JAKKS PACIFIC, INC. The following discussion and analysis of financial condition and results of operations should be read together with our Condensed Consolidated Financial Statements and Notes thereto, which appear elsewhere herein.
EffectiveJuly 9, 2020 , we completed a 1 for 10 reverse stock split of our$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"). 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 ofThe NASDAQ Stock Market LLC ("Nasdaq"). OnJuly 31, 2020 , we were notified by Nasdaq that we had regained compliance with the Nasdaq listing requirements. Explanatory Note As of the date of filing of this Quarterly Report on Form 10-Q (this "Report"), there are many uncertainties regarding the current Novel Coronavirus ("COVID-19") pandemic, including the scope of health issues, the possible duration of the pandemic, and the extent of local and worldwide social, political, and economic disruption it may cause. To date, the COVID-19 pandemic has had far-reaching impacts on many aspects of the operations ofJAKKS Pacific, Inc. (the "Company," "we," "our" or "us"), including on consumer behavior, customer store traffic, production capabilities, timing of product availability, our employees' personal and business lives, and the market generally. The scope and nature of these impacts continue to evolve each day. The COVID-19 pandemic has resulted in, and may continue to result in, regional and local quarantines, labor stoppages and shortages, changes in consumer purchasing patterns, mandatory or elective shut-downs of retail locations, disruptions to supply chains, including the inability of our suppliers and service providers to deliver materials and services on a timely basis, or at all, severe market volatility, liquidity disruptions, and overall economic instability, which, in many cases, have had, and we expect will continue to have, adverse impacts on our business, financial condition and results of operations. This situation is changing rapidly, and additional impacts may arise that we are not aware of currently.
In light of the uncertain and rapidly evolving situation relating to the COVID-19 pandemic, we have taken certain precautionary measures intended to help minimize the risk to our Company, employees and customers, including the following:
• OnMarch 23, 2020 , we encouraged our staff to begin working from home. In the US, we began to return to an in-office working model inJuly 2021 , but have paused that transition in consideration of the rise in cases attributable to the Delta-variant of COVID-19. We plan to monitor infection and transmission rates on a weekly basis, while remaining cognizant of federal, state and local guidelines. We anticipate returning to a more traditional, work-from-office model some time in Q1 2022, but those plans are, of course, subject to change; • Although our distribution center inCity of Industry, California currently continues to operate, we continue to evaluate its operations, and may elect, or be required, to shut down its operations temporarily at any time in the future; • We have reduced non-essential travel for our employees; and • Our employee attendance at industry events and in-person work-related meetings remain below pre-pandemic levels. Each of the remedial measures taken by us has had, and we expect will continue to have, adverse impacts on our current business, financial condition and results of operations, and may create additional risks for us. While we anticipate that the foregoing measures are temporary, we cannot predict the specific duration for which these precautionary measures will stay in effect, and we may elect or need to take additional measures as the information available to us continues to develop, including with respect to our employees, inventory receipts, and relationships with our licensors. We expect to continue to assess the evolving impact of the COVID-19 pandemic on our customers, consumers, employees, supply chain, and operations, and intend to make adjustments to our responses accordingly. However, the extent to which the COVID-19 pandemic and our precautionary measures in response thereto may impact our business, financial condition, and results of operations will depend on how the COVID-19 pandemic and its impact continues to develop inthe United States and elsewhere in the world, which remains highly uncertain and cannot be predicted at this time. 35
--------------------------------------------------------------------------------
Table of Contents
In light of these uncertainties, for purposes of this report, except where otherwise indicated, the descriptions of our business, our strategies, our risk factors, and any other forward-looking statements, including regarding us, our business and the market generally, do not reflect the potential impact of the COVID-19 pandemic or our responses thereto. In addition, the disclosures contained in this report are made only as of the date hereof, and we undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law. For further information, see "Disclosure Regarding Forward-Looking Statements" and "Risk Factors."
Disclosure Regarding Forward-Looking Statements
This Report includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. For example, statements included in this Report regarding our financial position, business strategy and other plans and objectives for future operations, and assumptions and predictions about future product demand, supply, manufacturing, costs, marketing and pricing factors are all forward-looking statements. When we use words like "intend," "anticipate," "believe," "estimate," "plan" or "expect," or other words of a similar import, we are making forward-looking statements. We believe that the assumptions and expectations reflected in such forward-looking statements are reasonable, based upon information available to us on the date hereof (but excluding the impact of COVID-19, as described above in "Explanatory Note"), but we cannot assure you that these assumptions and expectations will prove to have been correct or that we will take any action that we may presently be planning. We have disclosed certain important factors (e.g., see "Explanatory Note" and "Risk Factors") that could cause our actual results to differ materially from our current expectations elsewhere in this Report. You should understand that forward-looking statements made in this Report are necessarily qualified by these factors. We are not undertaking to publicly update or revise any forward-looking statement if we obtain new information or upon the occurrence of future events or otherwise.
Critical Accounting Policies and Estimates
The accompanying condensed consolidated financial statements and supplementary information were prepared in accordance with accounting principles generally accepted inthe United States of America . Significant accounting policies are discussed in Note 2 to the Consolidated Financial Statements set forth in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 . Inherent in the application of many of these accounting policies is the need for management to make estimates and judgments in the determination of certain revenues, expenses, assets and liabilities. As such, materially different financial results can occur as circumstances change and additional information becomes known. The policies with the greatest potential effect on our results of operations and financial position include: Allowance for Doubtful Accounts. Our allowance for doubtful accounts is based upon management's assessment of the business environment, customers' financial condition, historical collection experience, accounts receivable aging, customer disputes and the collectability of specific customer accounts. If there were a deterioration of a major customer's creditworthiness, or actual defaults were higher than our historical experience, our estimates of the recoverability of amounts due to us could be overstated, which could have an adverse impact on our operating results. Our allowance for doubtful accounts is also affected by the time at which uncollectible accounts receivable balances are actually written off. Major customers' accounts are monitored on an ongoing basis; more in-depth reviews are performed based upon changes in a customer's financial condition and/or the level of credit being extended. When a significant event occurs, such as a bankruptcy filing by a specific customer, and on a quarterly basis, the allowance is reviewed for adequacy and the balance or accrual rate is adjusted to reflect current risk prospects. When certain shocks to the market occur, customers are unilaterally reviewed to assess the potential impact of that shock on their financial stability. Many retailers have been operating under financial duress for several years. Ultimately, we assess the risk of liquidation and/or bankruptcy by a customer and the associated risk that we will not be paid for product shipped. To that end, it is not only outstanding accounts receivable balances but decisions to design and develop account-specific product and ultimately ship product that plays into our goal to maximize profitability while minimizing uncollectable accounts receivable. Revenue Recognition. Our contracts with customers only include one performance obligation (i.e., sale of our products). Revenue is recognized in the gross amount at a point in time when delivery is completed and control of the promised goods is transferred to the customers. Revenue is measured as the amount of consideration we expect to be entitled to in exchange for those goods. Our contracts do not involve financing elements as payment terms with customers are less than one year. Further, because revenue is recognized at the point in time goods are sold to customers, there are no contract assets or contract liability balances. We disaggregate our revenues from contracts with customers by reporting segment: Toys/Consumer Products and Costumes. We further disaggregate revenues by major geographic region. See Note 2 to the Condensed Consolidated Financial Statements for further information. 36
--------------------------------------------------------------------------------
Table of Contents
We offer various discounts, pricing concessions, and other allowances to customers, all of which are considered in determining the transaction price. Certain discounts and allowances are fixed and determinable at the time of sale and are recorded at the time of sale as a reduction to revenue. Other discounts and allowances can vary and are determined at management's discretion (variable consideration). Specifically, we occasionally grant discretionary credits to facilitate markdowns and sales of slow moving merchandise, and consequently accrue an allowance based on historic credits and management estimates. Further, while we generally do not allow product returns, we do make occasional exceptions to this policy, and consequently record a sales return allowance based upon historic return amounts and management estimates. These allowances (variable consideration) are estimated using the expected value method and are recorded at the time of sale as a reduction to revenue. We adjust our estimate of variable consideration at least quarterly or when facts and circumstances used in the estimation process may change. The variable consideration is not constrained as we have sufficient history on the related estimates and do not believe there is a risk of significant revenue reversal. We also participate in cooperative advertising arrangements with some customers, whereby we allow a discount from invoiced product amounts in exchange for customer purchased advertising that features our products. Generally, these allowances range from 1% to 20% of gross sales, and are generally based upon product purchases or specific advertising campaigns. Such allowances are accrued when the related revenue is recognized. These cooperative advertising arrangements provide a distinct benefit at fair value, and are accounted for as direct selling expenses. Sales commissions are expensed when incurred as the related revenue is recognized at a point in time and therefore the amortization period is less than one year. As a result, these costs are recorded as direct selling expenses, as incurred.
Shipping and handling activities are considered part of our obligation to transfer the products and therefore are recorded as direct selling expenses, as incurred.
Our reserve for sales returns and allowances amounted to
Fair value measurements. Fair value is the price that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. In determining fair value, we use
various methods including market, income and cost approaches. Based upon these
approaches, we often utilize certain assumptions that market participants would
use in pricing the asset or liability, including assumptions about risk and/or
the risks inherent in the inputs to the valuation technique. These inputs can be
readily observable, market-corroborated, or unobservable inputs. We utilize
valuation techniques that maximize the use of observable inputs and minimize the
use of unobservable inputs. Based upon observable inputs used in the valuation
techniques, we are required to provide information according to the fair value
hierarchy. The fair value hierarchy ranks the quality and reliability of the
information used to determine fair values into three broad levels as follows:
Level 1: Valuations for
assets and
liabilities
traded in
active markets
from readily
available
pricing sources
for market
transactions
involving
identical
assets or
liabilities.
Level 2: Valuations for
assets and
liabilities
traded in less
active dealer
or broker
markets.
Valuations are
obtained from
third-party
pricing
services for
identical or
similar assets
or liabilities.
Level 3: Valuations
incorporate
certain
assumptions and
projections in
determining the
fair value
assigned to
such assets or
liabilities.
In instances where the determination of the fair value measurement is based upon
inputs from different levels of the fair value hierarchy, the level in the fair
value hierarchy within which the entire fair value measurement falls is based
upon the lowest level input that is significant to the fair value measurement in
its entirety. Our assessment of the significance of a particular input to the
fair value measurement in its entirety requires judgment, and considers factors
specific to the asset or liability. See Note 16 to the Condensed Consolidated
Financial Statements included within for further information.
Factors we consider important that could trigger an impairment review include the following:
• significant underperformance
relative to expected historical
or projected future operating
results;
• significant changes in the
manner of our use of the
acquired assets or the strategy
for our overall business; and
• significant negative industry or economic trends.
37--------------------------------------------------------------------------------
Table of Contents
Due to the subjective nature of the impairment analysis, significant changes in the assumptions used to develop the estimate could materially affect the conclusion regarding the future cash flows necessary to support the valuation of long-lived assets, including goodwill. The valuation of goodwill involves a high degree of judgment and uncertainty related to our key assumptions. Any changes in our key projections or estimates could result in a reporting unit either passing or failing the first step of the impairment model, which could significantly change the amount of any impairment ultimately recorded. Based upon the assumptions underlying the valuation, impairment is determined by estimating the fair value of a reporting unit and comparing that value to the reporting unit's book value.Goodwill is tested for impairment annually, and on an interim basis if certain events or circumstances indicate that an impairment loss may have been incurred. If the fair value is more than the carrying value of the reporting unit, an impairment loss is not indicated. If a reporting unit's carrying value exceeds its fair value, an impairment charge would be recognized for the excess amount, not to exceed the carrying amount of goodwill. Based on ourApril 1 annual assessment, we determined that the fair values of our reporting units were not less than the carrying amounts. No goodwill impairment was determined to have occurred for the nine months endedSeptember 30, 2021 . Impairment of Long-Lived Assets. When facts and circumstances indicate that the carrying values of long-lived assets, including buildings, equipment and amortizable intangible assets, may be impaired, we perform an evaluation of recoverability by comparing the carrying values of the net assets to their related projected undiscounted future cash flows, in addition to other quantitative and qualitative analysis. Our estimates are subject to uncertainties and may be impacted by various external factors such as economic conditions and market competition. While we believe the inputs and assumptions utilized in our analysis of future cash flows are reasonable, events or circumstances may change, which could cause us to revise these estimates. Reserve for Inventory Obsolescence. We value our inventory at the lower of cost or net realizable value. Based upon a consideration of quantities on hand, actual and projected sales volume, anticipated product selling prices and product lines planned to be discontinued, slow-moving and obsolete inventory is written down to its net realizable value. Failure to accurately predict and respond to consumer demand could result in us under-producing popular items or over-producing less popular items. Furthermore, significant changes in demand for our products would impact management's estimates in establishing our inventory provision. Management's estimates are monitored on a quarterly basis, and a further adjustment to reduce inventory to its net realizable value is recorded as an increase to cost of sales when deemed necessary under the lower of cost or net realizable value standard. When unexpected shocks to market demand occur (such as the COVID-19 pandemic market shock), we review whether that shock might materially impact the value of our owned inventory. In some cases, where customers have cancelled orders, accommodation can be reached that the product will be reordered when the customer has restarted operations (in the event of store closures) or the customer agrees to minimize/eliminate requests for product line refreshment (such as in the event ofHalloween order cancellations) which allows the inventory and in some cases raw materials to be held through to the following calendar year without incurring any additional obsolescence. Discrete Items for Income Taxes. The discrete benefit recorded in the nine months endedSeptember 30, 2021 is$0.3 million which is primarily related to the change in uncertain tax positions offset by state income taxes, foreign return-to-provision adjustments, and excess tax deficiencies fully offset by valuation allowance. For the comparable period in 2020, a discrete tax benefit of$0.4 million was recorded primarily related to change in uncertain tax positions, excess tax deficiencies fully offset by valuation allowance, state income taxes, and foreign return-to-provision adjustments. Income taxes and interest and penalties related to income tax payable. We do not file a consolidated return for our foreign subsidiaries. We file federal and state returns and our foreign subsidiaries each file returns as required. Deferred taxes are provided on an asset and liability method, whereby deferred tax assets are recognized as deductible temporary differences and operating loss and tax credit carry-forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some 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. Management employs a threshold and measurement process for recording in the financial statements uncertain tax positions taken or expected to be taken in a tax return. Tax benefits that are subject to challenge by tax authorities are analyzed and accounted for in the income tax provision. 38
--------------------------------------------------------------------------------
Table of Contents
We accrue a tax reserve for additional income taxes, which may become payable in future years as a result of audit adjustments by tax authorities. The reserve is based upon management's assessment of all relevant information and is periodically reviewed and adjusted as circumstances warrant. As ofSeptember 30, 2021 , andDecember 31, 2020 , our income tax reserves were approximately$0.2 million and$1.0 million , respectively. The$0.2 million balance primarily relates to the potential tax settlements inHong Kong . Our income tax reserves are included in income tax payable on the Condensed Consolidated Balance Sheets and within provision for (benefit from) income taxes on the Condensed Consolidated Statements of Operations and Comprehensive Loss. Share-Based Compensation. We grant restricted stock units and awards to our employees (including officers) and to non-employee directors under our 2002 Stock Award and Incentive Plan (the "Plan"), as amended. The benefits provided under the Plan are share-based payments. We amortize over a requisite service period, the net total deferred restricted stock expense based upon the fair value of the underlying common stock on the date of the grants. In certain instances, the service period may differ from the period in which each award will vest. Additionally, certain groups of grants are subject to performance criteria and/or an expected forfeiture rate calculation. New Accounting Pronouncements
See Note 1 to the Condensed Consolidated Financial Statements.
Results of Operations
The following unaudited table sets forth, for the periods indicated, certain statement of income data as a percentage of net sales:
Three Months Ended Nine Months Ended
September 30, September 30,
(Unaudited) (Unaudited)
2021 2020 2021 2020
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 68.4 69.2 69.3 72.2
Gross profit 31.6 30.8 30.7 27.8
Selling, general and administrative
expenses 16.1 15.3 22.4 24.2
Restructuring charge - - - 0.5
Pandemic related charges - - - 0.1
Income from operations 15.5 15.5 8.3 3.0
Income from joint ventures - - - -
Other income (expense), net - - - -
Change in fair value of preferred stock
derivative liability - (1.1 ) (2.1 ) (0.1 )
Change in fair value of convertible
senior notes (1.5 ) 1.2 (3.8 ) 0.7
Gain on loan forgiveness 2.6 - 1.4 -
Loss on debt extinguishment - - (1.7 ) -
Interest income - - - -
Interest expense (1.1 ) (2.3 ) (2.7 ) (4.3 )
Income (loss) before provision for
(benefit from) income taxes 15.5 13.3 (0.6 ) (0.7 )
Provision for (benefit from) income
taxes 0.1 (0.1 ) 0.1 0.1
Net income (loss) 15.4 13.4 (0.7 ) (0.8 )
Net income attributable to
non-controlling interests - - - -
Net income (loss) attributable to JAKKS
Pacific, Inc. 15.4 % 13.4 % (0.7 )% (0.8 )%
39--------------------------------------------------------------------------------
Table of Contents
The following unaudited table summarizes, for the periods indicated, certain statements of operations data by segment (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
(Unaudited) (Unaudited)
2021 2020 2021 2020
Net Sales
Toys/Consumer Products $ 172,952 $ 187,309 $ 334,365 $ 306,088
Costumes 64,005 54,981 98,787 81,517
236,957 242,290 433,152 387,605
Cost of Sales
Toys/Consumer Products 115,107 125,143 225,276 215,521
Costumes 46,926 42,531 74,961 64,348
162,033 167,674 300,237 279,869
Gross Profit
Toys/Consumer Products 57,845 62,166 109,089 90,567
Costumes 17,079 12,450 23,826 17,169
$ 74,924 $ 74,616 $ 132,915 $ 107,736 Comparison of the Three Months Ended
Net Sales Toys/Consumer Products. Net sales of our Toys/Consumer Products segment were$173.0 million for the three months endedSeptember 30, 2021 compared to$187.3 million for the prior year period, representing a decrease of$14.3 million , or 7.6%. The Doll/Dress-Up/Nurturing Play and Seasonal/Outdoor divisions declined, while the Action Play and Collectibles division showed double-digit sales growth. Video game related toys like Nintendo® and Sonic the Hedgehog® in the Action Play and Collectables division led the sales growth, year over year. Increases in Disney Princess® from the Doll/Dress-Up/Nurturing Play division were offset by lower sales from Frozen over the prior-year period. Costumes. Net sales of our Costumes segment were$64.0 million for the three months endedSeptember 30, 2021 compared to$55.0 million for the prior year period, representing an increase of$9.0 million , or 16.4%. Sales for the quarter increased as retailers planned for a strongerHalloween than prior year. Cost of Sales Toys/Consumer Products. Cost of sales of our Toys/Consumer Products segment was$115.1 million , or 66.5% of related net sales for the three months endedSeptember 30, 2021 compared to$125.1 million , or 66.8% of related net sales for the prior year period, representing a decrease of$10.0 million , or 8.0%. The decrease in dollars is due to lower overall sales in 2021. The decrease as a percentage of net sales, year over year, is due to a lower average royalty rate, slightly offset by higher freight related costs. Costumes. Cost of sales of our Costumes segment was$46.9 million , or 73.3% of related net sales for the three months endedSeptember 30, 2021 compared to$42.5 million , or 77.3% of related net sales for the prior year period, representing an increase in dollars of$4.4 million , or 10.4%. The increase in dollars is due to higher sales, while the decrease in percentage of net sales, year over year, is due to a focused effort to design and develop our product lines for greater margin as well as a lower average royalty rate.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were$38.2 million for the three months endedSeptember 30, 2021 compared to$37.0 million for the prior year period constituting 16.1% and 15.3% of net sales, respectively. Selling, general and administrative expenses increased by$1.2 million from the prior year period due to an increase in product development and temporary labor expenses, but also due to austerity-related cost reductions in place due to the pandemic in the comparable period in 2020. 40
--------------------------------------------------------------------------------
Table of Contents Pandemic Related Charges During the three months endedSeptember 30, 2020 , we recognized$0.1 million spending directly attributable to making necessary accommodations related to the COVID-19 pandemic. Gain on Loan Forgiveness
During the three months ended
Interest Expense Interest expense was$2.7 million for the three months endedSeptember 30, 2021 , as compared to$5.6 million in the prior year period. During the three months endedSeptember 30, 2021 , we booked interest expense of$2.4 million related to our 2021 BSP Term Loan,$0.2 million related to our revolving credit facility and$0.1 million related to our convertible senior notes due in 2023. During the three months endedSeptember 30, 2020 , we booked interest expense of$0.5 million related to our convertible senior notes due in 2023,$4.6 million related to our 2019 Recap Term Loan,$18,873 related to our PPP Loan and$0.4 million related to our revolving credit facility.
Provision for (Benefit from) Income Taxes
Our income tax expense, which includes federal, state and foreign income taxes and discrete items, was$0.3 million , or an effective tax rate of 0.8%, for the three months endedSeptember 30, 2021 . During the comparable period in 2020, our income tax benefit was$0.3 million , or an effective tax rate of (0.8%).
Comparison of the Nine Months Ended
Net Sales Toys/Consumer Products. Net sales of our Toys/Consumer Products segment were$334.4 million for the nine months endedSeptember 30, 2021 compared to$306.1 million for the prior year period, representing an increase of$28.3 million , or 9.2%. The increase in net sales is primarily driven by strong performance across the Action Play and Collectibles, and Seasonal/Outdoor divisions. Costumes. Net sales of our Costumes segment were$98.8 million for the nine months endedSeptember 30, 2021 compared to$81.5 million for the prior year period, representing an increase of$17.3 million , or 21.2%. Sales were higher due to retailers' plans for a more robustHalloween in 2021 due to a lower impact from the ongoing pandemic compared to 2020. Cost of Sales Toys/Consumer Products. Cost of sales of our Toys/Consumer Products segment was$225.3 million , or 67.4% of related net sales for the nine months endedSeptember 30, 2021 compared to$215.5 million , or 70.4% of related net sales for the prior year period, representing an increase of$9.8 million , or 4.5%. The increase in dollars is due to higher overall sales in 2021. The decrease as a percentage of net sales, year over year, is due to a lower average royalty rate, in part driven by the mix of products sold during the nine-month period. Costumes. Cost of sales of our Costumes segment was$75.0 million , or 75.9% of related net sales for the nine months endedSeptember 30, 2021 compared to$64.3 million , or 78.9% of related net sales for the prior year period, representing an increase in dollars of$10.7 million , or 16.6%. The increase in dollars is due to higher overall sales in 2021. The decrease as a percentage of net sales is due to a focused effort to design and develop our product lines for greater margin as well as a lower average royalty rate versus the prior nine-month period.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were$97.1 million for the nine months endedSeptember 30, 2021 compared to$94.0 million for the prior year period constituting 22.4% and 24.2% of net sales, respectively. Selling, general and administrative expenses increased by$3.1 million from the prior year period due to slightly higher direct selling, and product development and testing expenses, as well as an increase in temporary labor expenses, but also due to austerity-related cost reductions in place due to the pandemic in 2020. 41
--------------------------------------------------------------------------------
Table of Contents Restructuring Charge During the nine months endedSeptember 30, 2020 , we recognized$1.6 million of restructuring charges as a result of a company-wide restructuring initiative. The restructuring charges primarily related to employee severance costs. Pandemic Related Charges
During the nine months ended
Gain on Loan Forgiveness
During the nine months ended
Interest Expense Interest expense was$11.9 million for the nine months endedSeptember 30, 2021 , as compared to$16.7 million in the prior year period. During the nine months endedSeptember 30, 2021 , we booked interest expense of$7.3 million related to our 2019 Recap Term Loan,$3.3 million related to our 2021 BSP Term Loan,$0.7 million related to our convertible senior notes due in 2023 and$0.6 million related to our revolving credit facility. During the nine months endedSeptember 30, 2020 , we booked interest expense of$1.7 million related to our convertible senior notes due in 2020 and 2023,$14.0 million related to our 2019 Recap Term Loan,$18,873 related to our PPP Loan, and$1.0 million related to our revolving credit facility.
Provision for (Benefit From) Income Taxes
Our income tax expense, which includes federal, state and foreign income taxes and discrete items, was$0.3 million , or an effective tax rate of (11.7 %), for the nine months endedSeptember 30, 2021 . During the comparable period in 2020, our income tax expense was$0.3 million , or an effective tax rate of (11.0%). Seasonality and Backlog The retail toy industry is inherently seasonal. Generally, our sales have been highest during the third and fourth quarters, and collections for those sales have been highest during the succeeding fourth and first quarters. Our working capital needs have been highest during the second and third quarters as we make royalty advance payments for some of our licenses and buy and sell inventory subject to customer payment terms. While we have taken steps to level sales over the entire year, sales are expected to remain heavily influenced by the seasonality of our toy and costume products. The result of these seasonal patterns is that operating results and the demand for working capital may vary significantly by quarter. Orders placed with us are generally cancelable until the date of shipment. The combination of seasonal demand and the potential for order cancellation makes accurate forecasting of future sales difficult and causes us to believe that backlog may not be an accurate indicator of our future sales. Similarly, financial results for a particular quarter may not be indicative of results for the entire year. 42
--------------------------------------------------------------------------------
Table of Contents
Liquidity and Capital Resources
As ofSeptember 30, 2021 , we had working capital (inclusive of cash, cash equivalents and restricted cash) of$114.0 million , compared to$112.6 million as ofDecember 31, 2020 , representing an increase in working capital of$1.4 million during the nine-month period endedSeptember 30, 2021 . Operating activities used net cash of$26.9 million during the nine months endedSeptember 30, 2021 , as compared to providing net cash of$15.9 million in the prior year period. The decrease in net cash during the nine months endedSeptember 30, 2021 was primarily impacted by an increase in accounts receivable and inventory, partially offset by the net loss, excluding the impact of non-cash charges, an increase in accounts payable, accrued expenses and reserve for sales returns and allowances, and a decrease in prepaid expenses and other assets. Net cash during the nine months endedSeptember 30, 2020 was primarily impacted by the net loss, excluding the impact of non-cash charges, an increase in accounts payable and reserve for sales returns and allowances, partially offset by an increase in accounts receivable. Other than open purchase orders issued in the normal course of business related to shipped product, we have no obligations to purchase inventory from our manufacturers. However, we may incur costs or other losses as a result of not placing orders consistent with our forecasts for product manufactured by our suppliers or manufacturers for a variety of reasons including customer order cancellations or a decline in demand. As part of our strategy to develop and market new products, we have entered into various character and product licenses with royalties/obligations generally ranging from 1% to 23% payable on net sales of such products. As ofSeptember 30, 2021 , these agreements required future aggregate minimum royalty guarantees of$23.5 million exclusive of$4.6 million in advances already paid. Of this$23.5 million future minimum royalty guarantee,$18.6 million is due over the next twelve months. Our investing activities used net cash of$6.3 million in the nine months endedSeptember 30, 2021 , as compared to using net cash of$6.1 million in the prior year period, and consisted primarily of cash paid for the purchase of molds and tooling used in the manufacture of our products. Our financing activities used cash of$32.5 million for the nine months endedSeptember 30, 2021 , consisting of the repayment of our 2019 Recap Term Loan of$125.8 million , as well as, debt issuance costs of$2.6 million incurred in connection with the refinancing of our debt (see Note 5 - Debt), partially offset by the net proceeds from the issuance of our 2021 BSP Term Loan of$96.3 million . Our financing activities provided net cash of$4.1 million for the nine months endedSeptember 30, 2020 , primarily consisting of proceeds from the loan under the Paycheck Protection Program, partially offset by the retirement of convertible senior notes. As ofSeptember 30, 2021 , we have$98.8 million of outstanding indebtedness under our first-lien secured term loan (the "2021 BSP Term Loan Agreement") and we have no outstanding indebtedness under our senior secured revolving credit facility (the "JPMorgan ABL Facility"), aside from utilizing$9.7 million in letters of credit. We also have$0.1 million of outstanding indebtedness under the New Oasis Notes due to residual interest owed. The First Lien Term Loan Facility Credit Agreement (the "2021 BSP Term Loan Agreement") and the Credit Agreement withJPMorgan Chase Bank, N.A ., as agent and lender (the "JPMorgan ABL Credit Agreement") each contain negative covenants that, subject to certain exceptions, limit our ability and our subsidiaries ability to, among other things, incur additional indebtedness, make restricted payments, pledge our assets as security, make investments, loans, advances, guarantees and acquisitions, undergo fundamental changes and enter into transactions with affiliates. The terms of the 2021 BSP Term Loan Agreement also require us to maintain a Net Leverage Ratio of 4:00x, with step-downs occurring each fiscal year starting with the quarter endingMarch 31, 2022 through the quarter endingSeptember 30, 2024 in which we are required to maintain a Net Leverage Ratio of 3:00x. As of the Closing Date, we must maintain a minimum cash balance of not less than$20.0 million . The minimum cash balance can be reduced to$15.0 million in increments of$1.0 million for every$5.0 million in principal repayment of the 2021 BSP Term Loan. The terms of the JPMorgan ABL Credit Agreement also subject us to a springing fixed charge coverage ratio covenant of not less than 1.1 to 1.0 under certain circumstances. The terms of both Agreements are described in more detail in their respective Agreements. The 2021 BSP Term Loan Agreement and the JPMorgan ABL Agreement contain 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 each Agreement. If an event of default occurs under either Agreement, the maturity of the amounts owed under the 2021 BSP Term Loan Agreement and the JPMorgan ABL Agreement may be accelerated. 43
--------------------------------------------------------------------------------
Table of Contents
We were in compliance with the financial covenants under the 2021 BSP Term Loan
Agreement and the JPMorgan ABL Agreement as of
See Note 5 - Debt and Note 6 - Credit Facilities for additional information pertaining to our Debt and Credit Facilities.
As ofSeptember 30, 2021 andDecember 31, 2020 , we held cash and cash equivalents, including restricted cash, of$26.7 million and$92.7 million , respectively. Cash, and cash equivalents, including restricted cash held outside ofthe United States in various foreign subsidiaries totaled$20.6 million and$48.7 million as ofSeptember 30, 2021 andDecember 31, 2020 , respectively. The cash and cash equivalents, including restricted cash balances in our foreign subsidiaries have either been fully taxed in theU.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 additionalU.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 ofSeptember 30, 2021 .
Our primary sources of working capital are cash flows from operations and borrowings under our JPMorgan ABL Facility (see Note 6 - Credit Facilities).
Typically, cash flows from operations are impacted by the effect on sales of (1) the appeal of our products, (2) the success of our licensed brands in motivating consumer purchase of related merchandise, (3) the highly competitive conditions existing in the toy industry and in securing commercially-attractive licenses, (4) dependency on a limited set of large customers, and (5) general economic conditions. A downturn in any single factor or a combination of factors could have a material adverse impact upon our ability to generate sufficient cash flows to operate the business. In addition, our business and liquidity are dependent to a significant degree on our vendors and their financial health, as well as the ability to accurately forecast the demand for products. The loss of a key vendor, or material changes in support by them, or a significant variance in actual demand compared to the forecast, can have a material adverse impact on our cash flows and business. Given the conditions in the toy industry environment in general, vendors, including licensors, may seek further assurances or take actions to protect against non-payment of amounts due to them. Changes in this area could have a material adverse impact on our liquidity.
Off-Balance Sheet Arrangements
As of
44--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source
