* After giving effect to a 1 for 10 reverse stock split effective July 9, 2020.
As of December 31, 2022, there was $3.6 million of property and equipment included in accounts payable. As of December 31, 2021, there was $2.8 million of property and equipment included in accounts payable. As of December 31, 2020, there was $2.1 million of property and equipment included in accounts payable.
The Company received income tax refunds of $0.3 million, $0.3 million and $0.6 million for the years ended December 31, 2022, 2021 and 2020, respectively, and has included these amounts in cash paid during the period for income taxes, net.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2022
Note 1—Principal Industry
JAKKS Pacific, Inc. (the “Company”) is engaged in the development, production and marketing of consumer products, including toys and related products, electronic products, and other consumer products. The Company markets its product lines domestically and internationally.
The Company is incorporated under the laws of the State of Delaware.
Note 2—Summary of Significant Accounting Policies
Principles of consolidation and basis of preparation
These consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries, and its majority owned joint venture. All intercompany transactions have been eliminated.
Effective July 9, 2020, the Company completed a 1 for 10 reverse stock split of its $0.001 par value common stock reducing the issued and outstanding shares of common stock from 42,395,782 to 4,239,578 (“Reverse Stock Split”). The Reverse Stock Split did not cause an adjustment to the par value or the authorized shares of the common stock. All share and per share amounts in the financial statements and notes thereto have been retroactively adjusted for all periods presented to give effect to the Reverse Stock Split, including reclassifying an amount equal to the reduction in par value of common stock to additional paid-in capital. The primary reason for implementing the Reverse Stock Split was to regain compliance with the minimum bid price requirement of The NASDAQ Stock Market LLC (“Nasdaq”). On July 31, 2020, the Company was notified by Nasdaq that it had regained compliance with the Nasdaq listing requirements.
Cash and cash equivalents
The Company considers all highly liquid investments with an original maturity of three months or less, when acquired, to be cash equivalents. The Company maintains its cash in bank deposits which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk of cash and cash equivalents.
Cash, and cash equivalents, including restricted cash held outside of the United States in various foreign subsidiaries totaled $39.4 million and $30.7 million as of December 31, 2022 and 2021, respectively. The cash and cash equivalents, including restricted cash balances in the Company’s foreign subsidiaries have either been fully taxed in the U.S. or tax has been accounted for in connection with the Tax Cuts and Jobs Act, or may be eligible for a full foreign dividends received deduction under such Act, and thus would not be subject to additional U.S. tax should such amounts be repatriated in the form of dividends or deemed distributions. Any such repatriation may result in foreign withholding taxes, which we expect would not be significant as of December 31, 2022.
Restricted cash
Restricted cash consists of a cash collateral account to cover a guarantee bond.
Accounts Receivable and Allowance for Doubtful Accounts
Credit is granted to customers on an unsecured basis. Credit limits and payment terms are established based on evaluations made on an ongoing basis throughout the fiscal year of the financial performance, cash generation, financing availability and liquidity status of each customer. Customers are reviewed at least annually, with more frequent reviews performed as necessary, depending upon the customer’s financial condition and the level of credit being extended. For customers who are experiencing financial difficulties, management performs additional financial analyses before shipping to those customers on credit. The Company uses a variety of financial arrangements to ensure collectability of accounts receivable of customers deemed to be a credit risk, including requiring letters of credit, purchasing various forms of credit insurance with unrelated third parties, or requiring cash in advance of shipment.
The Company records an allowance for doubtful accounts based upon management’s assessment of the business environment, customers’ financial condition, historical collection experience, accounts receivable aging, customer disputes and the collectability of specific customer accounts.
Use of estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the dates of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods. Actual future results could differ from those estimates. On an ongoing basis, the Company evaluates its estimates, including those related to the accounts receivable and sales allowances, fair values of financial instruments, intangible assets and goodwill, useful lives of intangible assets and property and equipment, income taxes, and contingent liabilities, among others. The Company bases its estimates on assumptions, both historical and forward looking, that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.
Revenue recognition
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 3 - 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 1% to 20% of gross sales, and are generally based upon product purchases or specific advertising campaigns. Such allowances are accrued when the related revenue is recognized. To the extent these cooperative advertising arrangements provide a distinct benefit at fair value, they are accounted for as direct selling expenses, otherwise they are recorded as a reduction to revenue. Further, while the Company generally does not allow product returns, the Company does make occasional exceptions to this policy and consequently records a sales return allowance based upon historic return amounts and management estimates. These allowances (variable consideration) are estimated using the expected value method and are recorded at the time of sale as a reduction to revenue. The Company adjusts its estimate of variable consideration at least quarterly or when facts and circumstances used in the estimation process may change. The variable consideration is not constrained as the Company has sufficient history on the related estimates and does not believe there is a risk of significant revenue reversal.
Sales commissions are expensed when incurred as the related revenue is recognized at a point in time and therefore the amortization period is less than one year. As a result, these costs are recorded as direct selling expenses, as incurred.
Shipping and handling activities are considered part of the Company’s obligation to transfer the products and therefore are recorded as direct selling expenses, as incurred. For the twelve months ended December 31, 2022, 2021, and 2020, shipping and handling costs were $7.7 million, $5.4 million, and $4.0 million, respectively.
The Company’s reserve for sales returns and allowances amounted to $51.9 million as of December 31, 2022 and $46.3 million as of December 31, 2021.
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.
Inventory
Inventory, which includes the ex-factory cost of goods, capitalized warehouse costs and in-bound freight and duty, is valued at the lower of cost or net realizable value, net of inventory obsolescence reserve, and consists of the following (in thousands):
|
|
December 31,
|
|
|
|
2022
|
|
|
2021
|
|
Raw materials
|
|
$ |
69 |
|
|
$ |
106 |
|
Finished goods
|
|
|
80,550 |
|
|
|
83,848 |
|
|
|
$ |
80,619 |
|
|
$ |
83,954 |
|
As of December 31, 2022 and 2021, the inventory obsolescence reserve was $9.0 million and $4.6 million, respectively.
Royalties
The Company enters into license agreements with strategic partners, inventors, designers and others for the use of intellectual properties in its products. These agreements may call for payment in advance or future payment of minimum guaranteed amounts. Amounts paid in advance are recorded as an asset and charged to expense when the related revenue is recognized in the consolidated statements of operations. If all or a portion of the minimum guaranteed amounts appear not to be recoverable through future use of the rights obtained under the license, the non-recoverable portion of the guaranty is charged to expense at that time.
Leases
The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets and operating lease liabilities in its consolidated balance sheets. The Company does not have any finance leases.
ROU assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit interest rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset also includes any prepaid lease amounts and excludes lease incentives. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that it will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
The Company excludes right-of-use ("ROU") assets and lease liabilities for leases with an initial term of 12 months or less from the balance sheet.
Deferred Financing Charges
Deferred financing charges consist of credit facility loan origination fees. These charges are capitalized and amortized over the life of the line of credit agreement.
Property and equipment
Property and equipment are stated at cost and are being depreciated using the straight-line method over their estimated useful lives as follows:
Office equipment
|
5 years |
Automobiles
|
5 years |
Furniture and fixtures
|
5 - 7 years |
Leasehold improvements
|
Shorter of length of lease or 10 years |
During interim reporting periods, the Company uses the usage method as its depreciation methodology for molds and tools used in the manufacturing of its products, which is more closely correlated to the production of goods as it follows the seasonality of sales. The Company believes that the usage method more accurately matches costs with revenues. From a full-year perspective, the depreciation methodology follows the straight-line method, based on the estimated useful life of molds and tools of three years. Estimated useful lives are periodically reviewed and, where appropriate, changes are made prospectively. The carrying value of property and equipment is reviewed when events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. No impairment charges were recorded for the years ended December 31, 2022, 2021 and 2020.
For the years ended December 31, 2022, 2021 and 2020, the Company’s aggregate depreciation expense related to property and equipment was $9.6 million, $9.2 million and $9.8 million, respectively.
For the years ended December 31, 2022, 2021 and 2020, the Company recorded a (gain) loss on disposal of tools and molds of ($43,850), ($34,100) and $0.1 million, respectively, which is included in cost of sales in the consolidated statements of operations.
Other Comprehensive Income (Loss)
Other comprehensive income (loss) includes all changes in equity from non-owner sources. The Company accounts for other comprehensive income in accordance with Accounting Standards Codification (“ASC”) ASC 220, “Comprehensive Income.” All the activity in other comprehensive income (loss) and all amounts in accumulated other comprehensive income (loss) relate to foreign currency translation adjustments.
Advertising
Production costs of commercials and programming are charged to operations in the period during which the production is first aired. The costs of other advertising, promotion and marketing programs are charged to operations in the period incurred. Advertising expense for the years ended December 31, 2022, 2021 and 2020, was approximately $14.3 million, $12.2 million and $10.1 million, respectively.
Income taxes
The Company does not file a consolidated return with its foreign subsidiaries. The Company files federal and state returns and its foreign subsidiaries file returns in their respective jurisdictions. Deferred taxes are provided on an asset and liability method. Deferred tax assets are recognized as deductible temporary differences, operating losses, or tax credit carry-forwards. Deferred tax liabilities are recognized as taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
The Company recognizes net deferred tax assets to the extent that the Company believes these assets are more likely than not to be realized. In making such a determination, management considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If management determines that the Company would be able to realize its deferred tax assets in the future in excess of their net recorded amount, management would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.
The Company records uncertain tax positions on the basis of a two-step process whereby (1) management determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, management recognizes the largest amount of tax benefit that is more than 50% likely to be realized upon ultimate settlement with the related tax authority. The Company recognizes interest and penalties related to unrecognized tax benefits within income tax expense. Any accrued interest and penalties are included within the related tax liability.
Revision of Previously Disclosed Amounts
During the course of preparing the Company’s financial statements as of and for the year ended December 31, 2022, the Company completed an Internal Revenue Code Section 382 and 383 analysis of its historical net operating loss and tax credit carryforward amounts. As a result, a portion of the prior year net operating loss and tax credit carryforwards were determined to be limited. See Note 13 – Income Taxes, for further details.
Foreign Currency Translation Exposure
The Company’s reporting currency is the U.S. dollar. The translation of its net investment in subsidiaries with non-U.S. dollar functional currencies subjects the Company to currency exchange rate fluctuations in its results of operations and financial position. Assets and liabilities of subsidiaries with non-U.S. dollar functional currencies are translated into U.S. dollars at year-end exchange rates. Income, expense and cash flow items are translated at average exchange rates prevailing during the year. The resulting currency translation adjustments are recorded as a component of accumulated other comprehensive income (loss) within stockholders’ equity. The Company’s primary currency translation exposures in 2022, 2021 and 2020 were related to its net investment in entities having functional currencies denominated in the Hong Kong Dollar, British Pound, Canadian Dollar, Chinese Yuan, Mexican Peso and the Euro.
Foreign Currency Transaction Exposure
Currency exchange rate fluctuations may impact the Company’s results of operations and cash flows. The Company’s currency transaction exposures include gains and losses realized on unhedged inventory purchases and unhedged receivables and payables balances that are denominated in a currency other than the applicable functional currency. Gains and losses on unhedged inventory purchases and other transactions associated with operating activities are recorded in the components of operating income in the consolidated statement of operations.
Accounting for the impairment of finite-lived tangible and intangible assets
Long-lived assets with finite lives, which include property and equipment and intangible assets other than goodwill, are evaluated for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through the estimated undiscounted future cash flows from the use of these assets. When any such impairment exists, the related assets will be written down to fair value. Finite-lived intangible assets often consist of product technology rights, acquired backlog, customer relationships, product lines and license agreements. These intangible assets are amortized over the estimated economic lives of the related assets.
Goodwill and other indefinite-lived intangible assets
Goodwill and indefinite-lived intangible assets are not amortized, but are tested for impairment at least annually at the reporting unit level and asset level. The annual goodwill test is performed in the second quarter and whenever events or changes in circumstances indicate that the carrying amount of a reporting unit may exceed its fair value, the Company may assess goodwill for impairment using a qualitative assessment. Qualitative factors and their impact on critical inputs are assessed to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If the Company determines that a reporting unit has an indication of impairment based on the qualitative assessment, it is required to perform a quantitative assessment. The Company may bypass the qualitative assessment and perform a quantitative assessment. Impairment is recognized in the amount by which, if any, the carrying value of the reporting unit exceeds the fair value, not to exceed the carrying value of goodwill. Indefinite-lived intangible assets other than goodwill consist of trademarks.
The carrying value of goodwill and trademarks is based upon cost, which is subject to management’s current assessment of fair value. Management evaluates fair value recoverability using both objective and subjective factors. Objective factors include cash flows and analysis of recent sales and earnings trends. Subjective factors include management’s best estimates of projected future earnings and competitive analysis and the Company’s strategic focus.
Share-based Compensation
The Company measures all employee share-based compensation awards using a fair value method and records such expense in its consolidated statements of operations.
Earnings (Loss) per share
A reconciliation of the amounts used to calculate basic and diluted income (loss) per share for the years ended December 31, 2022, 2021, and 2020 follows (in thousands, except per share data):
|
|
Year Ended December 31,
|
|
|
|
2022
|
|
|
2021
|
|
|
2020
|
|
Net income (loss)
|
|
$ |
91,083 |
|
|
$ |
(5,888 |
)
|
|
$ |
(14,144 |
)
|
Net income (loss) attributable to non-controlling interests
|
|
|
(330 |
)
|
|
|
120 |
|
|
|
130 |
|
Net income (loss) attributable to JAKKS Pacific, Inc.
|
|
|
91,413 |
|
|
|
(6,008 |
)
|
|
|
(14,274 |
)
|
Preferred stock dividend*
|
|
|
(1,416 |
)
|
|
|
(1,334 |
)
|
|
|
(1,257 |
)
|
Net income (loss) attributable to common stockholders**
|
|
$ |
89,997 |
|
|
$ |
(7,342 |
)
|
|
$ |
(15,531 |
)
|
Weighted average common shares outstanding - basic
|
|
|
9,651 |
|
|
|
7,498 |
|
|
|
3,634 |
|
Earnings (loss) per share available to common stockholders - basic
|
|
$ |
9.33 |
|
|
$ |
(0.98 |
)
|
|
$ |
(4.27 |
)
|
Weighted average common shares outstanding - diluted
|
|
|
10,155 |
|
|
|
7,498 |
|
|
|
3,634 |
|
Earnings (loss) per share available to common stockholders - diluted
|
|
$ |
8.86 |
|
|
$ |
(0.98 |
)
|
|
$ |
(4.27 |
)
|
* The 200,000 shares issued and outstanding are non-participating.
** Net income (loss) attributable to common stockholders was computed by deducting preferred dividends of $1.4 million, $1.3 million and $1.3 million for the years ended December 31, 2022, 2021 and 2020 respectively.
Basic earnings (loss) per share is calculated using the weighted average number of common shares outstanding during the period. Diluted earnings (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 awards, restricted stock units and convertible debt to the extent they are dilutive). For the years ended December 31, 2021 and 2020, the convertible senior notes interest and related weighted common share equivalent of 1,735,938 and 5,758,365, respectively, were excluded from the diluted earnings (loss) per share calculation since they would have been anti-dilutive. Potentially dilutive restricted stock awards and units of nil, 122,371 and 185,455 for each of the years ended December 31, 2022, 2021 and 2020, respectively, were excluded from the computation of diluted earnings (loss) per share since they would have been anti-dilutive.
Recent Accounting Pronouncements
In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The new standard was initially effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. In November 2019, the FASB issued ASU 2019-10 which deferred the effective date of ASU 2016-13 by three years for Smaller Reporting Companies. As a result, the effective date for the standard is fiscal years beginning after December 15, 2022, and interim periods therein, and early adoption is permitted. Based on the Company’s preliminary evaluation, the Company does not expect the adoption of ASU 2016-13 to have a material impact on its consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes,” which simplifies the accounting for income taxes related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax assets for investments. The guidance also reduces complexity in certain areas, including the accounting for transactions that result in a step-up in the tax basis of goodwill and allocating taxes to members of a consolidated group. This new standard is effective for the Company for fiscal years beginning January 1, 2021, with early adoption permitted. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
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. The new standard is effective for the Company for fiscal years beginning after December 15, 2024, including interim periods within these fiscal years, with early adoption permitted. The Company is currently evaluating the impact that the adoption of this new guidance will have on its 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 eliminates 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 requires 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 is currently evaluating the impact that the adoption of this new guidance will have on its consolidated financial statements.
In November 2021, the FASB issued ASU 2021-10, “Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance.” ASU 2021-10 requires annual disclosures that are expected to increase the transparency of transactions involving government grants, including (1) the types of transactions, (2) the accounting for those transactions and (3) the effect of those transactions on an entity’s financial statements. The provisions of ASU 2021-10 are effective for fiscal years beginning after December 31, 2021, with early adoption permitted. The Company adopted ASU 2021-10 during the fiscal period December 31, 2021. (See Note 5 – Prepaid Expenses and Other Assets and Note 10 – Debt, for disclosures related to government assistance received by the Company). The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
Note 3—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.
Results are not necessarily those which would be achieved if each segment was an unaffiliated business enterprise. Information by segment and a reconciliation to reported amounts as of December 31, 2022 and 2021 and for the three years in the period ended December 31, 2022 are as follows (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2022
|
|
|
2021
|
|
|
2020
|
|
Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
Toys/Consumer Products
|
|
$ |
647,317 |
|
|
$ |
513,517 |
|
|
$ |
427,122 |
|
Costumes
|
|
|
148,870 |
|
|
|
107,599 |
|
|
|
88,750 |
|
|
|
$ |
796,187 |
|
|
$ |
621,116 |
|
|
$ |
515,872 |
|
|
|
Year Ended December 31,
|
|
|
|
2022
|
|
|
2021
|
|
|
2020
|
|
Income (Loss) from Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Toys/Consumer Products
|
|
$ |
62,698 |
|
|
$ |
39,046 |
|
|
$ |
20,002 |
|
Costumes
|
|
|
(1,728 |
) |
|
|
(279 |
) |
|
|
(7,094 |
) |
|
|
$ |
60,970 |
|
|
$ |
38,767 |
|
|
$ |
12,908 |
|
|
|
Year Ended December 31,
|
|
|
|
2022
|
|
|
2021
|
|
|
2020
|
|
Depreciation and Amortization Expense
|
|
|
|
|
|
Toys/Consumer Products
|
|
$ |
10,182 |
|
|
$ |
9,585 |
|
|
$ |
10,292 |
|
Costumes
|
|
|
396 |
|
|
|
666 |
|
|
|
644 |
|
|
|
$ |
10,578 |
|
|
$ |
10,251 |
|
|
$ |
10,936 |
|
|
|
December 31,
|
|
|
|
2022
|
|
|
2021
|
|
Assets
|
|
|
|
|
|
|
|
|
Toys/Consumer Products
|
|
$ |
377,605 |
|
|
$ |
338,266 |
|
Costumes
|
|
|
27,737 |
|
|
|
18,781 |
|
|
|
$
|
405,342 |
|
|
$ |
357,047 |
|
Net revenues are categorized based upon location of the customer, while long-lived assets are categorized based upon the location of the Company’s assets. The following tables present information about the Company by geographic area as of December 31, 2022 and 2021 and for each of the three years in the period ended December 31, 2022 (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2022
|
|
|
2021
|
|
|
2020
|
|
Net Sales by Customer Area
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$ |
644,295 |
|
|
$ |
512,193 |
|
|
$ |
421,222 |
|
Europe
|
|
|
85,348 |
|
|
|
60,425 |
|
|
|
51,885 |
|
Canada
|
|
|
26,515 |
|
|
|
17,999 |
|
|
|
18,486 |
|
Latin America
|
|
|
18,338 |
|
|
|
12,606 |
|
|
|
7,734 |
|
Asia
|
|
|
10,431 |
|
|
|
9,232 |
|
|
|
8,285 |
|
Australia and New Zealand
|
|
|
8,836 |
|
|
|
6,423 |
|
|
|
5,795 |
|
Middle East and Africa
|
|
|
2,424 |
|
|
|
2,238 |
|
|
|
2,465 |
|
|
|
$ |
796,187 |
|
|
$ |
621,116 |
|
|
$ |
515,872 |
|
|
|
December 31,
|
|
|
|
2022
|
|
|
2021
|
|
Long-lived Assets
|
|
|
|
|
|
|
|
|
United States
|
|
$ |
17,383 |
|
|
$ |
16,252 |
|
China
|
|
|
14,161 |
|
|
|
11,655 |
|
Hong Kong
|
|
|
2,142 |
|
|
|
770 |
|
United Kingdom
|
|
|
974 |
|
|
|
1,270 |
|
Canada
|
|
|
46 |
|
|
|
73 |
|
Mexico
|
|
|
69 |
|
|
|
79 |
|
|
|
$ |
34,775 |
|
|
$ |
30,099 |
|
Major Customers
Net sales to major customers were as follows (in thousands, except for percentages):
|
|
2022
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
Percentage of
|
|
|
|
|
|
|
Percentage of
|
|
|
|
|
|
|
Percentage of
|
|
|
|
Amount |
|
|
Net Sales
|
|
|
Amount |
|
|
Net Sales
|
|
|
Amount |
|
|
Net Sales
|
|
Wal-Mart
|
|
$ |
226,318 |
|
|
|
28.4 |
%
|
|
$ |
167,260 |
|
|
|
26.9 |
%
|
|
$ |
150,250 |
|
|
|
29.1 |
%
|
Target
|
|
|
203,200 |
|
|
|
25.5 |
|
|
|
176,561 |
|
|
|
28.4 |
|
|
|
132,354 |
|
|
|
25.7 |
|
|
|
$ |
429,518 |
|
|
|
53.9 |
%
|
|
$ |
343,821 |
|
|
|
55.3 |
%
|
|
$ |
282,604 |
|
|
|
54.8 |
%
|
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.
Note 4—Joint Ventures
In November 2014, the Company entered into a joint venture with Meisheng Culture & Creative Corp. Ltd., (“MC&C”), for the purpose of providing certain JAKKS licensed and non-licensed toys and consumer products to agreed-upon territories of the People’s Republic of China. The joint venture includes a subsidiary in the Shanghai Free Trade Zone that sells, distributes and markets these products, which include dolls, plush, role play products, action figures, costumes, seasonal items, technology and app-enhanced toys, based on top entertainment licenses and JAKKS’ own proprietary brands. The Company owns fifty-one percent of the joint venture and consolidates the joint venture since control rests with the Company. The non-controlling interest’s share of the income (loss) from the joint venture for the years ended December 31, 2022, 2021 and 2020 was ($330,000), $120,000 and $130,000, respectively.
In October 2016, the Company entered into a joint venture with Hong Kong Meisheng Cultural Company Limited ("Meisheng"), a Hong Kong-based subsidiary of Meisheng Culture & Creative Corp., for the purpose of creating and developing original, multiplatform content for children including new short-form series and original shows. JAKKS and Meisheng each own fifty percent of the joint venture and will jointly own the content. JAKKS will retain merchandising rights for kids’ consumer products in all markets except China, which Meisheng Culture & Creative Corp. will oversee through the Company’s existing distribution joint venture. The results of operations of the joint venture are consolidated with the Company's results. The non-controlling interest’s share of the income (loss) from the joint venture for the years ended December 31, 2022, 2021 and 2020 was nil.
Note 5—Prepaid Expenses and Other Assets
Prepaid expenses and other assets for the year ended December 31, 2022 and 2021 consist of the following (in thousands):
|
|
December 31,
|
|
|
|
2022
|
|
|
2021
|
|
Prepaid expenses
|
|
$ |
994 |
|
|
$ |
4,151 |
|
Royalty advances
|
|
|
1,822 |
|
|
|
2,619 |
|
Employee retention credit
|
|
|
1,179 |
|
|
|
2,390 |
|
Income tax receivable
|
|
|
2,217 |
|
|
|
1,527 |
|
Other assets
|
|
|
119 |
|
|
|
190 |
|
|
|
$ |
6,331 |
|
|
$ |
10,877 |
|
Note 6—Goodwill
There were no changes in the carrying amount of goodwill by reporting unit for the year ended December 31, 2022 and 2021.
In the second quarter of 2022, the Company performed a quantitative assessment and determined that goodwill was not impaired as the fair value of the reporting units exceeded the carrying value. There were no events or changes in circumstances subsequent to the second quarter assessment that indicate that the carrying value of a reporting unit may exceed its fair value as of December 31, 2022.
Note 7—Intangible Assets Other Than Goodwill
Intangible assets other than goodwill consist primarily of licenses, product lines, customer relationships and trademarks. Amortized intangible assets are included in intangibles in the accompanying consolidated balance sheets. Trademarks are disclosed separately in the accompanying consolidated balance sheets. Intangible assets are as follows (in thousands, except for weighted useful lives):
|
|
|
|
|
|
December 31, 2022
|
|
|
December 31, 2021
|
|
|
|
Weighted
|
|
|
Gross
|
|
|
Accumulated
|
|
|
|
|
|
|
Gross
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Useful
|
|
|
Carrying
|
|
|
Amortization/
|
|
|
Net
|
|
|
Carrying
|
|
|
Amortization/
|
|
|
Net
|
|
|
|
Lives
|
|
|
Amount
|
|
|
Write-off
|
|
|
Amount
|
|
|
Amount
|
|
|
Write-off
|
|
|
Amount
|
|
|
|
(Years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized Intangible Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licenses
|
|
|
5.81 |
|
|
$ |
20,130 |
|
|
$ |
(20,130 |
) |
|
$ |
— |
|
|
$ |
20,130 |
|
|
$ |
(20,130 |
) |
|
$ |
— |
|
Product lines
|
|
|
10.36 |
|
|
|
33,858 |
|
|
|
(33,858 |
) |
|
|
— |
|
|
|
33,858 |
|
|
|
(32,843 |
) |
|
|
1,015 |
|
Customer relationships
|
|
|
4.90 |
|
|
|
3,152 |
|
|
|
(3,152 |
) |
|
|
— |
|
|
|
3,152 |
|
|
|
(3,152 |
) |
|
|
— |
|
Trade names
|
|
|
5.00 |
|
|
|
3,000 |
|
|
|
(3,000 |
) |
|
|
— |
|
|
|
3,000 |
|
|
|
(3,000 |
) |
|
|
— |
|
Non-compete agreements
|
|
|
5.00 |
|
|
|
200 |
|
|
|
(200 |
) |
|
|
— |
|
|
|
200 |
|
|
|
(200 |
) |
|
|
— |
|
Total amortized intangible assets
|
|
|
|
|
|
$ |
60,340 |
|
|
$ |
(60,340 |
) |
|
$ |
— |
|
|
$ |
60,340 |
|
|
$ |
(59,325 |
) |
|
$ |
1,015 |
|
|
|
December 31, 2022
|
|
|
December 31, 2021
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Impairment
|
|
|
Net
|
|
|
Carrying
|
|
|
Impairment
|
|
|
Net
|
|
|
|
Amount
|
|
|
Charge
|
|
|
Amount
|
|
|
Amount
|
|
|
Charge
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized Intangible Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
$ |
300 |
|
|
$ |
(300 |
) |
|
$ |
— |
|
|
$ |
300 |
|
|
$ |
— |
|
|
$ |
300 |
|
For the years ended December 31, 2022, 2021 and 2020, the Company’s aggregate amortization expense related to intangible assets was $1.0 million, $1.0 million and $1.2 million, respectively.
Note 8—Concentration of Credit Risk
Financial instruments that subject the Company to concentration of credit risk are cash and cash equivalents and accounts receivable. Cash equivalents consist primarily of overnight funds. These instruments are short-term in nature and bear minimal risk.
The Company maintains certain cash balances in excess of Federal Deposit Insurance Corporation (“FDIC”) insured limits. The Company has not experienced any losses in such accounts and believes that the credit risk to the Company’s cash is minimal.
The Company performs ongoing credit evaluations of its customers’ financial conditions, but does not require collateral to support domestic customer accounts receivable. For goods shipped FOB Hong Kong or China, the Company may require irrevocable letters of credit from the customer or purchase various forms of credit insurance.
Note 9—Accrued Expenses
Accrued expenses consist of the following (in thousands):
|
|
December 31,
|
|
|
|
2022
|
|
|
2021
|
|
Royalties
|
|
$ |
17,980 |
|
|
$ |
18,606 |
|
Salaries and employee benefits
|
|
|
4,697 |
|
|
|
4,347 |
|
Inventory liabilities
|
|
|
3,619 |
|
|
|
6,003 |
|
Professional fees
|
|
|
2,949 |
|
|
|
1,097 |
|
Bonuses
|
|
|
1,698 |
|
|
|
1,997 |
|
Goods in transit
|
|
|
1,519 |
|
|
|
5,601 |
|
Third-party warehouse
|
|
|
936 |
|
|
|
1,807 |
|
Unearned revenue
|
|
|
922 |
|
|
|
2,510 |
|
Sales commissions
|
|
|
558 |
|
|
|
527 |
|
Interest expense
|
|
|
68 |
|
|
|
51 |
|
Other
|
|
|
3,052 |
|
|
|
4,525 |
|
|
|
$ |
37,998 |
|
|
$ |
47,071 |
|
In addition to royalties currently payable on the sale of licensed products during the year, the Company records a liability as accrued royalties for the estimated shortfall in achieving minimum royalty guarantees pursuant to certain license agreements (see Note 17 - Commitments).
Note 10—Debt
Convertible senior notes
In August 2019, the Company entered into and consummated multiple, binding definitive agreements (collectively, the “Recapitalization Transaction”) among Wells Fargo, Oasis Investments II Master Fund Ltd. and an ad hoc group of holders of the Company’s 4.875% convertible senior notes due 2020 ( the “Investor Parties”) to recapitalize the Company’s balance sheet, including the extension to the Company of incremental liquidity and at least three-year extensions of substantially all of the Company’s outstanding convertible debt obligations and revolving credit facility.
In connection with the Recapitalization Transaction, the Company issued (i) amended and restated notes with respect to the Company’s $21.6 million Oasis Note issued on November 7, 2017, and the $8.0 million Oasis Note issued on July 26, 2018 (together, the “Existing Oasis Notes”), and (ii) a new $8.0 million convertible senior note having the same terms as such amended and restated notes (the "New $8.0 million Oasis Note" and collectively, the “New Oasis Notes” or the "3.25% convertible senior notes due 2023"). Interest on the New Oasis Notes is payable on each May 1 and November 1 until maturity and accrues at an annual rate of (i) 3.25% if paid in cash or 5.00% if paid in stock plus (ii) 2.75% payable in kind. The New Oasis Notes mature 91 days after the amounts outstanding under the 2019 Recap Term Loan are paid in full, and in no event later than July 3, 2023.
Excluding the impact of the Reverse Stock Split in July of 2020, the New Oasis Notes provide, among other things, that the initial conversion price is $1.00. The conversion price will be reset on each February 9 and August 9, starting on February 9, 2020 (each, a “reset date”) to a price equal to 105% of the 5-day VWAP preceding the applicable reset date. Under no circumstances shall the reset result in a conversion price be below the greater of (i) the closing price on the trading day immediately preceding the applicable reset date and (ii) 30% of the stock price as of the Transaction Agreement Date, or August 7, 2019, and will not be greater than the conversion price in effect immediately before such reset. The Company may trigger a mandatory conversion of the New Oasis Notes if the market price exceeds 150% of the conversion price under certain circumstances. The Company may redeem the New Oasis Notes in cash if a person, entity or group acquires shares of the Company’s Common Stock, par value $0.001 per share (the “Common Stock”), and as a result owns at least 49% of the Company’s issued and outstanding Common Stock. On February 9, 2020, excluding the impact of the Reverse Stock Split, the conversion price of the New Oasis Notes reset to $1.00 per share ($10.00 per share after reverse stock split). On August 9, 2020, the conversion price of the New Oasis Notes reset to $5.647. On February 9, 2021, the conversion price of the New Oasis Notes recalculated and remained unchanged at $5.647.
During 2021, $24.0 million of the New Oasis Notes (including $1.2 million in payment in-kind interest) were converted for 4,246,828 shares of common stock. As a result, the Company recorded an increase to additional paid-in capital of $50.8 million. As a result of the conversion in 2021, the New Oasis Notes were fully extinguished.
The Company accounted for the debt held by Oasis at fair value using Level 3 inputs and as a result, recognized a loss of $16.4 million and $2.3 million for the years ended December 31, 2021 and 2020, respectively, related to changes in the fair value of the 3.25% convertible senior notes due 2023 (see Note 16 – Fair Value Measurement).
On February 5, 2021, Benefit Street Partners and Oasis Investment II Master Funds Ltd, both related parties, entered into a purchase and sale agreement wherein Benefit Street Partners purchased $11.0 million of principal amount, plus all accrued and unpaid interest thereon, of the New Oasis Notes from Oasis Investment II Master Funds Ltd (see Note 12 – Related Party Transactions). The transaction closed on February 8, 2021. As of December 31, 2022 and 2021, Benefit Street Partners held nil in principal amount of the New Oasis Notes.
Key components of the 3.25% convertible senior notes due 2023 consist of the following (in thousands):
|
|
Year ended December 31,
|
|
|
|
2022
|
|
|
2021
|
|
|
2020
|
|
Contractual interest expense
|
|
$ |
— |
|
|
$ |
620 |
|
|
$ |
2,004 |
|
Term Loan
Term loan consists of the following (in thousands):
|
|
December 31, 2022
|
|
|
December 31, 2021
|
|
|
|
|
|
|
|
Debt Discount/
|
|
|
|
|
|
|
|
|
|
|
Debt Discount/
|
|
|
|
|
|
Principal
|
|
|
Issuance
|
|
|
Net
|
|
|
Principal
|
|
|
Issuance
|
|
|
Net
|
|
|
|
Amount
|
|
|
Costs*
|
|
|
Amount
|
|
|
Amount
|
|
|
Costs*
|
|
|
Amount
|
|
2021 BSP Term Loan
|
|
$ |
68,901 |
|
|
$ |
(1,750 |
) |
|
$ |
67,151 |
|
|
$ |
98,505 |
|
|
$ |
(2,986 |
) |
|
$ |
95,519 |
|
* The term loan was valued using the discounted cash flow method to determine the implied debt discount. The debt discount and issuance costs are being amortized over the life of the term loan on a straight-line basis which approximates the effective interest method.
On June 2, 2021, the Company and certain of its subsidiaries, as borrowers, entered into a First Lien Term Loan Facility Credit Agreement (the “2021 BSP Term Loan Agreement”) with Benefit Street Partners L.L.C., as Sole Lead Arranger, and BSP Agency, LLC, as agent, for a $99.0 million first-lien secured term loan (the “Initial Term Loan”) and a $19.0 million delayed draw term loan (the “Delayed Draw Term Loan” and collectively, the “2021 BSP Term Loan”). Net proceeds from the issuance of the 2021 BSP Term Loan, after deduction of $2.2 million in closing fees and $0.5 million of other administrative fees paid directly to the lenders, totaled $96.3 million. These fees are amortized over the life of the 2021 BSP Term Loan on a straight-line basis which approximates the effective interest method. Proceeds from the Initial Term Loan, together with available cash from the Company, were used to repay the Company’s existing term loan (the “2019 Recap Term Loan” formerly known as the “New Term Loan” in prior filings) under the agreement dated as of August 9, 2019 with Cortland Capital Market Services LLC, as agent for certain investor parties. The Delayed Draw Term Loan provision was designed to provide necessary capital to redeem any of the Company’s outstanding 3.25% convertible senior notes due 2023, upon their maturity, which, upon repayment of the 2019 Recap Term Loan, accelerated to no later than 91 days from the repayment of the 2019 Recap Term Loan, or September 1, 2021. On July 29, 2021, the Company terminated its Delayed Draw Term Loan option as it determined it had sufficient liquidity to fund any outstanding convertible senior notes that remained upon maturity.
Amounts outstanding under the 2021 BSP Term Loan bear interest at either (i) LIBOR plus 6.50% - 7.00% (determined by reference to a net leverage pricing grid), subject to a 1.00% LIBOR floor, or (ii) base rate plus 5.50% - 6.00% (determined by reference to a net leverage pricing grid), subject to a 2.00% base rate floor. The 2021 BSP Term Loan matures in June 2027.
The 2021 BSP Term Loan Agreement contains negative covenants that, subject to certain exceptions, limit the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, make restricted payments, pledge its assets as security, make investments, loans, advances, guarantees and acquisitions, undergo fundamental changes and enter into transactions with affiliates. Commencing with the fiscal quarter ending June 30, 2021, the Company is required to maintain a Net Leverage Ratio of 4:00x, with step-downs occurring each fiscal year starting with the quarter ending March 31, 2022 through the quarter ending September 30, 2024 in which the Company is required to maintain a Net Leverage Ratio of 3:00x. On April 26, 2022, the Company entered into a First Amendment to the 2021 BSP Term Loan Agreement, to provide, among other things, that the Company must maintain Qualified Cash of at least: (a) at all times after the Closing Date and prior to the First Amendment Effective Date, April 26, 2022, $20.0 million; (b) at all times during the period commencing on the First Amendment Effective Date through and including June 30, 2022, $15.0 million; and (c) at all times on and after July 1, 2022, through September 30, 2022, $17.5 million; provided, however, that if the Total Net Leverage Ratio exceeded 1.75:1.00 as of the last day of the most recently ended month for which financial statements were required to have been delivered, then the amount set forth in this clause shall be increased to $20.0 million. Notwithstanding the foregoing, the Applicable Minimum Cash Amount shall be reduced by $1.0 million for every $5.0 million principal prepayment or repayment of the Term Loans following the First Amendment Effective Date; provided however, that, the Applicable Minimum Cash Amount shall in no event be reduced below $15.0 million.
On June 27, 2022, as permitted by the terms within the 2021 BSP Term Loan Agreement, the Company made a voluntary fee-free $10.0 million prepayment towards the outstanding principal amount of the 2021 BSP Term Loan.
On September 28, 2022, as permitted by the terms within the 2021 BSP Term Loan Agreement, the Company made a voluntary $17.5 million prepayment towards the outstanding principal amount of the 2021 BSP Term Loan and incurred a $0.5 million prepayment penalty.
The 2021 BSP Term Loan Agreement contains events of default that are customary for a facility of this nature, including (subject in certain cases to grace periods and thresholds) nonpayment of principal, nonpayment of interest, fees or other amounts, material inaccuracy of representations and warranties, violation of covenants, cross-default to certain other existing indebtedness, bankruptcy or insolvency events, certain judgment defaults and a change of control as specified in the 2021 BSP Term Loan Agreement. If an event of default occurs, the maturity of the amounts owed under the 2021 BSP Term Loan Agreement may be accelerated.
The obligations under the 2021 BSP Term Loan Agreement are guaranteed by the Company, the subsidiary borrowers thereunder and certain of the other existing and future direct and indirect subsidiaries of the Company and are secured by substantially all of the assets of the Company, the subsidiary borrowers thereunder and such other subsidiary guarantors, in each case, subject to certain exceptions and permitted liens and subject to the priority lien granted under the JPMorgan ABL Credit Agreement (see Note 11 – Credit Facility).
The agent and Sole Lead Arranger under the 2021 BSP Term Loan are affiliates of an affiliate of the Company, which affiliate, at the time of refinancing, owned common stock and the 3.25% convertible senior notes due 2023 of the Company, as well as the Company’s outstanding Series A Preferred Stock.
Amortization expense classified as interest expense related to the $0.8 million of debt issuance costs associated with the issuance of the 2021 BSP Term Loan was $0.2 million and $0.1 million for the years ended December 31, 2022 and 2021, respectively.
Amortization expense classified as interest expense related to the $1.6 million debt discount associated with the issuance of the 2021 BSP Term Loan was $0.3 million and $0.2 million for the years ended December 31, 2022 and 2021, respectively.
The fair value of the Company’s 2021 BSP Term Loan is considered Level 3 fair value and are measured using the discounted future cash flow method. In addition to the debt terms, the valuation methodology includes an assumption of a discount rate that approximates the current yield on a debt security with comparable risk. This assumption is considered an unobservable input in that it reflects the Company’s own assumptions about the inputs that market participants would use in pricing the asset or liability. The Company believes that this is the best information available for use in the fair value measurement. The estimated fair value of the 2021 BSP Term Loan as of December 31, 2022 was $69.3 million compared to a carrying value of $68.9 million. The estimated fair value of the 2021 BSP Term Loan as of December 31, 2021 was $97.3 million compared to a carrying value of $95.5 million.
As of December 31, 2022, the Company was in compliance with the financial covenants under the 2021 BSP Term Loan Agreement.
The aggregate principal amount of long-term debt maturing in the next five years and thereafter is as follows:
|
|
|
2021 BSP Term Loan
|
|
2023
|
*
|
|
$
|
25,529 |
|
2024
|
|
|
|
2,475 |
|
2025
|
|
|
|
2,475 |
|
2026
|
|
|
|
2,475 |
|
2027
|
|
|
|
35,947 |
|
|
|
|
$
|
68,901 |
|
*Represents the Company’s current portion of principal amortization payments for the 2021 BSP Term Loan.
Loan under Paycheck Protection Program
On June 12, 2020, the Company received a $6.2 million loan under the Paycheck Protection Program (“PPP”) within the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”). The PPP loan maturity date was June 2, 2022, and was subject to the CARES Act terms which included, among other terms, an interest rate of 1.00% per annum and monthly installment payments of $261,275 commencing on September 27, 2021. The PPP loan allowed for prepayment at any time prior to maturity with no prepayment penalties. The PPP Loan was subject to events of default and other provisions customary for a loan of this type. A PPP loan may be forgiven, partially or in full, if certain conditions are met, principally based on having been disbursed for permissible purposes and maintaining certain average levels of employment and payroll as required by the CARES Act. On September 10, 2021, the full amount of the PPP loan was forgiven. The Small Business Administration (“SBA”) may review the Company’s PPP loan forgiveness application for six years after the date of forgiveness. The Company may be subjected to penalties and repayment of the PPP loan if the SBA disagrees with the Company’s eligibilities. Income from the forgiveness of the PPP Loan is recognized as a$6.2 million gain on loan forgiveness in the consolidated statements of operations.
Note 11—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 $67,500,000 senior secured revolving credit facility (the “JPMorgan ABL Facility”). The JPMorgan ABL Credit Agreement replaced the Company’s existing asset-based revolving credit agreement, dated as of March 27, 2014 (the “Wells Fargo ABL Facility,” formerly known as the “Amended ABL Facility” in prior filings), with General Electric Capital Corporation, since assigned to Wells Fargo Bank, National Association. The Company pays a commitment fee (0.25% - 0.375%) based on the unused portion of the revolving credit facility. Any amounts borrowed under the JPMorgan ABL Facility will bear interest at either (i) Eurodollar spread plus 1.50% - 2.00% (determined by reference to an excess availability pricing grid) or (ii) Alternate Base Rate plus 0.50% - 1.00% (determined by reference to an excess availability pricing grid and base rate subject to a 1.00% floor). The JPMorgan ABL Facility matures in June 2026. As of December 31, 2022 and 2021, the weighted average interest rate on the credit facility with JPMorgan Chase Bank was 1.88%.
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 1.1 to 1.0, as described in more detail in the JPMorgan ABL Credit Agreement.
The JPMorgan ABL Credit Agreement contains events of default that are customary for a facility of this nature, including (subject in certain cases to grace periods and thresholds) nonpayment of principal, interest, fees or other amounts, material inaccuracy of representations and warranties, violation of covenants, cross-default to certain other existing indebtedness, bankruptcy or insolvency events, certain judgment defaults, loss of liens or guarantees and a change of control as specified in the JPMorgan ABL Credit Agreement. If an event of default occurs, the commitments of the lenders to lend under the JPMorgan ABL Credit Agreement may be terminated and the maturity of the amounts owed may be accelerated.
The obligations under the JPMorgan ABL Credit Agreement are guaranteed by the Company, the subsidiary borrowers thereunder and certain of the other existing and future direct and indirect subsidiaries of the Company and are secured by substantially all of the assets of the Company, the subsidiary borrowers thereunder and such other subsidiary guarantors, in each case, subject to certain exceptions and permitted liens.
As of December 31, 2022, the amount of outstanding borrowings was nil and the total excess borrowing availability was $46.6 million.
As of December 31, 2022, off-balance sheet arrangements include letters of credit issued by JPMorgan of $17.2 million.
Amortization expense classified as interest expense related to the $1.6 million of debt issuance costs associated with the transaction that closed on June 2, 2021 was $0.3 million and $0.2 million for the years ended December 31, 2022 and 2021, respectively.
As of December 31, 2022, the Company was in compliance with the financial covenants under the JPMorgan ABL Credit Agreement.
Note 12—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 4 – Joint Ventures).
In October 2016, the Company entered into a joint venture with Hong Kong Meisheng Cultural Company Limited, a Hong Kong-based subsidiary of Meisheng Culture & Creative Corp, for the purpose of creating and developing original, multiplatform content for children including new short-form series and original shows (see Note 4 – Joint Ventures).
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 years ended December 31, 2022, 2021 and 2020, the Company made inventory-related payments to Meisheng of approximately $120.5 million, $77.7 million and $64.8 million respectively. As of December 31, 2022 and 2021, amounts due to Meisheng for inventory received by the Company, but not paid totaled $9.8 million and $15.9 million, respectively.
A director of the Company is a director at Benefit Street Partners, who owns 145,788 shares of the Series A Preferred Stock (see Note 15 – Common Stock and Preferred Stock). As of December 31, 2022, a division of Benefit Street Partners held $68.9 million in principal amount of the 2021 BSP Term Loan (see Note 10 - Debt).
Note 13—Income Taxes
The Company does not file a consolidated return with its foreign subsidiaries. The Company files federal and state returns and its foreign subsidiaries file returns in their respective jurisdiction.
For the years ended 2022, 2021 and 2020, the provision for income taxes, which included federal, state and foreign income taxes, was a benefit of $41.0 million, an expense of $0.2 million, and an expense of $0.7 million, respectively, reflecting effective tax provision rates of (81.9%), (4.0%), and (5.5%), respectively.
The 2022 tax benefit of $41.0 million included a discrete tax benefit of $49.8 million primarily comprised of the valuation allowance release. Absent these discrete tax benefits, our effective tax rate for 2022 was 17.6%, primarily due to taxes on federal, state, and foreign income.
For the years ended 2021 and 2020, provision for income taxes includes federal, state and foreign income taxes at effective tax rates of (4.0%) and (5.5%). Exclusive of discrete items, the effective tax provision rate would be (10.7%) in 2021 and (7.7%) in 2020.
As of December 31, 2022 and 2021, the Company had net deferred tax assets of $57.8 million related to the U.S. and foreign jurisdictions and net deferred tax liabilities of approximately $51,000 primarily related to foreign jurisdictions, respectively.
Provision for income taxes reflected in the accompanying consolidated statements of operations are comprised of the following (in thousands):
|
|
Year ended December 31,
|
|
|
|
2022
|
|
|
2021
|
|
|
2020
|
|
Federal
|
|
$ |
11,293 |
|
|
$ |
1 |
|
|
$ |
(212 |
)
|
State and local
|
|
|
2,031 |
|
|
|
43 |
|
|
|
134 |
|
Foreign
|
|
|
3,523 |
|
|
|
254 |
|
|
|
704 |
|
Total Current
|
|
|
16,847 |
|
|
|
298 |
|
|
|
626 |
|
Deferred
|
|
|
(57,855 |
)
|
|
|
(72 |
)
|
|
|
109 |
|
Total
|
|
$ |
(41,008 |
)
|
|
$ |
226 |
|
|
$ |
735 |
|
The components of deferred tax assets/(liabilities) are as follows (in thousands):
|
|
December 31,
|
|
|
|
2022
|
|
|
2021
|
|
Net deferred tax assets/(liabilities):
|
|
|
|
|
|
|
|
|
Reserve for sales allowances and possible losses
|
|
$ |
469 |
|
|
$ |
356 |
|
Accrued expenses
|
|
|
3,884 |
|
|
|
2,998 |
|
Prepaid royalties
|
|
|
599 |
|
|
|
1,298 |
|
Accrued royalties
|
|
|
465 |
|
|
|
1,731 |
|
Inventory
|
|
|
9,574 |
|
|
|
9,313 |
|
State income taxes
|
|
|
420 |
|
|
|
17 |
|
Property and equipment
|
|
|
1,701 |
|
|
|
1,832 |
|
Goodwill and intangibles
|
|
|
2,412 |
|
|
|
4,266 |
|
Share-based compensation
|
|
|
738 |
|
|
|
593 |
|
Interest limitation
|
|
|
2,256 |
|
|
|
3,595 |
|
Undistributed foreign earnings
|
|
|
(479 |
)
|
|
|
(2,919 |
)
|
Operating lease right-of-use assets
|
|
|
(3,989 |
)
|
|
|
(4,117 |
)
|
Operating lease liabilities
|
|
|
4,120 |
|
|
|
4,518 |
|
Federal and state net operating loss carryforwards
|
|
|
31,263 |
|
|
|
42,731 |
|
Credit carryforwards
|
|
|
110 |
|
|
|
110 |
|
Research & development capitalization
|
|
|
3,792 |
|
|
|
- |
|
Other
|
|
|
1,195 |
|
|
|
902 |
|
Gross
|
|
|
58,530 |
|
|
|
67,224 |
|
Valuation allowance
|
|
|
(726 |
)
|
|
|
(67,275 |
)
|
Total net deferred tax assets (liabilities)
|
|
$ |
57,804 |
|
|
$ |
(51 |
)
|
Provision for income taxes varies from the U.S. federal statutory rate. The following reconciliation shows the significant differences in the tax at statutory and effective rates:
|
|
Year ended December 31,
|
|
|
|
2022
|
|
|
2021
|
|
|
2020
|
|
Federal income tax expense
|
|
|
21.0 |
%
|
|
|
21.0 |
%
|
|
|
21.0 |
%
|
State income tax expense, net of federal tax effect
|
|
|
1.9 |
|
|
|
3.3 |
|
|
|
7.7 |
|
Effect of differences in U.S. and foreign statutory rates
|
|
|
(1.3 |
)
|
|
|
(0.5 |
)
|
|
|
1.2 |
|
Uncertain tax positions
|
|
|
5.0 |
|
|
|
7.0 |
|
|
|
3.4 |
|
Provision to return
|
|
|
21.2 |
|
|
|
6.3 |
|
|
|
(3.8 |
)
|
Change in tax rate
|
|
|
6.9 |
|
|
|
6.5 |
|
|
|
4.4 |
|
Foreign derived intangible income
|
|
|
(10.6 |
)
|
|
|
0.0 |
|
|
|
0.0 |
|
Non-deductible expenses
|
|
|
8.9 |
|
|
|
(68.7 |
)
|
|
|
(26.2 |
)
|
PPP Loan
|
|
|
0.0 |
|
|
|
29.1 |
|
|
|
0.0 |
|
Foreign tax credit
|
|
|
(3.6 |
)
|
|
|
0.0 |
|
|
|
0.0 |
|
Unrealized Loss
|
|
|
0.3 |
|
|
|
(138.9 |
)
|
|
|
(10.0 |
)
|
Undistributed foreign earnings
|
|
|
(1.4 |
)
|
|
|
(8.7 |
)
|
|
|
(3.3 |
)
|
Valuation allowance
|
|
|
(130.2 |
)
|
|
|
139.6 |
|
|
|
0.1 |
|
|
|
|
(81.9 |
)%
|
|
|
(4.0 |
)%
|
|
|
(5.5 |
)%
|
Deferred taxes result from temporary differences between tax basis of assets and liabilities and their reported amounts in the consolidated financial statements. The temporary differences result from costs required to be capitalized for tax purposes by the U.S. Internal Revenue Code (“IRC”), and certain items accrued for financial reporting purposes in the year incurred but not deductible for tax purposes until paid.
The components of income (loss) before provision for income taxes are as follows (in thousands):
|
|
Year ended December 31,
|
|
|
|
2022
|
|
|
2021
|
|
|
2020
|
|
Domestic
|
|
$ |
31,588 |
|
|
$ |
(7,881 |
) |
|
$ |
(18,748 |
) |
Foreign
|
|
|
18,487 |
|
|
|
2,219 |
|
|
|
5,339 |
|
|
|
$ |
50,075 |
|
|
$ |
(5,662 |
) |
|
$ |
(13,409 |
) |
The Company uses a recognition threshold and measurement process for recording in the consolidated financial statements uncertain tax positions (“UTP”) taken or expected to be taken in a tax return.
The following table provides further information of UTPs that would affect the effective tax rate, if recognized, as of December 31, 2022 (in millions):
Balance, December 31, 2019
|
|
$ |
1.6 |
|
Settlements
|
|
|
(0.6 |
)
|
Balance, December 31, 2020
|
|
|
1.0 |
|
Settlements
|
|
|
(0.8 |
)
|
Balance, December 31, 2021
|
|
|
0.2 |
|
Additions based on tax positions related to the current year
|
|
|
0.1 |
|
Additions for tax positions of prior years
|
|
|
2.8 |
|
Settlements
|
|
|
(0.2 |
)
|
Balance, December 31, 2022
|
|
$ |
2.9 |
|
Current interest on uncertain income tax liabilities is recognized as a component of the income tax provision recognized in the consolidated statements of operations. During 2022, the Company recognized $0.2 million of interest expense related to UTPs. The Company did not recognize any interest expense relating to UTPs in 2021.
The Company does not expect its gross unrecognized tax benefits to significantly change within the next 12 months.
Tax years 2019 through 2021 remain subject to examination in the United States. The tax years 2018 through 2021 are generally still subject to examination in the various states. Furthermore, all net operating losses and tax credit carryforwards are still subject to review given that the statute of limitation for these items would begin in the year of utilization. The tax years 2016 through 2021 are still subject to examination in Hong Kong. In the normal course of business, the Company is audited by federal, state and foreign tax authorities.
Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets by jurisdiction. The Company is required to establish a valuation allowance for the U.S. deferred tax assets and record a charge to income if Management determines, based upon available evidence at the time the determination is made, that it is more likely than not that some portion or all of the deferred tax assets may not be realized.
Based on the Company’s evaluation of all positive and negative evidence, as of December 31, 2022, a valuation allowance of $0.7 million has been recorded against the deferred tax assets that more likely than not will not be realized. For the year ended December 31, 2022, the valuation allowance decreased from $67.3 million at December 31, 2021. The release of the valuation allowance as of December 31, 2022 was primarily due to a pattern of sustained profitability such that it is more likely than not that the deferred income tax assets will be realized. The net deferred tax assets of $57.8 million consists of the net deferred tax assets in the US and foreign jurisdictions, where the Company is in a cumulative income position. The net deferred tax liabilities of $51,000 in 2021 represent the net deferred tax liabilities in the foreign jurisdiction, where the Company is in a cumulative income position.
Pursuant to the Internal Revenue Code of 1986, as amended (the “Code”) Sections 382 and 383, annual use of a company’s NOL and tax credit carryforwards may be limited if there is a cumulative change in ownership of greater than 50% within a three-year period. The amount of the annual limitation is determined based on the value of the company immediately prior to the ownership change. Subsequent ownership changes may further affect the limitation in future years. If limited, the related tax asset would be removed from the deferred tax asset schedule with a corresponding reduction in the valuation allowance. The Company had established a valuation allowance as the realization of such deferred tax assets had not met the more likely than not threshold requirement. Due to the existence of the valuation allowance, further changes in the Company’s unrecognized tax benefits did not impact the Company’s effective tax rate for 2021.
During 2022, the Company completed an assessment of the available net operating loss and tax credit carryforwards under Section 382 and 383 and determined that the Company underwent two ownership changes during the period from 2019 to 2021. As a result, net operating loss and tax credit carryforwards attributable to the pre-ownership changes are subject to substantial annual limitations under Section 382 and 383 of Code due to the ownership changes. The Company has adjusted their previously reported net operating loss and tax credit carryforwards to address the impact of the ownership changes. This resulted in a net reduction of available gross federal and state net operating loss carryforwards of approximately $53 million and $85 million, respectively which related to the year ended December 31, 2021 and prior. The tax effected federal and state net operating loss carryforwards (“NOL”) reduction amounts were $16.8 million. This also resulted in a reduction of federal tax credit carryforwards of approximately $0.6 million related to the years ended December 31, 2021 and prior. Accordingly, the net operating loss and tax credit carryforwards presented above for the year ending December 31, 2021 were reduced by $16.8 million and $0.6 million, respectively, with a corresponding reduction to the valuation allowance of $17.4 million.
At December 31, 2022, the Company has U.S. federal net NOLs, of approximately $136 million, which will begin to expire in 2033. At December 31, 2022, the Company has state NOLs of approximately $40 million, which will begin to expire in 2023.
Note 14—Leases
The Company has lease agreements with lease and non-lease components, which are generally accounted for separately. The Company has operating leases for corporate offices, warehouses, and certain equipment. The Company’s leases have remaining lease terms of 1 to 5 years, some of which include options to extend the lease for up to 10 years, and some of which include options to terminate the lease within 1 year. As of December 31, 2022, the Company’s weighted average remaining lease term is approximately 2 years and the weighted average discount rate used to calculate the Company’s lease liability is approximately 5.22%. As of December 31, 2021, the Company’s weighted average remaining lease term is approximately 2 years and the weighted average discount rate used to calculate the Company’s lease liability is approximately 5.09%.
Under ASC 842, total operating lease costs for the years ended December 31, 2022, 2021 and 2020 were $19.1 million, 10.3 million, and $11.7 million, respectively. Of the $19.1 million for the year ended December 31, 2022, $10.7 million related to short-term and variable lease costs, including common area maintenance charges, management fees, taxes and storage fees. Sublease rental income was $2.2 million in 2022. Of the $10.3 million for the year ended December 31, 2021, $2.0 million related to short-term and variable lease costs, including common area maintenance charges, management fees, taxes and storage fees. Sublease rental income was $2.2 million in 2021. Of the $11.7 million for the year ended December 31, 2020, $2.0 million related to short-term and variable lease costs, including common area maintenance charges, management fees, taxes and storage fees. Sublease rental income was $0.8 million in 2020.
The Company had a cash outflow of $11.5 million, $11.4 million and $11.1 million related to operating leases for the years ended December 31, 2022, 2021 and 2020, respectively.
The following table represents a reconciliation of the Company’s undiscounted future minimum lease payments under operating leases to the lease liability excluding minimum lease payments for executed and legally enforceable leases that have not yet commenced as of December 31, 2022 (in thousands):
Year ending December 31,
|
|
|
|
|
2023
|
|
$ |
11,723 |
|
2024
|
|
|
7,619 |
|
2025
|
|
|
2,346 |
|
2026
|
|
|
372 |
|
2027
|
|
|
13 |
|
Total lease payments
|
|
|
22,073 |
|
Less imputed interest
|
|
|
1,464 |
|
Total
|
|
$ |
20,609 |
|
As of December 31, 2022 and 2021, the minimum lease payments for executed and legally enforceable leases that have not yet commenced were nil.
Note 15—Common Stock and Preferred Stock
Common Stock
Effective July 9, 2020, the Company completed a Reverse Stock Split of its $0.001 par value common stock reducing the issued and outstanding shares of common stock from 42,395,782 to 4,239,578. All common stock and price per share amounts in this report have been restated to reflect the Reverse Stock Split. The Reverse Stock Split did not cause an adjustment to the par value or the authorized shares of the common stock. All share and per share amounts in the financial statements and notes thereto have been retroactively adjusted for all periods presented to give effect to this Reverse Stock Split, including reclassifying an amount equal to the reduction in par value of common stock to additional paid-in capital. The primary reason for implementing the Reverse Stock Split was to regain compliance with the minimum bid price requirement of Nasdaq. On July 31, 2020, the Company was notified by Nasdaq that it had regained compliance with the Nasdaq listing requirements.
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.
In January 2021, the Company issued an aggregate of 113,896 shares of restricted stock at a value of approximately $0.6 million to two executive officers, which vest in four equal annual installments over four years.
During 2021, certain employees, including two executive officers, surrendered an aggregate of 32,846 shares of restricted stock for $163,573 to cover income taxes due on the vesting of restricted shares. Additionally, an aggregate of 93,352 shares of restricted stock granted in 2018 with a value of approximately $0.5 million was forfeited during 2021.
During 2022, certain employees, including three executive officers, surrendered an aggregate of 113,162 shares of restricted stock units for $1.4 million to cover income taxes due on the vesting of restricted shares. Additionally, an aggregate of 149,238 shares of restricted stock granted in 2019 with a value of approximately $2.2 million was forfeited during 2022.
No dividend was declared or paid in 2022 and 2021.
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 $75 million of common stock, in one or more offerings in amounts, prices and at terms that the Company will determine at the time of the offering.
During the year ended December 31, 2022, 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 an additional $75 million of securities consisting of, or any combination of, common stock, preferred stock, debt securities, warrants, rights and/or units, in one or more offerings in amounts, prices and at terms that the Company will determine at the time of the offering.
During the year ended December 31, 2022, the Company has not sold any securities pursuant to its shelf registration statement.
Redeemable Preferred Stock
On August 9, 2019, in connection with the Recapitalization Transaction (see Note 10 - Debt), the Company issued 200,000 shares of Series A Senior Preferred Stock (the “Series A Preferred Stock”), $0.001 par value per share, to the Investor Parties (the “New Preferred Equity”). As of December 31, 2022 and 2021, 200,000 shares of Series A Preferred Stock were outstanding.
Each share of Series A Preferred Stock has an initial value of $100 per share, which is automatically increased for any accrued and unpaid dividends (the “Accreted Value”).
The Series A Preferred Stock has the right to receive dividends on a quarterly basis equal to 6.0% per annum, payable in cash or, if not paid in cash, by an automatic accretion of the Series A Preferred Stock. No cash dividends have been declared or paid. For the year ended December 31, 2022 and 2021, the Company recorded $1.4 million and $1.3 million, respectively of preferred stock dividends as an increase in the value of the Series A Preferred Stock.
The Series A Preferred Stock has no stated maturity, however, the Company has the right to redeem all or a portion of the Series A Preferred Stock at its Liquidation Preference (as defined below) at any time after payment in full of the 2019 Recap Term Loan. In addition, upon the occurrence of certain change of control type events, holders of the Series A Preferred Stock are entitled to receive an amount (the “Liquidation Preference”), in preference to holders of Common Stock or other junior stock, equal to (i) 20% of the Accreted Value in the case of a certain specified transaction, or (ii) otherwise, 150% of the Accreted value, plus any accrued and unpaid dividends.
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 (see Note 10 - Debt). 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, which 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 16 – 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.
Accordingly, these two embedded derivatives are accounted for separately from the Series A Preferred Stock at fair value.
As of December 31, 2022, the Series A Preferred Stock is recorded in temporary equity at the amount of accrued, but unpaid dividends of $4.5 million, and the redemption provision, as a bifurcated derivative, is recorded as a long-term liability with an estimated value of $21.9 million. As of December 31, 2021, the Series A Preferred Stock is recorded in temporary equity at the amount of accrued, but unpaid dividends of $3.1 million, and the redemption provision, as a bifurcated derivative, is recorded as a long term liability with an estimated value of $21.3 million.
The following table provides a reconciliation of the beginning and ending balances of the Series A Preferred Stock, which is recorded in temporary equity:
|
|
2022
|
|
|
2021
|
|
Balance, January 1,
|
|
$ |
3,074 |
|
|
$ |
1,740 |
|
Preferred stock accrued dividends
|
|
|
1,416 |
|
|
|
1,334 |
|
Balance, December 31,
|
|
$ |
4,490 |
|
|
$ |
3,074 |
|
Note 16 — Fair Value Measurements
The following tables summarize the Company’s financial liabilities measured at fair value on a recurring basis as of December 31, 2022 and 2021 (in thousands):
|
|
|
|
|
|
Fair Value Measurements
|
|
|
|
Carrying Amount as of
|
|
|
As of December 31, 2022
|
|
|
|
December 31, 2022
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Preferred stock derivative liability
|
|
$ |
21,918 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
21,918 |
|
|
|
|
|
|
|
Fair Value Measurements
|
|
|
|
Carrying Amount as of
|
|
|
As of December 31, 2021
|
|
|
|
December 31, 2021
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Preferred stock derivative liability
|
|
$ |
21,282 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
21,282 |
|
The following table provides a reconciliation of the beginning and ending balances of liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) (in thousands):
3.25% convertible senior notes due 2023
|
|
|
|
|
|
|
|
|
|
|
2022
|
|
|
2021
|
|
Balance at January 1,
|
|
$ |
— |
|
|
$ |
34,134 |
|
Conversion of convertible senior notes
|
|
|
— |
|
|
|
(50,760 |
) |
Change in fair value
|
|
|
— |
|
|
|
16,419 |
|
Payment in-kind
|
|
|
— |
|
|
|
207 |
|
Balance at December 31,
|
|
$ |
— |
|
|
$ |
— |
|
Preferred stock derivative liability
|
|
|
|
|
|
|
|
|
|
|
2022
|
|
|
2021
|
|
Balance at January 1,
|
|
$ |
21,282 |
|
|
$ |
8,062 |
|
Change in fair value
|
|
|
636 |
|
|
|
13,220 |
|
Balance at December 31,
|
|
$ |
21,918 |
|
|
$ |
21,282 |
|
The Company had elected the fair value option of measurement for the 3.25% 2023 Notes, under ASC 815, Derivatives and Hedging. As a result, these notes are re-measured each reporting period using Level 3 inputs (Monte Carlo simulation model and inputs for stock price, risk-free rate and volatility), with changes in fair value reflected in current period earnings in its consolidated statements of operations.
The Company’s Series A Preferred derivative liability is classified within Level 3 of the fair value hierarchy because unobservable inputs were used in estimating the fair value. The fair value of the redemption provision embedded in the Series A Preferred Stock is estimated based on a discounted cash flow model and probability assumptions based on management’s estimates of a change of control event occurring. The value of the redemption provision explicitly considered the present value of the potential premium that would be paid related to, and the probability of, an event that would trigger its payment. In subsequent periods, the derivative liability is accounted for at fair value, with changes in fair value recognized as other income (expense) on the Company's consolidated statements of operations.
The following table provides quantitative information of liabilities measured at fair value and the significant unobservable inputs (Level 3), the range of the significant unobservable inputs, and the valuation techniques.
|
|
Fair Value
As of December 31, 2022
|
|
Valuation
Technique
|
|
Unobservable
Inputs
|
|
Range
(Weighted Average)
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
Preferred Stock Derivative Liability
|
|
$ |
21,918 |
|
Discounted Cash Flow |
|
Change-in-control probability assumptions |
|
Range: 10% to 40% (27.3%) |
|
|
|
|
|
|
|
|
Timing of change-in-control assumptions |
|
Range: 1 to 10 years (4.19 years) |
|
|
|
|
|
|
|
|
Discount Rate |
|
Range: 17.48% to 18.23% (17.70%) |
|
|
|
|
|
|
|
|
Implied yield* |
|
11.23%* |
|
|
|
Fair Value
As of December 31, 2021
|
|
Valuation
Technique
|
|
Unobservable
Inputs
|
|
Range
(Weighted Average)
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
Preferred Stock Derivative Liability
|
|
$ |
21,282 |
|
Discounted Cash Flow |
|
Change-in-control probability assumptions |
|
Range: 5% to 45% (30.7%) |
|
|
|
|
|
|
|
|
Timing of change-in-control assumptions |
|
Range: 1 to 10 years (3.67 years) |
|
|
|
|
|
|
|
|
Discount Rate |
|
Range: 13.71% to 19.46% (15.16%) |
|
|
|
|
|
|
|
|
Implied yield* |
|
7.96%* |
|
*Represents the implied yield of the 2021 BSP Term Loan | |
The Company’s cash and cash equivalents including restricted cash, accounts receivable, accounts payable and accrued expenses represent financial instruments. The carrying value of these financial instruments is a reasonable approximation of fair value due to the short-term nature of the instruments.
Note 17—Commitments
The Company has entered into various license agreements whereby the Company may use certain characters and intellectual properties in conjunction with its products. Generally, such license agreements provide for royalties to be paid ranging from 1% to 22% of net sales with minimum guarantees and advance payments. These license agreements are subject to audits by the licensor, which can result in additional payments due to the licensor.
In the event the Company estimates that a shortfall in achieving the minimum guarantee is probable, a liability is recorded for the estimated shortfall and charged to royalty expense.
Future annual minimum royalty guarantees as of December 31, 2022 are as follows (in thousands):
2023
|
|
$ |
38,089 |
|
2024
|
|
|
34,630 |
|
2025
|
|
|
1,969 |
|
|
|
$ |
74,688 |
|
Royalty expense for the year ended December 31, 2022, 2021 and 2020, was $126.6 million, $87.2 million and $83.2 million, respectively.
The Company has entered into employment and consulting agreements with certain executives expiring through December 31, 2026. The aggregate future annual minimum guaranteed amounts due under those agreements as of December 31, 2022 are as follows (in thousands):
2023
|
|
$ |
8,500 |
|
2024
|
|
|
3,166 |
|
2025
|
|
|
2,458 |
|
2026
|
|
|
2,508 |
|
|
|
$ |
16,632 |
|
Note 18—Share-Based Payments
Under the Company’s 2002 Stock Award and Incentive Plan (“the Plan”), which incorporated its Third Amended and Restated 1995 Stock Option Plan, the Company has reserved shares of its common stock for issuance upon the exercise of options granted under the Plan, as well as for the awarding of other securities. Under the Plan, employees (including officers), non-employee directors and independent consultants may be granted options to purchase shares of common stock, restricted stock units and other securities (see Note 15 - Common Stock and Preferred Stock). The vesting of these share-based awards may vary, but typically vest over a requisite service period or are based on performance criteria, with a maximum vesting period of four years. Restricted shares typically vest in the same manner, with the exception of certain awards vesting over one to three years. Share-based compensation expense is recognized on a straight-line basis over the requisite service period. Compensation expense for performance-awards is measured based on the amount of shares ultimately expected to vest, estimated at each reporting date based on management expectations regarding the relevant performance criteria. Unlike the restricted stock awards, the shares for the restricted stock units are not issued until vested. As of December 31, 2022, 943,633 shares were available for future grant. Additional shares may become available to the extent that options or shares of restricted stock presently outstanding under the Plan terminate, expire, or are forfeited.
Restricted Stock Award
Under the Plan, share-based compensation payments may include the issuance of shares of restricted stock. Restricted stock award grants are based upon employment contracts, which vary by individual and year, and are subject to vesting conditions.
The following table summarizes the restricted stock award activity, annually, for the year ended December 31, 2022, 2021 and 2020:
|
|
2022
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
Number of
|
|
|
Average Grant Date
|
|
|
Number of
|
|
|
Average Grant Date
|
|
|
Number of
|
|
|
Average Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Shares
|
|
|
Fair Value
|
|
Outstanding, January 1
|
|
|
— |
|
|
$ |
— |
|
|
|
507,867 |
|
|
$ |
12.73 |
|
|
|
559,307 |
|
|
$ |
16.00 |
|
Granted
|
|
|
— |
|
|
|
— |
|
|
|
113,896 |
|
|
|
4.98 |
|
|
|
70,422 |
|
|
|
10.30 |
|
Vested
|
|
|
— |
|
|
|
— |
|
|
|
(97,645 |
) |
|
|
20.87 |
|
|
|
(69,442 |
) |
|
|
21.76 |
|
Forfeited
|
|
|
— |
|
|
|
— |
|
|
|
(93,352 |
) |
|
|
12.67 |
|
|
|
(52,420 |
) |
|
|
32.20 |
|
Converted to RSU
|
|
|
— |
|
|
|
— |
|
|
|
(430,766 |
) |
|
|
8.85 |
|
|
|
— |
|
|
|
— |
|
Outstanding, December 31
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
507,867 |
|
|
|
12.73 |
|
As of December 31, 2022, there was nil of total unrecognized compensation cost related to non-vested restricted stock. As of December 31, 2021, there was nil of total unrecognized compensation cost related to non-vested restricted stock.
On September 27, 2021, the Company amended the employment agreements with certain executives. The purpose of the amendments was to change the issuance, past and future, of all restricted stock awards to restricted stock units. All other material terms of the respective employment agreements remain the same, including without limitation, the terms of all such grants including the timing of all vesting periods and the vesting benchmarks.
Restricted Stock Units
Under the Plan, share-based compensation payments may include the issuance of Restricted Stock Units (RSUs) to employees, which occurs approximately once per year and are subject to vesting conditions. RSUs are valued at the market price of the shares underlying the award on the date of grant.
The following table summarizes the RSU award activity, annually for the year ended December 31, 2022, 2021 and 2020:
|
|
2022
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
Number of
|
|
|
Average Grant Date
|
|
|
Number of
|
|
|
Average Grant Date
|
|
|
Number of
|
|
|
Average Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Shares
|
|
|
Fair Value
|
|
Outstanding, January 1
|
|
|
1,073,902 |
|
|
$ |
8.62 |
|
|
|
131,517 |
|
|
$ |
6.32 |
|
|
|
102,718 |
|
|
$ |
23.42 |
|
Granted
|
|
|
827,349 |
|
|
|
16.75 |
|
|
|
540,154 |
|
|
|
8.72 |
|
|
|
100,200 |
|
|
|
3.89 |
|
Vested
|
|
|
(343,427 |
) |
|
|
8.37 |
|
|
|
(23,089 |
) |
|
|
17.28 |
|
|
|
(41,640 |
) |
|
|
16.64 |
|
Forfeited
|
|
|
(149,238 |
) |
|
|
14.70 |
|
|
|
(5,446 |
) |
|
|
9.66 |
|
|
|
(29,761 |
) |
|
|
42.83 |
|
Converted from RSA
|
|
|
— |
|
|
|
— |
|
|
|
430,766 |
|
|
|
8.85 |
|
|
|
— |
|
|
|
— |
|
Outstanding, December 31
|
|
|
1,408,586 |
|
|
|
12.82 |
|
|
|
1,073,902 |
|
|
|
8.62 |
|
|
|
131,517 |
|
|
|
6.32 |
|
As of December 31, 2022, there was $15 million of total unrecognized compensation cost related to non-vested restricted stock units, which is expected to be recognized over a weighted-average period of 2.6 years.
Share-Based Compensation Expense
The following table summarizes the total share-based compensation expense (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2022
|
|
|
2021
|
|
|
2020
|
|
Share-based compensation expense
|
|
$ |
5,082 |
|
|
$ |
2,093 |
|
|
$ |
2,303 |
|
Note 19—Employee Benefits Plan
The Company sponsored for its U.S. employees, a defined contribution plan under Section 401(k) of the Internal Revenue Code. The Plan provided that employees may defer up to 50% of their annual compensation subject to annual dollar limitations, and that the Company would make a matching contribution equal to 100% of each employee’s deferral, up to 5% of the employee’s annual compensation. Company-matching contributions, which vests immediately, totaled $2.1 million, $1.9 million and nil for the year ended December 31, 2022, 2021 and 2020, respectively. The Company eliminated the match on March 31, 2019, and resumed the match on contributions effective January 1, 2021.
Note 20—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.
A putative class action lawsuit was filed on May 18, 2021 in the Superior Court of the State of California for the County of Los Angeles (Isaiah Villarica v. Jakks Pacific, Inc.). Plaintiff formerly worked in one of the Company’s warehouses and was retained via Workforce Enterprises, a provider of temporary employees. The lawsuit alleges that the Company violated various California Labor Code provisions governing wage and hour requirements, including that the Company failed to pay all minimum and overtime wages owed, provide legally compliant meal and rest periods, or reimburse business expenses. The lawsuit further alleges derivative wage and hour claims for failure to timely pay all wages owed at separation of employment, failure to provide accurate wage statements, and unfair business practices.
The same counsel in the Villarica matter also filed a related lawsuit on February 15, 2022 in the same court (Matthew Cordova v. Jakks Pacific, Inc). Plaintiff also formerly worked in one of the Company’s warehouses and was retained via Workforce Enterprises. The lawsuit alleges that the Company committed wage and hour violations under the California Private Attorneys General Act, including failing to provide compliant meal and rest periods, properly calculate and pay all minimum and overtime wages, provide accurate wage statements, provide all wages due at separation of employment, provide sick leave, maintain accurate payroll records, or reimburse business expenses. Both of these matters were settled at mediation in March 2022, and the Court in November 2022 approved the settlements, the proceeds of which have been tendered to the settlement administrator to distribute to the State of California, plaintiff’s counsel, and class members. The Company’s temporary employee service providers provided the bulk of the settlement funds, and the matter had no material impact on the Company.
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 21—Subsequent Events
On January 3, 2023, as permitted by the terms within the 2021 BSP Term Loan Agreement, the Company made a voluntary $15.0 million prepayment towards the outstanding principal amount of the 2021 BSP Term Loan and incurred a $0.2 million prepayment penalty.
On March 3, 2023, as required by the terms within the 2021 BSP Term Loan Agreement under the ECF Sweep provision, the Company made a mandatory $23.1 million prepayment towards the outstanding principal amount of the 2021 BSP Term Loan.
In Q1 2023, the Company entered into amendments to its 2021 BSP Term Loan Agreement and its JPMorgan ABL Credit Agreement, which changed the interest reference rate on its term loan and revolving line of credit from LIBOR to the Secured Overnight Financing Rate (“SOFR”).