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.
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 Novel Coronavirus ("COVID-19")
pandemic ("the 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 pandemic has had far-reaching impacts on many aspects
of the operations of
We expect to continue to assess the evolving impact of the 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
pandemic and our precautionary measures in response thereto may impact our
business, financial condition, and results of operations will depend on how the
pandemic and its impact continues to develop in
The pandemic continues to have a lasting impact on household consumption and
wealth. Changes in personal behavior brought on by the pandemic in combination
with government spending and stimulus have created an inflationary environment
in many countries around the world,
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 pandemic and the follow-on market volatility. 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.
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Critical Accounting Policies & Estimates
Our critical accounting policies and estimates are included in the 2021 Annual Report on Form 10-K and did not materially change during the first nine months of 2022.
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)
2022 2021 2022 2021
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales:
Cost of goods 54.0 53.2 55.4 53.4
Royalty expense 16.3 13.6 16.0 14.3
Amortization of tools and molds 1.2 1.6 1.1 1.6
Cost of sales 71.5 68.4 72.5 69.3
Gross profit 28.5 31.6 27.5 30.7
Direct selling expenses 2.6 4.5 3.0 5.5
General and administrative expenses 9.1 11.3 12.7 16.5
Depreciation and amortization 0.1 0.3 0.2 0.4
Selling, general and administrative
expenses 11.8 16.1 15.9 22.4
Intangibles impairment - - - -
Income from operations 16.7 15.5 11.6 8.3
Other income (expense), net 0.1 - - -
Change in fair value of preferred stock
derivative liability (2.3 ) - (0.3 ) (2.1 )
Change in fair value of convertible
senior notes - (1.5 ) - (3.8 )
Gain on loan forgiveness - 2.6 - 1.4
Loss on debt extinguishment - - - (1.7 )
Interest income - - - -
Interest expense (1.4 ) (1.1 ) (1.3 ) (2.7 )
Income (loss) before provision for
income taxes 13.1 15.5 10.0 (0.6 )
Provision for income taxes 3.6 0.1 2.0 0.1
Net income (loss) 9.5 15.4 8.0 (0.7 )
Net income (loss) attributable to
non-controlling interests - - - -
Net income (loss) attributable to JAKKS
Pacific, Inc. 9.5 % 15.4 % 8.0 % (0.7 )%
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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)
2022 2021 2022 2021
Net Sales
Toys/Consumer Products
53,391 64,005 134,711 98,787
322,998 236,957 664,301 433,152
Cost of Sales Toys/Consumer Products 186,309 115,107 375,015 225,276 Costumes
44,778 46,926 106,568 74,961
231,087 162,033 481,583 300,237
Gross Profit
Toys/Consumer Products 83,298 57,845 154,575 109,089
Costumes 8,613 17,079 28,143 23,826
$ 91,911 $ 74,924 $ 182,718 $ 132,915 Comparison of the Three Months Ended
Net Sales
Toys/Consumer Products. Net sales of our Toys/Consumer Products segment were
Costumes. Net sales of our Costumes segment were
Cost of Sales
Toys/Consumer Products. Cost of sales of our Toys/Consumer Products segment was
Costumes. Cost of sales of our Costumes segment was
Selling, General and Administrative Expenses
Selling, general and administrative expenses were
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Interest expense was
Provision For Income Taxes
Our income tax expense, which includes federal, state and foreign income taxes
and discrete items, was
Comparison of the Nine Months Ended
Net Sales
Toys/Consumer Products. Net sales of our Toys/Consumer Products segment were
Costumes. Net sales of our Costumes segment were
Cost of Sales
Toys/Consumer Products. Cost of sales of our Toys/Consumer Products segment was
Costumes. Cost of sales of our Costumes segment was
Selling, General and Administrative Expenses
Selling, general and administrative expenses were
Interest Expense
Interest expense was
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Provision For (Benefit From) Income Taxes
Our income tax expense, which includes federal, state and foreign income taxes
and discrete items, was
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.
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
Operating activities provided net cash of
Investing activities used net cash of
Financing activities used net cash of
As of
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The First Lien Term Loan Facility Credit Agreement (the "2021 BSP Term Loan
Agreement") and the Credit Agreement with
On
On
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
See Note 5 - Debt and Note 6 - Credit Facilities for additional information pertaining to our Debt and Credit Facilities.
As of
Our primary sources of working capital are cash flows from operations and borrowings under our JPMorgan ABL Facility (see Note 6 - Credit Facilities).
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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
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