Log in
Log in
Or log in with
GoogleGoogle
Twitter Twitter
Facebook Facebook
Apple Apple     
Sign up
Or log in with
GoogleGoogle
Twitter Twitter
Facebook Facebook
Apple Apple     

JAKKS PACIFIC, INC.

(JAKK)
  Report
Delayed Nasdaq  -  01:00 2022-11-25 pm EST
18.29 USD   -0.38%
11/15Jakks Pacific Inc : Amendments to Articles of Inc. or Bylaws; Change in Fiscal Year, Financial Statements and Exhibits (form 8-K)
AQ
11/14JAKKS PACIFIC INC Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)
AQ
10/28Jakks Pacific Inc : Results of Operations and Financial Condition, Change in Directors or Principal Officers, Financial Statements and Exhibits (form 8-K)
AQ
SummaryQuotesChartsNewsRatingsCalendarCompanyFinancialsConsensusRevisionsFunds 
SummaryMost relevantAll NewsAnalyst Reco.Other languagesPress ReleasesOfficial PublicationsSector news

JAKKS PACIFIC INC Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

08/10/2022 | 05:20pm EST

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.



Explanatory Note



As of the date of filing of this Quarterly Report on Form 10-Q (this "Report"),
there continue to be uncertainties regarding the current Novel Coronavirus
("COVID-19") pandemic, including the scope of health issues, the duration of the
pandemic, and the continuing local and worldwide social, and economic
disruption. To date, the COVID-19 pandemic has had far-reaching impacts on many
aspects of the operations of JAKKS 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 over the past
two years intended to help minimize the risk to our Company, employees and
customers. A recap of the key elements as of today would include the following:



  • On March 23,
    2020, we
    encouraged our
    staff to begin
    working from
    home. In the
    US, we began
    to return to
    an in-office
    working model
    in July 2021,
    but paused
    that
    transition in
    consideration
    of the rise in
    cases
    attributable
    to the
    Delta-variant
    of COVID-19.
    As of March
    31, 2022, we
    have returned
    to an
    in-office
    operating
    model in our
    US offices. We
    continue to
    monitor
    federal, state
    and local
    guidelines;




  • Although our
    distribution
    center in the
    City 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 are slowly
    increasing
    employee
    attendance at
    industry
    events and
    in-person
    work-related
    meetings.




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 in the United States
and elsewhere in the world, which remains highly uncertain and cannot be
predicted at this time.



In light of these uncertainties, for purposes of this report, except where
otherwise indicated, the descriptions of our business, our strategies, our risk
factors, and any other forward-looking statements, including regarding us, our
business and the market generally, do not reflect the potential impact of the
COVID-19 pandemic or our responses thereto. In addition, the disclosures
contained in this report are made only as of the date hereof, and we undertake
no obligation to publicly update or revise any forward-looking statement as a
result of new information, future events or otherwise, except as otherwise
required by law. For further information, see "Disclosure Regarding
Forward-Looking Statements" and "Risk Factors."



                                       28

--------------------------------------------------------------------------------

Table of Contents

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 & Estimates




The accompanying condensed consolidated financial statements and supplementary
information were prepared in accordance with accounting principles generally
accepted in the United States of America. Significant accounting policies are
discussed in Note 2 to the consolidated financial statements set forth in our
Annual Report on Form 10-K for the fiscal year ended December 31, 2021. 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 and more in-depth
reviews are performed based upon changes in a customer's financial condition
and/or the level of credit being extended. When a significant event occurs, such
as a bankruptcy filing by a specific customer, and on a quarterly basis, the
allowance is reviewed for adequacy and the balance or accrual rate is adjusted
to reflect current risk prospects. When certain shocks to the market occur,
customers are unilaterally reviewed to assess the potential impact of that shock
on their financial stability. Many retailers have been operating under financial
duress for several years. Ultimately, we assess the risk of liquidation
bankruptcy by a customer and the associated likelihood that we will not be paid
for product shipped. To that end, it is not only outstanding accounts receivable
balances but the decisions to design and develop account-specific product and
ultimately ship product on a go-forward basis that plays into our attempts 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.



                                       29

--------------------------------------------------------------------------------

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. 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. 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 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.



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 $45.6 million as of June 30, 2022 and $46.3 million as of December 31, 2021.




Royalties. We enter into license agreements with strategic partners, inventors,
designers and others for the use of intellectual properties in our 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. 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.



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.



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.



                                       30

--------------------------------------------------------------------------------

Table of Contents




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, we review whether that shock has
materially impacted 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 (in the event of Halloween order cancellations) which
allows the inventory and, in some cases, raw materials to be held through to the
following calendar year without incurring any additional obsolescence.



Income Allocation for Income Taxes. Our annual income tax provision and related
income tax assets and liabilities are based upon actual income as allocated to
the various tax jurisdictions based upon our transfer pricing study, US and
foreign statutory income tax rates and tax regulations and planning
opportunities in the various jurisdictions in which we operate. Significant
judgment is required in interpreting tax regulations in the U.S. and foreign
jurisdictions, and in evaluating worldwide uncertain tax positions. Actual
results could differ materially from those judgments, and changes from such
judgments could materially affect our condensed consolidated financial
statements.



Discrete Items for Income Taxes. The discrete expense recorded for the three and
six months ended June 30, 2022 was $57,000 and $0.1 million, respectively, which
relate to foreign return-to-provision adjustments and state income taxes. For
the comparable period in 2021, a discrete benefit of $0.3 million was recorded
for the three and six months ended June 30, 2021, 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.



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.



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 of June 30, 2022
and December 31, 2021, our income tax reserves were approximately $0.2 million.
The $0.2 million balance primarily relates to the potential tax settlements in
Hong 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.



We recognize current period interest expense and penalties and the reversal of
previously recognized interest expense and penalties that has been determined to
not be assessable due to the expiration of the related audit period or other
compelling factors on the income tax liability for unrecognized tax benefits as
a component of the income tax provision recognized in the condensed consolidated
statements of operations.



Income Taxes. In determining the interim provision for income taxes for the
three and six months ended June 30, 2022, we utilized the discrete effective tax
rate method for the U.S. jurisdiction, as allowed by ASC 740-270-30-18, "Income
Taxes - Interim Reporting." The discrete method is applied when the application
of the estimated annual effective tax rate is impractical because it is not
possible to reliably estimate the annual effective tax rate. The discrete method
treats the year-to-date period as if it were the annual period and determines
the income tax expense or benefit on that basis. We believe that, at this time,
the use of the discrete method is more appropriate than the annual effective tax
rate method for the U.S. jurisdiction due to the uncertainty in estimating
annual pretax earnings in the U.S. and our ongoing assessment that the
recoverability of our deferred tax assets is not likely in the U.S.



                                       31

--------------------------------------------------------------------------------

Table of Contents

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 June 30,            Six Months Ended June 30,
                                                      (Unaudited)                           (Unaudited)
                                               2022                2021               2022               2021
Net sales                                          100.0  %            100.0  %          100.0  %           100.0 %
Cost of sales:
Cost of goods                                       55.3                54.7              56.8               53.7
Royalty expense                                     16.2                15.0              15.6               15.0
Amortization of tools and molds                      0.9                 1.9               1.0                1.7
Cost of sales                                       72.4                71.6              73.4               70.4
Gross profit                                        27.6                28.4              26.6               29.6
Direct selling expenses                              3.1                 5.6               3.4                6.7
General and administrative expenses                 13.4                20.7              16.1               22.7
Depreciation and amortization                        0.3                 0.5               0.3                0.6
Selling, general and administrative
expenses                                            16.8                26.8              19.8               30.0
Intangibles impairment                               0.1                   -               0.1                  -
Income (loss) from operations                       10.7                 1.6               6.7               (0.4 )
Other income (expense), net                          0.1                 0.1                 -                  -
Loss on debt extinguishment                            -                (6.5 )               -               (3.8 )
Change in fair value of preferred stock
derivative liability                                 2.7                (1.4 )             1.6               (4.5 )
Change in fair value of convertible
senior notes                                           -                (3.4 )               -               (6.6 )
Interest income                                        -                   -                 -                  -
Interest expense                                    (1.1 )              (3.9 )            (1.3 )             (4.7 )
Income (loss) before provision for
(benefit from) income taxes                         12.4               (13.5 )             7.0              (20.0 )
Provision for (benefit from) income
taxes                                                0.6                (0.1 )             0.4                  -
Net income (loss)                                   11.8               (13.4 )             6.6              (20.0 )
Net income (loss) attributable to
non-controlling interests                           (0.2 )                 -              (0.1 )                -
Net income (loss) attributable to JAKKS
Pacific, Inc.                                       12.0  %            (13.4 )%            6.7  %           (20.0 )%



The following unaudited table summarizes, for the periods indicated, certain statements of operations data by segment (in thousands):




                                               Three Months Ended June 30,           Six Months Ended June 30,
                                                       (Unaudited)                          (Unaudited)
                                                2022                 2021              2022               2021
Net Sales
Toys/Consumer Products                     $      148,860       $       81,538     $     259,983       $  161,413
Costumes                                           71,562               30,814            81,320           34,782
                                                  220,422              112,352           341,303          196,195
Cost of Sales
Toys/Consumer Products                            105,740               55,977           188,706          110,169
Costumes                                           53,792               24,478            61,790           28,035
                                                  159,532               80,455           250,496          138,204
Gross Profit
Toys/Consumer Products                             43,120               25,561            71,277           51,244
Costumes                                           17,770                6,336            19,530            6,747
                                           $       60,890       $       31,897     $      90,807       $   57,991




                                       32

--------------------------------------------------------------------------------

Table of Contents

Comparison of the Three Months Ended June 30, 2022 and 2021



Net Sales



Toys/Consumer Products. Net sales of our Toys/Consumer Products segment were
$148.9 million for the three months ended June 30, 2022 compared to $81.5
million for the prior year period, representing an increase of $67.4 million, or
82.7%. The Doll/Dress-Up/Nurturing Play and Action Play and Collectibles
division sales increased, led by Disney Encanto™ and Sonic the Hedgehog®. Some
of the increase in sales was related to convincing customers to place FOB orders
earlier in the year in lieu of domestic orders later in the year, in order to
get ahead of possible supply chain issues experienced a year ago, and to take
advantage of the larger customers' scale in the area of import logistics
infrastructures.



Costumes. Net sales of our Costumes segment were $71.6 million for the three
months ended June 30, 2022 compared to $30.8 million for the prior year period,
representing an increase of $40.8 million, or 132.5%. Similar to the
Toys/Consumer Products segment, some of the increase in sales was related to
earlier customer shipments to get ahead of possible supply chain issues
experienced a year ago.



Cost of Sales



Toys/Consumer Products. Cost of sales of our Toys/Consumer Products segment was
$105.7 million, or 71.0% of related net sales for the three months ended June
30, 2022 compared to $56.0 million, or 68.7% of related net sales for the prior
year period, representing an increase of $49.7 million, or 88.8%. The increase
in dollars is related to higher overall sales. The increase as a percentage of
net sales, year over year, is due to a higher average royalty rate and higher
freight costs, slightly offset by lower product costs.



Costumes. Cost of sales of our Costumes segment was $53.8 million, or 75.1% of
related net sales for the three months ended June 30, 2022, compared to $24.5
million, or 79.5% of related net sales for the prior year period, representing
an increase in dollars of $29.3 million, or 119.6%. The increase in dollars is
related to higher overall sales. The decrease as a percentage of net sales was
driven by lower product costs and a lower average royalty rate.



Selling, General and Administrative Expenses




Selling, general and administrative expenses were $36.9 million for the three
months ended June 30, 2022 compared to $30.1 million for the prior year period
constituting 16.8% and 26.8% of net sales, respectively. Selling, general and
administrative expenses increased as a result of higher payroll costs.



Interest Expense



Interest expense was $2.3 million for the three months ended June 30, 2022, as
compared to $4.4 million in the prior year period. During the three months ended
June 30, 2022, we incurred interest expense of $2.0 million related to our 2021
BSP Term Loan and $0.3 million related to our revolving credit facility. During
the three months ended June 30, 2021, we incurred interest expense of $3.0
million related to our 2019 Recap Term Loan, $0.9 million related to our 2021
BSP Term Loan, $0.3 million related to our convertible senior notes due in 2023
and $0.2 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 $1.3 million, or an effective tax rate of 4.8%, for the
three months ended June 30, 2022. During the comparable period in 2021, our
income tax benefit was $0.1 million, or an effective tax rate of 0.7%.



                                       33

--------------------------------------------------------------------------------

Table of Contents

Comparison of the Six Months Ended June 30, 2022 and 2021



Net Sales



Toys/Consumer Products. Net sales of our Toys/Consumer Products segment were
$260.0 million for the six months ended June 30, 2022 compared to $161.4 million
for the prior year period, representing an increase of $98.6 million, or 61.1%.
The Doll/Dress-Up/Nurturing Play and Action Play and Collectibles division sales
increased, led by Disney Encanto™ and Sonic the Hedgehog®. Some of the increase
in sales was related to convincing customers to place FOB orders earlier in the
year in lieu of domestic orders later in the year, in order to get ahead of
possible supply chain issues experienced a year ago, and to take advantage of
the larger customers' scale in the area of import logistics infrastructures.



Costumes. Net sales of our Costumes segment were $81.3 million for the six
months ended June 30, 2022 compared to $34.8 million for the prior year period,
representing an increase of $46.5 million, or 133.6%. Some of the increase in
sales was related to earlier customer shipments to get ahead of possible supply
chain issues experienced a year ago.



Cost of Sales



Toys/Consumer Products. Cost of sales of our Toys/Consumer Products segment was
$188.7 million, or 72.6% of related net sales for the six months ended June 30,
2022 compared to $110.2 million, or 68.3% of related net sales for the prior
year period, representing an increase of $78.5 million, or 71.2%. The increase
in dollars is related to higher overall sales. The increase as a percentage of
net sales, year over year, is due to higher freight costs and a higher average
royalty rate.



Costumes. Cost of sales of our Costumes segment was $61.8 million, or 76.0% of
related net sales for the six months ended June 30, 2022, compared to $28.0
million, or 80.5% of related net sales for the prior year period, representing
an increase in dollars of $33.8 million, or 120.7%. The increase in dollars is
related to higher overall sales. The decrease as a percentage of net sales was
driven by lower product costs and a lower average royalty rate.



Selling, General and Administrative Expenses




Selling, general and administrative expenses were $67.6 million for the six
months ended June 30, 2022 compared to $58.9 million for the prior year period
constituting 19.8% and 30.0% of net sales, respectively. Selling, general and
administrative expenses increased as a result of higher payroll costs.



Interest Expense



Interest expense was $4.5 million for the six months ended June 30, 2022, as
compared to $9.2 million in the prior year period. During the six months ended
June 30, 2022, we incurred interest expense of $4.0 million related to our 2021
BSP Term Loan and $0.5 million related to our revolving credit facility. During
the six months ended June 30, 2021, we incurred interest expense of $7.3 million
related to our 2019 Recap Term Loan, $0.9 million related to our 2021 BSP Term
Loan, $0.6 million related to our convertible senior notes due in 2023, 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 $1.8 million, or an effective tax rate of 7.3%, for the
six months ended June 30, 2022. During the comparable period in 2021, our income
tax benefit was $12,000, or an effective tax rate of 0.0%.



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. The pandemic has somewhat disrupted
historical industry seasonality. Consumer demand for certain product categories
has surged during this time. Surges in consumer demand have also strained the
supply-chain, lengthening the amount of time it takes to move products from
factory to warehouse to customers. Customers have also had increased challenges
in managing their inventory levels, resulting in either out-of-stock or
over-supply scenarios, depending on the product category and product line.



                                       34

--------------------------------------------------------------------------------

Table of Contents




While we have taken steps to level sales over the entire year, sales are
expected to remain heavily influenced by the seasonality of our toy and costume
products. The result of these seasonal patterns is that operating results and
the demand for working capital may vary significantly by quarter. Orders placed
with us are generally cancelable until the date of shipment. The combination of
seasonal demand and the potential for order cancellation makes accurate
forecasting of future sales difficult and causes us to believe that backlog may
not be an accurate indicator of our future sales. Similarly, financial results
for a particular quarter may not be indicative of results for the entire year.



Liquidity and Capital Resources




As of June 30, 2022, we had working capital (inclusive of cash, cash equivalents
and restricted cash) of $116.7 million, compared to $114.5 million as of
December 31, 2021, representing an increase in working capital of $2.2 million
during the six-month period ended June 30, 2022.



Operating activities provided net cash of $36.5 million during the six months
ended June 30, 2022, as compared to net cash used of $18.5 million in the prior
year period. The increase in net cash provided by operating activities
year-over-year is primarily due to a higher net income, an increase in accounts
payable due to higher inventory purchases, an increase in accrued expenses
primarily due to higher royalty accruals, partially offset by a higher inventory
balance, a higher accounts receivable balance due to higher sales, and lower
non-cash charges related to valuation adjustments for our convertible senior
notes and preferred stock derivative liability. Other than open purchase orders
issued in the normal course of business related to shipped product, we have no
obligations to purchase inventory from our manufacturers. However, we may incur
costs or other losses as a result of not placing orders consistent with our
forecasts for product manufactured by our suppliers or manufacturers for a
variety of reasons including customer order cancellations or a decline in
demand. As part of our strategy to develop and market new products, we have
entered into various character and product licenses with royalties/obligations
generally ranging from 1% to 22% payable on net sales of such products. As of
June 30, 2022, these agreements required future aggregate minimum royalty
guarantees of $86.4 million exclusive of $3.2 million in advances already paid.
Of this $86.4 million future minimum royalty guarantee, $29.9 million is due
over the next twelve months.



Investing activities used net cash of $5.3 million and $3.7 million for the six
months ended June 30, 2022 and 2021, respectively, and consisted primarily of
cash paid for the purchase of molds and tooling used in the manufacture of our
products.



Financing activities used net cash of $11.5 million and $32.5 million for the
six months ended June 30, 2022 and 2021, respectively. The cash used in
financing activities during the six months ended June 30, 2022, primarily
consists of the repayment of our 2021 BSP Term Loan of $10.9 million, and the
repurchase of common stock for employee tax withholding of $0.6 million. The
cash used in financing activities during the six months ended June 30, 2021 of
$32.5 million consists of the repayment of our 2019 Recap Term Loan of $125.8
million, as well as, debt issuance costs of $2.8 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.



As of June 30, 2022, we have $87.6 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 $17.2 million in letters of
credit.



The First Lien Term Loan Facility Credit Agreement (the "2021 BSP Term Loan
Agreement") and the Credit Agreement with JPMorgan 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 ending March 31, 2022 through the
quarter ending September 30, 2024 in which we are required to maintain a Net
Leverage Ratio of 3:00x. On April 26, 2022, we entered into a First Amendment to
the 2021 BSP Term Loan Agreement, to provide, among other things, that we must
maintain Qualified Cash of at least: (a) at all times after the Closing Date and
prior to the First Amendment Effective Date, $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.



                                       35

--------------------------------------------------------------------------------

Table of Contents

On June 27, 2022, as permitted by the terms within the 2021 BSP Term Loan Agreement, we made a voluntary fee-free $10.0 million prepayment towards the outstanding principal amount of the 2021 BSP Term Loan.




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.



We were in compliance with the financial covenants under the 2021 BSP Term Loan Agreement and the JPMorgan ABL Agreement as of June 30, 2022.

See Note 5 - Debt and Note 6 - Credit Facilities for additional information pertaining to our Debt and Credit Facilities.




As of June 30, 2022 and December 31, 2021, we held cash and cash equivalents,
including restricted cash, of $62.3 million and $45.3 million, respectively.
Cash, and cash equivalents, including restricted cash held outside of the United
States in various foreign subsidiaries totaled $53.5 million and $30.7 million
as of June 30, 2022 and December 31, 2021, respectively. The cash and cash
equivalents, including restricted cash balances in our foreign subsidiaries have
either been fully taxed in the U.S. or tax has been accounted for in connection
with the Tax Cuts and Jobs Act, or may be eligible for a full foreign dividends
received deduction under such Act, and thus would not be subject to additional
U.S. tax should such amounts be repatriated in the form of dividends or deemed
distributions. Any such repatriation may result in foreign withholding taxes,
which we expect would not be significant as of June 30, 2022.



On July 1, 2022, we filed a Form S-3 shelf registration statement (File No.
333-266009) with the SEC to register for future issuances, from time to time, up
to 2,000,000 shares of common stock, in one or more offerings in amounts, at
prices and on the terms that we will determine at the time of the offering. On
August 1, 2022, the SEC declared the Form S-3 shelf registration filed by us to
be effective.


Our primary sources of working capital are cash flows from operations and borrowings under our JPMorgan ABL Facility (see Note 6 - Credit Facilities).




Typically, cash flows from operations are impacted by the effect on sales of (1)
the appeal of our products, (2) the success of our licensed brands in motivating
consumer purchase of related merchandise, (3) the highly competitive conditions
existing in the toy industry and in securing commercially-attractive licenses,
(4) dependency on a limited set of large customers, and (5) general economic
conditions. A downturn in any single factor or a combination of factors could
have a material adverse impact upon our ability to generate sufficient cash
flows to operate the business. In addition, our business and liquidity are
dependent to a significant degree on our vendors and their financial health, as
well as the ability to accurately forecast the demand for products. The loss of
a key vendor, or material changes in support by them, or a significant variance
in actual demand compared to the forecast, can have a material adverse impact on
our cash flows and business. Given the conditions in the toy industry
environment in general, vendors, including licensors, may seek further
assurances or take actions to protect against non-payment of amounts due to
them. Changes in this area could have a material adverse impact on our
liquidity.



As of June 30, 2022 off-balance sheet arrangements include letters of credit issued by JPMorgan of $17.2 million.

                                       36

--------------------------------------------------------------------------------

Table of Contents

© Edgar Online, source Glimpses

All news about JAKKS PACIFIC, INC.
11/15Jakks Pacific Inc : Amendments to Articles of Inc. or Bylaws; Change in Fiscal Year, Finan..
AQ
11/14JAKKS PACIFIC INC Management's Discussion and Analysis of Financial Condition and Resu..
AQ
10/28Jakks Pacific Inc : Results of Operations and Financial Condition, Change in Directors or ..
AQ
10/27Jakks Pacific : Q3 FY 2022 Earnings Conference Call Presentation
PU
10/27Jakks : Q3 Earnings Snapshot
AQ
10/27Transcript : JAKKS Pacific, Inc., Q3 2022 Earnings Call, Oct 27, 2022
CI
10/27Earnings Flash (JAKK) JAKKS PACIFIC Posts Q3 Revenue $323M, vs. Street Est of $260.6M
MT
10/27JAKKS Pacific Reports Third Quarter 2022 Financial Results
BU
10/27JAKKS Pacific, Inc. Reports Earnings Results for the Third Quarter and Nine Months Ende..
CI
10/21JAKKS Pacific Files $150 Million Mixed Shelf; Launches $75 Million At-the-Market Offeri..
MT
More news
Analyst Recommendations on JAKKS PACIFIC, INC.
More recommendations