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.
July 9, 2020, we completed a 1 for 10 reverse stock split of our $0.001par 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:
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
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 Statesand elsewhere in the world, which remains highly uncertain and cannot be predicted at this time. 30
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. 31
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
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.
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. 32
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.
Goodwillis 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 Halloweenorder 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, 2021is $22,000which 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 $20,000was 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. 33
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, 2021and December 31, 2020, our income tax reserves were approximately $1.0 million. The $1.0 millionbalance 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 SalesToys/Consumer Products $ 79,875 $ 62,565Costumes 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 $ 16,35034
Comparison of the three completed months
Net SalesToys/Consumer Products. Net sales of our Toys/Consumer Products segment were $79.9 millionfor the three months ended March 31, 2021compared to $62.6 millionfor 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
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, 2021compared 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, 2021compared 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 millionfor the three months ended March 31, 2021compared to $32.3 millionfor the prior year period constituting 34.4% and 48.6% of net sales, respectively. Selling, general and administrative expenses decreased by $3.5 millionfrom the prior year period primarily driven by a $1.9 millionemployee 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 millionfor the three months ended March 31, 2021, as compared to $5.5 millionin the prior year period. During the three months ended March 31, 2021, we booked interest expense of $0.4 millionrelated to our convertible senior notes due in 2023, $4.3 millionrelated to our Term Loan, and $0.2 millionrelated to our revolving credit facility. During the three months ended March 31, 2020, we booked interest expense of $0.6 millionrelated to our convertible senior notes, $4.7 millionrelated to our Term Loan, and $0.2 millionrelated 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. 35
Liquidity and capital resources
Operating activities used net cash of
$7.0 millionin the three months ended March 31, 2021, as compared to $18.9 millionin the prior year period. Net cash during the three months ended March 31, 2021was 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, 2020was 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 millionin advances already paid. Of this $33.7 millionfuture minimum royalty guarantee, $21.6 millionis due over the next twelve months. Our investing activities used net cash of $1.5 millionin the three months ended March 31, 2021, as compared to using net cash of $1.6 millionin 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
March 31, 2021, we have $125.3 million(including $5.5 millionin 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 millionPPP 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 millionand a minimum liquidity of not less than $10.0 millioncommencing 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 millionof the New Term Loan immediately and, under certain conditions, pre-pay up to an additional $5.0 millionno later than the third quarter of fiscal year 2021. In connection with the amendments on October 20, 2020, we paid $15.0 millionof our outstanding principal amount and $0.3 millionin 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
Table of Contents Debt and Credit Facilities Convertible Senior Notes In
July 2013, we sold an aggregate of $100.0 millionprincipal 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 1and February 1of 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 $1,000principal amount of notes, equivalent to an initial conversion price of approximately $8.74per share of common stock, subject to adjustment in certain events. In 2016, we repurchased and retired an aggregate of approximately $6.1 millionprincipal amount of the 2018 Notes. During the first quarter of 2017, we exchanged and retired $39.1 millionprincipal amount of the 2018 Notes at par for $24.1 millionin cash and approximately 290,000 shares of our common stock. During the second quarter of 2017, we exchanged and retired $12.0 millionprincipal amount of the 2018 Notes at par for $11.6 millionin cash and 11,240 shares of our common stock. In August 2017, we agreed with Oasis Managementand Oasis Investments II Master Fund Ltd., (collectively, "Oasis") the holder of approximately $21.6 millionface 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 $1,000principal 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 millionface amount of the 2018 Notes with convertible senior notes similar to those issued to Oasis in November 2017. The July 26, 2018 $8.0 millionOasis 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 $1,000principal amount of the new notes. The conversion price for the 3.25% convertible senior notes due 2020 was reset on November 1, 2018and 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, 2018to $2.54per share and the conversion rate was increased to 393.7008 shares of our common stock per $1,000principal amount of notes.
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 Partnerswas 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 Noteissued on November 7, 2017, and the $8.0 million Oasis Noteissued on July 26, 2018(together, the "Existing Oasis Notes"), and (ii) a new $8.0 millionconvertible 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 1and November 1until 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 9and 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 $0.001per 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 $1.00per share ( $10.00per 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. 37
June 2020, $7.1 millionof the New Oasis Notes (including $0.2 millionin 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 millionof the New Oasis Notes (including $27,288in 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 millionof the New Oasis Notes (including $63,225in 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 millionof the New Oasis Notes (including $138,248in 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 millionof the New Oasis Notes (including $36,528in 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 millionof the New Oasis Notes (including $128,230in 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 Partnersand Oasis Investment II Master Funds Ltd, both related parties, entered into a purchase and sale agreement wherein Benefit Street Partnerspurchased $11.0 millionof 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 millionprincipal 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 1and December 1of 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 $1,000principal amount of notes, equivalent to an initial conversion price of approximately $9.64per 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 millionprincipal amount of the 2020 Notes. In connection with the Recapitalization Transaction, the 2020 Notes with a face amount of $111.1 millionof the total $113.0 millionthat were outstanding at the time of the Recapitalization Transaction were refinanced and the maturity dates were extended. Of the refinanced amount, $103.8 millionwas 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 millionof accrued interest was refinanced with the Investor Parties. The remaining refinanced amount of $7.3 millionwas exchanged into the New $8.0 million Oasis Notediscussed above. The remaining $1.9 millionprincipal 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 millionfirst-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
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 millionand a minimum liquidity of not less than $10.0 millioncommencing 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 millionof the New Term Loan immediately and, under certain conditions, pre-pay up to an additional $5.0 millionno later than the third quarter of fiscal year 2021. In connection with the amendments, on October 20, 2020, we paid $15.0 millionof our outstanding principal amount and $0.3 millionin related interest and PIK interest. As of March 31, 2021, we had $125.3 million(including $5.5 millionin PIK interest) outstanding under the New Term Loan Agreement. 38
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
June 12, 2020, we received a $6.2 millionPPP Loan under the PPP within the CARES Act. The PPP Loan matures on June 2, 2022and 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 $261,275commencing 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 millionrevolving 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 millionfor 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, 2018if 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 Kongbased 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 millionto $60.0 millionand 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 millionand 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 millionand 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 millionand a minimum availability of at least $9.0 million. As of March 31, 2021and December 31, 2020, we are in compliance with the financial covenants under the Amended ABL Credit Agreement and the previous Credit Facility, as applicable. 39
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, 2021and 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
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 millionterm 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.
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, 2021and December 31, 2020, we held cash and cash equivalents, including restricted cash, of $84.1 millionand $92.7 million, respectively. Cash, and cash equivalents, including restricted cash held outside of the United Statesin various foreign subsidiaries totaled $30.5 millionand $48.7 millionas of March 31, 2021and 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).
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
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