JAKKS PACIFIC: Management report and analysis of financial position and operating results (Form 10-Q)


The following discussion and analysis of the financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and accompanying notes, which appear elsewhere herein.



Effective July 9, 2020, we completed a 1 for 10 reverse stock split of our
$0.001 par value common stock reducing the issued and outstanding shares of
common stock from 42,395,782 to 4,239,578 ("Reverse Stock Split"). All common
stock and price per share amounts in this report have been restated to reflect
the Reverse Stock Split. The Reverse Stock Split did not cause an adjustment to
the par value or the authorized shares of the common stock. All share and per
share amounts in the financial statements and notes thereto have been
retroactively adjusted for all periods presented to give effect to this Reverse
Stock Split, including reclassifying an amount equal to the reduction in par
value of common stock to additional paid-in capital. The primary reason for
implementing the Reverse Stock Split was to regain compliance with the minimum
bid price requirement of The NASDAQ Stock Market LLC ("Nasdaq"). On July 31,
2020, we were notified by Nasdaq that we had regained compliance with the Nasdaq
listing requirements.



Explanatory Note



As of the date of filing of this Quarterly Report on Form 10-Q (this "Report"),
there are many uncertainties regarding the current Novel Coronavirus
("COVID-19") pandemic, including the scope of health issues, the possible
duration of the pandemic, and the extent of local and worldwide social,
political, and economic disruption it may cause. To date, the COVID-19 pandemic
has had far-reaching impacts on many aspects of the operations of JAKKS Pacific,
Inc. (the "Company," "we," "our" or "us"), including on consumer behavior,
customer store traffic, production capabilities, timing of product availability,
our employees' personal and business lives, and the market generally. The scope
and nature of these impacts continue to evolve each day. The COVID-19 pandemic
has resulted in, and may continue to result in, regional and local quarantines,
labor stoppages and shortages, changes in consumer purchasing patterns,
mandatory or elective shut-downs of retail locations, disruptions to supply
chains, including the inability of our suppliers and service providers to
deliver materials and services on a timely basis, or at all, severe market
volatility, liquidity disruptions, and overall economic instability, which, in
many cases, have had, and we expect will continue to have, adverse impacts on
our business, financial condition and results of operations. This situation is
changing rapidly, and additional impacts may arise that we are not aware of
currently.



In light of the uncertain and rapidly evolving situation related to the COVID-19 pandemic, we have taken certain precautionary measures designed to help minimize the risks to our business, employees and customers, including:

• At March 23, 2020, we encouraged our staff to start working from home. We

expect this to be our operating model for an indefinite period,

      and to the extent permitted by federal, state and local instructions to
      reopen;



• We have identified spending reductions that we intend to implement throughout

      remainder of fiscal 2021, as necessary;



• Although our distribution center City of Industry, California currently

continues to operate, we continue to evaluate its activities and can elect,

or be obliged, to temporarily stop its operations at any time in the

      future;




  • We have suspended all non-essential travel for our employees; and



• We discourage employee participation at industry events and in person

      work-related meetings.




Each of the remedial measures taken by us has had, and we expect will continue
to have, adverse impacts on our current business, financial condition and
results of operations, and may create additional risks for us. While we
anticipate that the foregoing measures are temporary, we cannot predict the
specific duration for which these precautionary measures will stay in effect,
and we may elect or need to take additional measures as the information
available to us continues to develop, including with respect to our employees,
inventory receipts, and relationships with our licensors. We expect to continue
to assess the evolving impact of the COVID-19 pandemic on our customers,
consumers, employees, supply chain, and operations, and intend to make
adjustments to our responses accordingly. However, the extent to which the
COVID-19 pandemic and our precautionary measures in response thereto may impact
our business, financial condition, and results of operations will depend on how
the COVID-19 pandemic and its impact continues to develop in the United States
and elsewhere in the world, which remains highly uncertain and cannot be
predicted at this time.



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



Disclosure Regarding Forward-Looking Statements



This Report includes "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. For example, statements included in this Report regarding our financial
position, business strategy and other plans and objectives for future
operations, and assumptions and predictions about future product demand, supply,
manufacturing, costs, marketing and pricing factors are all forward-looking
statements. When we use words like "intend," "anticipate," "believe,"
"estimate," "plan" or "expect," or other words of a similar import, we are
making forward-looking statements. We believe that the assumptions and
expectations reflected in such forward-looking statements are reasonable, based
upon information available to us on the date hereof (but excluding the impact of
COVID-19, as described above in "Explanatory Note"), but we cannot assure you
that these assumptions and expectations will prove to have been correct or that
we will take any action that we may presently be planning. We have disclosed
certain important factors (e.g., see "Explanatory Note" and "Risk Factors") that
could cause our actual results to differ materially from our current
expectations elsewhere in this Report. You should understand that
forward-looking statements made in this Report are necessarily qualified by
these factors. We are not undertaking to publicly update or revise any
forward-looking statement if we obtain new information or upon the occurrence of
future events or otherwise.


Accounting policies and critical estimates



The accompanying condensed consolidated financial statements and supplementary
information were prepared in accordance with accounting principles generally
accepted in the United States of America. Significant accounting policies are
discussed in Note 2 to the Consolidated Financial Statements set forth in our
Annual Report on Form 10-K for the fiscal year ended December 31, 2020. Inherent
in the application of many of these accounting policies is the need for
management to make estimates and judgments in the determination of certain
revenues, expenses, assets and liabilities. As such, materially different
financial results can occur as circumstances change and additional information
becomes known. The policies with the greatest potential effect on our results of
operations and financial position include:



Allowance for Doubtful Accounts. Our allowance for doubtful accounts is based
upon management's assessment of the business environment, customers' financial
condition, historical collection experience, accounts receivable aging, customer
disputes and the collectability of specific customer accounts. If there were a
deterioration of a major customer's creditworthiness, or actual defaults were
higher than our historical experience, our estimates of the recoverability of
amounts due to us could be overstated, which could have an adverse impact on our
operating results. Our allowance for doubtful accounts is also affected by the
time at which uncollectible accounts receivable balances are actually written
off.



Major customers' accounts are monitored on an ongoing basis; more in-depth
reviews are performed based upon changes in a customer's financial condition
and/or the level of credit being extended. When a significant event occurs, such
as a bankruptcy filing by a specific customer, and on a quarterly basis, the
allowance is reviewed for adequacy and the balance or accrual rate is adjusted
to reflect current risk prospects. When certain shocks to the market occur,
customers are unilaterally reviewed to assess the potential impact of that shock
on their financial stability. Many retailers have been operating under financial
duress for several years. Ultimately, we assess the risk of liquidation and/or
bankruptcy by a customer and the associated risk that we will not be paid for
product shipped. To that end, it is not only outstanding accounts receivable
balances but decisions to design and develop account-specific product and
ultimately ship product that plays into our goal to maximize profitability while
minimizing uncollectable accounts receivable.



Revenue Recognition. Our contracts with customers only include one performance
obligation (i.e., sale of our products). Revenue is recognized in the gross
amount at a point in time when delivery is completed and control of the promised
goods is transferred to the customers. Revenue is measured as the amount of
consideration we expect to be entitled to in exchange for those goods. Our
contracts do not involve financing elements as payment terms with customers are
less than one year. Further, because revenue is recognized at the point in time
goods are sold to customers, there are no contract assets or contract liability
balances.



We disaggregate our revenues from contracts with customers by reporting segment:
Toys/Consumer Products and Costumes. We further disaggregate revenues by major
geographic region. See Note 2 to the Condensed Consolidated Financial Statements
for further information.



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We offer various discounts, pricing concessions, and other allowances to
customers, all of which are considered in determining the transaction price.
Certain discounts and allowances are fixed and determinable at the time of sale
and are recorded at the time of sale as a reduction to revenue. Other discounts
and allowances can vary and are determined at management's discretion (variable
consideration). Specifically, we occasionally grant discretionary credits to
facilitate markdowns and sales of slow moving merchandise, and consequently
accrue an allowance based on historic credits and management estimates. Further,
while we generally do not allow product returns, we do make occasional
exceptions to this policy, and consequently record a sales return allowance
based upon historic return amounts and management estimates. These allowances
(variable consideration) are estimated using the expected value method and are
recorded at the time of sale as a reduction to revenue. We adjust our estimate
of variable consideration at least quarterly or when facts and circumstances
used in the estimation process may change. The variable consideration is not
constrained as we have sufficient history on the related estimates and do not
believe there is a risk of significant revenue reversal.



We also participate in cooperative advertising arrangements with some customers,
whereby we allow a discount from invoiced product amounts in exchange for
customer purchased advertising that features our products. Generally, these
allowances range from 1% to 20% of gross sales, and are generally based upon
product purchases or specific advertising campaigns. Such allowances are accrued
when the related revenue is recognized. These cooperative advertising
arrangements provide a distinct benefit at fair value, and are accounted for as
direct selling expenses.



Sales commissions are expensed when incurred as the related revenue is
recognized at a point in time and therefore the amortization period is less than
one year. As a result, these costs are recorded as direct selling expenses, as
incurred.


Shipping and handling activities are considered part of our obligation to transfer the products and are therefore recorded as direct selling costs, as they are incurred.

Our reserve for sales returns and discounts was $ 39.5 million from
March 31, 2021 and $ 42.1 million from December 31, 2020.



Fair value measurements. Fair value is the price that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. In determining fair value, we use
various methods including market, income and cost approaches. Based upon these
approaches, we often utilize certain assumptions that market participants would
use in pricing the asset or liability, including assumptions about risk and/or
the risks inherent in the inputs to the valuation technique. These inputs can be
readily observable, market-corroborated, or unobservable inputs. We utilize
valuation techniques that maximize the use of observable inputs and minimize the
use of unobservable inputs. Based upon observable inputs used in the valuation
techniques, we are required to provide information according to the fair value
hierarchy. The fair value hierarchy ranks the quality and reliability of the
information used to determine fair values into three broad levels as follows:



Level 1: asset valuations and

         liabilities traded in active
         markets from readily available
         pricing sources for market
         transactions involving identical
         assets or liabilities.
Level 2: Valuations for assets and
         liabilities traded in less active
         dealer or broker markets.
         Valuations are obtained from
         third-party pricing services for
         identical or similar assets or
         liabilities.

Level 3: the evaluations include certain

         assumptions and projections in
         determining the fair value
         assigned to such assets or
         liabilities.




In instances where the determination of the fair value measurement is based upon
inputs from different levels of the fair value hierarchy, the level in the fair
value hierarchy within which the entire fair value measurement falls is based
upon the lowest level input that is significant to the fair value measurement in
its entirety. Our assessment of the significance of a particular input to the
fair value measurement in its entirety requires judgment, and considers factors
specific to the asset or liability. See Note 16 to the Condensed Consolidated
Financial Statements included within for further information.



Good will and other intangible assets with indefinite useful lives. Good will and intangible assets with indefinite useful lives are not amortized, but are tested for impairment at least once a year at the business unit level.

The factors that we consider important and likely to trigger an impairment review are as follows:

• significant underperformance compared to historical or projected forecasts

         future operating results;




      •  significant changes in the manner of our use of the acquired assets or
         the strategy for our overall business; and




  • significant negative industry or economic trends.




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Due to the subjective nature of the impairment analysis, significant changes in
the assumptions used to develop the estimate could materially affect the
conclusion regarding the future cash flows necessary to support the valuation of
long-lived assets, including goodwill. The valuation of goodwill involves a high
degree of judgment and uncertainty related to our key assumptions. Any changes
in our key projections or estimates could result in a reporting unit either
passing or failing the first step of the impairment model, which could
significantly change the amount of any impairment ultimately recorded.



Based upon the assumptions underlying the valuation, impairment is determined by
estimating the fair value of a reporting unit and comparing that value to the
reporting unit's book value. Goodwill is tested for impairment annually, and on
an interim basis if certain events or circumstances indicate that an impairment
loss may have been incurred. If the fair value is more than the carrying value
of the reporting unit, an impairment loss is not indicated. If a reporting
unit's carrying value exceeds its fair value, an impairment charge would be
recognized for the excess amount, not to exceed the carrying amount of goodwill.



Based on several factors that occurred during the quarter ended March 31, 2020,
we determined the fair value of our reporting units should be retested for
potential impairment. As a result of the retesting performed, no goodwill
impairment was determined to have occurred for the three-month period ended
March 31, 2020. No goodwill impairment was determined to have occurred for the
three-month period ended March 31, 2021.



Impairment of Long-Lived Assets. When facts and circumstances indicate that the
carrying values of long-lived assets, including buildings, equipment and
amortizable intangible assets, may be impaired, we perform an evaluation of
recoverability by comparing the carrying values of the net assets to their
related projected undiscounted future cash flows, in addition to other
quantitative and qualitative analysis. Our estimates are subject to
uncertainties and may be impacted by various external factors such as economic
conditions and market competition. While we believe the inputs and assumptions
utilized in our analysis of future cash flows are reasonable, events or
circumstances may change, which could cause us to revise these estimates.



Reserve for Inventory Obsolescence. We value our inventory at the lower of cost
or net realizable value. Based upon a consideration of quantities on hand,
actual and projected sales volume, anticipated product selling prices and
product lines planned to be discontinued, slow-moving and obsolete inventory is
written down to its net realizable value.



Failure to accurately predict and respond to consumer demand could result in us
under-producing popular items or over-producing less popular items. Furthermore,
significant changes in demand for our products would impact management's
estimates in establishing our inventory provision.



Management's estimates are monitored on a quarterly basis, and a further
adjustment to reduce inventory to its net realizable value is recorded as an
increase to cost of sales when deemed necessary under the lower of cost or net
realizable value standard.



When unexpected shocks to market demand occur (such as the COVID-19 pandemic
market shock), we review whether that shock might materially impact the value of
our owned inventory. In some cases, where customers have cancelled orders,
accommodation can be reached that the product will be reordered when the
customer has restarted operations (in the event of store closures) or the
customer agrees to minimize/eliminate requests for product line refreshment
(such as in the event of Halloween order cancellations) which allows the
inventory and in some cases raw materials to be held through to the following
calendar year without incurring any additional obsolescence.



Discrete Items for Income Taxes. The discrete expense recorded in the three
months ended March 31, 2021 is $22,000 which is primarily related to excess tax
deficiencies fully offset by valuation allowance, state income taxes, and
foreign return-to-provision adjustments. For the comparable period in 2020, a
discrete tax benefit of $20,000 was recorded related to excess tax deficiencies
fully offset by valuation allowance and change in uncertain tax positions.



Income taxes and interest and penalties related to income tax payable. We do not
file a consolidated return for our foreign subsidiaries. We file federal and
state returns and our foreign subsidiaries each file returns as required.
Deferred taxes are provided on an asset and liability method, whereby deferred
tax assets are recognized as deductible temporary differences and operating loss
and tax credit carry-forwards and deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are the differences between
the reported amounts of assets and liabilities and their tax bases. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some or all of the deferred tax assets will not
be realized. Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment.



Management employs a threshold and measurement process for recording in the
financial statements uncertain tax positions taken or expected to be taken in a
tax return. Tax benefits that are subject to challenge by tax authorities are
analyzed and accounted for in the income tax provision.



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We accrue a tax reserve for additional income taxes, which may become payable in
future years as a result of audit adjustments by tax authorities. The reserve is
based upon management's assessment of all relevant information and is
periodically reviewed and adjusted as circumstances warrant. As of March 31,
2021 and December 31, 2020, our income tax reserves were approximately $1.0
million. The $1.0 million balance primarily relates to the potential tax
settlements in Hong Kong. Our income tax reserves are included in income tax
payable on the Condensed Consolidated Balance Sheets and within provision for
income taxes on the Condensed Consolidated Statements of Operations and
Comprehensive Loss.



Share-Based Compensation. We grant restricted stock units and awards to our
employees (including officers) and to non-employee directors under our 2002
Stock Award and Incentive Plan (the "Plan"), as amended. The benefits provided
under the Plan are share-based payments. We amortize over a requisite service
period, the net total deferred restricted stock expense based upon the fair
value of the underlying common stock on the date of the grants. In certain
instances, the service period may differ from the period in which each award
will vest. Additionally, certain groups of grants are subject to performance
criteria and/or an expected forfeiture rate calculation.



New Accounting Pronouncements


See note 1 of the condensed consolidated financial statements.


Results of Operations


The following unaudited table presents, for the periods indicated, certain income statement data as a percentage of net sales.



                                                                  Three Months Ended March 31,
                                                                   2021                  2020
Net sales                                                              100.0 %               100.0 %
Cost of sales                                                           68.9                  75.4
Gross profit                                                            31.1                  24.6
Selling, general and administrative expenses                            34.4                  48.6
Loss from operations                                                    (3.3 )               (24.0 )
Income from joint ventures                                                 -                     -
Other income (expense), net                                              0.1                   0.1
Change in fair value of preferred stock derivative liability            (8.8 )                 3.1
Change in fair value of convertible senior notes                       (10.8 )                11.5
Interest income                                                            -                     -
Interest expense                                                        (5.8 )                (8.3 )
Loss before provision for income taxes                                 (28.6 )               (17.6 )
Provision for income taxes                                               0.1                   0.4
Net loss                                                               (28.7 )               (18.0 )
Net income attributable to non-controlling interests                       -                   0.1
Net loss attributable to JAKKS Pacific, Inc.                           (28.7 )%              (18.1 )%



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


                            Three Months Ended March 31,
                              2021                 2020
Net Sales
Toys/Consumer Products   $       79,875       $       62,565
Costumes                          3,968                3,992
                                 83,843               66,557
Cost of Sales
Toys/Consumer Products           54,192               47,436
Costumes                          3,557                2,771
                                 57,749               50,207
Gross Profit
Toys/Consumer Products           25,683               15,129
Costumes                            411                1,221
                         $       26,094       $       16,350




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Comparison of the three completed months March 31, 2021 and 2020


Net Sales



Toys/Consumer Products. Net sales of our Toys/Consumer Products segment were
$79.9 million for the three months ended March 31, 2021 compared to $62.6
million for the prior year period, representing an increase of $17.3 million, or
27.6%. Double-digit sales growth was seen across all three divisions: Boys,
Girls, and Seasonal/Outdoor. Sales from Boys' toys increased in the quarter led
by video game related toys like Nintendo®, Sonic the Hedgehog®, and Apex
Legends®. Girls' toys saw increases from Disney Princess® and Disney Raya®, with
positive contributions from Perfectly Cute®. Seasonal grew over the prior year
period with the help of Redo Skateboards® and activity tables.



Costumes. The net sales of our Suits segment were $ 4.0 million for the three months ended March 2021 compared to $ 4.0 million for the period of the previous year. Sales for the quarter were stable, in line with the seasonality of the suits business.



Cost of Sales



Toys/Consumer Products. Cost of sales of our Toys/Consumer Products segment was
$54.2 million, or 67.8% of related net sales for the three months ended March
31, 2021 compared to $47.4 million, or 75.7% of related net sales for the prior
year period, representing an increase of $6.8 million, or 14.3%. The increase in
dollars is due to higher overall sales in 2021. The decrease as a percentage of
net sales, year over year, is due to lower average manufacturing costs resulting
from a focused effort to design and develop our product lines for greater
product margins as well as a reduction in the volume of lower margin closeout
sales. A lower average royalty rate, in part driven by the mix of products sold
in the quarter also contributed to the decrease.



Costumes. Cost of sales of our Costumes segment was $3.6 million, or 90.0% of
related net sales for the three months ended March 31, 2021 compared to $2.8
million, or 70.0% of related net sales for the prior year period, representing
an increase in dollars of $0.8 million, or 28.6%. The increase in dollars and as
a percentage of net sales, year over year, is due to an increase in customer
credits attributable to slower-moving products.



Selling, general and administrative expenses



Selling, general and administrative expenses were $28.8 million for the three
months ended March 31, 2021 compared to $32.3 million for the prior year period
constituting 34.4% and 48.6% of net sales, respectively. Selling, general and
administrative expenses decreased by $3.5 million from the prior year period
primarily driven by a $1.9 million employee retention credit and company-wide
cost savings initiatives begun in 2019 as well as other pandemic-driven cost
mitigation programs.



Interest Expense



Interest expense was $4.9 million for the three months ended March 31, 2021, as
compared to $5.5 million in the prior year period. During the three months ended
March 31, 2021, we booked interest expense of $0.4 million related to our
convertible senior notes due in 2023, $4.3 million related to our Term Loan, and
$0.2 million related to our revolving credit facility. During the three months
ended March 31, 2020, we booked interest expense of $0.6 million related to our
convertible senior notes, $4.7 million related to our Term Loan, and $0.2
million related to our revolving credit facility.



Provision for Income Taxes



Our income tax expense, which includes federal, state and foreign income taxes
and discrete items, was $0.1 million, or an effective tax rate of (0.4)%, for
the three months ended March 31, 2021. During the comparable period in 2020, our
income tax expense was $0.3 million, or an effective tax rate of (2.4)%.



Seasonality and Backlog



The retail toy industry is inherently seasonal. Generally, our sales have been
highest during the third and fourth quarters, and collections for those sales
have been highest during the succeeding fourth and first quarters. Our working
capital needs have been highest during the second and third quarters.



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



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Liquidity and capital resources

From March 31, 2021, we had working capital of $ 107.8 million, compared to
$ 112.6 million from December 31, 2020.



Operating activities used net cash of $7.0 million in the three months ended
March 31, 2021, as compared to $18.9 million in the prior year period. Net cash
during the three months ended March 31, 2021 was primarily impacted by a
decrease in accrued expenses, accounts payable and reserve for sales returns and
allowances, and an increase in prepaid expenses and other assets, partially
offset by a decrease in accounts receivable. Net cash during the three months
ended March 31, 2020 was primarily impacted by a decrease in accounts payable,
accrued expenses and reserve for sales returns and allowances, partially offset
by a decrease in accounts receivable. Other than open purchase orders issued in
the normal course of business related to shipped product, we have no obligations
to purchase inventory from our manufacturers. However, we may incur costs or
other losses as a result of not placing orders consistent with our forecasts for
product manufactured by our suppliers or manufacturers for a variety of reasons
including customer order cancellations or a decline in demand. As part of our
strategy to develop and market new products, we have entered into various
character and product licenses with royalties/obligations generally ranging from
1% to 25% payable on net sales of such products. As of March 31, 2021, these
agreements required future aggregate minimum royalty guarantees of $33.7
million, exclusive of $15.1 million in advances already paid. Of this $33.7
million future minimum royalty guarantee, $21.6 million is due over the next
twelve months.



Our investing activities used net cash of $1.5 million in the three months ended
March 31, 2021, as compared to using net cash of $1.6 million in the prior year
period, and consisted primarily of cash paid for the purchase of molds and
tooling used in the manufacture of our products.



Our financing activities used cash of $ 0.2 million for the three months ended
March 31, 2021 and 2020, consisting of the buyback of ordinary shares for withholding tax on employees.



As of March 31, 2021, we have $125.3 million (including $5.5 million in PIK
interest) of outstanding indebtedness under a First Lien Term Loan Facility
Credit Agreement (the "New Term Loan Agreement) and we have no outstanding
indebtedness under an amended and extended Credit Agreement (the "Amended ABL
Credit Agreement" or "Amended Wells Fargo Credit Agreement") with Wells Fargo
Bank, National Association ("Wells Fargo"). We also have a $6.2 million PPP Loan
under the PPP provided under the CARES Act.



The New Term Loan Agreement and Amended ABL Credit Agreement each contain
negative covenants that, subject to certain exceptions, limit our ability 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, as well as cross-default provisions. The original terms of the New
Term Loan Agreement required us to maintain a trailing 12-month Earnings Before
Interest, Taxes, Depreciation and Amortization ("EBITDA") (as defined and
adjusted therein) of not less than $34.0 million and a minimum liquidity of not
less than $10.0 million commencing with the fiscal quarter ending September 30,
2020.



On October 16, 2020, we reached an agreement (the "Amendment") with holders of
our term loan and Wells Fargo Bank, National Association ("Wells Fargo"), holder
of our revolving credit facility, to amend our New Term Loan Agreement and defer
the EBITDA covenant calculation until March 31, 2022. Under the Amendment, the
trailing 12-month EBITDA requirement was reduced to $25.0 million, which will
not be calculated earlier than March 31, 2022. The Amendment also required us to
pre-pay $15.0 million of the New Term Loan immediately and, under certain
conditions, pre-pay up to an additional $5.0 million no later than the third
quarter of fiscal year 2021. In connection with the amendments on October 20,
2020, we paid $15.0 million of our outstanding principal amount and $0.3 million
in related interest and PIK interest.



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, and cross-default
provisions with the Amended Wells Fargo Credit Agreement. If an event of default
occurs under either Agreement, the maturity of the amounts owed under the New
Term Loan Agreement and the Amended Wells Fargo Credit Agreement may be
accelerated.



We were in compliance with financial covenants under the new term loan agreement at March 31, 2021.

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Debt and Credit Facilities



Convertible Senior Notes



In July 2013, we 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, 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. Excluding the impact of the Reverse Stock Split, the initial conversion
rate for the 2018 Notes was 114.3674 shares of our 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, we repurchased and retired an aggregate of approximately $6.1
million principal amount of the 2018 Notes. During the first quarter of 2017, we
exchanged and retired $39.1 million principal amount of the 2018 Notes at par
for $24.1 million in cash and approximately 290,000 shares of our common stock.
During the second quarter of 2017, we exchanged and retired $12.0 million
principal amount of the 2018 Notes at par for $11.6 million in cash and 11,240
shares of our common stock.



In August 2017, we agreed with Oasis Management and Oasis Investments II Master
Fund Ltd., (collectively, "Oasis") the holder of approximately $21.6 million
face amount of our 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, excluding the impact of the Reverse Stock
Split, the conversion rate was increased to 328.0302 shares of our 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 our Board of Directors and Oasis' Investment Committee, the
transaction closed on November 7, 2017. On July 26, 2018, we closed a
transaction with Oasis to exchange $8.0 million face amount of the 2018 Notes
with convertible senior notes similar to those issued to Oasis in November 2017.
The July 26, 2018 $8.0 million Oasis notes mature on November 1, 2020, accrue
interest at an annual rate of 3.25%, and excluding the impact of the Reverse
Stock Split, are convertible into shares of our common stock at a rate of
322.2688 shares per $1,000 principal amount of the new notes. The conversion
price for the 3.25% convertible senior notes due 2020 was reset on November 1,
2018 and 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. Excluding the impact of the Reverse Stock
Split, the conversion price of the 3.25% convertible senior notes due 2020 reset
on November 1, 2018 to $2.54 per share and the conversion rate was increased to
393.7008 shares of our common stock per $1,000 principal amount of notes.



The rest $ 13.2 million of the 2018 notes were redeemed at par at maturity on
Aug 1, 2018.



In August 2019, we entered into and consummated multiple, binding definitive
agreements (collectively, the "Recapitalization Transaction") among Wells Fargo,
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 our balance sheet, including the extension to us of incremental
liquidity and at least three-year extensions of substantially all of our
outstanding convertible debt obligations and revolving credit facility. Our 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, we 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.



Excluding the impact of the Reverse Stock Split, 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. We
may trigger a mandatory conversion of the New Oasis Notes if the market price
exceeds 150% of the conversion price under certain circumstances. We may redeem
the New Oasis Notes in cash if a person, entity or group acquires shares of our
Common Stock, par value $0.001 per share (the "Common Stock"), and as a result
owns at least 49% of our issued and outstanding Common Stock. On February 9,
2020, excluding the impact of the Reverse Stock Split, the conversion price of
the New Oasis Notes reset to $1.00 per share ($10.00 per share after the Reverse
Stock Split). On August 9, 2020, the conversion price of the New Oasis Notes
reset to $5.647. On February 9, 2021, the conversion price of the New Oasis
Notes recalculated and remained unchanged at $5.647.



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In June 2020, $7.1 million of the New Oasis Notes (including $0.2 million in PIK
interest) were converted for 710,100 shares of common stock. As a result, we
recorded an increase to additional paid-in capital of $9.5 million. In August
2020, $1.0 million of the New Oasis Notes (including $27,288 in PIK interest)
were converted for 177,085 shares of common stock. As a result, we recorded an
increase to additional paid-in capital of $1.3 million. In October 2020, $2.0
million of the New Oasis Notes (including $63,225 in PIK interest) were
converted for 354,170 shares of common stock. As a result, we recorded an
increase to additional paid-in capital of $2.6 million. In November 2020, $4.0
million of the New Oasis Notes (including $138,248 in PIK interest) were
converted for 708,340 shares of common stock. As a result, we recorded an
increase to additional paid-in capital of $5.4 million. In December 2020, $1.0
million of the New Oasis Notes (including $36,528 in PIK interest) were
converted for 177,085 shares of common stock. As a result, we recorded an
increase to additional paid-in capital of $1.4 million. In March 2021, $3.0
million of the New Oasis Notes (including $128,230 in PIK interest) were
converted for 531,255 shares of common stock. As a result, the Company recorded
an increase to additional paid-in capital of $5.6 million.



On February 5, 2021, Benefit Street Partners and Oasis Investment II Master
Funds Ltd, both related parties, entered into a purchase and sale agreement
wherein Benefit Street Partners purchased $11.0 million of principal amount,
plus all accrued and unpaid interest thereon, of the New Oasis Notes from Oasis
Investment II Master Funds Ltd (see Note 17 - Related Party Transactions). The
transaction closed on February 8, 2021 (see Note 5 - Debt).



In June 2014, we 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 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. Excluding the impact of the Reverse Stock Split, the initial and still
current conversion rate for the 2020 Notes is 103.7613 shares of our 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 our
common stock. Holders of the 2020 Notes may require that we 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, we repurchased and retired an
aggregate of $2.0 million principal amount of the 2020 Notes.



In connection with the Recapitalization Transaction, the 2020 Notes with a face
amount of $111.1 million of the total $113.0 million that were outstanding at
the time of the Recapitalization Transaction were refinanced and the maturity
dates were extended. Of the refinanced amount, $103.8 million was refinanced
with the Investor Parties through the issuance of the New Common Equity, the New
Preferred Equity (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. The remaining $1.9 million
principal amount of 2020 Notes were redeemed at par at maturity on June 1, 2020.



Term Loan



On August 9, 2019, in connection with the Recapitalization Transaction, we
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"). We also issued
common stock and preferred stock (see Note 9 - Common Stock and Preferred Stock)
to the Investor Parties.


The unpaid amounts under the new term loan bear interest at 10.50% per annum, payable semi-annually (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 our ability and the ability of our subsidiaries to, among
other things, incur additional indebtedness, make restricted payments, pledge
assets as security, make investments, loans, advances, guarantees and
acquisitions, undergo fundamental changes and enter into transactions with
affiliates. The original terms of the New Term Loan Agreement required us to
maintain a trailing 12-month EBITDA (as defined and adjusted therein) of not
less than $34.0 million and a minimum liquidity of not less than $10.0 million
commencing with the fiscal quarter ending September 30, 2020.



On October 16, 2020, we reached an agreement (the "Amendment") with holders of
our New Term Loan and Wells Fargo, holder of our revolving credit facility, to
amend our New Term Loan Agreement and defer the EBITDA covenant calculation
until March 31, 2022. Under the Amendment, the trailing 12-month EBITDA
requirement was reduced to $25.0 million, which will not be calculated earlier
than March 31, 2022. The Amendment also required us to pre-pay $15.0 million of
the New Term Loan immediately and, under certain conditions, pre-pay up to an
additional $5.0 million no later than the third quarter of fiscal year 2021. In
connection with the amendments, on October 20, 2020, we paid $15.0 million of
our outstanding principal amount and $0.3 million in related interest and PIK
interest. As of March 31, 2021, we had $125.3 million (including $5.5 million in
PIK interest) outstanding under the New Term Loan Agreement.



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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, violations 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 us, the
subsidiary borrowers thereunder and certain of the other existing and future
direct and indirect subsidiaries and are secured by substantially all of our
assets, the subsidiary borrowers thereunder and such other subsidiary
guarantors, in each case, subject to certain exceptions and permitted liens.



Paycheque Protection Program Loan



On June 12, 2020, we received a $6.2 million PPP Loan under the PPP within the
CARES Act. The PPP Loan matures on June 2, 2022 and is subject to the CARES Act
terms which include, among other terms, an interest rate of 1.00% per annum and
monthly installment payments of $261,275 commencing on September 27, 2021. The
PPP Loan may be prepaid at any time prior to maturity with no prepayment
penalties. The PPP Loan is subject to events of default and other provisions
customary for a loan of this type. The PPP Loan may be forgiven, partially or in
full, if certain conditions are met, principally based on having been disbursed
for permissible purposes and maintaining certain average levels of employment
and payroll as required by the CARES Act. The loan received has been recorded as
a liability by the Company as of the date received. We intend to apply for
forgiveness of amounts received under the PPP, in accordance with the
requirements of the CARES Act, as amended. Any loan amounts forgiven will be
removed from liabilities recorded. While we used the proceeds of the PPP Loan
only for permissible purposes, there can be no assurance that we will be
eligible for forgiveness of the PPP Loan, in full or in part.



Wells Fargo



In March 2014, we and our 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 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 we 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,
we entered into a Term Loan Agreement with Great American Capital Partners
Finance Co., LLC ("GACP") 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, we revised certain of the
Credit Facility documents (and entered into new ones) so that certain of our
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 we 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), we entered into an amended and extended
revolving credit facility with Wells Fargo (the "Amended ABL Credit Agreement").
The Amended ABL Credit Agreement, amends, extends and restates our 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 us, the
subsidiary borrowers thereunder and certain of the other existing and future
direct and indirect subsidiaries and are secured by substantially all of our
assets, the subsidiary borrowers thereunder and such other subsidiary
guarantors, in each case, subject to certain exceptions and permitted liens. As
of March 31, 2021, the amount of outstanding borrowings was nil, the amount of
outstanding stand-by letters of credit was $10.8 million and the total excess
borrowing capacity was $35.0 million. As of December 31, 2020, the amount of
outstanding borrowings was nil, the amount of outstanding stand-by letters of
credit was $10.8 million and the total excess borrowing capacity was $37.3
million.



The Amended ABL Credit Agreement contains negative covenants that, subject to
certain exceptions, limit our ability to, among other things, incur additional
indebtedness, make restricted payments, pledge our assets as security, make
investments, loans, advances, guarantees and acquisitions, undergo fundamental
changes and enter into transactions with affiliates. We are 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 March 31, 2021 and December 31,
2020, we are in compliance with the financial covenants under the Amended ABL
Credit Agreement and the previous Credit Facility, as applicable.



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Any amounts borrowed under the Amended ABL Credit Agreement 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 March 31, 2021 and December 31, 2020, the weighted average interest rate
on the credit facility with Wells Fargo was nil.



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


As described in the Term Loan section above, on October 16, 2020, we amended the new term loan agreement to reduce the amount and defer the calculation of our EBITDA clause as Wells Fargo is a party to the agreement.

Awesome American Capital Partners



On June 14, 2018, we entered into a Term Loan Agreement, Term Note, Guaranty and
Security Agreement and other ancillary documents and agreements (the "Term
Loan") with 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 us by Lenders of a $20.0 million term
loan. To secure our obligations under the Term Loan, we granted to Agent, for
the benefit of the Secured Parties, a security interest in a substantial amount
of our consolidated assets and a pledge of the majority of the capital stock of
various of our subsidiaries. The Term Loan was a secured obligation, second only
to the Credit Facility with Wells Fargo, except with respect to certain of our
inventory in which GACP has a priority secured position.



The Term Loan required 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 would be due,
and the Term Loan would terminate, no later than June 14, 2021, unless sooner
terminated in accordance with its terms, which included the date of termination
of the Wells Fargo Credit Facility and the date that is 91 days prior to the
maturity of our various convertible senior notes due in 2020 (see Note 5 -
Debt). We were permitted to prepay the Term Loan, which would have required 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.



In August 2019, as part of the recapitalization transaction (see note 5 – Debt), we repaid in full and terminated the term loan agreement.



We are subject to negative covenants which, during the life of the Amended Wells
Fargo Credit Agreement and New Term Loan Agreement, prohibit and/or limit us
from, among other things, incurring certain types of other debt, acquiring other
companies, making certain expenditures or investments, and changing the
character of our business. An outbreak of infectious disease, a pandemic or a
similar public health threat, such as the 2019 Novel Coronavirus outbreak, or a
fear of any of the foregoing, could adversely impact our ability to comply with
such covenants. Our failure to comply with such covenants or any other breach of
the Amended Wells Fargo Credit Agreement or New Term Loan Agreement could cause
a default and we may then be required to repay borrowings under our Amended
Wells Fargo Credit Agreement or New Term Loan Agreement with capital from other
sources, or reach some other accommodation with those parties.



As of March 31, 2021 and December 31, 2020, we held cash and cash equivalents,
including restricted cash, of $84.1 million and $92.7 million, respectively.
Cash, and cash equivalents, including restricted cash held outside of the United
States in various foreign subsidiaries totaled $30.5 million and $48.7 million
as of March 31, 2021 and December 31, 2020, respectively. The cash and cash
equivalents, including restricted cash balances in our foreign subsidiaries have
either been fully taxed in the U.S. or tax has been accounted for in connection
with the Tax Cuts and Jobs Act, or may be eligible for a full foreign dividends
received deduction under such Act, and thus would not be subject to additional
U.S. tax should such amounts be repatriated in the form of dividends or deemed
distributions. Any such repatriation may result in foreign withholding taxes,
which we expect would not be significant as of March 31, 2021.



Our primary sources of working capital are cash flow from operations and borrowings under our Amended Wells Fargo Credit Agreement (see Note 6 – Credit Facilities).



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



Off-balance sheet arrangements

From March 31, 2021, off-balance sheet arrangements include letters of credit issued by Wells Fargo to $ 10.8 million.








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