional |
Other |
Stockholders' |
Non- |
Total |
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Common |
Paid-in |
Accumulated |
Comprehensive |
Equity |
Controlling |
Stockholders' |
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Stock |
Capital |
Deficit |
Loss |
(Deficit) |
Interests |
Equity |
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Balance, December 31, 2023 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | $ | $ | |||||||||||||||||
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New stock issuance |
— | — | — | — | ||||||||||||||||||||||||
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Share-based compensation expense |
— | — | — | — | ||||||||||||||||||||||||
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Non-controlling interests – capital reduction |
— | — | — | — | — | ( |
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Repurchase of common stock for employee tax withholding |
— | ( |
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) | — | ( |
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Preferred stock accrued dividends |
— | ( |
) | — | — | ( |
) | — | ( |
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Preferred stock redemption |
— | — | — | — | ||||||||||||||||||||||||
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Net income (loss) |
— | — | ( |
) | — | ( |
) | ( |
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Foreign currency translation adjustment |
— | — | — | ( |
) | ( |
) | — | ( |
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Balance, March 31, 2024 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | $ | $ | |||||||||||||||||
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Three Months Ended March 31, 2023 |
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(Unaudited) |
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JAKKS |
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Accumulated |
Pacific, Inc. |
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Additional |
Other |
Stockholders' |
Non- |
Total |
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Common |
Paid-in |
Accumulated |
Comprehensive |
Equity |
Controlling |
Stockholders' |
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Stock |
Capital |
Deficit |
Loss |
(Deficit) |
Interests |
Equity |
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Balance, December 31, 2022 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | $ | $ | |||||||||||||||||
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Share-based compensation expense |
— | — | — | — | ||||||||||||||||||||||||
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Repurchase of common stock for employee tax withholding |
— | ( |
) | — | — | ( |
) | — | ( |
) | ||||||||||||||||||
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Preferred stock accrued dividends |
— | ( |
) | — | — | ( |
) | — | ( |
) | ||||||||||||||||||
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Net loss |
— | — | ( |
) | — | ( |
) | ( |
) | ( |
) | |||||||||||||||||
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Foreign currency translation adjustment |
— | — | — | — | ||||||||||||||||||||||||
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Balance, March 31, 2023 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | $ | $ | |||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
JAKKS PACIFIC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
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Three Months Ended March 31, |
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(Unaudited) |
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2024 |
2023 |
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Cash flows from operating activities |
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Net loss |
$ | ( |
) | $ | ( |
) | ||
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Adjustments to reconcile net loss to net cash used in operating activities: |
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Provision for credit losses |
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Depreciation and amortization |
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Write-off and amortization of debt discount |
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Write-off and amortization of debt issuance costs |
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Share-based compensation expense |
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Gain on disposal of property and equipment |
( |
) | ||||||
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Deferred income taxes |
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Change in fair value of preferred stock derivative liability |
( |
) | ||||||
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Changes in operating assets and liabilities: |
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Accounts receivable |
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Inventory |
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Prepaid expenses and other assets |
( |
) | ( |
) | ||||
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Accounts payable |
( |
) | ( |
) | ||||
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Accounts payable - Meisheng (related party) |
( |
) | ( |
) | ||||
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Accrued expenses |
( |
) | ( |
) | ||||
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Reserve for sales returns and allowances |
( |
) | ( |
) | ||||
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Income taxes payable |
( |
) | ( |
) | ||||
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Other liabilities |
( |
) | ||||||
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Total adjustments |
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Net cash used in operating activities |
( |
) | ( |
) | ||||
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Cash flows from investing activities |
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Purchases of property and equipment |
( |
) | ( |
) | ||||
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Investments in employee deferred compensation trusts |
( |
) | ||||||
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Proceeds from sale of property and equipment |
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Net cash used in investing activities |
( |
) | ( |
) | ||||
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Cash flows from financing activities |
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Repurchase of common stock for employee tax withholding |
( |
) | ||||||
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Redemption of preferred stock |
( |
) | ||||||
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Repayment of 2021 BSP Term Loan |
( |
) | ||||||
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Net cash used in financing activities |
( |
) | ( |
) | ||||
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Net decrease in cash, cash equivalents and restricted cash |
( |
) | ( |
) | ||||
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Effect of foreign currency translation |
( |
) | ||||||
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Cash, cash equivalents and restricted cash, beginning of period |
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Cash, cash equivalents and restricted cash, end of period |
$ | $ | ||||||
| Supplemental disclosures of non-cash activities: | ||||||||
| Right-of-use assets exchanged for lease liabilities | $ | $ | ||||||
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Supplemental disclosures of cash flow information: |
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Cash paid for income taxes, net |
$ | $ | ||||||
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Cash paid for interest |
$ | $ | ||||||
As of March 31, 2024 and 2023, there was $
As of March 31, 2024 and 2023, the Company had accrued $
See Notes 5, 6 and 9 for additional supplemental information to the condensed consolidated statements of cash flows.
See accompanying notes to condensed consolidated financial statements.
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2024
Note 1 — Basis of Presentation
The accompanying unaudited interim condensed consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to prevent the information presented from being misleading. These financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K, which contains audited financial information for the three years in the period ended December 31, 2023.
The information provided in this report reflects all adjustments (consisting solely of normal recurring items) that are, in the opinion of management, necessary to present fairly the financial position and the results of operations for the periods presented. Interim results are not necessarily, especially given seasonality, indicative of results to be expected for a full year.
The condensed consolidated financial statements include the accounts of JAKKS Pacific, Inc. and its wholly-owned subsidiaries (collectively, “the Company”). The condensed consolidated financial statements also include the accounts of JAKKS Pacific Trading Limited, a joint venture with Meisheng Cultural & Creative Corp., Ltd., and JAKKS Meisheng Animation (HK) Limited, a joint venture with Hong Kong Meisheng Cultural Company Limited.
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” In January 2021, the FASB issued ASU 2021-01, “Reference Rate Reform (Topic 848): Scope.” The ASUs provide temporary optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions, for a limited period of time, to ease the potential burden of recognizing the effects of reference rate reform on financial reporting. The amendments in ASU 2020-04 apply to contracts, hedging relationships and other transactions that reference the London Inter-Bank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued due to the global transition away from LIBOR and certain other interbank offered rates. In December 2022, the FASB issued ASU 2022-06 which extended the effective date of the new standard to fiscal years beginning after December 15, 2024, including interim periods within those fiscal years, with early adoption permitted. In Q1 2023, the Company entered into amendments to its 2021 BSP Term Loan Agreement and its JPMorgan ABL Credit Agreement, which transitioned the interest reference rate on its term loan and revolving line of credit from LIBOR to the Secured Overnight Financing Rate (“SOFR”) (See Note 5 – Debt and Note 6 – Credit Facilities). The adoption of this new accounting standard did not have a material impact on the Company’s condensed consolidated financial statements.
In August 2020, the FASB issued ASU 2020-06, “Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.” The new guidance eliminates two of the three models in ASC 470-20, which required entities to account for beneficial conversion features and cash conversion features in equity, separately from the host convertible debt or preferred stock. As a result, only conversion features accounted for under the substantial premium model in ASC 470-20 and those that require bifurcation in accordance with ASC 815-15 will be accounted for separately. In addition, the amendments in ASU 2020-06 eliminate some of the requirements in ASC 815-40 related to equity classification. The amendments in ASU 2020-06 further revised the guidance in ASC 260, Earnings Per Share (“EPS”), to address how convertible instruments are accounted for in calculating diluted EPS and require enhanced disclosures about the terms of convertible instruments and contracts in an entity’s own equity. The new standard is effective for the Company for fiscal years beginning after December 15, 2023, including interim periods within these fiscal years, with early adoption permitted. The Company adopted ASU 2020-06 on January 1, 2024. The adoption of this new accounting standard did not have a material impact on the Company’s condensed consolidated financial statements.
In November 2023, the FASB issued ASU 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures.” The amendments in this Update improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The new standard is effective for the Company for fiscal years beginning after December 15, 2023, and interim periods beginning after December 15, 2024. The Company will adopt ASU 2023-07 in its fourth quarter of 2024. The Company is currently evaluating the impact that the updated disclosure will have on its condensed consolidated financial statements.
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2024
In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures.” This ASU provides standardization of tax disclosures, primarily related to the rate reconciliation and income taxes paid information. The new standard is effective for the Company for fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the impact that the updated disclosure will have on its condensed consolidated financial statements.
No new additional accounting pronouncements were issued or adopted for the three months ended March 31, 2024 that materially impacted the Company.
Note 2 — Business Segments, Geographic Data and Sales by Major Customers
The Company is a worldwide producer and marketer of children’s toys and other consumer products, principally engaged in the design, development, production, marketing and distribution of its diverse portfolio of products. The Company’s segments are (i) Toys/Consumer Products and (ii) Costumes.
The Toys/Consumer Products segment includes action figures, vehicles, play sets, plush products, dolls, electronic products, construction toys, infant and pre-school toys, child-sized and hand-held role play toys and everyday costume play, foot-to-floor ride-on vehicles, wagons, novelty toys, seasonal and outdoor products, kids’ indoor and outdoor furniture, and related products.
The Costumes segment, under its Disguise branding, designs, develops, markets and sells a wide range of every-day and special occasion dress-up costumes and related accessories in support of Halloween, Carnival, Children’s Day, Book Day/Week, and every-day/any-day costume play.
Segment performance is measured at the operating income (loss) level. All sales are made to external customers and general corporate expenses have been attributed to the segments based upon relative sales volumes. Segment assets are primarily comprised of accounts receivable and inventories, net of applicable reserves and allowances, goodwill and other assets. Certain assets which are not tracked by operating segment and/or that benefit multiple operating segments have been allocated on the same basis.
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Three Months Ended |
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March 31, |
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2024 |
2023 |
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Net Sales |
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Toys/Consumer Products |
$ | $ | ||||||
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Costumes |
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| $ | $ | |||||||
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Three Months Ended |
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March 31, |
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2024 |
2023 |
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Loss from Operations |
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Toys/Consumer Products |
$ | ( |
) | $ | ( |
) | ||
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Costumes |
( |
) | ( |
) | ||||
| $ | ( |
) | $ | ( |
) | |||
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Three Months Ended |
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March 31, |
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2024 |
2023 |
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Depreciation and Amortization Expense |
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Toys/Consumer Products |
$ | $ | ||||||
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Costumes |
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| $ | $ | |||||||
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March 31, |
December 31, |
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2024 |
2023 |
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Assets |
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Toys/Consumer Products |
$ | $ | ||||||
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Costumes |
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| $ | $ | |||||||
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2024
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March 31, |
December 31, |
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2024 |
2023 |
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Long-lived Assets |
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United States |
$ | $ | ||||||
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China |
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Hong Kong |
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United Kingdom |
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Italy |
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Mexico |
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Canada |
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| $ | $ | |||||||
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Three Months Ended |
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March 31, |
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2024 |
2023 |
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Net Sales by Customer Area |
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United States |
$ | $ | ||||||
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Latin America |
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Europe |
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Canada |
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Australia & New Zealand |
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Asia |
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Middle East & Africa |
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| $ | $ | |||||||
Major Customers
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Three Months Ended March 31, |
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2024 |
2023 |
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Percentage |
Percentage |
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Amount |
of Net Sales |
Amount |
of Net Sales |
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Target |
$ | % | $ | % | ||||||||||||
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Walmart |
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| $ | % | $ | % | |||||||||||||
No other customer accounted for more than 10% of the Company's total net sales.
The concentration of the Company’s business with a relatively small number of customers may expose the Company to material adverse effects if one or more of its large customers were to experience financial difficulty. The Company performs ongoing credit evaluations of its top customers and maintains an allowance for potential credit losses.
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2024
Note 3 — Inventory
|
March 31, |
December 31, |
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|
2024 |
2023 |
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Raw materials |
$ | $ | ||||||
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Finished goods |
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| $ | $ | |||||||
The inventory obsolescence reserve was $
Note 4 — Revenue Recognition and Reserve for Sales Returns and Allowances
The Company’s contracts with customers only include one performance obligation (i.e., sale of the Company’s 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 the Company expects to be entitled to in exchange for those goods. The Company’s 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.
The Company disaggregates its revenues from contracts with customers by reporting segment: Toys/Consumer Products and Costumes. The Company further disaggregates revenues by major geographic regions (See Note 2 - Business Segments, Geographic Data and Sales by Major Customers, for further information).
The Company offers 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, the Company occasionally grants discretionary credits to facilitate markdowns and sales of slow-moving merchandise, and consequently accrues an allowance based on historic credits and management estimates. The Company also participates in cooperative advertising arrangements with some customers, whereby it allows a discount from invoiced product amounts in exchange for customer purchased advertising that features the Company’s products. Generally, these allowances range from
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. For the three months ended March 31, 2024 and 2023, sales commissions were $
Shipping and handling activities are considered part of the Company’s obligation to transfer the products and therefore are recorded as direct selling expenses, as incurred. For the three months ended March 31, 2024 and 2023, shipping and handling costs were $
The Company’s reserve for sales returns and allowances amounted to $
The Company’s net accounts receivable as of March 31, 2024, December 31, 2023 and December 31, 2022 were $
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2024
Note 5 — Debt
Term Loan
The Company and certain of its subsidiaries, as borrowers, had entered into a First Lien Term Loan Facility Credit Agreement on June 2, 2021, (the “2021 BSP Term Loan Agreement”) with Benefit Street Partners L.L.C., as Sole Lead Arranger, and BSP Agency, LLC, as agent, for a $
On June 5, 2023, the Company paid in full the 2021 BSP Term Loan and terminated the 2021 BSP Term Loan Agreement by making a $
On January 3, 2023, as permitted by the terms within the 2021 BSP Term Loan Agreement, the Company had made a voluntary $
Amounts outstanding under the 2021 BSP Term Loan bore interest at either (i) LIBOR plus
In January 2023, the Company entered into a second amendment for its 2021 BSP Term Loan Agreement, which transitioned the interest reference rate on its 2021 BSP Term Loan from LIBOR to the Secured Overnight Financing Rate (“SOFR”). The new interest reference rate for the 2021 BSP Term Loan was effective on April 1, 2023. In addition to the transition to SOFR, the amendment also included a constant
The 2021 BSP Term Loan Agreement contained negative covenants that, subject to certain exceptions, limited the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, make restricted payments, pledge its assets as security, make investments, loans, advances, guarantees and acquisitions, undergo fundamental changes and enter into transactions with affiliates. Commencing with the fiscal quarter ending June 30, 2021, the Company was required to maintain a Net Leverage Ratio of 4:00x, with step-downs occurring each fiscal year starting with the quarter ending March 31, 2022 through the quarter ending September 30, 2024 in which the Company was required to maintain a Net Leverage Ratio of 3:00x.
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2024
The 2021 BSP Term Loan Agreement contained events of default that are customary for a facility of this nature, including (subject in certain cases to grace periods and thresholds) nonpayment of principal, nonpayment of interest, fees or other amounts, material inaccuracy of representations and warranties, violation of covenants, cross-default to certain other existing indebtedness, bankruptcy or insolvency events, certain judgment defaults and a change of control as specified in the 2021 BSP Term Loan Agreement. If an event of default occurred, the maturity of the amounts owed under the 2021 BSP Term Loan Agreement might have been accelerated.
The obligations under the 2021 BSP Term Loan Agreement were guaranteed by the Company, the subsidiary borrowers thereunder and certain of the other existing and future direct and indirect subsidiaries of the Company and were secured by substantially all of the assets of the Company, the subsidiary borrowers thereunder and such other subsidiary guarantors, in each case, subject to certain exceptions and permitted liens and subject to the priority lien granted under the JPMorgan ABL Credit Agreement (see Note 10 – Credit Facility).
The agent and Sole Lead Arranger under the 2021 BSP Term Loan were affiliates of an affiliate of the Company, which affiliate, at the time of refinancing, owned common stock, and the
The fair value of the Company’s 2021 BSP Term Loan was considered Level 3 fair value (see Note 15 – Fair Value Measurements for further discussion of the fair value hierarchy) and was measured using the discounted future cash flow method. In addition to the debt terms, the valuation methodology included an assumption of a discount rate that approximated the current yield on a debt security with comparable risk. This assumption was considered an unobservable input in that it reflected the Company’s own assumptions about the inputs that market participants would use in pricing the asset or liability. The Company believed that this was the best information available for use in the fair value measurement.
Note 6 — Credit Facilities
JPMorgan Chase
On June 2, 2021, the Company and certain of its subsidiaries, as borrowers, entered into a Credit Agreement (the “JPMorgan ABL Credit Agreement”), with JPMorgan Chase Bank, N.A., as agent and lender for a $
In March 2023, the Company entered into a first amendment for its JPMorgan ABL Credit Agreement, which transitioned the interest reference rate on its JPMorgan ABL Facility from LIBOR to the Secured Overnight Financing Rate (“SOFR”). The new interest reference rate for the ABL Facility became effective on March 16, 2023. Any amounts borrowed under the JPMorgan ABL Facility will bear interest at either (i) SOFR plus
The JPMorgan ABL Credit Agreement contains negative covenants that, subject to certain exceptions, limit the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, make restricted payments, pledge their assets as security, make investments, loans, advances, guarantees and acquisitions, undergo fundamental changes and enter into transactions with affiliates. Under certain circumstances the Company is also subject to a springing fixed charge coverage ratio covenant of not less than
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2024
The JPMorgan ABL Credit Agreement contains events of default that are customary for a facility of this nature, including (subject in certain cases to grace periods and thresholds) nonpayment of principal, interest, fees or other amounts, material inaccuracy of representations and warranties, violation of covenants, cross-default to certain other existing indebtedness, bankruptcy or insolvency events, certain judgment defaults, loss of liens or guarantees and a change of control as specified in the JPMorgan ABL Credit Agreement. If an event of default occurs, the commitments of the lenders to lend under the JPMorgan ABL Credit Agreement may be terminated and the maturity of the amounts owed may be accelerated.
The obligations under the JPMorgan ABL Credit Agreement are guaranteed by the Company, the subsidiary borrowers thereunder and certain of the other existing and future direct and indirect subsidiaries of the Company and are secured by substantially all of the assets of the Company, the subsidiary borrowers thereunder and such other subsidiary guarantors, in each case, subject to certain exceptions and permitted liens.
As of March 31, 2024, the amount of outstanding borrowings was and the total excess borrowing availability was $
As of March 31, 2024, off-balance sheet arrangements include letters of credit issued by JPMorgan of $
Amortization expense classified as interest expense related to the $
As of March 31, 2024, the Company was in compliance with the financial covenants under the JPMorgan ABL Credit Agreement.
Note 7 — Income Taxes
The Company’s income tax benefit of $
Note 8 — Loss Per Share
|
Three Months Ended |
||||||||
|
Loss per share - basic and diluted |
2024 |
2023 |
||||||
|
Net loss |
$ | ( |
) | $ | ( |
) | ||
|
Net income (loss) attributable to non-controlling interests |
( |
) | ||||||
|
Net loss attributable to JAKKS Pacific, Inc. |
( |
) | ( |
) | ||||
|
Preferred stock dividend * |
||||||||
|
Redemption of preferred stock |
||||||||
|
Net loss attributable to common stockholders ** |
$ | ( |
) | $ | ( |
) | ||
|
Weighted average common shares outstanding - basic and diluted |
||||||||
|
Loss per share available to common stockholder - basic and diluted |
$ | ( |
) | $ | ( |
) | ||
*
**
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2024
Basic loss per share is calculated using the weighted average number of common shares outstanding during the period. Diluted loss per share is calculated using the weighted average number of common shares and common share equivalents outstanding during the period (which consist of restricted stock units to the extent they are dilutive). Potentially dilutive restricted stock units of
Note 9 — Common Stock and Preferred Stock
Common Stock
All issuances of common stock, including those issued pursuant to restricted stock or unit grants, are issued from the Company’s authorized but not issued and outstanding shares.
During 2023, certain employees, including
During 2024, certain employees, including
No dividend was declared or paid in 2024 and 2023.
At the Market Offering
On July 1, 2022, the Company entered into an At the Market Issuance Sales Agreement (“ATM Agreement”) with B. Riley, as agent pursuant to which the Company may, from time to time, sell shares of its common stock, up to $
As of March 31, 2024, the Company did not sell any shares of common stock under the ATM Agreement.
The Company has on file with the SEC an effective registration statement pursuant to which it may issue, from time to time, up to $
As of March 31, 2024, the Company has not sold any securities pursuant to its shelf registration statement.
Redeemable Preferred Stock
On August 9, 2019, the Company entered into and consummated multiple, binding definitive agreements (collectively, the “Recapitalization Transaction”) among various investor parties to recapitalize the Company’s balance sheet. In connection with the Recapitalization Transaction, the Company issued
On March 11, 2024, the Company redeemed all of the outstanding shares of Series A Senior Preferred Stock for an aggregate price of $
Each share of Series A Preferred Stock has an initial value of $
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2024
The Series A Preferred Stock has the right to receive dividends on a quarterly basis equal to
The Series A Preferred Stock has no stated maturity, however, the Company has the right to redeem all or a portion of the Series A Preferred Stock at its Liquidation Preference (as defined below) at any time after payment in full of the 2019 Recap Term Loan. In addition, upon the occurrence of certain change of control type events, holders of the Series A Preferred Stock are entitled to receive an amount (the “Liquidation Preference”), in preference to holders of Common Stock or other junior stock, equal to (i)
The Company has the right, but is not required, to repurchase all or a portion of the Series A Preferred Stock at its Liquidation Preference at any time after payment in full of the 2019 Recap Term Loan. The Series A Preferred Stock does not have any voting rights, except to the extent required by the Delaware General Corporation Law, except for the exclusive right to elect the Series A Preferred Directors (as described below) and except for certain approval rights over certain transactions (as described below). These approval rights require the prior consent of specified percentages of holders (or in certain cases, all holders) of the Series A Preferred Stock in order for the Company to take certain actions, including the issuance of additional shares of Series A Preferred Stock or parity stock, the issuance of senior stock, certain amendments to the Amended and Restated Certificate of Incorporation, the Certificate of Designations of the Series A Preferred Stock (the “Certificate of Designations”), the Second Amended and Restated By-laws or the Amended and Restated Nominating and Corporate Governance Committee Charter, material changes in the Company’s line of business and certain change of control type transactions. In addition, the Certificate of Designations provides that the approval of at least six directors is required for any related person transaction within the meaning of Item 404 of Regulation S-K under the Securities Act of 1933, as amended, including, without limitation, the adoption of, or any amendment, modification or waiver of, any agreement or arrangement related to any such transaction. The Certificate of Designations also includes restrictions on the ability of the Company to pay dividends on or make distributions with respect to, or redeem or repurchase, shares of Common Stock or other junior stock. In addition, holders of the Series A Preferred Stock have preemptive rights regarding future issuance of Series A Preferred Stock or parity stock. In 2022, an agreement was reached with the preferred shareholders to eliminate their ability to elect members to the Company’s Board of Directors on a going-forward basis.
The Series A Preferred Stock redemption amount is contingent upon certain events with no stated redemption date as of the reporting date, although may become redeemable in the future. In accordance with the SEC guidance within ASC Topic 480, Distinguishing Liabilities from Equity: Classification and Measurement of Redeemable Securities, the Company classified the Series A Preferred Stock as temporary equity as the Series A Preferred Stock contains a redemption feature which is contingent upon certain deemed liquidation events, the occurrence of which may not solely be within the control of the Company.
Under ASC 815, Derivatives and Hedging, certain contractual terms that meet the accounting definition of a derivative must be accounted for separately from the financial instrument in which they are embedded. The Company has concluded that the redemption upon a change of control and the repurchase option by the Company constitute embedded derivatives.
The embedded redemption upon a change of control must be accounted for separately from the Series A Preferred Stock. The redemption provision specifies if certain events that constitute a change of control occur, the Company may be required to settle the Series A Preferred Stock at 150% of its accreted amount. Accordingly, the redemption provision meets the definition of a derivative, and its economic characteristics are not considered clearly and closely related to the economic characteristics of the Series A Preferred Stock, and is more akin to a debt instrument than equity.
The Company considers the repurchase option to have no value as the likelihood is remote that this event, within the Company’s control, would ever occur. The liability is accounted for at fair value, with changes in fair value recognized as other income (expense) on the Company's condensed consolidated statements of operations (see Note 15 – Fair Value Measurement). The value of the redemption provision explicitly considered the present value of the potential premium that would be paid related to, and the probability of, an event that would trigger its payment. The probability of a triggering event was based on management’s estimates of the probability of a change of control event occurring.
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2024
Accordingly, these two embedded derivatives are accounted for separately from the Series A Preferred Stock at fair value.
As of March 31, 2024, the Company had redeemed all of the outstanding shares of the Series A Preferred Stock.
As of December 31, 2023, the Series A Preferred Stock was recorded in temporary equity at the amount of accrued, but unpaid dividends of $
As of December 31, 2023, the Series A Preferred Stock had a carrying value of $
|
2024 |
2023 |
|||||||
|
Balance, January 1, |
$ | $ | ||||||
|
Preferred stock accrued dividends |
||||||||
|
Preferred stock redemption |
( |
) | ||||||
|
Balance, March 31, |
$ | $ | ||||||
Note 10 — Joint Ventures
In November 2014, the Company entered into a joint venture with Meisheng Culture & Creative Corp. Ltd., (“MC&C”), for the purpose of providing certain JAKKS licensed and non-licensed toys and consumer products to agreed-upon territories of the People’s Republic of China. On May 10, 2023, the Company dissolved the joint venture with MC&C. Prior to the dissolution, the Company owned
Note 11 — Goodwill
The Company applies a fair value-based impairment test to the carrying value of goodwill and indefinite-lived intangible assets on an annual basis and, on an interim basis, if certain events or circumstances indicate that an impairment loss may have been incurred. Goodwill impairment exists when the estimated fair value of goodwill is less than its carrying value. For the three months ended March 31, 2024, there were no events or circumstances that indicated that an impairment loss may have been incurred.
Note 12 — Comprehensive Loss
|
Three Months Ended |
||||||||
|
March 31, |
||||||||
|
2024 |
2023 |
|||||||
|
Net loss |
$ | ( |
) | $ | ( |
) | ||
|
Other comprehensive income (loss): |
||||||||
|
Foreign currency translation adjustment |
( |
) | ||||||
|
Comprehensive loss |
( |
) | ( |
) | ||||
|
Less: Comprehensive loss attributable to non-controlling interests |
( |
) | ||||||
|
Comprehensive loss attributable to JAKKS Pacific, Inc. |
$ | ( |
) | $ | ( |
) | ||
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2024
Note 13 — Litigation and Contingencies
The Company is a party to, and certain of its property is the subject of, various pending claims and legal proceedings that routinely arise in the ordinary course of its business. The Company accrues for losses when the loss is deemed probable and the liability can reasonably be estimated. Where a liability is probable and there is a range of estimated loss with no best estimate in the range, the Company records the minimum estimated liability related to the claim. As additional information becomes available, the Company assesses the potential liability related to its pending litigation and revises its estimates.
In the normal course of business, the Company may provide certain indemnifications and/or other commitments of varying scope to a) its licensors, customers and certain other parties, including against third-party claims of intellectual property infringement, and b) its officers, directors and employees, including against third-party claims regarding the periods in which they serve in such capacities with the Company. The duration and amount of such obligations is, in certain cases, indefinite. The Company's director’s and officer’s liability insurance policy may, however, enable it to recover a portion of any future payments related to its officer, director or employee indemnifications. For the past five years, costs related to director and officer indemnifications have not been significant. Other than certain liabilities recorded in the normal course of business related to royalty payments due to the Company's licensors, no liabilities have been recorded for indemnifications and/or other commitments.
Note 14 — Share-Based Payments
The Company’s 2002 Stock Award and Incentive Plan (the “Plan”), as amended, provides for the awarding of stock options, restricted stock and restricted stock units to certain key employees, executive officers and non-employee directors. Current awards under the Plan include grants to executive officers and certain key employees of restricted stock units, with vesting contingent upon the completion of specified service periods ranging from
|
Three Months Ended |
||||||||
|
March 31, |
||||||||
|
2024 |
2023 |
|||||||
|
Share-based compensation expense |
$ | $ | ||||||
Restricted Stock Units
|
Restricted Stock Units |
||||||||
|
Number of Shares |
Weighted Average Grant Date Fair Value |
|||||||
|
Outstanding, December 31, 2023 |
$ | |||||||
|
Granted |
||||||||
|
Vested |
( |
) | ||||||
|
Forfeited |
( |
) | ||||||
|
Outstanding, March 31, 2024 |
||||||||
As of March 31, 2024, there was $
As of March 31, 2024, the fair market value of non-vested restricted stock units was $
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2024
Note 15 — 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, the Company uses various methods including market, income and cost approaches. Based upon these approaches, the Company often utilizes 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. The Company utilizes 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, the Company is 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. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
|
Fair Value Measurements |
||||||||||||||||
|
Carrying Amount as of |
As of December 31, 2023 |
|||||||||||||||
|
March 31, 2024 |
Level 1 |
Level 2 |
Level 3 |
|||||||||||||
|
Money market funds |
$ | $ | $ | $ | ||||||||||||
|
Investments in employee deferred compensation trusts |
||||||||||||||||
|
Fair Value Measurements |
||||||||||||||||
|
Carrying Amount as of |
As of December 31, 2023 |
|||||||||||||||
|
December 31, 2023 |
Level 1 |
Level 2 |
Level 3 |
|||||||||||||
|
Money market funds |
$ | $ | $ | $ | ||||||||||||
|
Investments in employee deferred compensation trusts |
||||||||||||||||
|
Preferred stock derivative liability |
||||||||||||||||
|
Preferred stock derivative liability |
2024 |
2023 |
||||||
|
Balance, January 1, |
$ | $ | ||||||
|
Change in fair value |
( |
) | ||||||
|
Extinguishment through redemption of preferred stock |
( |
) | ||||||
|
Balance, March 31, |
$ | $ | ||||||
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2024
The Company’s Series A Preferred derivative liability was classified within Level 3 of the fair value hierarchy because unobservable inputs were used in estimating the fair value. The fair value of the redemption provision embedded in the Series A Preferred Stock is estimated based on a discounted cash flow model and probability assumptions based on management’s estimates of a change of control event occurring. The value of the redemption provision explicitly considered the present value of the potential premium that would be paid related to, and the probability of, an event that would trigger its payment. In subsequent periods, the derivative liability was accounted for at fair value, with changes in fair value recognized as other income (expense) on the Company's condensed consolidated statements of operations.
The preferred stock derivative liability was extinguished on March 11, 2024.
|
Fair Value As of December 31, 2023 |
Valuation Technique |
Unobservable Inputs |
Range (Weighted Average) |
|||||||
|
(In thousands) |
||||||||||
|
Preferred Stock Derivative Liability |
$ | |
|
Range: |
||||||
| |
Range: |
|||||||||
| |
Range: |
|||||||||
| |
||||||||||
*
The Company’s cash and cash equivalents including restricted cash, accounts receivable, accounts payable, and accrued expenses represent financial instruments. The carrying value of these financial instruments is a reasonable approximation of fair value due to the short-term nature of the instruments.
Note 16 — Related Party Transactions
In November 2014, the Company entered into a joint venture with MC&C for the purpose of providing certain JAKKS licensed and non-licensed toys and consumer products to agreed-upon territories of the People’s Republic of China (see Note 10 – Joint Ventures).
In October 2016, the Company entered into a joint venture with Hong Kong Meisheng Cultural Company Limited, a Hong Kong-based subsidiary of Meisheng Culture & Creative Corp, for the purpose of creating and developing original, multiplatform content for children including new short-form series and original shows. On December 1, 2023, the Company dissolved the joint venture with Meisheng. Prior to the dissolution, JAKKS and Meisheng each owned
In March 2017, the Company entered into an equity purchase agreement with Meisheng which provided, among other things, that as long as Meisheng and its affiliates hold 10% or more of the issued and outstanding shares of common stock of the Company, Meisheng shall have the right from time to time to designate a nominee (who currently is Mr. Xiaoqiang Zhao) for election to the Company’s board of directors.
Meisheng also serves as a significant manufacturer of the Company. For the three months ended March 31, 2024 and 2023, the Company made inventory-related payments to Meisheng of approximately $
JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2024
Note 17 — Prepaid Expenses and Other Assets
|
March 31, |
December 31, |
|||||||
|
Royalty advances |
$ | $ | ||||||
|
Income tax receivable |
||||||||
|
Prepaid expenses |
||||||||
|
Other assets |
||||||||
|
Employee retention credit |
||||||||
|
Prepaid expenses and other assets |
$ | $ | ||||||
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of financial condition and results of operations should be read together with our condensed consolidated financial statements and notes thereto, which appear elsewhere herein.
Disclosure Regarding Forward-Looking Statements
This Report 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 Report 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 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 “Risk Factors”) that could cause our actual results to differ materially from our current expectations elsewhere in this Report. You should understand that forward-looking statements made in this Report 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.
Critical Accounting Estimates
Our critical accounting policies and estimates are included in the 2023 Annual Report on Form 10-K and did not materially change during the first three months of 2024.
New Accounting Pronouncements
See Note 1 to the condensed consolidated financial statements.
Results of Operations
The following unaudited table sets forth, for the periods indicated, certain statement of income data as a percentage of net sales:
|
Three Months Ended March 31, |
||||||||
|
(Unaudited) |
||||||||
|
2024 |
2023 |
|||||||
|
Net sales |
100.0 | % | 100.0 | % | ||||
|
Cost of sales: |
||||||||
|
Cost of goods |
59.7 | 54.3 | ||||||
|
Royalty expense |
15.3 | 15.5 | ||||||
|
Amortization of tools and molds |
1.6 | 1.0 | ||||||
|
Cost of sales |
76.6 | 70.8 | ||||||
|
Gross profit |
23.4 | 29.2 | ||||||
|
Direct selling expenses |
9.0 | 7.2 | ||||||
|
General and administrative expenses |
38.0 | 26.0 | ||||||
|
Depreciation and amortization |
0.1 | 0.1 | ||||||
|
Selling, general and administrative expenses |
47.1 | 33.3 | ||||||
|
Loss from operations |
(23.7 | ) | (4.1 | ) | ||||
|
Other income (expense), net |
0.2 | 0.4 | ||||||
|
Change in fair value of preferred stock derivative liability |
— | 0.1 | ||||||
|
Interest income |
0.4 | 0.1 | ||||||
|
Interest expense |
(0.2 | ) | (2.8 | ) | ||||
|
Loss before benefit from income taxes |
(23.3 | ) | (6.3 | ) | ||||
|
Benefit from income taxes |
(7.5 | ) | (1.3 | ) | ||||
|
Net loss |
(15.8 | ) | (5.0 | ) | ||||
|
Net income (loss) attributable to non-controlling interests |
0.3 | — | ||||||
|
Net loss attributable to JAKKS Pacific, Inc. |
(16.1 | )% | (5.0 | )% | ||||
The following unaudited table sets forth, for the periods indicated, certain statements of operations data by segment (in thousands):
|
Three Months Ended March 31, |
||||||||
|
(Unaudited) |
||||||||
|
2024 |
2023 |
|||||||
|
Net Sales |
||||||||
|
Toys/Consumer Products |
$ | 82,910 | $ | 97,893 | ||||
|
Costumes |
7,166 | 9,591 | ||||||
| 90,076 | 107,484 | |||||||
|
Cost of Sales |
||||||||
|
Toys/Consumer Products |
65,055 | 68,671 | ||||||
|
Costumes |
3,969 | 7,376 | ||||||
| 69,024 | 76,047 | |||||||
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Gross Profit |
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Toys/Consumer Products |
17,855 | 29,222 | ||||||
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Costumes |
3,197 | 2,215 | ||||||
| $ | 21,052 | $ | 31,437 | |||||
Comparison of the Three Months Ended March 31, 2024 and 2023
Net Sales
Toys/Consumer Products. Net sales of our Toys/Consumer Products segment were $82.9 million for the three months ended March 31, 2024 compared to $97.9 million for the prior year period, representing a decrease of $15.0 million, or 15.3%. The decrease was primarily driven by lower sales in North America, which was down $9.3 million, or 12.0%. Our Dolls, Role-Play/Dress-up division products saw a decline of 15.2%, due to lower Disney sales versus a year ago. Net sales from the Action Play & Collectibles division were down 12.8% due to lower net sales from the Super Mario MovieTM which was released April 2023.
Costumes. Net sales of our Costumes segment were $7.2 million for the three months ended March 31, 2024 compared to $9.6 million for the prior year period, representing a decrease of $2.4 million, or 25.0%. The decrease was primarily due to reduced orders from select recurring costumes.
Cost of Sales
Toys/Consumer Products. Cost of sales of our Toys/Consumer Products segment was $65.1 million, or 78.5% of related net sales for the three months ended March 31, 2024 compared to $68.7 million, or 70.1% of related net sales for the prior year period, representing a decrease of $3.6 million, or 5.3%. The increase as a percentage of net sales was due to a lower mix of high margin movie-related product as well as increased inventory reserves on slower moving movie-related product.
Costumes. Cost of sales of our Costumes segment was $4.0 million, or 55.6% of related net sales for the three months ended March 31, 2024, compared to $7.4 million, or 77.1% of related net sales for the prior year period, representing a decrease in dollars of $3.4 million, or 45.9%. The decrease as a percentage of net sales was due to lower inventory reserves as a result of higher sell thru of reserved product.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $42.4 million for the three months ended March 31, 2024 compared to $35.8 million for the prior year period constituting 47.1% and 33.3% of net sales, respectively. The increase in selling, general and administrative expenses was primarily due to higher headcount and salaries as we expand our international presence and associated marketing and travel expenses, as well as additional costs related to IT infrastructure, process and internal control enhancements.
Interest Expense
Interest expense was $0.1 million for the three months ended March 31, 2024, as compared to $3.0 million in the prior year period. During the three months ended March 31, 2024, we incurred interest expense of $0.1 million related to our revolving credit facility. During the three months ended March 31, 2023, we incurred interest expense of $2.5 million related to our 2021 BSP Term Loan, $0.1 million related to our revolving credit facility and $0.4 million related to other borrowing costs.
Provision For (Benefit From) Income Taxes
Our income tax benefit, which includes federal, state and foreign income taxes and discrete items, was $6.7 million, or an effective tax (benefit) rate of 32.1%, for the three months ended March 31, 2024. During the comparable period in 2023, our income tax benefit was $1.4 million, or an effective tax (benefit) rate of 20.6%. The effective tax rate increased primarily due to the expectation of taxes owed in higher tax jurisdictions.
Seasonality and Backlog
The retail toy industry is inherently seasonal. Generally, our sales have been highest during the third and fourth quarters, and collections for those sales have been highest during the succeeding fourth and first quarters. Our working capital needs have been highest during the second and third quarters as we make royalty advance payments for some of our licenses and buy and sell inventory subject to customer payment terms.
While we have taken steps to level sales over the entire year, sales are expected to remain heavily influenced by the seasonality of our toy and costume products. The result of these seasonal patterns is that operating results and the demand for working capital may vary significantly by quarter. Orders placed with us are generally cancelable until the date of shipment. The combination of seasonal demand and the potential for order cancellation makes accurate forecasting of future sales difficult and causes us to believe that backlog may not be an accurate indicator of our future sales. Similarly, financial results for a particular quarter may not be indicative of results for the entire year.
Liquidity and Capital Resources
As of March 31, 2024, we had working capital (inclusive of cash, cash equivalents and restricted cash) of $67.1 million, compared to $106.1 million as of December 31, 2023, representing a decrease in working capital of $39.0 million during the three-month period ended March 31, 2024. The decrease in working capital is primarily attributable to the $20.0 million cash payment made to holders for the redemption of our outstanding preferred stock. The remaining decrease is mainly attributable to cash used in operating activities and higher working capital usage.
Operating activities used net cash of $12.9 million during the three months ended March 31, 2024, as compared to net cash used of $4.1 million in the prior year period. The increase in net cash used in operating activities year-over-year is primarily due to a higher net loss. Other than open purchase orders issued in the normal course of business related to shipped product, we have no obligations to purchase inventory from our manufacturers. 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 royalties/obligations generally ranging from 1% to 22% payable on net sales of such products. As of March 31, 2024, these agreements required future aggregate minimum royalty guarantees of $60.2 million exclusive of $7.0 million in advances already paid. Of this $60.2 million future minimum royalty guarantee, $37.6 million is due over the next twelve months.
Investing activities used net cash of $3.6 million and $3.5 million for the three months ended March 31, 2024 and 2023, respectively, and consisted primarily of cash paid for the purchase of molds and tooling used in the manufacture of our products and purchases of investments to fund our obligation to our employees stemming from our non-qualified deferred compensation plan.
Financing activities used net cash of $20.0 million and $39.9 million for the three months ended March 31, 2024 and 2023, respectively. The cash used in financing activities during the three months ended March 31, 2023, consists of $20.0 million used in the redemption of our outstanding preferred stock. The cash used in financing activities during the three months ended March 31, 2023, primarily consists of the repayment of our 2021 BSP Term Loan of $38.7 million and the repurchase of common stock for employee tax withholding of $1.2 million.
As of March 31, 2024, we have no outstanding indebtedness under our senior secured revolving credit facility (the “JPMorgan ABL Facility”), aside from utilizing $9.4 million in letters of credit.
See Note 5 – Debt and Note 6 – Credit Facilities for additional information pertaining to our Debt and Credit Facilities.
As of March 31, 2024 and December 31, 2023, we held cash and cash equivalents, including restricted cash, of $35.5 million and $72.6 million, respectively. Cash, and cash equivalents, including restricted cash held outside of the United States in various foreign subsidiaries totaled $26.9 million and $21.5 million as of March 31, 2024 and December 31, 2023, respectively. The cash and cash equivalents, including restricted cash balances in our foreign subsidiaries have either been fully taxed in the U.S. 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. During the first quarter of 2024, the Company declared a one-time dividend from Canada to the U.S in the amount of $5.9 million, in order to fund the preferred stock redemption that occurred during the quarter, resulting in a 5% withholding tax. This was a significant one-time event as there are no preferred stock outstanding as of March 31, 2024. Future cash remittances will come from Hong Kong, which does not impose withholding taxes. As such, foreign withholding taxes on future repatriations are not expected to be significant.
Our primary sources of working capital are cash flows from operations and borrowings under our JPMorgan ABL Facility (see Note 6 – Credit Facilities).
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 March 31, 2024 off-balance sheet arrangements include letters of credit issued by JPMorgan of $9.4 million.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
Our exposure to market risk includes interest rate fluctuations in connection with our JPMorgan ABL Facility (see Note 6 – Credit Facilities). Borrowings under our JPMorgan ABL Facility bear interest at either (i) LIBOR plus 1.50% - 2.00% (determined by reference to an excess availability pricing grid) or (ii) Alternate Base Rate plus 0.50% - 1.00% (determined by reference to an excess availability pricing grid and base rate subject to a 1.00% floor). Borrowings under the JPMorgan ABL 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.
In Q1 2023, we entered into an amendment to our JPMorgan ABL Credit Agreement which changed the interest reference rate on our revolving line of credit from LIBOR to the Secured Overnight Financing Rate (“SOFR”).
Foreign Currency Risk
We have wholly-owned subsidiaries in Hong Kong, China, the United Kingdom, Germany, France, the Netherlands, Canada, Italy 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, the Netherlands, Canada, Italy, 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 results of operations. 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 4. Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Report, have concluded that as of that date, our disclosure controls and procedures were effective. There has been no change in our internal control over financial reporting identified in connection with the evaluation required by Exchange Act Rule 13a-15(d) that occurred during the period covered by this Report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
We are a party to, and certain of our property is the subject of, various pending claims and legal proceedings that routinely arise in the ordinary course of our business. We accrue for losses when the loss is deemed probable and the liability can reasonably be estimated. Where a liability is probable and there is a range of estimated loss with no best estimate in the range, we record the minimum estimated liability related to the claim. As additional information becomes available, we assess the potential liability related to the pending litigation and revise our estimates.
In the normal course of business, we may provide certain indemnifications and/or other commitments of varying scope to a) our licensors, customers and certain other parties, including against third-party claims of intellectual property infringement, and b) our officers, directors and employees, including against third-party claims regarding the periods in which they serve in such capacities with us. The duration and amount of such obligations is, in certain cases, indefinite. Our director’s and officer’s liability insurance policy may, however, enable us to recover a portion of any future payments related to our officer, director or employee indemnifications. For the past five years, costs related to director and officer indemnifications have not been significant. Other than certain liabilities recorded in the normal course of business related to royalty payments due to our licensors, no liabilities have been recorded for indemnifications and/or other commitments.
Item 1A. Risk Factors
Risk factors with respect to us and our business are contained in “Part I, Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023. There have been no material changes from the risk factors previously disclosed in such filing. The disclosures made in this Quarterly Report should be reviewed together with the risk factors contained therein.
Item 6. Exhibits
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Number |
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Description |
| 10.1 | Preferred Stock Redemption Agreement dated March 8, 2024 (2) | |
| 10.2 | Registration Rights Agreement dated March 8, 2024 (2) | |
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31.1 |
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Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer (1) |
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31.2 |
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Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer (1) |
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32.1 |
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32.2 |
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101.INS |
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Inline XBRL Instance Document |
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101.SCH |
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Inline XBRL Taxonomy Extension Schema Document |
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101.CAL |
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Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF |
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Inline XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB |
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Inline XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE |
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Inline XBRL Taxonomy Extension Presentation Linkbase Document |
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104 |
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Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
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(1) |
Filed herewith. |
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(2) |
Filed previously as an exhibit to the Company’s Current Report on Form 8-K filed March 14, 2024, and incorporated herein by reference. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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JAKKS PACIFIC, INC. |
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Date: May 8, 2024 |
By: |
/s/ John Kimble |
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John Kimble |
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Executive Vice President and Chief Financial Officer |
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(Duly Authorized Officer and Principal Financial Officer) |
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