Company Quick10K Filing
JAKKS Pacific
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$0.00 29 $18
10-Q 2019-11-13 Quarter: 2019-09-30
10-Q 2019-08-09 Quarter: 2019-06-30
10-Q 2019-05-09 Quarter: 2019-03-31
10-K 2019-03-18 Annual: 2018-12-31
10-Q 2018-11-09 Quarter: 2018-09-30
10-Q 2018-08-09 Quarter: 2018-06-30
10-Q 2018-05-10 Quarter: 2018-03-31
10-K 2018-03-16 Annual: 2017-12-31
10-Q 2017-11-09 Quarter: 2017-09-30
10-Q 2017-08-09 Quarter: 2017-06-30
10-Q 2017-05-10 Quarter: 2017-03-31
10-K 2017-03-16 Annual: 2016-12-31
10-Q 2016-11-09 Quarter: 2016-09-30
10-Q 2016-08-09 Quarter: 2016-06-30
10-Q 2016-05-10 Quarter: 2016-03-31
10-K 2016-03-15 Annual: 2015-12-31
10-Q 2015-11-09 Quarter: 2015-09-30
10-Q 2015-08-10 Quarter: 2015-06-30
10-Q 2015-05-11 Quarter: 2015-03-31
10-K 2015-03-16 Annual: 2014-12-31
10-Q 2014-11-10 Quarter: 2014-09-30
10-Q 2014-08-11 Quarter: 2014-06-30
10-Q 2014-05-13 Quarter: 2014-03-31
10-K 2014-03-17 Annual: 2013-12-31
10-Q 2013-11-08 Quarter: 2013-09-30
10-Q 2013-08-08 Quarter: 2013-06-30
10-Q 2013-05-10 Quarter: 2013-03-31
10-K 2013-03-15 Annual: 2012-12-31
10-Q 2012-11-09 Quarter: 2012-09-30
10-Q 2012-08-07 Quarter: 2012-06-30
10-Q 2012-05-10 Quarter: 2012-03-31
10-K 2012-03-15 Annual: 2011-12-31
10-Q 2011-11-09 Quarter: 2011-09-30
10-Q 2011-08-01 Quarter: 2011-06-30
10-Q 2011-05-06 Quarter: 2011-03-31
10-K 2011-03-04 Annual: 2010-12-31
10-Q 2010-11-04 Quarter: 2010-09-30
10-Q 2010-08-06 Quarter: 2010-06-30
10-Q 2010-05-07 Quarter: 2010-03-31
10-K 2010-03-17 Annual: 2009-12-31
8-K 2019-12-26 Officers, Exhibits
8-K 2019-11-15 Enter Agreement, Officers, Shareholder Vote, Exhibits
8-K 2019-11-07 Earnings, Exhibits
8-K 2019-11-07 Officers
8-K 2019-10-17
8-K 2019-09-20 Amend Bylaw, Exhibits
8-K 2019-08-16
8-K 2019-08-09 Regulation FD, Exhibits
8-K 2019-08-09 Earnings, Exhibits
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 2019-06-28 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 2019-02-26 Regulation FD, Exhibits
8-K 2019-02-26 Earnings, Exhibits
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
JAKK 2019-09-30
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 - Debt
Note 6 - Credit Facilities
Note 7 - Income Taxes
Note 8 - Income (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 Income (Loss)
Note 14 - Litigation and Contingencies
Note 15 - Share-Based Payments
Note 16 - Fair Value Measurements
Note 17 - Liquidity
Note 18 - Leases
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-20190930xexx311.htm
EX-31.2 jakk-20190930xexx312.htm
EX-32.1 jakk-20190930xexx321.htm
EX-32.2 jakk-20190930xexx322.htm

JAKKS Pacific Earnings 2019-09-30

JAKK 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Comparables ($MM TTM)
Ticker M Cap Assets Liab Rev G Profit Net Inc EBITDA EV G Margin EV/EBITDA ROA
MIK 1,508 3,707 5,295 5,191 1,978 327 663 4,072 38% 6.1 9%
FNKO 811 716 524 768 288 44 92 1,013 38% 11.0 6%
JOUT 760 446 123 550 243 43 76 611 44% 8.0 10%
CLAR 443 217 49 221 78 11 17 458 35% 27.2 5%
ESCA 157 156 28 205 69 9 17 159 33% 9.3 6%
GPIC 105 80 16 87 27 4 10 93 31% 9.5 5%
NLS 64 193 98 350 143 -82 -71 77 41% -1.1 -42%
BBW 49 299 211 334 140 -17 -0 34 42% -209.4 -6%
JAKK 18 329 327 535 137 -39 -7 144 26% -22.1 -12%
EDNT

10-Q 1 jakk-20190930x10q.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 September 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 35,210,371 as of November 12, 2019.

1


JAKKS PACIFIC, INC. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED SEPTEMBER 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
September 30,
2019
 
December 31,
2018
 
(Unaudited)
Current assets
 
 
 
Cash and cash equivalents
$
71,028

 
$
53,282

Restricted cash
4,862

 
4,923

Accounts receivable, net of allowance for doubtful accounts of $2,413 and $2,149 at September 30, 2019 and December 31, 2018, respectively
200,788

 
122,278

Inventory
65,298

 
53,880

Prepaid expenses and other assets
18,495

 
15,780

Total current assets
360,471

 
250,143

Property and equipment
 
 
 
Office furniture and equipment
11,799

 
11,999

Molds and tooling
109,770

 
108,315

Leasehold improvements
7,215

 
7,735

Total
128,784

 
128,049

Less accumulated depreciation and amortization
111,859

 
107,147

Property and equipment, net
16,925

 
20,902

Operating lease right-of-use assets
34,142

 

Intangible assets, net
13,744

 
17,312

Other long term assets
18,976

 
19,101

Goodwill
35,083

 
35,083

Trademarks
300

 
300

Total assets
$
479,641

 
$
342,841

Liabilities, Preferred Stock and Stockholders' Equity
 
 
 
Current liabilities
 
 
 
Accounts payable
$
136,175

 
$
57,574

Accrued expenses
60,257

 
29,914

Reserve for sales returns and allowances
38,109

 
29,403

Short term operating lease liabilities
9,368

 

Short term debt, net
6,905

 
27,211

Total current liabilities
250,814

 
144,102

Long term operating lease liabilities
27,864

 

Long term debt, net
170,812

 
139,792

Other liabilities
5,036

 
4,409

Income taxes payable
1,465

 
1,458

Deferred income taxes, net
1,431

 
1,431

Total liabilities
457,422

 
291,192

 
 
 
 
Preferred stock
180

 

 
 
 
 
Stockholders' Equity
 
 
 
Common stock, $.001 par value; 100,000,000 shares authorized; 35,210,371 and 29,169,913 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively
36

 
30

Treasury stock, at cost; nil and 3,112,840 shares outstanding as of September 30, 2019 and December 31, 2018, respectively

 
(24,000
)
Additional paid-in capital
199,782

 
218,155

Accumulated deficit
(162,856
)
 
(127,601
)
Accumulated other comprehensive loss
(15,892
)
 
(15,847
)
Total JAKKS Pacific, Inc. stockholders' equity
21,070

 
50,737

Non-controlling interests
969

 
912

Total stockholders' equity
22,039

 
51,649

Total liabilities, preferred stock and stockholders' equity
$
479,641

 
$
342,841

See accompanying notes to condensed consolidated financial statements.

3


JAKKS PACIFIC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share data)
 
Three Months Ended September 30,
(Unaudited)
 
Nine Months Ended September 30,
(Unaudited)
 
2019
 
2018
 
2019
 
2018
Net sales
$
280,130

 
$
236,699

 
$
446,138

 
$
435,484

Cost of sales
199,271

 
172,369

 
333,193

 
320,254

Gross profit
80,859

 
64,330

 
112,945

 
115,230

Selling, general and administrative expenses
44,586

 
44,184

 
113,722

 
142,549

Restructuring charge
24

 

 
294

 

Acquisition related and other
587

 
103

 
5,957

 
436

Income (loss) from operations
35,662

 
20,043

 
(7,028
)
 
(27,755
)
Income from joint ventures

 

 

 
227

Other income (expense), net
36

 
223

 
(123
)
 
304

Loss on extinguishment of debt

(13,205
)
 
(453
)
 
(13,205
)
 
(453
)
Change in fair value of convertible senior notes
(463
)
 
917

 
(2,992
)
 
(2,514
)
Interest income
17

 
19

 
64

 
47

Interest expense
(4,617
)
 
(3,097
)
 
(10,554
)
 
(7,230
)
Income (loss) before provision for income taxes
17,430

 
17,652

 
(33,838
)
 
(37,374
)
Provision for income taxes
1,016

 
1,953

 
1,360

 
1,708

Net income (loss)
16,414

 
15,699

 
(35,198
)
 
(39,082
)
Net income (loss) attributable to non-controlling interests
(31
)
 
17

 
57

 
39

Net income (loss) attributable to JAKKS Pacific, Inc.
$
16,445

 
$
15,682

 
$
(35,255
)
 
$
(39,121
)
Net income (loss) attributable to common stockholders
$
16,265

 
$
15,682

 
$
(35,435
)
 
$
(39,121
)
Income (loss) per share - basic
$
0.60

 
$
0.68

 
$
(1.43
)
 
$
(1.69
)
Shares used in income (loss) per share - basic
27,085

 
23,106

 
24,754

 
23,104

Income (loss) per share - diluted
$
0.51

 
$
0.38

 
$
(1.43
)
 
$
(1.69
)
Shares used in income (loss) per share - diluted
60,345

 
45,686

 
24,754

 
23,104

Comprehensive income (loss)
$
15,516

 
$
14,550

 
$
(35,243
)
 
$
(40,571
)
Comprehensive income (loss) attributable to JAKKS Pacific, Inc.
$
15,547

 
$
14,533

 
$
(35,300
)
 
$
(40,610
)
See accompanying notes to condensed consolidated financial statements.

4


JAKKS PACIFIC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
Three and Nine Months Ended September 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

Stock-based compensation expense
3

 

 
857

 

 

 
860

 

 
860

Adjustment to additional paid-in capital

 

 
(3
)
 

 

 
(3
)
 

 
(3
)
Common stock issuance
6

 

 
4,208

 

 

 
4,214

 

 
4,214

Treasury shares retirement
(3
)
 
24,000

 
(23,997
)
 

 

 

 

 

Preferred stock accrued dividends

 

 
(180
)
 

 

 
(180
)
 

 
(180
)
Net income (loss)

 

 

 
16,445

 

 
16,445

 
(31
)
 
16,414

Foreign currency translation adjustment

 

 

 

 
(898
)
 
(898
)
 

 
(898
)
Balance, September 30, 2019
$
36

 
$

 
$
199,782

 
$
(162,856
)
 
$
(15,892
)
 
$
21,070

 
$
969

 
$
22,039

Three and Nine Months Ended September 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

Stock-based compensation expense

 

 
760

 

 

 
760

 

 
760

Adjustment to additional paid-in capital

 

 
(1
)
 

 

 
(1
)
 

 
(1
)
Net Income

 

 

 
15,682

 

 
15,682

 
17

 
15,699

Foreign currency translation adjustment

 

 

 

 
(1,149
)
 
(1,149
)
 

 
(1,149
)
Balance, September 30, 2018
$
30

 
$
(24,000
)
 
$
217,468

 
$
(124,354
)
 
$
(14,548
)
 
$
54,596

 
$
1,008

 
$
55,604

See accompanying notes to condensed consolidated financial statements.

5



JAKKS PACIFIC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 
Nine Months Ended September 30,
(Unaudited)
 
2019
 
2018
Cash flows from operating activities
 
 
 
Net loss
$
(35,198
)
 
$
(39,082
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Provision for doubtful accounts
601

 
11,530

Depreciation and amortization
14,471

 
13,991

Payment-in-kind interest
624

 

Amortization of debt discount
393

 

Write-off and amortization of debt issuance costs
1,103

 
1,234

Share-based compensation expense
1,872

 
1,747

Gain on disposal of property and equipment
(72
)
 
(108
)
Loss on extinguishment of debt
13,205

 
453

Change in fair value of convertible senior notes
2,992

 
2,514

Deferred income taxes

 
4

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(79,111
)
 
(74,485
)
Inventory
(11,418
)
 
(6,019
)
Prepaid expenses and other assets
(2,731
)
 
(21,767
)
Accounts payable
79,360

 
94,011

Accrued expenses
30,343

 
6,394

Reserve for sales returns and allowances
8,706

 
12,648

Income taxes payable
7

 
(267
)
Other liabilities
962

 
(173
)
Total adjustments
61,307

 
41,707

Net cash provided by operating activities
26,109

 
2,625

Cash flows from investing activities
 
 
 
Purchases of property and equipment
(7,624
)
 
(9,552
)
Proceeds from sale of property and equipment
12

 
108

Net cash used in investing activities
(7,612
)
 
(9,444
)
Cash flows from financing activities
 
 
 
Retirement of convertible senior notes

 
(13,178
)
Repayment of credit facility borrowings
(7,500
)
 
(5,000
)
Debt issuance costs
(4,957
)
 
(1,449
)
Term loan prepayment penalty
(393
)
 

Proceeds from term loan facility

 
20,000

Net proceeds from credit facility borrowings
5,000

 

Net proceeds from issuance of long term debt
27,356

 

Repayment of term loan facility
(20,000
)
 

Repurchase of common stock for employee tax withholding
(273
)
 
(85
)
Net cash provided by (used in) financing activities
(767
)
 
288

Net increase (decrease) in cash, cash equivalents and restricted cash
17,730

 
(6,531
)
Effect of foreign currency translation
(45
)
 
(1,302
)
Cash, cash equivalents and restricted cash, beginning of period
58,205

 
64,977

Cash, cash equivalents and restricted cash, end of period
$
75,890

 
$
57,144

Cash paid during the period for:
 
 
 
Income taxes
$
152

 
$
1,009

Interest
$
5,956

 
$
5,161

As of September 30, 2019, there was $2.6 million of property and equipment included in accounts payable. As of September 30, 2018, there was $3.9 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)
September 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 income (loss) for the three and nine months ended September 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)
September 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 June 2016, the FASB issued ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The new standard was initially effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. In July 2019, the FASB tentatively deferred the effective date of ASU 2016-13 by three years for Smaller Reporting Companies. The tentative decisions would change the effective date for the new standard to fiscal years beginning after December 15, 2022, and interim periods therein, and early adoption is permitted. The Company is currently evaluating the impact of the adoption of ASU 2016-13 on its consolidated financial statements.
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.

8


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


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.
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.

9


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


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.
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 nine months ended September 30, 2019 and 2018 and as of September 30, 2019 and December 31, 2018 are as follows (in thousands):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
Net Sales
 
 
 
 
 
 
 
U.S. and Canada
$
165,087

 
$
133,481

 
$
271,022

 
$
263,397

International
39,251

 
37,902

 
59,297

 
77,245

Halloween
75,792

 
65,316

 
115,819

 
94,842

 
$
280,130

 
$
236,699

 
$
446,138

 
$
435,484

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
Income (Loss) from Operations
 
 
 
 
 
 
 
U.S. and Canada
$
26,557

 
$
12,029

 
$
193

 
$
(17,373
)
International
5,958

 
2,919

 
(1,159
)
 
(6,764
)
Halloween
3,147

 
5,095

 
(6,062
)
 
(3,618
)
 
$
35,662

 
$
20,043

 
$
(7,028
)
 
$
(27,755
)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
Depreciation and Amortization Expense
 
 
 
 
 
 
 
U.S. and Canada
$
4,405

 
$
4,823

 
$
9,717

 
$
10,125

International
1,094

 
1,312

 
2,110

 
2,886

Halloween
1,499

 
428

 
2,644

 
980

 
$
6,998

 
$
6,563

 
$
14,471

 
$
13,991

 
September 30,
2019
 
December 31,
2018
Assets
 
 
 
U.S. and Canada
$
296,349

 
$
223,877

International
112,892

 
108,669

Halloween
70,400

 
10,295

 
$
479,641

 
$
342,841


10


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


The following tables present information about the Company by geographic area as of September 30, 2019 and December 31, 2018 and for the three and nine months ended September 30, 2019 and 2018 (in thousands):
 
September 30,
2019
 
December 31,
2018
Long-lived Assets
 
 
 
China
$
12,889

 
$
15,825

United States
3,766

 
4,920

Hong Kong
270

 
157

 
$
16,925

 
$
20,902

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
Net Sales by Customer Area
 
 
 
 
 
 
 
United States
$
229,975

 
$
186,497

 
$
369,942

 
$
337,543

Europe
25,740

 
25,606

 
39,477

 
49,542

Canada
10,218

 
11,091

 
14,960

 
18,663

Hong Kong
616

 
1,182

 
1,808

 
1,709

Other
13,581

 
12,323

 
19,951

 
28,027

 
$
280,130

 
$
236,699

 
$
446,138

 
$
435,484

Major Customers
Net sales to major customers for the three and nine months ended September 30, 2019 and 2018 were as follows (in thousands, except for percentages):
 
Three Months Ended September 30,
 
Nine Months Ended September 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
$
78,347

 
28.0
%
 
$
64,133

 
27.1
%
 
$
130,165

 
29.2
%
 
$
107,344

 
24.6
%
Target
64,172

 
22.9

 
50,797

 
21.5

 
90,367

 
20.2

 
87,641

 
20.1

 
$
142,519

 
50.9
%
 
$
114,930

 
48.6
%
 
$
220,532

 
49.4
%
 
$
194,985

 
44.7
%
No other customer accounted for more than 10% of the Company's total net sales.
As of September 30, 2019 and December 31, 2018, the Company’s three largest customers accounted for approximately 43.0% 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 nine months ended September 30, 2018, the Company recorded bad debt expense of $12.0 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)
September 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):
 
September 30,
2019
 
December 31,
2018
Raw materials
$
79

 
$
311

Finished goods
65,219

 
53,569

 
$
65,298

 
$
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 $38.1 million as of September 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)
September 30, 2019


Note 5 — Debt
Convertible senior notes
Convertible senior notes consist of the following (in thousands):
 
September 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
$
1,905

 
$

 
$
1,905

 
$
113,000

 
$
1,182

 
$
111,818

3.25% convertible senior notes due 2020 *

 

 

 
27,974

 

 
27,974

3.25% convertible senior notes due 2023 **
48,635

 

 
48,635

 

 

 

Total convertible senior notes
$
50,540

 
$

 
$
50,540

 
$
140,974

 
$
1,182

 
$
139,792


* The amount presented for the 3.25% convertible senior notes due 2020 within the table represents the fair value as of September 30, 2019 and December 31, 2018 (see Note 16 - Fair Value Measurements). The notes were extinguished on August 9, 2019 in connection with the Recapitalization transaction (defined below). The principal amount of these notes was nil as of September 30, 2019 and $29.6 million as of December 31, 2018.

** The amount presented for the 3.25% convertible senior notes due 2023 within the table represents the fair value as of September 30, 2019 and December 31, 2018 (see Note 16 - Fair Value Measurements). The principal amount of these notes totaled $37.6 million as of September 30, 2019 and nil as of December 31, 2018. Also, the amount presented excludes accrued, but unpaid, payment-in-kind interest of $0.1 million.
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.
 


13


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


In August 2017, the Company agreed with Oasis Management and Oasis Investments II Master Fund Ltd., (collectively, “Oasis”) the holder of approximately $21.6 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.
In August 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 ( the "Investor Parties") to recapitalize the Company’s balance sheet, including the extension to the Company of incremental liquidity and at least three-year extensions of substantially all of the Company’s outstanding convertible debt obligations and revolving credit facility. The Company’s term loan agreement entered into with Great American Capital Partners was paid in full and terminated in connection with the Recapitalization transaction.

In connection with the Recapitalization transaction, the Company issued (i) amended and restated notes with respect to the $21.6 million Oasis Note issued on November 7, 2017, and the $8.0 million Oasis Note issued on July 26, 2018 (together, the “Existing Oasis Notes”), and (ii) a new $8.0 million convertible senior note having the same terms as such amended and restated notes (the "New $8.0 million Oasis Note" and collectively, the “New Oasis Notes” or the "3.25% convertible senior notes due 2023"). Interest on the New Oasis Notes is payable on each May 1 and November 1 until maturity and accrues at an annual rate of (i) 3.25% if paid in cash or 5.00% if paid in stock plus (ii) 2.75% payable in kind. The New Oasis Notes mature 91 days after the amounts outstanding under the New Term Loan are paid in full, and in no event later than July 3, 2023. 
The New Oasis Notes provide, among other things, that the initial conversion price is $1.00. The conversion price will be reset on each February 9 and August 9, starting on February 9, 2020 (each, a “reset date”) to a price equal to 105% of the 5-day VWAP preceding the applicable reset date. Under no circumstances shall the reset result in a conversion price be below the greater of (i) the closing price on the trading day immediately preceding the applicable reset date and (ii) 30% of the stock price as of the Transaction Agreement Date, or August 7, 2019, and will not be greater than the conversion price in effect immediately before such reset. The Company may trigger a mandatory conversion of the New Oasis Notes if the market price exceeds 150% of the conversion price under certain circumstances. The Company may redeem the New Oasis Notes in cash if a person, entity or group acquires shares of the Company’s Common Stock, par value $0.001 per share (the “Common Stock”), and as a result owns at least 49% of the Company’s issued and outstanding Common Stock. In connection with the issuance of the New Oasis Notes, the Company recognized a loss on extinguishment of the Existing Oasis Notes of approximately $10.4 million.
A director of the Company is a portfolio manager at Oasis Management.

14


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


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 $0.5 million for the three and nine months ended September 30, 2019 related to changes in the fair value of the New Oasis Notes. The Company recognized a gain of $0.9 million for the three months ended September 30, 2018 and a loss of $2.5 million for the nine months ended September 30, 2018 related to changes in the fair value of the Existing Oasis Notes. At September 30, 2019 and December 31, 2018, the debt held by Oasis had a fair value of approximately $48.6 million and $28.0 million, respectively. The Company evaluated its credit risk as of September 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.

In connection with the Recapitalization transaction, 2020 Notes outstanding with a face amount of $111.1 million of the total $113.0 million that were outstanding at the time of the transaction were refinanced and the maturity dates effectively extended. Of the refinanced amount, $103.8 million was refinanced with the Investor Parties through the issuance of the New Common Equity (as defined below), the New Preferred Equity (as defined below) (see Note 9 - Common Stock and Preferred Stock) and new secured term debt that matures in February 2023 (see Term Loan section below). Additionally, $1.0 million of accrued interest was refinanced with the Investor Parties. The remaining refinanced amount of $7.3 million was exchanged into the New $8.0 million Oasis Note discussed above. In connection with the issuance of the new secured term loan, as well as the New Common Equity and the New Preferred Equity, the Company recognized a loss on extinguishment of the 2020 Notes refinanced with the Investor Parties of approximately $2.4 million, and wrote off $0.7 million of unamortized debt issuance costs related to the 2020 Notes.
The Company classified the remaining $1.9 million of the 2020 Notes, which are due June 2020, as current liabilities on the Condensed Consolidated Balance Sheet.
The fair value of the 4.875% convertible senior notes due June 2020 as of September 30, 2019 and December 31, 2018 was $1.8 million (principal amount $1.9 million) and $93.2 million (principal amount $113.0 million), respectively, based upon the most recent quoted market prices.
Amortization expense classified as interest expense related to debt issuance costs of the Company's convertible senior notes was $0.1 million and $0.2 million for the three months ended September 30, 2019 and 2018, respectively, and $0.5 million and $0.7 million for the nine months ended September 30, 2019 and 2018, respectively.
    

15


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


Term Loan
Term loan consists of the following (in thousands):
 
September 30, 2019
 
December 31, 2018
 
Principal Amount
 
Debt Discount/
Issuance
Costs*
 
Net
Amount
 
Principal Amount
 
Debt Discount/
Issuance
Costs*
 
Net
Amount
Term Loan
$
134,801

 
$
(13,248
)
 
$
121,553

**
$

 
$

 
$


* The term loan was valued using the discounted cash flow method to determine the implied debt discount. The debt discount and issuance costs are being amortized over the life of the term loan.

** The amount presented excludes accrued, but unpaid, payment-in-kind interest of $0.5 million.

On August 9, 2019, in connection with the Recapitalization transaction, the Company entered into a First Lien Term Loan Facility Credit Agreement, (the “New Term Loan Agreement”), with certain holders of the 2020 Notes, or the Investor Parties, and Cortland Capital Market Services LLC, as agent, for a $134.8 million first-lien secured term loan (the “New Term Loan”). The Company also issued common stock and preferred stock (see Note 9 - Common Stock and Preferred Stock) to the Investor Parties.
 
Amounts outstanding under the New Term Loan accrue interest at 10.50% per annum, payable semi-annually (with 8% per annum payable in cash and 2.5% per annum payable in kind). The New Term Loan matures on February 9, 2023.
 
The New Term Loan Agreement contains negative covenants that, subject to certain exceptions, limit the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, make restricted payments, pledge their assets as security, make investments, loans, advances, guarantees and acquisitions, undergo fundamental changes and enter into transactions with affiliates. Commencing with the fiscal quarter ending September 30, 2020, the Company is also required to maintain a minimum EBITDA of not less than $34.0 million and a minimum liquidity of not less than $10.0 million.

The New Term Loan Agreement contains events of default that are customary for a facility of this nature, including nonpayment of principal, nonpayment of interest, fees or other amounts, material inaccuracy of representations and warranties, violation of covenants, cross-default to other material indebtedness, bankruptcy or insolvency events, material judgment defaults and a change of control as specified in the New Term Loan Agreement. If an event of default occurs, the maturity of the amounts owed under the New Term Loan Agreement may be accelerated.
 
The obligations under the New Term Loan Agreement are guaranteed by the Company, the subsidiary borrowers thereunder and certain of the other existing and future direct and indirect subsidiaries of the Company and are secured by substantially all of the assets of the Company, the subsidiary borrowers thereunder and such other subsidiary guarantors, in each case, subject to certain exceptions and permitted liens.

Amortization expense classified as interest expense related to the $3.8 million of debt issuance costs associated with the issuance of the New Term Loan was $0.2 million for the three and nine months ended September 30, 2019 and nil for the three and nine months ended September 30, 2018.

Amortization expense classified as interest expense related to the $10.1 million debt discount associated with the transaction that closed on August 9, 2019 was $0.4 million for the three and nine months ended September 30, 2019 and nil for the three and nine months ended September 30, 2018.

16


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


Note 6 — 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. In August 2019, in connection with the Recapitalization transaction (See Note 5 - Debt), the Company entered into an amended and extended revolving credit facility with Wells Fargo (the “Amended ABL Credit Agreement”). The Amended ABL Credit Agreement, or Amended ABL facility, amends and restates the Company’s existing Credit Facility, dated as of March 27, 2014, as amended, with GECC and subsequently assigned to Wells Fargo, to, among other things, decrease the borrowing capacity from $75.0 million to $60.0 million and extend the maturity to August 9, 2022.
The obligations under the Amended ABL Credit Agreement are guaranteed by the Company, the subsidiary borrowers thereunder and certain of the other existing and future direct and indirect subsidiaries of the Company and are secured by substantially all of the assets of the Company, the subsidiary borrowers thereunder and such other subsidiary guarantors, in each case, subject to certain exceptions and permitted liens. As of September 30, 2019, the amount of outstanding borrowings was $5.0 million, the amount of outstanding stand-by letters of credit totaled $10.5 million and the total excess borrowing capacity was $44.5 million. As of December 31, 2018, the amount of outstanding borrowings under the previous Credit Facility was $7.5 million, outstanding stand-by letters of credit totaled $12.8 million and the total excess borrowing capacity was $40.7 million.
 
The Amended ABL Credit Agreement contains negative covenants that, subject to certain exceptions, limit the ability of the Company and its subsidiaries to, among other things, incur additional indebtedness, make restricted payments, pledge their assets as security, make investments, loans, advances, guarantees and acquisitions, undergo fundamental changes and enter into transactions with affiliates. The Company is also required to maintain a fixed charge coverage ratio of not less than 1.1 to 1.0 under certain circumstances, and a minimum liquidity of $25.0 million and a minimum availability of at least $9.0 million. As of September 30, 2019 and December 31, 2018, the Company was in compliance with the financial covenants under the Amended ABL Facility and the previous Credit Facility, as applicable.
Any amounts borrowed under the Amended ABL Facility accrue interest, at either (i) LIBOR plus 1.50%-2.00% (determined by reference to a fixed charge coverage ratio-based pricing grid) or (ii) base rate plus 0.50%-1.00% (determined by reference to a fixed charge coverage ratio-based pricing grid). As of September 30, 2019 and December 31 2018, the weighted average interest rate on the credit facilities with Wells Fargo was approximately 4.59% and 5.53%, respectively.

The Amended ABL 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 Amended ABL Facility may be declared immediately due and payable. For certain events of default relating to insolvency, all outstanding obligations become due and payable.
 

17


JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 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 5 - Debt). 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.

In August 2019, in connection with the Recapitalization transaction (See Note 5 - Debt), the Company repaid in full and terminated the Term Loan Agreement. As of September 30, 2019 and December 31, 2018, the amount outstanding under the Term Loan was nil and $20.0 million, respectively. Borrowings under the Term Loan accrue interest at LIBOR plus 9.00% per annum. As of September 30, 2019 and December 31, 2018, the weighted average interest rate on the Term Loan was approximately 11.4% and 11.1%, respectively. In connection with this transaction, the Company recognized a loss on extinguishment of the debt of approximately $0.4 million.

Amortization expense classified as interest expense related to the $1.3 million of 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) and $1.1 million of debt issuance cost associated with the transaction that closed on August 9, 2019 (i.e., Amended ABL Facility) was $0.1 million and $0.5 million for the three and nine months ended September 30, 2019, respectively. Amortization expense classified as interest expense was $0.4 million and $0.5 million for the three and nine months ended September 30, 2018, respectively.

    


18


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


Note 7 — Income Taxes

The Company’s income tax expense of $1.0 million for the three months ended September 30, 2019 reflects an effective tax rate of 5.8%. The Company’s income tax expense of $2.0 million for the three months ended September 30, 2018 reflects an effective tax rate of 11.1%. The majority of the tax expense for the three months ended September 30, 2019 relates to foreign income taxes and discrete items. The majority of the tax expense for the three months ended September 30, 2018 relates to foreign income taxes and discrete items.

The Company’s income tax expense of $1.4 million for the nine months ended September 30, 2019 reflects an effective tax rate of (4.0%). The Company’s income tax expense of $1.7 million for the nine months ended September 30, 2018 reflects an effective tax rate of (4.6%). The majority of the tax expense for the nine months ended September 30, 2019 relates to foreign income taxes and discrete items. The majority of the tax expense for the nine months ended September 30, 2018 primarily relates to foreign income taxes, partially offset by discrete items.
Note 8 — Income (Loss) Per Share
The following table is a reconciliation of the weighted average shares used in the computation of income (loss) per share for the periods presented (in thousands, except per share data):
 
 
Three Months Ended September 30,
 
 
2019
 
2018
 
 
Income (Loss)
 
Weighted
Average
Shares
 
Per-
Share
 
Income (Loss)
 
Weighted
Average
Shares
 
Per-
Share
Income (loss) per share - basic
Net income (loss) attributable to common stockholders
 
$
16,265

*
27,085

 
$
0.60

 
$
15,682

 
23,106

 
$
0.68

Effect of dilutive securities:

 
 
 
 
 
 
 
 
 
 
 
 
Convertible senior notes
 
14,367

 
31,648

 

 
1,487

 
21,426

 

Unvested performance stock grants
 

 
72

 

 

 
832

 

Unvested restricted stock grants
 

 
1,540

 

 

 
322

 

Income (loss) per share - diluted
Net income (loss) attributable to common
stockholders plus assumed exercises and conversion

 
$
30,632

 
60,345

 
$
0.51

 
$
17,169

 
45,686

 
$
0.38

* Net income (loss) attributable to common shareholders was computed by deducting $180,000 of preferred dividends from net income (loss) attributable to JAKKS Pacific, Inc.

19


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


 
 
Nine Months Ended September 30,
 
 
2019
 
2018
 
 
Income (Loss)
 
Weighted
Average
Shares
 
Per-
Share
 
Income (Loss)
 
Weighted
Average
Shares
 
Per-
Share
Income (loss) per share - basic
Net income (loss) attributable to common stockholders
 
$
(35,435
)
*
24,754

 
$
(1.43
)
 
$
(39,121
)
 
23,104

 
$
(1.69
)
Effect of dilutive securities:

 
 
 
 
 
 
 
 
 
 
 
 
Convertible senior notes
 

 

 

 

 

 

Unvested performance stock grants
 

 

 

 

 

 

Unvested restricted stock grants
 

 

 

 

 

 

Income (loss) per share - diluted
Net income (loss) attributable to common
stockholders plus assumed exercises and conversion

 
$
(35,435
)
 
24,754

 
$
(1.43
)
 
$
(39,121
)
 
23,104

 
$
(1.69
)
* Net income (loss) attributable to common shareholders was computed by deducting $180,000 of preferred dividends from net income (loss) attributable to JAKKS Pacific, Inc.
Basic income (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. These shares were retired on September 13, 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 5,460,873 and 31,341,392 for the three and nine months ended September 30, 2019, respectively. 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 2,894,029 and 25,332,390 for the three and nine months ended September 30, 2018, respectively.
Note 9 — Common Stock and Preferred Stock
Common 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-year 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.  
        

20


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


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.

On August 9, 2019, in connection with the Recapitalization transaction (see Note 5 - Debt), the Company issued to the Investor Parties, in the aggregate, 5,853,002 shares of Common Stock valued at $4.2 million on the date of issuance. (the "New Common Equity").
    
In August 2019, the Board resolved to accelerate and immediately vest upon closing of the Recapitalization transaction, 164,166 shares of the annual stock compensation granted to resigning members of the Board on January 1, 2019. Each resigning Board member forfeited the remaining balance of the annual stock compensation granted on January 1, 2019, or an aggregate of 54,704 shares.

The Company effectively repurchased 3,112,840 shares of its common stock at an average cost of $7.71 per share for an aggregate amount of $24.0 million pursuant to a prepaid forward share repurchase agreement entered into with Merrill Lynch International (“ML”) on June 9, 2014. These repurchased shares were treated as retired for basic and diluted income (loss) per share purposes although they remained legally outstanding. The Company reflected the aggregate purchase price of its common shares repurchased as a reduction to stockholders’ equity allocated to treasury stock. On September 13, 2019, ML returned the shares to the Company. The Company subsequently retired the shares which had no impact to the Company’s stockholder’s equity.
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 nine months ended September 30, 2019 or 2018.

21


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


Preferred Stock
On August 9, 2019, in connection with the Recapitalization transaction (see Note 5 - Debt), the Company issued 200,000 shares of Series A Senior Preferred Stock (the “Series A Preferred Stock”), $0.001 par value per share, to the Investor Parties (the “New Preferred Equity”) As of September 30, 2019, 200,000 shares of Series A Preferred Stock were outstanding. 
Each share of Series A Preferred Stock has an initial value of $100 per share, which is automatically increased for any accrued and unpaid dividends (the “Accreted Value”).
The Series A Preferred Stock has the right to receive dividends on a quarterly basis equal to 6.0% per annum, payable in cash or, if not paid in cash, by an automatic accretion of the Series A Preferred Stock. No dividends have been declared or paid. For the three and nine months ended September 30, 2019, the Company recorded $180,000 of preferred stock dividends as an increase in the value of the Series A Preferred Stock.
The Series A Preferred Stock has no stated maturity, however, the Company has the right to redeem all or a portion of the Series A Preferred Stock at its Liquidation Preference (as defined below) at any time after payment in full of the New Term Loan. In addition, upon the occurrence of certain change of control type events, holders of the Series A Preferred Stock are entitled to receive an amount (the “Liquidation Preference”), in preference to holders of Common Stock or other junior stock, equal to (i) 20% of the Accreted Value in the case of a certain specified transaction, or (ii) otherwise, 150% of the Accreted value, plus any accrued and unpaid dividends.
The Company has the right, but is not required, to repurchase all or a portion of the Series A Preferred Stock at its Liquidation Preference at any time after payment in full of the New Term Loan (see Note 5 - Debt).
The Series A Preferred Stock does not have any voting rights, except to the extent required by the Delaware General Corporation Law, except for the exclusive right to elect the Series A Preferred Directors (as described below) and except for certain approval rights over certain transactions (as described below). These approval rights require the prior consent of specified percentages of holders (or in certain cases, all holders) of the Series A Preferred Stock in order for the Company to take certain actions, including the issuance of additional shares of Series A Preferred Stock or parity stock, the issuance of senior stock, certain amendments to the Amended and Restated Certificate of Incorporation, the Certificate of Designations of the Series A Preferred Stock (the “Certificate of Designations”), the Second Amended and Restated By-laws or the Amended and Restated Nominating and Corporate Governance Committee Charter, material changes in the Company’s line of business and certain change of control type transactions. In addition, the Certificate of Designations provides that the approval of at least six directors is required for any related person transaction within the meaning of Item 404 of Regulation S-K under the Securities Act of 1933, as amended, including, without limitation, the adoption of, or any amendment, modification or waiver of, any agreement or arrangement related to any such transaction. The Certificate of Designations also includes restrictions on the ability of the Company to pay dividends on or make distributions with respect to, or redeem or repurchase, shares of Common Stock or other junior stock. In addition, holders of the Series A Preferred Stock have preemptive rights regarding future issuance of Series A Preferred Stock or parity stock.

22


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


In addition, the Certificate of Designations provides the holders of Series A Preferred Stock certain board representation rights. The Certificate of Designations provides, among other things, that, for so long as at least 50,000 shares of Series A Preferred Stock remain outstanding, (i) the holders of a majority of the outstanding shares of Series A Preferred Stock have the sole right to nominate candidates to serve as the Series A Preferred Directors and (ii) the holders of shares of Series A Preferred Stock, voting as a separate class, have the right to elect two individuals to serve as the Series A Preferred Directors. From and after (i) the first annual meeting of stockholders occurring after less than 50,000 shares of Series A Preferred Stock remain outstanding, the holders of Series A Preferred Stock will only have the right to nominate and elect one Series A Preferred Director, and (ii) the time no shares of Series A Preferred Stock remain outstanding, the holders of Series A Preferred Stock will no longer have the right to nominate or elect any Series A Preferred Directors. The Series A Preferred Directors will serve for terms ending at the annual meeting of stockholders in 2023 and for successive three-year terms thereafter (until no shares of Series A Preferred Stock remain outstanding), and as of such time as the proposal to amend the Certificate of Incorporation to classify the Board into three classes, designated Class I, Class II and Class III, with staggered three-year terms, the Series A Preferred Directors shall be deemed to serve in Class III. The number of directors elected by the holders of the Company’s Common Stock and the number of Series A Preferred Directors is fixed and cannot be amended without the approval of holders of a majority of the outstanding Common Stock and holders of at least 80% of the outstanding shares of Series A Preferred Stock, each voting as a separate class.
The Series A Preferred Stock redemption amount is contingent upon certain events with no stated redemption date as of the reporting date, although may become redeemable in the future. In accordance with the SEC guidance within ASC Topic 480, Distinguishing Liabilities from Equity: Classification and Measurement of Redeemable Securities, the Company classified the Series A Preferred Stock as temporary equity as the Series A Preferred Stock contains a redemption feature which is contingent upon certain deemed liquidation events, the occurrence of which may not solely be within the control of the Company.

Under ASC 815, “Derivatives and Hedging”, certain contractual terms that meet the accounting definition of a derivative must be accounted for separately from the financial instrument in which they are embedded. The Company has concluded that the redemption upon a change of control and the repurchase option by the Company constitute embedded derivatives.
The embedded redemption upon a change of control must be accounted for separately from the Series A Preferred Stock. The redemption provision specifies if certain events that constitute a change of control occur; the Company may be required to settle the Series A Preferred Stock at 20% or 150% of its accreted amount. Accordingly, the redemption provision meets the definition of a derivative, and its economic characteristics are not considered clearly and closely related to the economic characteristics of the Series A Preferred Stock, which is considered more akin to a debt instrument than equity.
    
Accordingly, these two embedded derivatives are required to be bundled into a single derivative instrument and accounted for separately from the Series A Preferred Stock at fair value.    

The Company considers the repurchase option to have no value as the likelihood is remote that this event, within the Company’s control, would ever occur. The Company determined that the fair value of the redemption provision upon a change of control was $4.9 million and recorded as a long term liability. In subsequent periods, the liability is accounted for at fair value, with changes in fair value recognized as other income (expense) on the Company's condensed consolidated statements of operations. The value of the redemption provision explicitly considered the present value of the potential premium that would be paid related to, and the probability of, an event that would trigger its payment. The probability of a triggering event was based on management’s estimates of the probability of a change of control event occurring.
    
As of September 30, 2019, the Series A Preferred Stock is recorded in temporary equity at the amount of accrued, but unpaid dividends of $180,000, and the redemption provision, as a bifurcated derivative, is recorded as a long term liability with an estimated value of $4.9 million.

23


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


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 nine months ended September 30, 2019, the Company recognized income from the joint venture of nil. For the three and nine months ended September 30, 2018, the Company recognized income from the joint venture of nil and $22,000, respectively.
As of September 30, 2019 and December 31, 2018, the balance of the investment in the Pacific Animation Partners joint venture is nil.
For the three and nine months ended September 30, 2018, respectively, the Company recognized nil and $0.2 million of income for funds received related to a former video game joint venture in partial settlement of amounts owed to the Company when our joint venture partner was liquidated pursuant to their 2012 bankruptcy filing.
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.
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 ($31,000) and $17,000 for the three months ended September 30, 2019 and 2018, respectively, and $57,000 and $39,000 for the nine months ended September 30, 2019 and 2018, respectively.

24


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


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 nine months ended September 30, 2019 and 2018 was nil. As of September 30, 2019, Meisheng beneficially owns more than 10% of the Company’s outstanding common stock.
A director of the Company is a representative of Meisheng Culture & Creative Corp.

Meisheng also serves as a significant manufacturer of the Company. For the three and nine months ended September 30, 2019, the Company made inventory-related payments to Meisheng of approximately $49.6 million and $74.8 million, respectively. For the three and nine months ended September 30, 2018, the Company made inventory-related payments to Meisheng of approximately $19.8 million and $33.9 million, respectively. As of September 30, 2019 and 2018, amounts due Meisheng for inventory received by the Company, but not paid totaled $40.9 million and $18.2 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 nine months ended September 30, 2019.


25


JAKKS PACIFIC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 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 September 30, 2019 and December 31, 2018 include the following (in thousands, except for weighted useful lives):
 
 
 
September 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

 
$
(19,846
)
 
$
284

 
$
20,130

 
$
(19,383
)
 
$
747

Product lines
10.36
 
33,858

 
(20,398
)
 
13,460

 
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

 
$
(46,596
)
 
$
13,744

 
$
60,340

 
$
(43,028
)
 
$
17,312

Unamortized Intangible Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Trademarks
 
 
$
300

 
$

 
$
300

 
$
300

 
$

 
$
300

Note 13 — Comprehensive Income (Loss)
The table below presents the components of the Company’s comprehensive income (loss) for the three and nine months ended September 30, 2019 and 2018 (in thousands):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
Net Income (Loss)
$
16,414

 
$
15,699

 
$
(35,198
)
 
$
(39,082
)
Other comprehensive income (loss):
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