Company Quick10K Filing
Quick10K
Jakks Pacific
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$1.03 27 $28
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-08-09 Enter Agreement, Leave Agreement, Off-BS Arrangement, Sale of Shares, Shareholder Rights, Officers, Amend Bylaw, Other Events, Exhibits
8-K 2019-08-09 Regulation FD, Exhibits
8-K 2019-08-09 Earnings, Exhibits
8-K 2019-08-09 Regulation FD, Exhibits
8-K 2019-06-28 Shareholder Vote
8-K 2019-06-24
8-K 2019-05-09 Regulation FD, Exhibits
8-K 2019-05-09 Earnings, Exhibits
8-K 2019-03-31 Officers
8-K 2019-01-07
8-K 2018-10-25 Earnings, Exhibits
8-K 2018-07-25 Enter Agreement, Off-BS Arrangement, Sale of Shares, Exhibits
8-K 2018-06-14 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-04-26 Earnings
8-K 2018-04-02 Enter Agreement, Exhibits
8-K 2018-03-29
8-K 2018-03-26 Other Events, Exhibits
8-K 2018-02-22 Earnings
8-K 2018-01-25 Other Events, Exhibits
BKNG Booking Holdings 76,210
RF Regions Financial 15,130
W Wayfair 13,520
WIX Wix.com 7,040
DQ Daqo New Energy 448
DRD Drdgold 131
VISI Volt Information Sciences 95
TACT Transact Technologies 69
MN Manning & Napier 34
ORNC Oranco 0
JAKK 2019-06-30
Part I - Financial Information
Item 1. Financial Statements
Note 1 - Basis of Presentation
Note 2 - Business Segments, Geographic Data, and Sales By Major Customers
Note 3 - Inventory
Note 4 - Revenue Recognition and Reserve for Sales Returns and Allowances
Note 5 - Credit Facilities
Note 6 - Convertible Senior Notes
Note 7 - Income Taxes
Note 8 - Loss per Share
Note 9 - Common Stock and Preferred Stock
Note 10 - Joint Ventures
Note 11 - Goodwill
Note 12 - Intangible Assets Other Than Goodwill
Note 13 - Comprehensive Loss
Note 14 - Litigation and Contingencies
Note 15 - Share-Based Payments
Note 16 - Fair Value Measurements
Note 17 - Liquidity
Note 18 - Leases
Note 19 - Subsequent Event
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
EX-31.1 jakk-20190630xexx311.htm
EX-31.2 jakk-20190630xexx312.htm
EX-32.1 jakk-20190630xexx321.htm
EX-32.2 jakk-20190630xexx322.htm

Jakks Pacific Earnings 2019-06-30

JAKK 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 jakk-20190630x10q.htm 10-Q Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
 
 
 
Commission file number: 0-28104
JAKKS Pacific, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
(State or Other Jurisdiction of Incorporation or Organization)
95-4527222
(I.R.S. Employer Identification No.)
 
 
2951 28th Street
Santa Monica, California
(Address of Principal Executive Offices)
90405
(Zip Code)
Registrant’s Telephone Number, Including Area Code: (424) 268-9444
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   ☒       No   ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes   ☒       No   ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “non-accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  ☐
Accelerated filer  ☐
Non-accelerated filer  ☒
Smaller reporting company  ☒
Emerging growth company  ☐
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐ 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   ☐       No   ☒
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
 
Trading
Symbol(s)
 
Name of each exchange on which registered
Common Stock $.001 Par Value
 
JAKK
 
The NASDAQ Global Select Market
The number of shares outstanding of the issuer’s common stock is 32,524,913 as of August 9, 2019.

1


JAKKS PACIFIC, INC. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED JUNE 30, 2019
ITEMS IN FORM 10-Q
 
 
 
 
 
 
 
 
 
 
 
Item 3.
Defaults Upon Senior Securities
None
Item 4.
Mine Safety Disclosures
None
Item 5.
Other Information
None
 
 
 
 
 
 
 

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 condensed consolidated 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,” “expect” or words of similar import, we are making forward-looking statements. We believe that the assumptions and expectations reflected in such forward-looking statements are reasonable and are based on information available to us on the date hereof, but we cannot assure you that these assumptions and expectations will prove to have been correct or that we will take any action that we may presently be planning. We 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.


2


PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
JAKKS PACIFIC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
Assets
June 30,
2019
 
December 31,
2018
 
(Unaudited)
Current assets
 
 
 
Cash and cash equivalents
$
32,125

 
$
53,282

Restricted cash
4,923

 
4,923

Accounts receivable, net of allowance for doubtful accounts of $1,613 and $2,149 at June 30, 2019 and December 31, 2018, respectively
85,119

 
122,278

Inventory
53,521

 
53,880

Prepaid expenses and other assets
28,523

 
15,780

Total current assets
204,211

 
250,143

Property and equipment
 
 
 
Office furniture and equipment
11,876

 
11,999

Molds and tooling
108,250

 
108,315

Leasehold improvements
7,220

 
7,735

Total
127,346

 
128,049

Less accumulated depreciation and amortization
106,239

 
107,147

Property and equipment, net
21,107

 
20,902

Operating lease right-of-use assets
35,848

 

Intangible assets, net
14,931

 
17,312

Other long term assets
17,264

 
19,101

Goodwill
35,083

 
35,083

Trademarks
300

 
300

Total assets
$
328,744

 
$
342,841

Liabilities and Stockholders' Equity
 
 
 
Current liabilities
 
 
 
Accounts payable
$
64,388

 
$
57,574

Accrued expenses
33,628

 
29,914

Reserve for sales returns and allowances
24,498

 
29,403

Short term operating lease liabilities
9,182

 

Short term debt, net
1,892

 
27,211

Total current liabilities
133,588

 
144,102

Long term operating lease liabilities
29,829

 

Long term debt, net
160,656

 
139,792

Other liabilities
137

 
4,409

Income taxes payable
1,471

 
1,458

Deferred income taxes, net
1,431

 
1,431

Total liabilities
327,112

 
291,192

Stockholders' equity
 
 
 
Preferred stock, $.001 par value; 5,000,000 shares authorized; nil outstanding

 

Common stock, $.001 par value; 100,000,000 shares authorized; 29,463,689 and 29,169,913 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively
30

 
30

Treasury stock, at cost; 3,112,840 shares
(24,000
)
 
(24,000
)
Additional paid-in capital
218,897

 
218,155

Accumulated deficit
(179,301
)
 
(127,601
)
Accumulated other comprehensive loss
(14,994
)
 
(15,847
)
Total JAKKS Pacific, Inc. stockholders' equity
632

 
50,737

Non-controlling interests
1,000

 
912

Total stockholders' equity
1,632

 
51,649

Total liabilities and stockholders' equity
$
328,744

 
$
342,841

See accompanying notes to condensed consolidated financial statements.

3


JAKKS PACIFIC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except per share data)
 
Three Months Ended June 30,
(Unaudited)
 
Six Months Ended June 30,
(Unaudited)
 
2019
 
2018
 
2019
 
2018
Net sales
$
95,182

 
$
105,781

 
$
166,008

 
$
198,785

Cost of sales
77,436

 
77,840

 
133,922

 
147,885

Gross profit
17,746

 
27,941

 
32,086

 
50,900

Selling, general and administrative expenses
33,870

 
39,748

 
69,136

 
98,365

Restructuring charge
22

 

 
270

 

Acquisition related and other
2,503

 
333

 
5,370

 
333

Loss from operations
(18,649
)
 
(12,140
)
 
(42,690
)
 
(47,798
)
Income from joint ventures

 
205

 

 
227

Other income (expense), net
(242
)
 
31

 
(159
)
 
81

Change in fair value of convertible senior notes
(106
)
 
(2,410
)
 
(2,529
)
 
(3,431
)
Interest income
20

 
14

 
47

 
28

Interest expense
(2,919
)
 
(2,197
)
 
(5,937
)
 
(4,133
)
Loss before provision for (benefit from) income taxes
(21,896
)
 
(16,497
)
 
(51,268
)
 
(55,026
)
Provision for (benefit from) income taxes
589

 
2,091

 
344

 
(245
)
Net loss
(22,485
)
 
(18,588
)
 
(51,612
)
 
(54,781
)
Net income (loss) attributable to non-controlling interests
57

 
(29
)
 
88

 
22

Net loss attributable to JAKKS Pacific, Inc.
$
(22,542
)
 
$
(18,559
)
 
$
(51,700
)
 
$
(54,803
)
Loss per share - basic and diluted
$
(0.96
)
 
$
(0.80
)
 
$
(2.19
)
 
$
(2.37
)
Shares used in loss per share - basic and diluted
23,600

 
23,106

 
23,578

 
23,103

Comprehensive loss
$
(22,935
)
 
$
(19,978
)
 
$
(50,759
)
 
$
(55,121
)
Comprehensive loss attributable to JAKKS Pacific, Inc.
$
(22,992
)
 
$
(19,949
)
 
$
(50,847
)
 
$
(55,143
)
See accompanying notes to condensed consolidated financial statements.

4


JAKKS PACIFIC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
Three and Six Months Ended June 30, 2019

 (Unaudited)
 
 
Common Stock
 
Treasury
Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Loss
 
JAKKS
Pacific, Inc.
Stockholders’
Equity
 
Non-
Controlling
Interests
 
Total
Stockholders’
Equity
 
 
 
 
 
 
 
 
 
Balance, December 31, 2018
 
$
30

 
$
(24,000
)
 
$
218,155

 
$
(127,601
)
 
$
(15,847
)
 
$
50,737

 
$
912

 
$
51,649

Stock-based compensation expense
 

 

 
618

 

 

 
618

 

 
618

Repurchase of common stock for employee tax withholding
 

 

 
(249
)
 

 

 
(249
)
 

 
(249
)
Net income (loss)
 

 

 

 
(29,158
)
 

 
(29,158
)
 
31

 
(29,127
)
Foreign currency translation adjustment
 

 

 

 

 
1,303

 
1,303

 

 
1,303

Balance, March 31, 2019
 
$
30

 
$
(24,000
)
 
$
218,524

 
$
(156,759
)
 
$
(14,544
)
 
$
23,251

 
$
943

 
$
24,194

Stock-based compensation expense
 

 

 
397

 

 

 
397

 

 
397

Repurchase of common stock for employee tax withholding
 

 

 
(24
)
 

 

 
(24
)
 

 
(24
)
Net income (loss)
 

 

 

 
(22,542
)
 

 
(22,542
)
 
57

 
(22,485
)
Foreign currency translation adjustment
 

 

 

 

 
(450
)
 
(450
)
 

 
(450
)
Balance, June 30, 2019
 
$
30

 
$
(24,000
)
 
$
218,897

 
$
(179,301
)
 
$
(14,994
)
 
$
632

 
$
1,000

 
$
1,632

Three and Six Months Ended June 30, 2018
 (Unaudited)
 
 
Common Stock
 
Treasury
Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Loss
 
JAKKS
Pacific, Inc.
Stockholders’
Equity
 
Non-
Controlling
Interests
 
Total
Stockholders’
Equity
 
 
 
 
 
 
 
 
 
Balance, December 31, 2017
 
$
27

 
$
(24,000
)
 
$
215,809

 
$
(85,233
)
 
$
(13,059
)
 
$
93,544

 
$
969

 
$
94,513

Restricted stock grants
 
3

 

 

 

 

 
3

 

 
3

Stock-based compensation expense
 

 

 
674

 

 

 
674

 

 
674

Repurchase of common stock for employee tax withholding
 

 

 
(85
)
 

 

 
(85
)
 

 
(85
)
Net income (loss)
 

 

 

 
(36,244
)
 

 
(36,244
)
 
51

 
(36,193
)
Foreign currency translation adjustment
 

 

 

 

 
1,050

 
1,050

 

 
1,050

Balance, March 31, 2018
 
$
30

 
$
(24,000
)
 
$
216,398

 
$
(121,477
)
 
$
(12,009
)
 
$
58,942

 
$
1,020

 
$
59,962

Stock-based compensation expense
 

 

 
313

 

 

 
313

 

 
313

Adjustment to additional paid in capital
 

 

 
(2
)
 

 

 
(2
)
 

 
(2
)
Net loss
 

 

 

 
(18,559
)
 

 
(18,559
)
 
(29
)
 
(18,588
)
Foreign currency translation adjustment
 

 

 

 

 
(1,390
)
 
(1,390
)
 

 
(1,390
)
Balance, June 30, 2018
 
$
30

 
$
(24,000
)
 
$
216,709

 
$
(140,036
)
 
$
(13,399
)
 
$
39,304

 
$
991

 
$
40,295

See accompanying notes to condensed consolidated financial statements.

5


JAKKS PACIFIC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 
Six Months Ended June 30,
(Unaudited)
 
2019
 
2018
Cash flows from operating activities
 
 
 
Net loss
$
(51,612
)
 
$
(54,781
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Provision for doubtful accounts
(248
)
 
12,468

Depreciation and amortization
7,473

 
7,428

Write-off and amortization of debt issuance costs
803

 
556

Share-based compensation expense
1,015

 
987

Gain on disposal of property and equipment
(61
)
 
(28
)
Change in fair value of convertible senior notes
2,529

 
3,431

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
37,407

 
29,710

Inventory
359

 
(3,729
)
Prepaid expenses and other assets
(12,079
)
 
(19,840
)
Accounts payable
6,785

 
18,497

Accrued expenses
3,714

 
(6,675
)
Reserve for sales returns and allowances
(4,905
)
 
3,713

Income taxes payable
13

 
(267
)
Other liabilities
(58
)
 
(190
)
Total adjustments
42,747

 
46,061

Net cash used in operating activities
(8,865
)
 
(8,720
)
Cash flows from investing activities
 
 
 
Purchases of property and equipment
(5,205
)
 
(6,510
)
Net cash used in investing activities
(5,205
)
 
(6,510
)
Cash flows from financing activities
 
 
 
Repayment of credit facility borrowings
(7,500
)
 
(5,000
)
Deferred issuance costs

 
(1,447
)
Proceeds from term loan facility

 
20,000

Repayment of term loan
(167
)
 

Repurchase of common stock for employee tax withholding
(273
)
 
(85
)
Net cash (used in) provided by financing activities
(7,940
)
 
13,468

Net decrease in cash, cash equivalents and restricted cash
(22,010
)
 
(1,762
)
Effect of foreign currency translation
853

 
(224
)
Cash, cash equivalents and restricted cash, beginning of period
58,205

 
64,977

Cash, cash equivalents and restricted cash, end of period
$
37,048

 
$
62,991

Cash paid during the period for:
 
 
 
Income taxes
$
68

 
$
712

Interest
$
5,063

 
$
3,592

As of June 30, 2019, there was $3.4 million of property and equipment included in accounts payable. As of June 30, 2018, there was $4.9 million of property and equipment included in accounts payable.
See Notes 1, 5, 6 and 9 for additional supplemental information to the condensed consolidated statements of cash flows.
See accompanying notes to condensed consolidated financial statements.

6


JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2019
Note 1 — Basis of Presentation
The accompanying unaudited interim condensed consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to prevent the information presented from being misleading. These financial statements should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K, which contains audited financial information for the three years in the period ended December 31, 2018.
The information provided in this report reflects all adjustments (consisting solely of normal recurring items) that are, in the opinion of management, necessary to present fairly the financial position and the results of operations for the periods presented. Interim results are not necessarily, especially given seasonality, indicative of results to be expected for a full year.
The condensed consolidated financial statements include the accounts of JAKKS Pacific, Inc. and its wholly-owned subsidiaries (collectively, “the Company”). The condensed consolidated financial statements also include the accounts of DreamPlay Toys, LLC, a joint venture with NantWorks LLC, JAKKS Meisheng Trading (Shanghai) Limited, a joint venture with Meisheng Cultural & Creative Corp., Ltd., and JAKKS Meisheng Animation (HK) Limited, a joint venture with Hong Kong Meisheng Cultural Company Limited.
Certain prior period amounts have been reclassified for consistency with the current period presentation.
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Updates ("ASU") 2014-09, “Revenue from Contracts with Customers (Topic 606),” which supersedes the revenue recognition requirements in ASC 605, (Topic 605), and most industry-specific guidance. Under the new model, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the new standard requires that reporting companies disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers – Deferral of the Effective Date,” which defers the effective date of ASU 2014-09 to annual reporting periods beginning after December 15, 2017, and interim periods therein. In 2016, the FASB issued ASU 2016-08, “Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” ASU 2016-10, “Identifying Performance Obligations and Licensing,” and ASU 2016-12, “Revenue from Contracts with Customers - Narrow-Scope Improvements and Practical Expedients.” Entities have the choice to adopt these updates using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a modified retrospective approach with the cumulative effect of these standards recognized at the date of the adoption.
On January 1, 2018, the Company adopted the new accounting standard ASC 606, (Topic 606), Revenue from Contracts with Customers and all the related amendments (“new revenue standard”) using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with the Company’s historic accounting under ASC 605, (Topic 605).
There is no impact to the Company’s condensed consolidated financial statements resulting from the adoption of Topic 606 as the timing and measurement of revenue remained consistent with Topic 605, although the Company’s approach to revenue recognition is now based on the transfer of control. Further, there is no difference in the amounts of the revenue and cost of sales reported in the Company’s condensed consolidated statements of operations and comprehensive loss for the three and six months ended June 30, 2019 and 2018 that were recognized pursuant to Topic 606 and those that would have been reported pursuant to Topic 605.

7


JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2019


In January 2016, the FASB issued ASU 2016-01, “Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities," (“ASU 2016-01”). The new guidance is intended to improve the recognition and measurement of financial instruments. The ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2017. The adoption of this standard did not have an impact on the Company’s condensed consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, “Leases.” ASU 2016-02 establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the statement of operations. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. If an entity chooses the second option, the transition requirements for existing leases also apply to leases entered into between the date of initial application and the effective date. The entity must also recast its comparative period financial statements and provide the disclosures required by the new standard for the comparative periods. On January 1, 2019, the Company adopted the new standard and uses the effective date as its date of initial application. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019. The new standard provides a number of optional practical expedients in transition. The Company elected certain practical expedients, which permits the Company not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs. The Company did not elect the use-of-hindsight or the practical expedient pertaining to land easements; the latter not being applicable to the Company.

On adoption, the Company recognized operating lease liabilities of approximately $40.8 million with corresponding ROU assets of $37.6 million based on the present value of the remaining minimum rental payments for existing operating leases. The Company also derecognized deferred rent liabilities of $4.3 million and prepaid rent of $1.1 million upon the recognition of lease liabilities and ROU assets.
In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory.” The amendments in this ASU reduce the complexity in the accounting standards by allowing the recognition of current and deferred income taxes for an intra-entity asset transfer, other than inventory, when the transfer occurs. Historically, recognition of the income tax consequence was not recognized until the asset was sold to an outside party. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The adoption of this standard did not have an impact on the Company’s condensed consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting,” which clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. ASU 2017-09 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The adoption of this standard did not have an impact on the Company’s condensed consolidated financial statements.
In January 2018, the FASB issued ASU 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,” which gives entities the option to reclassify to retained earnings the tax effects resulting from the U.S. Tax Cuts and Jobs Act ("the Act") related to items in Accumulated Other Comprehensive Income (“AOCI”) that the FASB refers to as having been stranded in AOCI. The new guidance may be applied retrospectively to each period in which the effect of the Act is recognized in the period of adoption. The Company could adopt this guidance for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted for periods for which financial statements have not yet been issued or made available for issuance, including the period the Act was enacted. The guidance, when adopted, will require new disclosures regarding a company’s accounting policy for releasing the tax effects in AOCI and permit the company the option to reclassify to retained earnings the tax effects resulting from the Act that are stranded in AOCI. The Company adopted this guidance on January 1, 2019 and the impact was not material.

8


JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2019


In March 2018, the FASB issued ASU 2018-03, “Technical Corrections and Improvements to Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,” which made targeted improvements to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years beginning after June 15, 2018. The adoption of this standard did not have an impact on the Company’s condensed consolidated financial statements.
In June 2018, the FASB issued ASU 2018-07, “Improvements to Nonemployee Share-Based Payment Accounting,” which supersedes most of the prior accounting guidance on nonemployee share-based payments, and instead aligns it with existing guidance on employee share-based payments in Topic 718. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and early adoption is permitted. The adoption of this standard did not have an impact on the Company’s condensed consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, “Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement,” which improves the effectiveness of the disclosures required under ASC 820 and modifies the disclosure requirements on fair value measurements, including the consideration of costs and benefits. The new standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and early adoption is permitted. The Company is currently evaluating the impact of the pending adoption of this new standard on its condensed consolidated financial statements.
In October 2018, the FASB issued ASU 2018-17, "Consolidation: Targeted Improvements to Related Party Guidance for Variable Interest Entities," which improves the accounting for variable interest entities by considering indirect interests held through related parties under common control for determining whether fees paid to decision makers and service providers are variable interests. This new standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The amendments are required to be applied retrospectively with a cumulative-effect adjustment to retained earnings at the beginning of the earliest period presented. Early adoption is permitted. The Company is currently evaluating the impact of the pending adoption of this new standard on its condensed consolidated financial statements.
Note 2 — Business Segments, Geographic Data, and Sales by Major Customers
The Company is a worldwide producer and marketer of children’s toys and other consumer products, principally engaged in the design, development, production, marketing and distribution of its diverse portfolio of products. The Company has aligned its operating segments into three reporting segments that reflect the management and operation of the business. The Company’s segments are (i) U.S. and Canada, (ii) International, and (iii) Halloween.
The U.S. and Canada segment includes action figures, vehicles, play sets, plush products, dolls, electronic products, construction toys, infant and pre-school toys, role play and everyday costume play, foot to floor ride-on vehicles, wagons, novelty toys, seasonal and outdoor products, kids’ indoor and outdoor furniture, and related products.
Within the International segment, the Company markets and sells its toy products in markets outside of the U.S. and Canada, primarily in the European, Asia Pacific, and Latin American regions.
Within the Halloween segment, the Company markets and sells Halloween costumes and accessories and everyday costume play products, primarily in the U.S. and Canada.
Segment performance is measured at the operating income (loss) level. All sales are made to external customers and general corporate expenses have been attributed to the various segments based upon relative sales volumes. Segment assets are primarily comprised of accounts receivable and inventories, net of applicable reserves and allowances, goodwill and other assets. Certain assets which are not tracked by operating segment and/or that benefit multiple operating segments have been allocated on the same basis.

9


JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2019


Results are not necessarily those which would be achieved if each segment was an unaffiliated business enterprise. Information by segment and a reconciliation to reported amounts for the three and six months ended June 30, 2019 and 2018 and as of June 30, 2019 and December 31, 2018 are as follows (in thousands):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Net Sales
 
 
 
 
 
 
 
U.S. and Canada
$
48,502

 
$
59,381

 
$
105,935

 
$
129,916

International
10,293

 
22,044

 
20,046

 
39,343

Halloween
36,387

 
24,356

 
40,027

 
29,526

 
$
95,182

 
$
105,781

 
$
166,008

 
$
198,785

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Loss from Operations
 
 
 
 
 
 
 
U.S. and Canada
$
(10,910
)
 
$
(6,423
)
 
$
(26,364
)
 
$
(29,402
)
International
(2,694
)
 
(2,744
)
 
(7,117
)
 
(9,683
)
Halloween
(5,045
)
 
(2,973
)
 
(9,209
)
 
(8,713
)
 
$
(18,649
)
 
$
(12,140
)
 
$
(42,690
)
 
$
(47,798
)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Depreciation and Amortization Expense
 
 
 
 
 
 
 
U.S. and Canada
$
2,625

 
$
2,886

 
$
5,312

 
$
5,302

International
566

 
993

 
1,016

 
1,574

Halloween
1,048

 
453

 
1,145

 
552

 
$
4,239

 
$
4,332

 
$
7,473

 
$
7,428

 
June 30,
2019
 
December 31,
2018
Assets
 
 
 
U.S. and Canada
$
200,748

 
$
223,877

International
82,876

 
108,669

Halloween
45,120

 
10,295

 
$
328,744

 
$
342,841


10


JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2019


The following tables present information about the Company by geographic area as of June 30, 2019 and December 31, 2018 and for the three and six months ended June 30, 2019 and 2018 (in thousands):
 
June 30,
2019
 
December 31,
2018
Long-lived Assets
 
 
 
China
$
16,758

 
$
15,825

United States
4,121

 
4,920

Hong Kong
228

 
157

 
$
21,107

 
$
20,902

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Net Sales by Customer Area
 
 
 
 
 
 
 
United States
$
82,409

 
$
79,673

 
$
139,967

 
$
151,046

Europe
6,546

 
15,307

 
13,737

 
23,936

Canada
2,182

 
3,811

 
4,742

 
7,572

Hong Kong
937

 
300

 
1,192

 
527

Other
3,108

 
6,690

 
6,370

 
15,704

 
$
95,182

 
$
105,781

 
$
166,008

 
$
198,785

Major Customers
Net sales to major customers for the three and six months ended June 30, 2019 and 2018 were as follows (in thousands, except for percentages):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
Amount
 
Percentage
of Net Sales
 
Amount
 
Percentage
of Net Sales
 
Amount
 
Percentage
of Net Sales
 
Amount
 
Percentage
of Net Sales
Wal-Mart
$
29,709

 
31.2
%
 
$
18,454

 
17.4
%
 
$
51,818

 
31.2
%
 
$
43,211

 
21.7
%
Target
14,016

 
14.7

 
21,532

 
20.4

 
26,195

 
15.8

 
36,844

 
18.5

 
$
43,725

 
45.9
%
 
$
39,986

 
37.8
%
 
$
78,013

 
47.0
%
 
$
80,055

 
40.2
%
No other customer accounted for more than 10% of the Company's total net sales.
As of June 30, 2019 and December 31, 2018, the Company’s three largest customers accounted for approximately 68.1% and 61.4%, respectively, of the Company’s gross accounts receivable. The concentration of the Company’s business with a relatively small number of customers may expose the Company to material adverse effects if one or more of its large customers were to experience financial difficulty. The Company performs ongoing credit evaluations of its top customers and maintains an allowance for potential credit losses. For the six months ended June 30, 2018, the Company recorded bad debt expense of $12.5 million primarily due to the bankruptcy and liquidation of Toys “R” Us.


11


JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2019


Note 3 — Inventory
Inventory, which includes the ex-factory cost of goods, in-bound freight, duty and capitalized warehouse costs, is valued at the lower of cost (first-in, first-out) or net realizable value, net of inventory obsolescence reserve, and consists of the following (in thousands):
 
June 30,
2019
 
December 31,
2018
Raw materials
$
288

 
$
311

Finished goods
53,233

 
53,569

 
$
53,521

 
$
53,880

Note 4 — Revenue Recognition and Reserve for Sales Returns and Allowances
The Company’s contracts with customers only include one performance obligation (i.e., sale of the Company’s products). Revenue is recognized in the gross amount at a point in time when delivery is completed and control of the promised goods is transferred to the customers. Revenue is measured as the amount of consideration the Company expects to be entitled to in exchange for those goods. The Company’s contracts do not involve financing elements as payment terms with customers are less than one year. Further, because revenue is recognized at the point in time goods are sold to customers, there are no contract assets or contract liability balances.
The Company disaggregates its revenues from contracts with customers by reporting segment: U.S. and Canada, International, and Halloween. The Company further disaggregates revenues by major geographic region. See Note 2, Business Segments, Geographic Data, and Sales by Major Customers, for further information.
The Company offers various discounts, pricing concessions, and other allowances to customers, all of which are considered in determining the transaction price. Certain discounts and allowances are fixed and determinable at the time of sale and are recorded at the time of sale as a reduction to revenue. Other discounts and allowances can vary and are determined at management’s discretion (variable consideration). Specifically, the Company occasionally grants discretionary credits to facilitate markdowns and sales of slow moving merchandise, and consequently accrues an allowance based on historic credits and management estimates. Further, while the Company generally does not allow product returns, the Company does make occasional exceptions to this policy, and consequently records a sales return allowance based upon historic return amounts and management estimates. These allowances (variable consideration) are estimated using the expected value method and are recorded at the time of sale as a reduction to revenue. The Company adjusts its estimate of variable consideration at least quarterly or when facts and circumstances used in the estimation process may change. The variable consideration is not constrained as the Company has sufficient history on the related estimates and does not believe there is a risk of significant revenue reversal.
The Company also participates in cooperative advertising arrangements with some customers, whereby it allows a discount from invoiced product amounts in exchange for customer purchased advertising that features the Company’s products. Generally, these allowances range from 1% to 20% of gross sales, and are generally based upon product purchases or specific advertising campaigns. Such allowances are accrued when the related revenue is recognized. 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 the Company’s obligation to transfer the products and therefore are recorded as direct selling expenses, as incurred.
The Company’s reserve for sales returns and allowances amounted to $24.5 million as of June 30, 2019, compared to $29.4 million as of December 31, 2018.

12


JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2019


Note 5 — Credit Facilities
Wells Fargo
In March 2014, the Company and its domestic subsidiaries entered into a secured credit facility with General Electric Capital Corporation (“GECC”). The credit facility, as amended and subsequently assigned to Wells Fargo Bank, N.A. (“Wells Fargo”) pursuant to its acquisition of GECC, provides for a $75.0 million revolving credit facility subject to availability based on prescribed advance rates on certain domestic accounts receivable and inventory amounts used to compute the borrowing base (the “Credit Facility”). The Credit Facility includes a sub-limit of up to $35.0 million for the issuance of letters of credit. The amounts outstanding under the Credit Facility, as amended, were payable in full upon maturity of the facility on September 27, 2019, except that the Credit Facility would mature on June 15, 2018 if the Company did not refinance or extend the maturity of the convertible senior notes that mature in 2018, provided that any such refinancing or extension shall have a maturity date that is no sooner than six months after the stated maturity of the Credit Facility (i.e., on or about September 27, 2019). On June 14, 2018, the Company entered into a Term Loan Agreement with Great American Capital Partners to provide the necessary capital to refinance the 2018 convertible senior notes (see additional details regarding the Term Loan Agreement below). In addition, on June 14, 2018, the Company revised certain of the Credit Facility documents (and entered into new ones) so that certain of its Hong Kong based subsidiaries became additional parties to the Credit Facility. As a result, the receivables of these subsidiaries can now be included in the borrowing base computation, subject to certain limitations, thereby effectively increasing the amount of funds the Company can borrow under the Credit Facility. Any additional borrowings under the Credit Facility will be used for general working capital purposes.

The Credit Facility is secured by a security interest in favor of Wells Fargo covering a substantial amount of the consolidated assets and a pledge of the majority of the capital stock of various of the Company’s subsidiaries. As of June 30, 2019, there were no outstanding borrowings and the amount of outstanding stand-by letters of credit totaled $9.5 million; the total excess borrowing capacity was $19.3 million. As of December 31, 2018, the amount of outstanding borrowings was $7.5 million and outstanding stand-by letters of credit totaled $12.8 million; the total excess borrowing capacity was $40.7 million. In July 2019, the Company borrowed $5.0 million under the Credit Facility.
 
The Company’s ability to borrow under the Credit Facility is also subject to its ongoing compliance with certain financial covenants, including the maintenance by the Company of a fixed charge coverage ratio of at least 1.25:1.0 based on the trailing four fiscal quarters in the event minimum excess availability of $10.0 million under the Credit Facility is not maintained. As of June 30, 2019 and December 31, 2018, the Company was in compliance with the financial covenants under the Credit Facility.

The Company may borrow funds at LIBOR or at a Base Rate, plus applicable margins of 225 basis point spread over LIBOR and 125 basis point spread on Base Rate loans. The Base Rate is the highest of (i) the Federal Funds Rate plus a margin of 0.50%, (ii) the rate last quoted by The Wall Street Journal as the “Prime Rate,” or (iii) the sum of a LIBOR rate plus 1.00%. In addition to standard fees, the Credit Facility has an unused credit line fee, which ranges from 25 to 50 basis points. As of June 30, 2019 and December 31 2018, the weighted average interest rate on the Credit Facility was approximately 4.77% and 5.53%, respectively.

The Credit Facility also contains customary events of default, including a cross default provision and a change of control provision. In the event of a default, all of the obligations of the Company and its subsidiaries under the Credit Facility may be declared immediately due and payable. For certain events of default relating to insolvency and receivership, all outstanding obligations become due and payable.

In August 2019, in connection with the Recapitalization transaction (See Note 19 - Subsequent Event), the Company entered into an amended and extended revolving credit facility with Wells Fargo, which includes, among other changes, a revised revolving credit facility limit of $60.0 million and an extended maturity date to August 2022.

13


JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2019


Great American Capital Partners

On June 14, 2018, the Company entered into a Term Loan Agreement, Term Note, Guaranty and Security Agreement and other ancillary documents and agreements (the “Term Loan”) with Great American Capital Partners Finance Co., LLC (“GACP”), for itself as a Lender (as defined below) and as the Agent (in such capacity, “Agent”) for the Lenders from time to time party to the Term Loan (collectively, “Lenders”) and the other “Secured Parties” under and as defined therein, with respect to the issuance to the Company by Lenders of a $20.0 million term loan. To secure the Company’s obligations under the Term Loan, the Company granted to Agent, for the benefit of the Secured Parties, a security interest in a substantial amount of the Company’s consolidated assets and a pledge of the majority of the capital stock of various of its subsidiaries. The Term Loan is a secured obligation, second only to the Credit Facility with Wells Fargo, except with respect to certain of the Company’s inventory in which GACP has a priority secured position. The Company may use the funds from the Term Loan to repurchase or retire its outstanding convertible senior notes due August 2018, for working capital, capital expenditures and other general corporate purposes, subject to certain negative covenants set forth in the Term Loan.

The Term Loan requires the repayment of principal in the amount of 10% of the outstanding Term Loan per year (payable monthly) beginning after the first anniversary. All then-outstanding borrowings under the Term Loan are due, and the Term Loan terminates, no later than June 14, 2021, unless sooner terminated in accordance with its terms, which includes the date of termination of the Wells Fargo Credit Facility and the date that is 91 days prior to the maturity of the Company’s various convertible senior notes due in 2020 (see Note 6). The Company is permitted, and may be required under certain circumstances as set forth in the Term Loan documents, to prepay the Term Loan, which would require a prepayment fee (i) in year one of up to any unearned and unpaid interest that would have become due and payable in year one had the prepayment not occurred plus 2% of the initial amount of the Term Loan (i.e., $20.0 million), (ii) in year two of 2% of the initial amount of the Term Loan and (iii) in year three of 1% of the initial amount of the Term Loan.

The Company’s ability to continue to borrow the initial Term Loan amount of $20.0 million is based on certain accounts receivable and inventory amounts used to compute the borrowing base. In the event the Term Loan balance exceeds the borrowing base computation, the shortfall would be (i) applied to any excess availability under the Wells Fargo Credit Facility or (ii) prepaid. Similar to the Wells Fargo Credit Facility, the Company is subject to ongoing compliance with certain financial covenants, including the maintenance by the Company of a fixed charge coverage ratio of at least 1.25:1.0 based on the trailing four fiscal quarters in the event minimum excess availability of $10.0 million under the Wells Fargo Credit Facility is not maintained. The Company must also maintain a minimum amount of liquidity, as defined in the Term Loan, of $10.0 million. As of June 30, 2019 and December 31, 2018, the Company was in compliance with the financial covenants under the Term Loan.

The Term Loan is accelerated and becomes immediately due and payable (and the Term Loan terminates) in the event of a default under the Term Loan which includes, among other things, breach of certain covenants or representations contained in the Term Loan documents, defaults under other loans or obligations, involvement in bankruptcy proceedings or an occurrence of a change of control (as such terms are defined in the Term Loan). The Term Loan Documents also contain negative covenants which, during the life of the Term Loan, prohibit and/or limit the Company from, among other things, incurring certain types of other debt, acquiring other companies, making certain expenditures or investments and changing the character of its business.

As of June 30, 2019 and December 31, 2018, the amount outstanding under the Term Loan was $19.8 million and $20.0 million, respectively. Borrowings under the Term Loan accrue interest at LIBOR plus 9.00% per annum. As of June 30, 2019 and December 31, 2018, the weighted average interest rate on the Term Loan was approximately 11.5% and 11.1%, respectively.

Amortization expense classified as interest expense related to the $1.3 million debt issuance costs associated with the transactions that closed on June 14, 2018 (i.e., the amendment of the Wells Fargo Credit Facility and the GACP Term Loan) was nil and $0.4 million for the three and six months ended June 30, 2019 and $0.1 million for the three and six months ended June 30, 2018.


14


JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2019


In August 2019, in connection with the Recapitalization transaction (See Note 19 - Subsequent Event), the Term Loan with a principal amount outstanding as of June 30, 2019 of $19.8 million has been paid in full and refinanced with new secured term debt with a face amount of approximately $30.0 million that matures in February 2023. As a result, the Term Loan is reflected as a long term liability on the accompanying condensed consolidated balance sheet at June 30, 2019.

Note 6 — Convertible Senior Notes
Convertible senior notes consist of the following (in thousands):
 
June 30, 2019
 
December 31, 2018
 
Principal/
Fair Value
Amount
 
Debt
Issuance
Costs
 
Net
Amount
 
Principal/
Fair Value
Amount
 
Debt
Issuance
Costs
 
Net
Amount
4.875% convertible senior notes (due 2020)
$
113,000

 
$
788

 
$
112,212

 
$
113,000

 
$
1,182

 
$
111,818

3.25% convertible senior notes (due 2020) *
30,503

 

 
30,503

 
27,974

 

 
27,974

Total convertible senior notes, net of debt issuance costs
$
143,503

 
$
788

 
$
142,715

 
$
140,974

 
$
1,182

 
$
139,792

* The amount presented for the 3.25% 2020 convertible senior notes within the table represents the fair value as of June 30, 2019 and December 31, 2018 (see Note 16). The principal amount of these notes totals $29.5 million as of June 30, 2019 and December 31, 2018.
Amortization expense classified as interest expense related to debt issuance costs was $0.2 million and $0.2 million for the three months ended June 30, 2019 and 2018, respectively, and $0.4 million and $0.5 million for the six months ended June 30, 2019 and 2018.
In July 2013, the Company sold an aggregate of $100.0 million principal amount of 4.25% convertible senior notes due 2018 (the “2018 Notes”). The 2018 Notes, which were senior unsecured obligations of the Company, paid interest semi-annually in arrears on August 1 and February 1 of each year at a rate of 4.25% per annum and matured on August 1, 2018. The initial conversion rate for the 2018 Notes was 114.3674 shares of the Company’s common stock per $1,000 principal amount of notes, equivalent to an initial conversion price of approximately $8.74 per share of common stock, subject to adjustment in certain events. In 2016, the Company repurchased and retired an aggregate of approximately $6.1 million principal amount of the 2018 Notes. In addition, approximately $0.1 million of the unamortized debt issuance costs were written off and a nominal gain was recognized in conjunction with the retirement of the 2018 Notes. During the first quarter of 2017, the Company exchanged and retired $39.1 million principal amount of the 2018 Notes at par for $24.1 million in cash and approximately 2.9 million shares of its common stock. During the second quarter of 2017, the Company exchanged and retired $12.0 million principal amount of the 2018 Notes at par for $11.6 million in cash and 112,400 shares of its common stock, and approximately $0.1 million of the unamortized debt issuance costs were written off and a $0.1 million gain was recognized in conjunction with the exchange and retirement of the 2018 Notes.

15


JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2019


In August 2017, the Company agreed with Oasis Management and Oasis Investments II Master Fund Ltd., (collectively, “Oasis”) the holder of approximately $21.5 million face amount of its 4.25% convertible senior notes due in 2018, to extend the maturity date of these notes to November 1, 2020. In addition, the interest rate was reduced to 3.25% per annum and the conversion rate was increased to 328.0302 shares of the Company’s common stock per $1,000 principal amount of notes, among other things. After execution of a definitive agreement for the modification and final approval by the other members of the Company’s Board of Directors and Oasis’ Investment Committee the transaction closed on November 7, 2017. In connection with this transaction, the Company recognized a loss on extinguishment of the debt of approximately $0.6 million. On July 26, 2018, the Company closed a transaction with Oasis to exchange $8.0 million face amount of the 4.25% convertible senior notes due in August 2018 with convertible senior notes similar to those issued to Oasis in November 2017. The new notes mature on November 1, 2020, accrue interest at an annual rate of 3.25% and are convertible into shares of the Company’s common stock at an initial rate of 322.2688 shares per $1,000 principal amount of the new notes. In connection with this transaction, the Company recognized a loss on extinguishment of the debt of approximately $0.5 million. The conversion price for the 3.25% convertible senior notes was reset on November 1, 2018 and will be reset on November 1, 2019 (each, a “reset date”) to a price equal to 105% above the 5-day Volume Weighted Average Price ("VWAP") preceding the reset date; provided, however, among other reset restrictions, that if the conversion price resulting from such reset is lower than 90 percent of the average VWAP during the 90 calendar days preceding the reset date, then the reset price shall be the 30-day VWAP preceding the reset date. The conversion price of the 3.25% 2020 Notes reset on November 1, 2018 to $2.54 per share and the conversion rate was increased to 393.7008 shares of the Company's common stock per $1,000 principal amount of notes.
The remaining $13.2 million of 2018 Notes were redeemed at par at maturity on August 1, 2018.
The Company has elected to measure and present the debt held by Oasis at fair value using Level 3 inputs and as a result, recognized a loss of $0.1 million and $2.4 million for the three months ended June 30, 2019 and 2018, respectively, related to changes in the fair value of the 3.25% 2020 Notes. At June 30, 2019 and December 31, 2018, the 3.25% 2020 Notes had a fair value of approximately $30.5 million and $28.0 million, respectively. The Company evaluated its credit risk as of June 30, 2019, and determined that there was no change from December 31, 2018.
In June 2014, the Company sold an aggregate of $115.0 million principal amount of 4.875% convertible senior notes due 2020 (the “2020 Notes”). The 2020 Notes are senior unsecured obligations of the Company paying interest semi-annually in arrears on June 1 and December 1 of each year at a rate of 4.875% per annum and will mature on June 1, 2020. The initial and still current conversion rate for the 2020 Notes is 103.7613 shares of the Company’s common stock per $1,000 principal amount of notes, equivalent to an initial conversion price of approximately $9.64 per share of common stock, subject to adjustment in certain events. Upon conversion, the 2020 Notes will be settled in shares of the Company’s common stock. Holders of the 2020 Notes may require that the Company repurchase for cash all or some of their notes upon the occurrence of a fundamental change (as defined in the 2020 Notes). In January 2016, the Company repurchased and retired an aggregate of $2.0 million principal amount of the 2020 Notes. In addition, approximately $0.1 million of the unamortized debt issuance costs were written off and a $0.1 million gain was recognized in conjunction with the retirement of the 2020 Notes.
The fair value of the 4.875% convertible senior notes payable due 2020 as of June 30, 2019 and December 31, 2018 was $102.5 million and $93.2 million, respectively, based upon the most recent quoted market prices. The fair values of the convertible senior notes are considered to be Level 3 measurements on the fair value hierarchy.
    
In August 2019, in connection with the Recapitalization transaction (See Note 19 - Subsequent Event), 2020 Notes outstanding with a face amount of $111.1 million of the total $113.0 million outstanding at June 30, 2019 were refinanced to extend the maturity date. Of the refinanced amount, $103.8 million were refinanced with the issuance of new secured term debt that matures in February 2023. The remaining refinanced amount of $7.3 million was exchanged into similar convertible senior notes previously issued to Oasis with a total face amount of $29.5 million with an original maturity of November 2020. The convertible senior notes issued to Oasis were amended to, among other things, extend the maturity date to the earlier of (i) 91 days after the repayment in full of the newly issued secured term debt that matures in February 2023 or (ii) July 2023. As a result, the refinanced portion of $111.1 million is reflected as a long term liability on the accompanying condensed consolidated balance sheet at June 30, 2019.

16


JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2019


Note 7 — Income Taxes

The Company’s income tax expense of $0.6 million for the three months ended June 30, 2019 reflects an effective tax rate of (2.7)%. The Company’s income tax expense of $2.1 million for the three months ended June 30, 2018 reflects an effective tax rate of (12.7)%. The majority of the tax expense for the three months ended June 30, 2019 relates to foreign income taxes and discrete items. The majority of the tax expense for the three months ended June 30, 2018 relates to foreign income taxes partially offset by discrete items.

The Company’s income tax expense of $0.3 million for the six months ended June 30, 2019 reflects an effective tax rate of (0.7)%. The Company’s income tax benefit of $0.2 million for the six months ended June 30, 2018 reflects an effective tax rate of 0.4%. The majority of the tax expense for the six months ended June 30, 2019 relates to foreign income taxes and discrete items. The majority of the tax benefit for the six months ended June 30, 2018 relates to favorable discrete items and foreign income tax benefit.
Note 8 — Loss Per Share
The following table is a reconciliation of the weighted average shares used in the computation of loss per share for the periods presented (in thousands, except per share data):
 
 
Three Months Ended June 30,
 
 
2019
 
2018
 
 
Loss
 
Weighted
Average
Shares
 
Per-
Share
 
Loss
 
Weighted
Average
Shares
 
Per-
Share
Loss per share - basic and diluted
 
 
 
 
 
 
 
 
 
 
 
 
Net loss available to common stockholders
 
$
(22,542
)
 
23,600

 
$
(0.96
)
 
$
(18,559
)
 
23,106

 
$
(0.80
)

 
 
Six Months Ended June 30,
 
 
2019
 
2018
 
 
Loss
 
Weighted
Average
Shares
 
Per-
Share
 
Loss
 
Weighted
Average
Shares
 
Per-
Share
Loss per share - basic and diluted
 
 
 
 
 
 
 
 
 
 
 
 
Net loss available to common stockholders
 
$
(51,700
)
 
23,578

 
$
(2.19
)
 
$
(54,803
)
 
23,103

 
$
(2.37
)
Basic loss per share is calculated using the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated using the weighted average number of common shares and common share equivalents outstanding during the period (which consist of warrants, options, restricted stock awards, restricted stock units and convertible debt to the extent they are dilutive). The weighted average number of common shares outstanding excludes 3,112,840 shares repurchased pursuant to a prepaid forward share repurchase agreement associated with the issuance of the convertible senior notes due 2020. Common share equivalents that could potentially dilute basic earnings per share in the future, which were excluded from the computation of diluted earnings per share due to being anti-dilutive, totaled 27,675,542 for the three and six months ended June 30, 2019. Common share equivalents that could potentially dilute basic earnings per share in the future, which were excluded from the computation of diluted earnings per share due to being anti-dilutive, totaled 25,268,205 for the three and six months ended June 30, 2018.


17


JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2019


Note 9 — Common Stock and Preferred Stock
In January 2018, the Company issued an aggregate of 1,914,894 shares of restricted stock at a value of approximately $4.5 million to two executive officers, which vest, subject to certain company financial performance criteria and market conditions, over a 3 years period. In addition, an aggregate of 249,480 shares of restricted stock at an aggregate value of approximately $0.6 million were issued to its six non-employee directors, which vested in January 2019.

During 2018, an executive officer surrendered an aggregate of 42,346 shares of restricted stock for $98,000 to cover income taxes due on the vesting of restricted shares.

In January 2019, the Company was obligated to issue an aggregate of 3,061,224 shares of restricted stock at a value of approximately $4.5 million to two executive officers pursuant to the applicable employment contracts. The shares were not issued at that time due to insufficient shares available in the 2002 Stock Award and Incentive Plan. Such shares were subsequently approved by the Company's shareholders and issued in July 2019. In addition, an aggregate of 328,230 shares of restricted stock at an aggregate value of approximately $0.5 million were issued to its six non-employee directors, which will vest in January 2020.

During the first quarter of 2019, two executive officers surrendered an aggregate of 143,913 shares of restricted stock for approximately $215,000 to cover income taxes due on the vesting of restricted shares.

During the second quarter of 2019, an executive officer surrendered an aggregate of 24,281 shares of restricted stock for approximately $25,000 to cover income taxes due on the vesting of restricted stock units.
All issuances of common stock, including those issued pursuant to stock option and warrant exercises, restricted stock grants and acquisitions, are issued from the Company’s authorized but not issued and outstanding shares.
No dividend was declared or paid in the three and six months ended June 30, 2019 or 2018.
Note 10 — Joint Ventures
The Company owns a fifty percent interest in a joint venture (“Pacific Animation Partners”) with the U.S. entertainment subsidiary of a leading Japanese advertising and animation production company. The joint venture was created to develop and produce a boys’ animated television show, which it licensed worldwide for television broadcast as well as consumer products. The Company produced toys based upon the television program under a license from the joint venture which also licensed certain other merchandising rights to third parties. The joint venture completed and delivered 65 episodes of the show, which began airing in February 2012, and has since ceased production of the television show. For the three and six months ended June 30, 2019, the Company recognized income from the joint venture of nil. For the three and six months ended June 30, 2018, the Company recognized income from the joint venture of nil and $22,000, respectively.
As of June 30, 2019 and December 31, 2018, the balance of the investment in the Pacific Animation Partners joint venture is nil.
In September 2012, the Company entered into a joint venture (“DreamPlay Toys”) with NantWorks LLC (“NantWorks”) in which it owns a fifty percent interest. Pursuant to the operating agreement of DreamPlay Toys, the Company paid to NantWorks cash in the amount of $8.0 million and issued NantWorks a warrant to purchase 1.5 million shares of the Company’s common stock at a value of $7.0 million in exchange for the exclusive right to arrange for the provision of the NantWorks recognition technology platform for toy products. The Company had classified these rights as an intangible asset, which was being amortized over the anticipated revenue stream from the exploitation of these rights. However, the Company has abandoned the use of the technology in connection with its toy products and no future sales are anticipated, and the Company recorded an impairment charge to income of $2.9 million to write off the remaining unamortized technology rights during the third quarter of 2017. The Company retains the financial risk of the joint venture and is responsible for the day-to-day operations, which are expected to be nominal in future periods. The results of operations of the joint venture are consolidated with the Company’s results.

18


JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2019


In addition, in 2012, the Company invested $7.0 million in cash in exchange for a five percent economic interest in a related entity, DreamPlay, LLC, that was expected to monetize the exploitation of the recognition technologies in non-toy consumer product categories. Adoption of the technology has been inadequate to establish a commercially viable market for the technology. NantWorks has the right to repurchase the Company’s interest for $7.0 million, but the Company does not anticipate that NantWorks will do so. As of September 30, 2017, the Company determined the value of this investment will not be realized and that full impairment of the value had occurred. Accordingly, the Company recorded an impairment charge of $7.0 million during the quarter ended September 30, 2017.
In November 2014, the Company entered into a joint venture with Meisheng Culture & Creative Corp., for the purpose of providing certain JAKKS licensed and non-licensed toys and consumer products to agreed-upon territories of the People’s Republic of China. The joint venture includes a subsidiary in the Shanghai Free Trade Zone that sells, distributes and markets these products, which include dolls, plush, role play products, action figures, costumes, seasonal items, technology and app-enhanced toys, based on entertainment licenses and JAKKS’ own proprietary brands. The Company owns fifty-one percent of the joint venture and consolidates the joint venture since control rests with the Company. The non-controlling interest’s share of the income (loss) was $57,000 and ($29,000) for the three months ended June 30, 2019 and 2018, respectively, and $88,000 and $22,000 for the six months ended June 30, 2019 and 2018, respectively.
In October 2016, the Company entered into a joint venture with Hong Kong Meisheng Cultural Company Limited ("Meisheng"), a Hong Kong-based subsidiary of Meisheng Culture & Creative Corp., for the purpose of creating and developing original, multiplatform content for children including new short-form series and original shows. JAKKS and Meisheng each own fifty percent of the joint venture and will jointly own the content. JAKKS will retain merchandising rights for kids’ consumer products in all markets except China, which Meisheng Culture & Creative Corp. will oversee through the Company’s existing distribution joint venture. The results of operations of the joint venture are consolidated with the Company's results. The non-controlling interest’s share of the income from the joint venture for the three and six months ended June 30, 2019 and 2018 was nil. As of June 30, 2019, Meisheng beneficially owns more than 10% of the Company’s outstanding common stock.

Meisheng also serves as a significant manufacturer of the Company. For the three and six months ended June 30, 2019, the Company made inventory-related payments to Meisheng of approximately $23.0 million and $25.2 million, respectively. For the three and six months ended June 30, 2018, the Company made inventory-related payments to Meisheng of approximately $12.1 million and $14.1 million, respectively. As of June 30, 2019 and 2018, amounts due Meisheng for inventory received by the Company, but not paid totaled $18.8 million and $13.0 million, respectively.
Note 11 — Goodwill
The Company applies a fair value-based impairment test to the carrying value of goodwill and indefinite-lived intangible assets on an annual basis and, on an interim basis, if certain events or circumstances indicate that an impairment loss may have been incurred. Goodwill impairment exists when the estimated fair value of goodwill is less than its carrying value. Based on the Company's April 1 annual assessment, it determined that the fair values of its reporting units were not less than the carrying amounts. No goodwill impairment was determined to have occurred for the six months ended June 30, 2019.


19


JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2019


Note 12 — Intangible Assets Other Than Goodwill
Intangible assets other than goodwill consist primarily of licenses, product lines, customer relationships and trademarks. Amortized intangible assets are included in intangibles in the accompanying condensed consolidated balance sheets. Trademarks are disclosed separately in the accompanying condensed consolidated balance sheets. Intangible assets as of June 30, 2019 and December 31, 2018 include the following (in thousands, except for weighted useful lives):
 
 
 
June 30, 2019
 
December 31, 2018
 
Weighted
Useful
Lives
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Amount
 
(Years)
 
 
 
 
 
 
 
 
 
 
 
 
Amortized Intangible Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Licenses
5.81
 
$
20,130

 
$
(19,694
)
 
$
436

 
$
20,130

 
$
(19,383
)
 
$
747

Product lines
10.36
 
33,858

 
(19,363
)
 
14,495

 
33,858

 
(17,293
)
 
16,565

Customer relationships
4.90
 
3,152

 
(3,152
)
 

 
3,152

 
(3,152
)
 

Trade names
5.00
 
3,000

 
(3,000
)
 

 
3,000

 
(3,000
)
 

Non-compete agreements
5.00
 
200

 
(200
)
 

 
200

 
(200
)
 

Total amortized intangible assets
 
 
$
60,340

 
$
(45,409
)
 
$
14,931

 
$
60,340

 
$
(43,028
)
 
$
17,312

Unamortized Intangible Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Trademarks
 
 
$
300

 
$

 
$
300

 
$
300

 
$

 
$
300

Note 13 — Comprehensive Loss
The table below presents the components of the Company’s comprehensive loss for the three and six months ended June 30, 2019 and 2018 (in thousands):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Net Loss
$
(22,485
)
 
$
(18,588
)
 
$
(51,612
)
 
$
(54,781
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustment
(450
)
 
(1,390
)
 
853

 
(340
)
Comprehensive loss
(22,935
)
 
(19,978
)
 
(50,759
)
 
(55,121
)
Less: Comprehensive income (loss) attributable to non-controlling interests
57

 
(29
)
 
88

 
22

Comprehensive loss attributable to JAKKS Pacific, Inc.
$
(22,992
)
 
$
(19,949
)
 
$
(50,847
)
 
$
(55,143
)
Note 14 — Litigation and Contingencies
The Company is a party to, and certain of its property is the subject of, various pending claims and legal proceedings that routinely arise in the ordinary course of its business. The Company accrues for losses when the loss is deemed probable and the liability can reasonably be estimated. Where a liability is probable and there is a range of estimated loss with no best estimate in the range, the Company records the minimum estimated liability related to the claim. As additional information becomes available, the Company assesses the potential liability related to its pending litigation and revises its estimates. 

20


JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2019


In the normal course of business, the Company may provide certain indemnifications and/or other commitments of varying scope to a) its licensors, customers and certain other parties, including against third party claims of intellectual property infringement, and b) its officers, directors and employees, including against third party claims regarding the periods in which they serve in such capacities with the Company. The duration and amount of such obligations is, in certain cases, indefinite. The Company's director’s and officer’s liability insurance policy may, however, enable it to recover a portion of any future payments related to its officer, director or employee indemnifications. For the past five years, costs related to director and officer indemnifications have not been significant. Other than certain liabilities recorded in the normal course of business related to royalty payments due the Company's licensors, no liabilities have been recorded for indemnifications and/or other commitments.
Note 15 — Share-Based Payments
The Company’s 2002 Stock Award and Incentive Plan (the “Plan”), as amended, provides for the awarding of stock options, restricted stock and restricted stock units to certain key employees, executive officers and non-employee directors. Current awards under the Plan include grants to directors, executive officers and certain key employees of restricted stock awards and units, with vesting contingent upon (a) the completion of specified service periods ranging from one to five years and/or (b) meeting certain financial performance and/or market-based metrics. Unlike the restricted stock awards, the shares for the restricted stock units are not issued until they vest. The Plan is more fully described in Notes 15 and 17 to the Consolidated Financial Statements in the Company’s 2018 Annual Report on Form 10-K.
The following table summarizes the total share-based compensation expense recognized for the three and six months ended June 30, 2019 and 2018 (in thousands):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Share-based compensation expense
$
397

 
$
313

 
$
1,015

 
$
987

Restricted Stock Awards
Restricted stock award activity (including those with performance-based vesting criteria) for the six months ended June 30, 2019 is summarized as follows:
 
Restricted Stock Awards
 
Number of Shares
 
Weighted Average
Grant Date Fair Value
Outstanding, December 31, 2018
2,950,782

 
$
2.41

Awarded
328,230

 
1.47

Released
(528,348
)
 
2.81

Forfeited

 

Outstanding, June 30, 2019
2,750,664

 
2.22

As of June 30, 2019, there was $2.3 million of total unrecognized compensation cost related to non-vested restricted stock awards, which is expected to be recognized over a weighted-average period of 1.87 years.

21


JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2019


Restricted Stock Units
Restricted stock unit activity (including those with performance-based vesting criteria) for the six months ended June 30, 2019 is summarized as follows:
 
Restricted Stock Units
 
Number of Shares
 
Weighted Average
Grant Date Fair Value
Outstanding, December 31, 2018
1,052,166

 
$
3.72

Awarded
742,574

 
0.81

Released
(161,486
)
 
3.80

Forfeited
(65,166
)
 
4.51

Outstanding, June 30, 2019
1,568,088

 
2.30

As of June 30, 2019, there was $1.6 million of total unrecognized compensation cost related to non-vested restricted stock units, which is expected to be recognized over a weighted-average period of 1.78 years.
Note 16 — Fair Value Measurements
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various methods including market, income and cost approaches. Based upon these approaches, the Company often utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market-corroborated, or unobservable inputs. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based upon observable inputs used in the valuation techniques, the Company is required to provide information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values into three broad levels as follows:
Level 1:
Valuations for assets and liabilities traded in active markets from readily available pricing sources for market transactions involving identical assets or liabilities.
Level 2:
Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third-party pricing services for identical or similar assets or liabilities.
Level 3:
Valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.
In instances where the determination of the fair value measurement is based upon inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based upon the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
The following tables summarize the Company's financial liabilities measured at fair value on a recurring basis as of June 30, 2019 and December 31, 2018 (in thousands):
 
Carrying Amount as of
June 30, 2019
 
Fair Value Measurements
As of June 30, 2019
 
 
Level 1
 
Level 2
 
Level 3
3.25% convertible senior notes due in 2020
$
30,503

 
$

 
$

 
$
30,503


22


JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2019


 
Carrying Amount as of
December 31, 2018
 
Fair Value Measurements
As of December 31, 2018
 
 
Level 1
 
Level 2
 
Level 3
3.25% convertible senior notes due in 2020
$
27,974

 
$

 
$

 
$
27,974

The following table provides a reconciliation of the beginning and ending balances of liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) (in thousands):
 
2019
Balance at January 1, 2019
$
27,974

Change in fair value
2,529

Balance at June 30, 2019
$
30,503

Note 17 — Liquidity
As of June 30, 2019 and December 31, 2018, the Company held cash and cash equivalents, including restricted cash, of $37.0 million and $58.2 million, respectively. Cash, and cash equivalents, including restricted cash held outside of the United States in various foreign subsidiaries totaled $21.8 million and $33.9 million as of June 30, 2019 and December 31, 2018, respectively. The cash and cash equivalents, including restricted cash balances in the Company's foreign subsidiaries have either been fully taxed in the U.S. or tax has been accounted for in connection with the Tax Cuts and Jobs Act, or may be eligible for a full foreign dividends received deduction under such Act, and thus would not be subject to additional U.S. tax should such amounts be repatriated in the form of dividends or deemed distributions. Any such repatriation may result in foreign withholding taxes, which the Company expects would not be significant as of June 30, 2019.The Company’s primary sources of working capital are cash flows from operations and borrowings under its credit facility (see Note 5 - Credit Facilities in the accompanying notes to the condensed consolidated financial statements for additional information).Typically, cash flows from operations are impacted by the effect on sales of (1) the appeal of the Company’s products, (2) the success of its licensed brands, (3) the highly competitive conditions existing in the toy industry, (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 the Company’s ability to generate sufficient cash flows to operate the business. In addition, the Company’s business and liquidity are dependent to a significant degree on its 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 the Company’s 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 the Company’s liquidity.
Cash and cash equivalents, including restricted cash, projected cash flow from operations, and borrowings under the Company’s credit facility, as well as taking into account the August 2019 Recapitalization transaction (See Note 19  - Subsequent Event for further information), should be sufficient to meet working capital and capital expenditure requirements for the next 12 months. The Company’s ability to fund operations and retire debt when due is dependent on a number of factors, some of which are beyond the Company's control and/or inherently difficult to estimate, including the Company's future operating performance and the factors mentioned above, among other risks and uncertainties. To the extent we are unable to fund our operations or retire debt when due, no assurances can be given that the Company will have the financial resources required to obtain, or that the conditions of the capital markets will support, any future debt or equity financings which could have a material adverse impact on the Company’s business, results of operations and financial condition.
As of June 30, 2019, off-balance sheet arrangements include letters of credit issued by Wells Fargo of $9.5 million.

23


JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2019


Note 18 — Leases
The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets and operating lease liabilities in its condensed consolidated balance sheets. The Company does not have any finance leases.
ROU assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit interest rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset also includes any prepaid lease amounts and excludes lease incentives. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that it will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
The Company has lease agreements with lease and non-lease components, which are generally accounted for separately.
The Company has operating leases for corporate offices, warehouses, and certain equipment. The Company’s leases have remaining lease terms of 1 to 8 years, some of which include options to extend the lease for up to 10 years, and some of which include options to terminate the lease within 1 year. As of June 30, 2019, the Company’s weighted average remaining lease term is approximately 4 years and the weighted average discount rate used to calculate the Company’s lease liability is approximately 5.31%. For the three and six months ended June 30, 2019, rent expense under the Company's leases was approximately $3.6 million and $7.0 million, respectively. For the three and six months ended June 30, 2018, rent expense under the Company's leases was approximately $3.3 million and $6.6 million, respectively.

The following table represents a reconciliation of the Company’s undiscounted future minimum lease payments under operating leases to the lease liability as of June 30, 2019 (in thousands):
 
Year ending December 31,
 
2019 (excluding the 6 months ended June 30, 2019)
 
$
5,756

2020
 
10,905

2021
 
10,598

2022
 
9,966

2023
 
5,499

Thereafter
 
773

Total lease payments
 
43,497

Less imputed interest
 
(4,486
)
Total
 
$
39,011

 

24


JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2019


Note 19 — Subsequent Event

As discussed in the Current Report on Form 8-K dated August 9, 2019, the Company entered into and consummated multiple, binding definitive agreements (collectively, the “Recapitalization”) among Wells Fargo Bank, National Association, Oasis Investments II Master Fund Ltd. and an ad hoc group of holders of the 4.875% convertible senior notes due 2020 to recapitalize the Company’s balance sheet, including the extension to the Company of incremental liquidity and three-year extensions of substantially all of the Company’s outstanding convertible debt obligations and revolving credit facility. The Company’s term loan agreement entered into with Great American Capital Partners has been paid in full in connection with the Recapitalization transaction.

25


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of financial condition and results of operations should be read together with our Condensed Consolidated Financial Statements and Notes thereto, which appear elsewhere herein.
Critical Accounting Policies and 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, 2018. 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.
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: U.S. and Canada, International, and Halloween. We further disaggregate revenues by major geographic region.

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.

26



Our reserve for sales returns and allowances amounted to $24.5 million as of June 30, 2019 and $29.4 million as of December 31, 2018.
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.
The following tables summarize our financial liabilities measured at fair value on a recurring basis as of June 30, 2019 and December 31, 2018 (in thousands):
 
Carrying Amount as of
June 30, 2019
 
Fair Value Measurements
As of June 30, 2019
 
 
Level 1
 
Level 2
 
Level 3
3.25% convertible senior notes due in 2020
$
30,503

 
$

 
$

 
$
30,503

 
Carrying Amount as of
December 31, 2018
 
Fair Value Measurements
As of December 31, 2018
 
 
Level 1
 
Level 2
 
Level 3
3.25% convertible senior notes due in 2020
$
27,974

 
$

 
$

 
$
27,974

The following table provides a reconciliation of the beginning and ending balances of liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) (in thousands):
 
2019
Balance at January 1, 2019
$
27,974

Change in fair value
2,529

Balance at June 30, 2019
$
30,503

Our accounts receivable, accounts payable and accrued expenses represent financial instruments. The carrying value of these financial instruments is a reasonable approximation of fair value.

27


In August 2017, we agreed with Oasis Management and Oasis Investments II Master Fund Ltd., (collectively "Oasis") the holder of approximately $21.5 million face amount of our 4.25% convertible senior notes due in 2018 (“2018 Notes”), to exchange and extend the maturity date of these notes to November 1, 2020. In addition, the interest rate was reduced to 3.25% per annum and the conversion rate was increased to 328.0302 shares of our common stock per $1,000 principal amount of notes, among other things. These notes are hereafter referred to as the “3.25% convertible senior notes due in 2020” or “3.25% 2020 Notes.” After execution of a definitive agreement and final approval by the other members of our Board of Directors and Oasis’ Investment Committee, the transaction closed on November 7, 2017. On July 26, 2018, we closed a transaction with Oasis to exchange $8.0 million face amount of the 4.25% convertible senior notes due in August 2018 with convertible senior notes similar to those issued to Oasis in November 2017. The new notes mature on November 1, 2020, accrue interest at an annual rate of 3.25% and are convertible into shares of our common stock at a rate of 322.2688 shares per $1,000 principal amount of the new notes. The conversion price of the 3.25% 2020 notes reset on November 1, 2018 to $2.54 per share and the conversion rate was increased to 393.7008 of our common stock per $1,000 principal amount of notes.

In connection with these transactions, we elected the fair value option of measurement for the 3.25% 2020 Notes under ASC 815 Derivatives and Hedging. As a result, these notes are re-measured each reporting period using Level 3 inputs (Monte Carlo simulation model and inputs for stock price, risk-free rate and volatility), with changes in fair value reflected in current period earnings in our condensed consolidated statements of operations. We evaluated our credit risk as of June 30, 2019, and determined that there was no change from December 31, 2018. At June 30, 2019, the 3.25% 2020 Notes had a fair value of $30.5 million.
The fair value of the 4.875% convertible senior notes payable due 2020 as of June 30, 2019 and December 31, 2018 was $102.5 million and $93.2 million, respectively, based upon the most recent quoted market prices. The fair values of the convertible senior notes are considered to be Level 3 measurements on the fair value hierarchy.
For the six months ended June 30, 2019, there was no impairment to the value of the Company’s non-financial assets.
Goodwill and other indefinite-lived intangible assets. Goodwill and indefinite-lived intangible assets are not amortized, but are tested for impairment at least annually at the reporting unit level.
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.
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. 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. If the implied fair value is more than the book value of the reporting unit, an impairment loss is not indicated. If impairment exists, the fair value of the reporting unit is allocated to all of its assets and liabilities excluding goodwill, with the excess amount representing the fair value of goodwill. An impairment loss is measured as the amount by which the book value of the reporting unit’s goodwill exceeds the estimated fair value of that goodwill. Based on our April 1 annual assessment, we determined the fair values of our reporting units were not less than the carrying amounts. No goodwill impairment was determined to have occurred for the six months ended June 30, 2019.
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.

28


Discrete Items for Income Taxes. The discrete tax expense recorded in the six months ended June 30, 2019 is $0.1 million which is primarily related to excess tax deficiencies fully offset by valuation allowance, return to provision adjustments for foreign jurisdictions, state income taxes, and change in uncertain tax positions. For the comparable period in 2018, a discrete tax benefit was recorded for return to provision adjustments for foreign jurisdictions, change in uncertain tax positions, 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, 2019 and December 31, 2018, our income tax reserves were approximately $1.5 million and $1.5 million, respectively. The $1.5 million balance primarily relates to the potential tax settlements in Hong Kong and adjustments in the area of withholding taxes. Our income tax reserves are included in income taxes 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
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” which supersedes the revenue recognition requirements in ASC 605, (Topic 605), and most industry-specific guidance. Under the new model, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the new standard requires that reporting companies disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers - Deferral of the Effective Date,” which defers the effective date of ASU 2014-09 to annual reporting periods beginning after December 15, 2017, and interim periods therein. In 2016, the FASB issued ASU 2016-08, “Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” ASU 2016-10, “Identifying Performance Obligations and Licensing,” and ASU 2016-12, “Revenue from Contracts with Customers - Narrow-Scope Improvements and Practical Expedients.” Entities have the choice to adopt these updates using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a modified retrospective approach with the cumulative effect of these standards recognized at the date of the adoption.

On January 1, 2018, we adopted the new accounting standard ASC 606, (Topic 606), Revenue from Contracts with Customers and all the related amendments (“new revenue standard”) using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under ASC 605, (Topic 605).


29


There is no impact to our condensed consolidated financial statements resulting from the adoption of Topic 606 as the timing and measurement of revenue remained consistent with Topic 605, although our approach to revenue recognition is now based on the transfer of control. Further, there is no difference in the amounts of the revenue and cost of sales reported in our condensed consolidated statements of operations and comprehensive loss for the three and six months ended June 30, 2019 and 2018 that were recognized pursuant to Topic 606 and those that would have been reported pursuant to Topic 605.

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities,” (“ASU 2016-01”). The new guidance is intended to improve the recognition and measurement of financial instruments. The ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2017. The adoption of this standard did not have an impact on our condensed consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, “Leases.” ASU 2016-02 establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the statement of operations. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. If an entity chooses the second option, the transition requirements for existing leases also apply to leases entered into between the date of initial application and the effective date. The entity must also recast its comparative period financial statements and provide the disclosures required by the new standard for the comparative periods. On January 1, 2019, we adopted the new standard and use the effective date as our date of initial application. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019. The new standard provides a number of optional practical expedients in transition. We elected certain practical expedients, which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. We did not elect the use-of-hindsight or the practical expedient pertaining to land easements; the latter not being applicable to us.

On adoption, we recognized operating lease liabilities of approximately $40.8 million with corresponding ROU assets of $37.6 million based on the present value of the remaining minimum rental payments for existing operating leases. We also derecognized deferred rent liabilities of $4.3 million and prepaid rent of $1.1 million upon the recognition of lease liabilities and ROU assets.

In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory.” The amendments in this ASU reduce the complexity in the accounting standards by allowing the recognition of current and deferred income taxes for an intra-entity asset transfer, other than inventory, when the transfer occurs. Historically, recognition of the income tax consequence was not recognized until the asset was sold to an outside party. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The adoption of this standard did not have an impact on our condensed consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting,” which clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. ASU 2017-09 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The adoption of this standard did not have an impact on our condensed consolidated financial statements.

In January 2018, the FASB issued ASU 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,” which gives entities the option to reclassify to retained earnings the tax effects resulting from the U.S. Tax Cuts and Jobs Act ("The Act") related to items in Accumulated Other Comprehensive Income (“AOCI”) that the FASB refers to as having been stranded in AOCI. The new guidance may be applied retrospectively to each period in which the effect of the Act is recognized in the period of adoption. We could adopt this guidance for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted for periods for which financial statements have not yet been issued or made available for issuance, including the period the Act was enacted. The guidance, when adopted, will require new disclosures regarding a company’s accounting policy for releasing the tax effects in AOCI and permit the company the option to reclassify to retained earnings the tax effects resulting from the Act that are stranded in AOCI. We adopted this guidance on January 1, 2019 and the impact was not material.

30


In March 2018, the FASB issued ASU 2018-03, “Technical Corrections and Improvements to Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,” which made targeted improvements to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years beginning after June 15, 2018. The adoption of this standard did not have an impact on our condensed consolidated financial statements.

In June 2018, the FASB issued ASU 2018-07, “Improvements to Nonemployee Share-Based Payment Accounting,” which supersedes most of the prior accounting guidance on nonemployee share-based payments, and instead aligns it with existing guidance on employee share-based payments in Topic 718. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and early adoption is permitted. The adoption of this standard did not have an impact on our condensed consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, “Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement,” which improves the effectiveness of the disclosures required under ASC 820 and modifies the disclosure requirements on fair value measurements, including the consideration of costs and benefits. The new standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and early adoption is permitted. We are currently evaluating the impact of the pending adoption of this new standard on our condensed consolidated financial statements.

In October 2018, the FASB issued ASU 2018-17, "Consolidation: Targeted Improvements to Related Party Guidance for Variable Interest Entities," which improves the accounting for variable interest entities by considering indirect interests held through related parties under common control for determining whether fees paid to decision makers and service providers are variable interests. This new standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The amendments are required to be applied retrospectively with a cumulative-effect adjustment to retained earnings at the beginning of the earliest period presented. Early adoption is permitted. We are currently evaluating the impact of the pending adoption of this new standard on our 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,
 
2019
 
2018
 
2019
 
2018
Net sales
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of sales
81.4

 
73.6

 
80.7

 
74.4

Gross profit
18.6

 
26.4

 
19.3

 
25.6

Selling, general and administrative expenses
35.6

 
37.6

 
41.6

 
49.4

Restructuring charge

 

 
0.2

 

Acquisition related and other
2.6

 
0.3

 
3.2

 
0.2

Loss from operations
(19.6
)
 
(11.5
)
 
(25.7
)
 
(24.0
)
Income from joint ventures

 
0.3

 

 
0.1

Other income (expense), net
(0.3
)
 

 
(0.1
)
 

Change in fair value of convertible senior notes
(0.1
)
 
(2.3
)
 
(1.5
)
 
(1.7
)
Interest income

 

 

 

Interest expense
(3.0
)
 
(2.1
)
 
(3.6
)
 
(2.1
)
Loss before provision for (benefit from) income taxes
(23.0
)
 
(15.6
)
 
(30.9
)
 
(27.7
)
Provision for (benefit from) income taxes
0.6

 
2.0

 
0.2

 
(0.1
)
Net loss
(23.6
)
 
(17.6
)
 
(31.1
)
 
(27.6
)
Net income (loss) attributable to non-controlling interests
0.1

 

 

 

Net loss attributable to JAKKS Pacific, Inc.
(23.7
)%
 
(17.6
)%
 
(31.1
)%
 
(27.6
)%

31


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,
 
2019
 
2018
 
2019
 
2018
Net Sales
 
 
 
 
 
 
 
U.S. and Canada
$
48,502

 
$
59,381

 
$
105,935

 
$
129,916

International
10,293

 
22,044

 
20,046

 
39,343

Halloween
36,387

 
24,356

 
40,027

 
29,526

 
95,182

 
105,781

 
166,008

 
198,785

Cost of Sales
 

 
 

 
 
 
 
U.S. and Canada
40,271