NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018
Note 1—Principal Industry
JAKKS Pacific, Inc. (the “Company”) is engaged in the development, production and marketing of consumer products, including toys and related products, electronic products, and other consumer products, many of which are based on highly-recognized character and entertainment licenses. The Company commenced its primary business operations in July 1995 through the purchase of substantially all of the assets of a Hong Kong toy company. The Company markets its product lines domestically and internationally.
The Company was incorporated under the laws of the State of Delaware in January 1995.
Note 2—Summary of Significant Accounting Policies
Principles of consolidation
These consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries, and its majority owned joint venture. All intercompany transactions have been eliminated.
The Company entered into a joint venture with Meisheng Culture & Creative Corp., for the purpose of providing certain JAKKS licensed and non-licensed toys and consumer products to agreed-upon territories of the People’s Republic of China. The joint venture includes a subsidiary in the Shanghai Free Trade Zone that sells, distributes and markets these products, which include dolls, plush, role play products, action figures, costumes, seasonal items, technology and app-enhanced toys, based on top entertainment licenses and JAKKS’ own proprietary brands. The Company owns
fifty-one
percent of the joint venture and consolidates the joint venture since control rests with the Company.
Cash and cash equivalents
The Company considers all highly liquid investments with an original maturity of three months or less, when acquired, to be cash equivalents. The Company maintains its cash in bank deposits which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk of cash and cash equivalents.
Restricted cash
Restricted cash consists primarily of a Wells Fargo collateral account established to cover the excess Wells Fargo borrowing base availability shortfall and a cash collateral account to cover a guarantee bond.
Accounts Receivable and Allowance for Doubtful Accounts
Credit is granted to customers on an unsecured basis. Credit limits and payment terms are established based on evaluations made on an ongoing basis throughout the fiscal year of the financial performance, cash generation, financing availability, and liquidity status of each customer. Customers are reviewed at least annually, with more frequent reviews performed as necessary, depending upon the customer’s financial condition and the level of credit being extended. For customers who are experiencing financial difficulties, management performs additional financial analyses before shipping to those customers on credit. The Company uses a variety of financial arrangements to ensure collectability of accounts receivable of customers deemed to be a credit risk, including requiring letters of credit, purchasing various forms of credit insurance with unrelated third parties, or requiring cash in advance of shipment.
The Company records an allowance for doubtful accounts 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.
Use of estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the dates of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods. Actual future results could differ from those estimates. On an ongoing basis, the Company evaluates its estimates, including those related to the accounts receivable and sales allowances, fair values of financial instruments, intangible assets and goodwill, useful lives of intangible assets and property and equipment, income taxes, and contingent liabilities, among others. The Company bases its estimates on assumptions, both historical and forward looking, that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.
Revenue recognition for 2018
The Company’s contracts with customers only include one performance obligation (i.e., sale of the Company’s products). Revenue is recognized in the gross amount at a point in time when delivery is completed and control of the promised goods is transferred to the customers. Revenue is measured as the amount of consideration the Company expects to be entitled to in exchange for those goods. The Company’s contracts do not involve financing elements as payment terms with customers are less than one year. Further, because revenue is recognized at the point in time goods are sold to customers, there are
no
contract assets or contract liability balances.
The Company disaggregates its revenues from contracts with customers by reporting segment: U.S. and Canada, International, and Halloween. The Company further disaggregates revenues by major geographic region. See Note 3 —Business Segments, Geographic Data, Sales by Product Group and Major Customers for further information.
The Company offers various discounts, pricing concessions, and other allowances to customers, all of which are considered in determining the transaction price. Certain discounts and allowances are fixed and determinable at the time of sale and are recorded at the time of sale as a reduction to revenue. Other discounts and allowances can vary and are determined at management’s discretion (variable consideration). Specifically, the Company occasionally grants discretionary credits to facilitate markdowns and sales of slow moving merchandise, and consequently accrues an allowance based on historic credits and management estimates. Further, while the Company generally does not allow product returns, the Company does make occasional exceptions to this policy, and consequently records a sales return allowance based upon historic return amounts and management estimates. These allowances (variable consideration) are estimated using the expected value method and are recorded at the time of sale as a reduction to revenue. The Company adjusts its estimate of variable consideration at least quarterly or when facts and circumstances used in the estimation process may change. The variable consideration is not constrained as the Company has sufficient history on the related estimates and does not believe there is a risk of significant revenue reversal.
The Company also participates in cooperative advertising arrangements with some customers, whereby it allows a discount from invoiced product amounts in exchange for customer purchased advertising that features the Company’s products. Generally, these allowances range from
1%
to
20%
of gross sales, and are generally based upon product purchases or specific advertising campaigns. Such allowances are accrued when the related revenue is recognized. These cooperative advertising arrangements provide a distinct benefit at fair value, and are accounted for as direct selling expenses.
Sales commissions are expensed when incurred as the related revenue is recognized at a point in time and therefore the amortization period is less than
1
year. As a result these costs are recorded as direct selling expenses, as incurred.
Shipping and handling activities are considered part of the Company’s obligation to transfer the products and therefore are recorded as direct selling expenses, as incurred.
The Company’s reserve for sales returns and allowances amounted to
$17.6 million
as of December 31, 2017 and
$29.4 million
as of December 31, 2018.
Revenue recognition for 2016 and 2017
Revenue is recognized upon the shipment of goods to customers or their agents, depending upon terms, provided there are no uncertainties regarding customer acceptance, the sales price is fixed or determinable and collectability is reasonably assured.
Generally the Company does not allow product returns. It provides its customers a negotiated allowance for breakage or defects, which is recorded when the related revenue is recognized. However, the Company does make occasional exceptions to this policy and consequently accrues a return allowance based upon historic return amounts and management estimates. The Company occasionally grants credits to facilitate markdowns and sales of slow-moving merchandise. These credits are recorded as a reduction of gross sales at the time of the sale.
Fair value measurements
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various methods including market, income and cost approaches. Based upon these approaches, the Company often utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market-corroborated, or unobservable inputs. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based upon observable inputs used in the valuation techniques, the Company is required to provide information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values into three broad levels as follows:
|
|
|
Level 1:
|
Valuations for assets and liabilities traded in active markets from readily available pricing sources for market transactions involving identical assets or liabilities.
|
Level 2:
|
Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third-party pricing services for identical or similar assets or liabilities.
|
Level 3:
|
Valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.
|
In instances where the determination of the fair value measurement is based upon inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based upon the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
The following table summarizes the Company’s financial asset and liabilities measured at fair value on a recurring basis as of
December 31,
2017 and 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Amount as of
December 31, 2017
|
|
Fair Value Measurements
As of December 31, 2017
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Cash equivalents
|
$
|
13,718
|
|
|
$
|
13,718
|
|
|
$
|
—
|
|
|
$
|
—
|
|
3.25% Convertible senior notes due in 2020
|
22,469
|
|
|
—
|
|
|
—
|
|
|
22,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Amount as of
December 31, 2018
|
|
Fair Value Measurements
As of December 31, 2018
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Cash equivalents
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
3.25% Convertible senior notes due in 2020
|
27,974
|
|
|
—
|
|
|
—
|
|
|
27,974
|
|
The following table provides a reconciliation of the beginning and ending balances of liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) (in thousands):
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2017
|
|
2018
|
Balance at January 1,
|
$
|
—
|
|
|
$
|
22,469
|
|
Issuance of 3.25% convertible senior notes
|
21,550
|
|
|
8,000
|
|
Loss on extinguishment of convertible senior notes
|
611
|
|
|
453
|
|
Change in fair value
|
308
|
|
|
(2,948
|
)
|
Balance at December 31,
|
$
|
22,469
|
|
|
$
|
27,974
|
|
The Company’s accounts receivable, accounts payable and accrued expenses represent financial instruments. The carrying value of these financial instruments is a reasonable approximation of fair value.
In August 2017, the Company agreed with Oasis Management and Oasis Investments II Master Fund Ltd., (collectively "Oasis") the holder of approximately
$21.5 million
face amount of its
4.25%
convertible senior notes due in 2018 (“2018 Notes”), to exchange and extend the maturity date of these notes to
November 1, 2020
. In addition, the interest rate was reduced to
3.25%
per annum and the conversion rate was increased to
328.0302
shares of the Company’s common stock per $1,000 principal amount of notes, among other things. These notes are hereafter referred to as the “
3.25%
convertible senior notes due in
2020
” or “
3.25%
2020 Notes.” After execution of a definitive agreement and final approval by the other members of the Company’s Board of Directors and Oasis’ Investment Committee, the transaction closed on November 7, 2017. On July 26, 2018, the Company closed a transaction with Oasis to exchange
$8.0 million
face amount of the
4.25%
convertible senior notes due in August 2018 with convertible senior notes similar to those issued to Oasis in November 2017. The new notes mature on November 1, 2020, accrue interest at an annual rate of
3.25%
and are convertible into shares of the Company’s common stock at a rate of
322.2688
shares per $1,000 principal amount of the new notes. The conversion price of the
3.25%
2020 Notes reset on November 1, 2018 to
$2.54
per share and the conversion rate was increased to
393.7008
of the Company's common stock per $1,000 principal amount of notes.
In connection with these transactions, the Company elected the fair value option of measurement for the
3.25%
2020 Notes under ASC 815,
Derivatives and Hedging
. As a result, these notes are re-measured each reporting period using Level 3 inputs (Monte Carlo simulation model and inputs for stock price, risk-free rate and volatility), with changes in fair value reflected in current period earnings in our consolidated statements of operations. At
December 31, 2018
, the
3.25%
2020 Notes had a fair value of
$28.0 million
.
The fair value of the
4.875%
convertible senior notes due
2020
as of
December 31, 2017
and
2018
was
$89.7 million
and
$93.2 million
, respectively, based upon the most recent quoted market prices. The fair values of the convertible senior notes are considered to be Level 3 measurements on the fair value hierarchy.
Inventory
Inventory, which includes the ex-factory cost of goods, capitalized warehouse costs and in-bound freight and duty, is valued at the lower of cost (first-in, first-out) or market, net of inventory obsolescence reserve, and consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2018
|
Raw materials
|
$
|
477
|
|
|
$
|
311
|
|
Finished goods
|
57,955
|
|
|
53,569
|
|
|
$
|
58,432
|
|
|
$
|
53,880
|
|
As of December 31, 2017 and 2018, the inventory obsolescence reserve was
$14.4 million
and
$12.8 million
, respectively.
Property and equipment
Property and equipment are stated at cost and are being depreciated using the straight-line method over their estimated useful lives as follows:
|
|
|
Office equipment
|
5 years
|
Automobiles
|
5 years
|
Furniture and fixtures
|
5 - 7 years
|
Leasehold improvements
|
Shorter of length of lease or 10 years
|
During interim reporting periods, the Company uses the usage method as its depreciation methodology for molds and tools used in the manufacturing of its products, which is more closely correlated to the production of goods as it follows the seasonality of sales. The Company believes that the usage method more accurately matches costs with revenues. From a full-year perspective, the depreciation methodology follows the straight-line method, based on the estimated useful life of molds and tools of
three years
. Estimated useful lives are periodically reviewed and, where appropriate, changes are made prospectively. The carrying value of property and equipment is reviewed when events or changes in circumstances indicate that the carrying value of an asset may not be recoverable.
No
impairment charges were recorded for the years ended
December 31, 2016
,
2017
and
2018
.
For the years ended
December 31, 2016
,
2017
and
2018
, the Company’s aggregate depreciation expense related to property and equipment was
$13.9 million
,
$13.0 million
and
$12.2 million
, respectively.
Other Comprehensive Income (Loss)
Other comprehensive income (loss) includes all changes in equity from non-owner sources. The Company accounts for other comprehensive income in accordance with Accounting Standards Codification (“ASC”) ASC 220, “Comprehensive Income.” All the activity in other comprehensive income (loss) and all amounts in accumulated other comprehensive income (loss) relate to foreign currency translation adjustments.
Advertising
Production costs of commercials and programming are charged to operations in the period during which the production is first aired. The costs of other advertising, promotion and marketing programs are charged to operations in the period incurred. Advertising expense for the years ended
December 31, 2016
,
2017
and
2018
, was approximately
$20.1 million
,
$10.8 million
and
$13.7 million
, respectively. See also Revenue Recognition regarding cooperative advertising arrangements.
Income taxes
The Company does not file a consolidated return with its foreign subsidiaries. The Company files federal and state returns and its foreign subsidiaries file returns in their respective jurisdiction. 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 carryforwards 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 basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion 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.
The Company recognizes net deferred tax assets to the extent that the Company believes these assets are more likely than not to be realized. In making such a determination, management considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If management determines that the Company would be able to realize its deferred tax assets in the future in excess of their net recorded amount, management would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.
The Company records uncertain tax positions on the basis of a two-step process whereby (1) management determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, management recognizes the largest amount of tax benefit that is more than 50% likely to be realized upon ultimate settlement with the related tax authority. The Company recognizes interest and penalties related to unrecognized tax benefits within income tax expense. Any accrued interest and penalties are included within the related tax liability.
Foreign Currency Translation Exposure
The Company’s reporting currency is the U.S. dollar. The translation of its net investment in subsidiaries with non-U.S. dollar functional currencies subjects the Company to currency exchange rate fluctuations in its results of operations and financial position. Assets and liabilities of subsidiaries with non-U.S. dollar functional currencies are translated into U.S. dollars at year-end exchange rates. Income, expense and cash flow items are translated at average exchange rates prevailing during the year. The resulting currency translation adjustments are recorded as a component of accumulated other comprehensive income (loss) within stockholders’ equity. The Company’s primary currency translation exposures in
2016
,
2017
and
2018
were related to its net investment in entities having functional currencies denominated in the Hong Kong dollar, British pound, Canadian dollar, Chinese yuan, Mexican peso and the Euro.
Foreign Currency Transaction Exposure
Currency exchange rate fluctuations may impact the Company’s results of operations and cash flows. The Company’s currency transaction exposures include gains and losses realized on unhedged inventory purchases and unhedged receivables and payables balances that are denominated in a currency other than the applicable functional currency. Gains and losses on unhedged inventory purchases and other transactions associated with operating activities are recorded in the components of operating income in the consolidated statement of operations.
Accounting for the impairment of finite-lived tangible and intangible assets
Long-lived assets with finite lives, which include property and equipment and intangible assets other than goodwill, are evaluated for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through the estimated undiscounted future cash flows from the use of these assets. When any such impairment exists, the related assets will be written down to fair value. Finite-lived intangible assets consist primarily of product technology rights, acquired backlog, customer relationships, product lines and license agreements. These intangible assets are amortized over the estimated economic lives of the related assets.
Goodwill and other indefinite-lived intangible assets
Goodwill and indefinite-lived intangible assets are not amortized, but are tested for impairment at least annually at the reporting unit level and asset level, respectively. Losses in value are recorded when material impairment has occurred in the underlying assets or when the benefits of the identified intangible assets are realized. Indefinite-lived intangible assets other than goodwill consist of trademarks.
The carrying value of goodwill and trademarks is based upon cost, which is subject to management’s current assessment of fair value. Management evaluates fair value recoverability using both objective and subjective factors. Objective factors include cash flows and analysis of recent sales and earnings trends. Subjective factors include management’s best estimates of projected future earnings and competitive analysis and the Company’s strategic focus.
Share-based Compensation
The Company measures all employee share-based compensation awards using a fair value method and records such expense in its consolidated financial statements.
Earnings per share
The following table is a reconciliation of the weighted-average shares used in the computation of basic and diluted earnings per share (“EPS”) for the periods presented (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
Income
|
|
Weighted
Average
Shares
|
|
Per Share
|
Basic EPS
|
|
|
|
|
|
Income available to common stockholders
|
$
|
1,243
|
|
|
16,542
|
|
|
$
|
0.08
|
|
Effect of dilutive securities:
|
|
|
|
|
|
Assumed conversion of convertible senior notes
|
—
|
|
|
—
|
|
|
|
Options and warrants
|
—
|
|
|
—
|
|
|
|
Unvested performance stock grants
|
—
|
|
|
—
|
|
|
|
Unvested restricted stock grants
|
—
|
|
|
123
|
|
|
|
Diluted EPS
|
|
|
|
|
|
Income available to common stockholders plus assumed exercises and conversion
|
$
|
1,243
|
|
|
16,665
|
|
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
Loss
|
|
Weighted
Average
Shares
|
|
Per Share
|
Basic EPS
|
|
|
|
|
|
Loss attributable to common stockholders
|
$
|
(83,085
|
)
|
|
21,341
|
|
|
$
|
(3.89
|
)
|
Effect of dilutive securities:
|
|
|
|
|
|
Assumed conversion of convertible senior notes
|
—
|
|
|
—
|
|
|
|
Options and warrants
|
—
|
|
|
—
|
|
|
|
Unvested performance stock grants
|
—
|
|
|
—
|
|
|
|
Unvested restricted stock grants
|
—
|
|
|
—
|
|
|
|
Diluted EPS
|
|
|
|
|
|
Loss attributable to common stockholders plus assumed exercises and conversion
|
$
|
(83,085
|
)
|
|
21,341
|
|
|
$
|
(3.89
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
Loss
|
|
Weighted
Average
Shares
|
|
Per Share
|
Basic EPS
|
|
|
|
|
|
Loss attributable to common stockholders
|
$
|
(42,368
|
)
|
|
23,104
|
|
|
$
|
(1.83
|
)
|
Effect of dilutive securities:
|
|
|
|
|
|
Assumed conversion of convertible senior notes
|
—
|
|
|
—
|
|
|
|
Options and warrants
|
—
|
|
|
—
|
|
|
|
Unvested performance stock grants
|
—
|
|
|
—
|
|
|
|
Unvested restricted stock grants
|
—
|
|
|
—
|
|
|
|
Diluted EPS
|
|
|
|
|
|
Loss attributable to common stockholders plus assumed exercises and conversion
|
$
|
(42,368
|
)
|
|
23,104
|
|
|
$
|
(1.83
|
)
|
Basic earnings per share is calculated using the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated using the weighted average number of common shares and common share equivalents outstanding during the period (which consist of warrants, options and convertible debt to the extent they are dilutive). For the years ended
December 31, 2016
,
2017
and
2018
, the convertible senior notes interest and related weighted common share equivalent of
23,004,916
,
18,272,906
and
21,606,816
, respectively, were excluded from the diluted earnings per share calculation because they were anti-dilutive. Potentially dilutive stock options and warrants of
1,500,000
,
1,062,500
and
nil
for the years ended
December 31, 2016
,
2017
and
2018
, respectively, were excluded from the computation of diluted earnings per share since they would have been anti-dilutive. Potentially dilutive restricted stock and units of
262,510
,
312,663
, and
1,130,233
for each of the years ended
December 31, 2016
,
2017
and
2018
, respectively, were excluded from the computation of diluted earnings per share since they would have been anti-dilutive.
The Company is also party to a prepaid forward contract to purchase
3,112,840
shares of its common stock that are to be delivered over a settlement period in 2020. The number of shares to be delivered under the prepaid forward contract has been removed from the weighted-average basic and diluted shares outstanding. Any dividends declared and paid on the shares underlying the forward contract are to be reverted back to the Company based on the contractual terms of the forward contract.
Reclassifications
Certain reclassifications were made to the prior year consolidated financial statements to conform to current year presentation.
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” which supersedes the revenue recognition requirements in ASC 605, (Topic 605), and most industry-specific guidance. Under the new model, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the new standard requires that reporting companies disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers - Deferral of the Effective Date,” which defers the effective date of ASU 2014-09 to annual reporting periods beginning after December 15, 2017, and interim periods therein. In 2016, the FASB issued ASU 2016-08, “Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” ASU 2016-10, “Identifying Performance Obligations and Licensing,” and ASU 2016-12, “Revenue from Contracts with Customers - Narrow-Scope Improvements and Practical Expedients.” Entities have the choice to adopt these updates using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a modified retrospective approach with the cumulative effect of these standards recognized at the date of the adoption.
On January 1, 2018, the Company adopted the new accounting standard ASC 606, (Topic 606), Revenue from Contracts with Customers and all the related amendments (“new revenue standard”) using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with the Company’s historic accounting under ASC 605, (Topic 605).
There is no impact to the Company’s consolidated financial statements resulting from the adoption of Topic 606 as the timing and measurement of revenue remained consistent with Topic 605, although the Company’s approach to revenue recognition is now based on the transfer of control. Further, there is no difference in the amounts of the revenue and cost of sales reported in the Company’s consolidated statements of operations and comprehensive income (loss) for the year ended December 31, 2018 that were recognized pursuant to Topic 606 and those that would have been reported pursuant to Topic 605.
In January 2016, the FASB issued ASU 2016-01, “Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities,” (“ASU 2016-01”). The new guidance is intended to improve the recognition and measurement of financial instruments. The ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2017. The adoption of this standard did not have an impact on the Company’s consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, “Leases.” ASU 2016-02 establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. Entities can either select a modified retrospective transition approach for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements (“comparative method”), or alternatively apply the new standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption (“effective date method”). The Company adopted this standard on January 1, 2019 under the effective date method. The Company expects the adoption of this Standard will have a significant impact on its consolidated balance sheets. The most significant changes relate to the recognition of new right-of-use assets and lease liabilities on the balance sheet for operating leases. The Company expects the right of use asset will be the present value of the remaining lease payments as noted in Note 14 - Leases. The recognition of lease expense is expected to be similar to the Company’s current methodology. The accounting for finance leases will remain substantially unchanged.
In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory.” The amendments in this ASU reduce the complexity in the accounting standards by allowing the recognition of current and deferred income taxes for an intra-entity asset transfer, other than inventory, when the transfer occurs. Historically, recognition of the income tax consequence was not recognized until the asset was sold to an outside party. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The adoption of this standard did not have an impact on the Company’s consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting,” which clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. ASU 2017-09 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The adoption of this standard did not have an impact on the Company’s consolidated financial statements.
In January 2018, the FASB issued ASU 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,” which gives entities the option to reclassify to retained earnings the tax effects resulting from the Act related to items in Accumulated Other Comprehensive Income (“AOCI”) that the FASB refers to as having been stranded in AOCI. The new guidance may be applied retrospectively to each period in which the effect of the U.S. Tax Cuts and Jobs Act ("the Act") is recognized in the period of adoption. The Company could adopt this guidance for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted for periods for which financial statements have not yet been issued or made available for issuance, including the period the Act was enacted. The guidance, when adopted, will require new disclosures regarding a company’s accounting policy for releasing the tax effects in AOCI and permit the company the option to reclassify to retained earnings the tax effects resulting from the Act that are stranded in AOCI. The Company adopted this guidance on January 1, 2019 and the impact was not material.
In March 2018, the FASB issued ASU 2018-03, “Technical Corrections and Improvements to Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,” which made targeted improvements to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years beginning after June 15, 2018. The adoption of this standard did not have an impact on the Company’s consolidated financial statements.
In June 2018, the FASB issued ASU 2018-07, “Improvements to Nonemployee Share-Based Payment Accounting,” which supersedes most of the prior accounting guidance on nonemployee share-based payments, and instead aligns it with existing guidance on employee share-based payments in Topic 718. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and early adoption is permitted. The Company is currently evaluating the impact of the pending adoption of this new standard on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, “Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement,” which improves the effectiveness of the disclosures required under ASC 820 and modifies the disclosure requirements on fair value measurements, including the consideration of costs and benefits. The new standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and early adoption is permitted. The Company is currently evaluating the impact of the pending adoption of this new standard on its consolidated financial statements.
In October 2018, the FASB issued ASU 2018-17, "Consolidation: Targeted Improvements to Related Party Guidance for Variable Interest Entities", which improves the accounting for variable interest entities by considering indirect interests held through related parties under common control for determining whether fees paid to decision makers and service providers are variable interests. This new standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The amendments are required to be applied retrospectively with a cumulative-effect adjustment to retained earnings at the beginning of the earliest period presented. Early adoption is permitted. The Company is currently evaluating the impact of the pending adoption of this new standard on its consolidated financial statements.
In January 2019, the FASB issued ASU 2019-11, "Leases (Topic 842): Codification Improvements,” which requires an entity (a lessee or lessor) to provide transition disclosures under Topic 250 upon adoption of Topic 842. This new standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of the pending adoption of this new standard on its consolidated financial statements.
Note 3—Business Segments, Geographic Data, Sales by Product Group and Major Customers
The Company is a worldwide producer and marketer of children’s toys and other consumer products, principally engaged in the design, development, production, marketing and distribution of its diverse portfolio of products. The Company has aligned its operating segments into
three
segments that reflect the management and operation of the business. The Company’s segments are (i) U.S. and Canada, (ii) International and (iii) Halloween.
The U.S. and Canada segment includes action figures, vehicles, play sets, plush products, dolls, electronic products, construction toys, infant and pre-school toys, role play and everyday costume play, foot to floor ride-on vehicles, wagons, novelty toys, seasonal and outdoor products, and kids’ indoor and outdoor furniture, primarily within the United States and Canada.
Within the International segment, the Company markets and sells its toy products in markets outside of the U.S. and Canada, primarily in the European, Asia Pacific, and Latin American regions.
Within the Halloween segment, the Company markets and sells Halloween costumes and accessories and everyday costume play products, primarily in the U.S. and Canada.
Segment performance is measured at the operating income level. All sales are made to external customers and general corporate expenses have been attributed to the various segments based upon relative sales volumes. Segment assets are primarily comprised of accounts receivable and inventories, net of applicable reserves and allowances, goodwill and other assets. Certain assets which are not tracked by operating segment and/or that benefit multiple operating segments have been allocated on the same basis.
Results are not necessarily those which would be achieved if each segment was an unaffiliated business enterprise. Information by segment and a reconciliation to reported amounts as of
December 31, 2017
and
2018
and for the three years in the period ended
December 31, 2018
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2017
|
|
2018
|
Net Sales
|
|
|
|
|
|
U.S. and Canada
|
$
|
478,595
|
|
|
$
|
406,411
|
|
|
$
|
364,313
|
|
International
|
131,229
|
|
|
107,231
|
|
|
101,873
|
|
Halloween
|
96,779
|
|
|
99,469
|
|
|
101,624
|
|
|
$
|
706,603
|
|
|
$
|
613,111
|
|
|
$
|
567,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2017
|
|
2018
|
Income (Loss) from Operations
|
|
|
|
|
|
U.S. and Canada
|
$
|
17,434
|
|
|
$
|
(35,720
|
)
|
|
$
|
(11,693
|
)
|
International
|
4,360
|
|
|
(13,184
|
)
|
|
(8,706
|
)
|
Halloween
|
(4,688
|
)
|
|
(15,254
|
)
|
|
(11,774
|
)
|
|
$
|
17,106
|
|
|
$
|
(64,158
|
)
|
|
$
|
(32,173
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2017
|
|
2018
|
Depreciation and Amortization Expense
|
|
|
|
|
|
U.S. and Canada
|
$
|
16,817
|
|
|
$
|
15,286
|
|
|
$
|
12,553
|
|
International
|
4,549
|
|
|
4,079
|
|
|
3,449
|
|
Halloween
|
1,578
|
|
|
1,638
|
|
|
1,079
|
|
|
$
|
22,944
|
|
|
$
|
21,003
|
|
|
$
|
17,081
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2018
|
Assets
|
|
|
|
U.S. and Canada
|
$
|
229,505
|
|
|
$
|
223,877
|
|
International
|
106,255
|
|
|
108,669
|
|
Halloween
|
34,589
|
|
|
10,295
|
|
|
$
|
370,349
|
|
|
$
|
342,841
|
|
Net revenues are categorized based upon location of the customer, while long-lived assets are categorized based upon the location of the Company’s assets. Tools, dies and molds represent a substantial portion of the long-lived assets included in the United States with a net book value of
$17.0 million
in
2017
and
$15.8 million
in
2018
and substantially all of these assets are located in China. The following tables present information about the Company by geographic area as of
December 31, 2017
and
2018
and for each of the three years in the period ended
December 31, 2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2018
|
Long-lived Assets
|
|
|
|
China
|
$
|
17,194
|
|
|
$
|
15,825
|
|
United States
|
5,755
|
|
|
4,920
|
|
Hong Kong
|
278
|
|
|
157
|
|
|
$
|
23,227
|
|
|
$
|
20,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2017
|
|
2018
|
Net Sales by Customer Area
|
|
|
|
|
|
United States
|
$
|
544,096
|
|
|
$
|
479,133
|
|
|
$
|
439,979
|
|
Europe
|
92,811
|
|
|
71,094
|
|
|
69,647
|
|
Canada
|
26,947
|
|
|
21,882
|
|
|
21,923
|
|
Hong Kong
|
2,012
|
|
|
1,064
|
|
|
1,952
|
|
Other
|
40,737
|
|
|
39,938
|
|
|
34,309
|
|
|
$
|
706,603
|
|
|
$
|
613,111
|
|
|
$
|
567,810
|
|
Major Customers
Net sales to major customers were as follows (in thousands, except for percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2017
|
|
2018
|
|
Amount
|
|
Percentage of
Net Sales
|
|
Amount
|
|
Percentage of
Net Sales
|
|
Amount
|
|
Percentage of
Net Sales
|
Wal-Mart
|
$
|
186,894
|
|
|
26.5
|
%
|
|
$
|
156,436
|
|
|
25.5
|
%
|
|
$
|
143,587
|
|
|
25.3
|
%
|
Target
|
110,233
|
|
|
15.6
|
|
|
108,799
|
|
|
17.8
|
|
|
122,141
|
|
|
21.5
|
|
Toys "R" Us
|
90,568
|
|
|
12.8
|
|
|
69,508
|
|
|
11.3
|
|
|
*
|
|
|
*
|
|
|
$
|
387,695
|
|
|
54.9
|
%
|
|
$
|
334,743
|
|
|
54.6
|
%
|
|
$
|
265,728
|
|
|
46.8
|
%
|
* Sales to Toys "R" Us in the applicable periods were less than 10% of total net sales.
No other customer accounted for more than 10% of the Company's total net sales.
As of
December 31, 2017
and
2018
, the Company’s three largest customers accounted for approximately
60.6%
and
61.4%
, respectively, of net accounts receivable. The concentration of the Company’s business with a relatively small number of customers may expose the Company to material adverse effects if one or more of its large customers were to experience financial difficulty. The Company performs ongoing credit evaluations of its top customers and maintains an allowance for potential credit losses. For the years ended December 31, 2017 and 2018, the Company recorded bad debt expense of
$11.8 million
and
$9.6 million
, respectively, primarily due to the bankruptcy and liquidation of Toys "R" Us.
Note 4—Joint Ventures
The Company owns a
fifty percent
interest in a joint venture (“Pacific Animation Partners”) with the U.S. entertainment subsidiary of a leading Japanese advertising and animation production company. The joint venture was created to develop and produce a boys’ animated television show, which it licensed worldwide for television broadcast as well as consumer products. The Company produced toys based upon the television program under a license from the joint venture which also licensed certain other merchandising rights to third parties. The joint venture completed and delivered
65
episodes of the show, which began airing in February 2012, and has since ceased production of the television show. For the years ended
December 31, 2016
,
2017
and
2018
, the Company recognized income from the joint venture of
$0.7 million
,
$16,000
and
$22,000
, respectively.
As of
December 31, 2017
and
2018
, the balance of the investment in the Pacific Animation Partners joint venture is nil.
In September 2012, the Company entered into a joint venture (“DreamPlay Toys”) with NantWorks LLC (“NantWorks”) in which it owns a
fifty percent
interest. Pursuant to the operating agreement of DreamPlay Toys, the Company paid to NantWorks cash in the amount of
$8.0 million
and issued NantWorks a warrant to purchase
1.5 million
shares of the Company’s common stock at a value of
$7.0 million
in exchange for the exclusive right to arrange for the provision of the NantWorks recognition technology platform for toy products. The Company had classified these rights as an intangible asset, which was being amortized over the anticipated revenue stream from the exploitation of these rights. However, the Company has abandoned the use of the technology in connection with its toy products and no future sales are anticipated, and the Company recorded an impairment charge to income of
$2.9 million
to write off the remaining unamortized technology rights during the third quarter of 2017. The Company retains the financial risk of the joint venture and is responsible for the day-to-day operations, which are expected to be nominal in future periods. The results of operations of the joint venture are consolidated with the Company’s results.
In addition, in 2012, the Company invested
$7.0 million
in cash in exchange for a
five percent
economic interest in a related entity, DreamPlay, LLC, that was expected to monetize the exploitation of the recognition technologies in non-toy consumer product categories. Adoption of the technology has been inadequate to establish a commercially viable market for the technology. NantWorks has the right to repurchase the Company’s interest for
$7.0 million
, but the Company does not anticipate that NantWorks will do so. As of September 30, 2017, the Company determined the value of this investment will not be realized and that full impairment of the value had occurred. Accordingly, the Company recorded an impairment charge of
$7.0 million
during the quarter ended September 30, 2017.
In November 2014, the Company entered into a joint venture with Meisheng Culture & Creative Corp., for the purpose of providing certain JAKKS licensed and non-licensed toys and consumer products to agreed-upon territories of the People’s Republic of China. The joint venture includes a subsidiary in the Shanghai Free Trade Zone that sells, distributes and markets these products, which include dolls, plush, role play products, action figures, costumes, seasonal items, technology and app-enhanced toys, based on top entertainment licenses and JAKKS’ own proprietary brands. The Company owns
fifty-one percent
of the joint venture and consolidates the joint venture since control rests with the Company. The non-controlling interest’s share of the income (loss) from the joint venture for the year ended December 31, 2016, 2017 and
2018
was
$6,000
,
$57,000
and (
$57,000
), respectively.
In October 2016, the Company entered into a joint venture with Hong Kong Meisheng Cultural Company Limited (“Meisheng”), a Hong Kong-based subsidiary of Meisheng Culture & Creative Corp., for the purpose of creating and developing original, multiplatform content for children including new short-form series and original shows. JAKKS and Meisheng each own
fifty percent
of the joint venture and will jointly own the content. JAKKS will retain merchandising rights for kids’ consumer products in all markets except China, which Meisheng Culture & Creative Corp. will oversee through the Company’s existing distribution joint venture. The results of operations of the joint venture are consolidated with the Company’s results. The non-controlling interest’s share of the loss from the joint venture for year ended December 31, 2017 and 2018 was
nil
. As of December 31, 2018, Meisheng beneficially owns more than
10%
of the Company’s outstanding common stock.
Note 5—Business Combinations
In October 2016, the Company acquired the operating assets of C’est Moi with its performance makeup and youth skincare product lines for
$0.3 million
to further enhance its existing product lines and to continue diversification into other consumer products categories. The Company launched a full line of makeup and skincare products branded under the C’est Moi name in the U.S. to a limited number of retail customers in 2018. The Company’s investment in C’est Moi is included in trademarks in our consolidated financial statements (See Note 7).
Note 6—Goodwill
The changes in the carrying amount of goodwill by reporting unit for the years ended
December 31, 2017
and
2018
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. and Canada
|
|
International
|
|
Halloween
|
|
Total
|
Balance, January 1, 2017:
|
|
|
|
|
|
|
|
Goodwill
|
$
|
29,540
|
|
|
$
|
11,455
|
|
|
$
|
2,213
|
|
|
$
|
43,208
|
|
Adjustments to goodwill for foreign currency translation
|
317
|
|
|
125
|
|
|
22
|
|
|
464
|
|
Impairment
|
(6,053
|
)
|
|
—
|
|
|
(2,235
|
)
|
|
(8,288
|
)
|
Balance December 31, 2017:
|
23,804
|
|
|
11,580
|
|
|
—
|
|
|
35,384
|
|
Adjustments to goodwill for foreign currency translation
|
(203
|
)
|
|
(98
|
)
|
|
—
|
|
|
(301
|
)
|
Balance December 31, 2018:
|
$
|
23,601
|
|
|
$
|
11,482
|
|
|
$
|
—
|
|
|
$
|
35,083
|
|
In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment”, which removes Step 2 from the goodwill impairment test. ASU 2017-04 requires that 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. ASU 2017-04 will be effective for interim and annual reporting periods beginning after December 15, 2019. Early application is permitted after January 1, 2017. The Company early adopted ASU 2017-04 in the third quarter of 2017.
The Company applies a fair value-based impairment test to the carrying value of goodwill and indefinite-lived intangible assets on an annual basis and, on an interim basis, if certain events or circumstances indicate that an impairment loss may have been incurred. Goodwill impairment exists when the estimated fair value of goodwill is less than its carrying value. Based on the Company’s April 1, 2017 annual assessment, it was determined that the fair values of its reporting units were not less than the carrying amounts. Based on several factors that occurred during the quarter ended September 31, 2017, the Company determined the fair value of its reporting units should be retested for potential impairment. As a result of the retesting performed, a charge of
$8.3
million for goodwill impairment was recorded for the year ended December 31, 2017. The valuation process included a combination of a guideline public company method and a discounted cash flow method using Level 3 inputs. Based on several factors that occurred during the quarter ended March 31, 2018, the Company determined the fair value of its 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 months ended March 31, 2018. Based on the Company’s April 1, 2018 annual assessment, it was determined that the fair values of its reporting units were not less than the carrying amounts. Also,
no
goodwill impairment was determined to have occurred for the year ended December 31, 2018.
Note 7—Intangible Assets Other Than Goodwill
Intangible assets other than goodwill consist primarily of licenses, product lines, customer relationships and trademarks. Amortized intangible assets are included in intangibles in the accompanying consolidated balance sheets. Trademarks are disclosed separately in the accompanying consolidated balance sheets. Intangible assets are as follows (in thousands, except for weighted useful lives):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
December 31, 2018
|
|
Weighted
Useful
Lives
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Amount
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Amount
|
|
(Years)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized Intangible Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licenses
|
5.81
|
|
$
|
20,130
|
|
|
$
|
(18,620
|
)
|
|
$
|
1,510
|
|
|
$
|
20,130
|
|
|
$
|
(19,383
|
)
|
|
$
|
747
|
|
Product lines
|
10.36
|
|
33,858
|
|
|
(13,178
|
)
|
|
20,680
|
|
|
33,858
|
|
|
(17,293
|
)
|
|
16,565
|
|
Customer relationships
|
4.90
|
|
3,152
|
|
|
(3,152
|
)
|
|
—
|
|
|
3,152
|
|
|
(3,152
|
)
|
|
—
|
|
Trade names
|
5.00
|
|
3,000
|
|
|
(3,000
|
)
|
|
—
|
|
|
3,000
|
|
|
(3,000
|
)
|
|
—
|
|
Non-compete agreements
|
5.00
|
|
200
|
|
|
(200
|
)
|
|
—
|
|
|
200
|
|
|
(200
|
)
|
|
—
|
|
Total amortized intangible assets
|
|
|
$
|
60,340
|
|
|
$
|
(38,150
|
)
|
|
$
|
22,190
|
|
|
$
|
60,340
|
|
|
$
|
(43,028
|
)
|
|
$
|
17,312
|
|
Unamortized Intangible Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
$
|
300
|
|
|
$
|
—
|
|
|
$
|
300
|
|
|
$
|
300
|
|
|
$
|
—
|
|
|
$
|
300
|
|
In 2017, the Company recorded impairment charges of
$2.9 million
to write off the remaining unamortized technology rights related to DreamPlay, LLC which were included in product lines, and
$2.3 million
to write down several underutilized trademarks and trade names that were determined to have no value.
No
impairment charges were recorded for the year ended December 31, 2018.
For the years ended
December 31, 2016
,
2017
and
2018
, the Company’s aggregate amortization expense related to intangible assets was
$8.8 million
,
$8.0 million
and
$4.9 million
, respectively. The Company currently estimates continuing future amortization expense to be approximately (in thousands):
|
|
|
|
|
2019
|
$
|
4,747
|
|
2020
|
4,284
|
|
2021
|
4,141
|
|
2022
|
4,140
|
|
|
$
|
17,312
|
|
Note 8—Concentration of Credit Risk
Financial instruments that subject the Company to concentration of credit risk are cash and cash equivalents and accounts receivable. Cash equivalents consist principally of short-term money market funds. These instruments are short-term in nature and bear minimal risk.
The Company performs ongoing credit evaluations of its customers’ financial conditions, but does not require collateral to support domestic customer accounts receivable. For goods shipped FOB Hong Kong or China, the Company may require irrevocable letters of credit from the customer or purchase various forms of credit insurance.
Note 9—Accrued Expenses
Accrued expenses consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2018
|
Royalties
|
$
|
17,854
|
|
|
$
|
10,245
|
|
Inventory liabilities
|
5,943
|
|
|
7,084
|
|
Salaries and employee benefits
|
4,064
|
|
|
2,891
|
|
Professional fees
|
1,376
|
|
|
1,671
|
|
Bonuses
|
1,914
|
|
|
1,152
|
|
Goods in transit
|
1,669
|
|
|
1,072
|
|
Interest expense
|
1,398
|
|
|
878
|
|
Unearned revenue
|
3,924
|
|
|
561
|
|
Sales commissions
|
663
|
|
|
398
|
|
Other
|
3,340
|
|
|
3,962
|
|
|
$
|
42,145
|
|
|
$
|
29,914
|
|
In addition to royalties currently payable on the sale of licensed products during the year, the Company records a liability as accrued royalties for the estimated shortfall in achieving minimum royalty guarantees pursuant to certain license agreements (Note 16).
Note 10—Related Party Transactions
A director of the Company is a partner in a law firm that acts as counsel to the Company. The Company incurred legal fees and expenses to the law firm in the amount of approximately
$3.2 million
in
2016
,
$2.2 million
in
2017
and
$1.3 million
in
2018
. As of
December 31, 2017
and
2018
, legal fees and reimbursable expenses of
$0.5 million
and
$0.2 million
, respectively, were payable to this law firm.
The owner of NantWorks, the Company’s DreamPlay Toys joint venture partner, beneficially owns
8.5%
of the Company’s outstanding common stock. Pursuant to the joint venture agreements, the Company is obligated to pay NantWorks a preferred return on joint venture sales. This agreement expired on September 30, 2018.
For the years ended
December 31, 2016
,
2017
and
2018
, preferred returns earned and payable to NantWorks were nil. Pursuant to the amended Toy Services Agreement, NantWorks is entitled to receive a renewal fee in the amount
$1.2 million
payable in installments of
$0.8 million
paid on the effective date of the renewal in 2015 and
$0.2 million
on or before each of August 1, 2016 and 2017. As of
December 31, 2017
and
2018
, the Company's receivable balance from NantWorks was
nil
. In addition, the Company previously leased office space from NantWorks. Rent expense, including common area maintenance and parking, for the years ended
December 31, 2016
,
2017
and
2018
was
nil
.
In November 2014, the Company entered into a joint venture with Meisheng Cultural & Creative Corp., Ltd., for the purpose of providing certain JAKKS licensed and non-licensed toys and consumer products to agreed-upon territories of the People’s Republic of China. The joint venture includes a subsidiary in the Shanghai Free Trade Zone that sells, distributes and markets these products, which include dolls, plush, role play products, action figures, costumes, seasonal items, technology and app-enhanced toys, based on top entertainment licenses and JAKKS’ own proprietary brands. The Company owns
fifty-one percent
of the joint venture and consolidates the joint venture since control rests with the Company. The non-controlling interest’s share of the income (loss) from the joint venture for the years ended 2016,
2017
and
2018
was
$6,000
,
$57,000
and ($
57,000
), respectively.
In October 2016, the Company entered into a joint venture with Hong Kong Meisheng Cultural Company Limited (“Meisheng”), a Hong Kong-based subsidiary of Meisheng Culture & Creative Corp, for the purpose of creating and developing original, multiplatform content for children including new short-form series and original shows. JAKKS and Meisheng each own fifty percent of the joint venture and will jointly own the content. JAKKS will retain merchandising rights for kids’ consumer products in all markets except China, which Meisheng Culture & Creative Corp. will oversee through the Company’s existing distribution joint venture. The non-controlling interest’s share of the loss from the joint venture for the year ended
December 31, 2018
was
nil
. As of December 31, 2018, Meisheng beneficially owns more than
10%
of the Company’s outstanding common stock.
In March 2017, the Company entered into an agreement to issue
3,660,891
shares of its common stock at an aggregate price of
$19.3 million
to a Hong Kong affiliate of its China joint venture partner. After their shareholder and China regulatory approval, the transaction closed on April 27, 2017. Upon the closing, the Company added a representative of Meisheng Culture & Creative Corp as a non-employee director and issued
13,319
shares of restricted stock at a value of
$0.1 million
, which vested in January 2018. In 2018, the Company issued
41,580
shares of restricted stock at a value of
$0.1 million
to the non-employee director, which vested in January 2019.
Meisheng also serves as a significant manufacturer of the Company. For the years ended December 31, 2017 and 2018, the Company made inventory-related payments to Meisheng of approximately
$35.1 million
and
$36.2 million
, respectively. As of December 31, 2017 and 2018, amounts due Meisheng for inventory received by the Company, but not paid totaled
$3.3 million
and
$3.6 million
, respectively.
A director of the Company is a portfolio manager at Oasis Management. In August 2017, the Company agreed with Oasis Management and Oasis Investments II Master Fund Ltd., the holder of approximately
$21.5 million
face amount of its
4.25%
convertible senior notes due in 2018, to exchange and extend the maturity date of these notes to November 1, 2020. The transaction closed on November 7, 2017. In July 2018, the Company closed a transaction with Oasis Management and Oasis Investments II Master Fund Ltd., to exchange
$8.0 million
face amount of the
4.25%
convertible senior notes due in August 2018 with convertible senior notes similar to those issued in November 2017 (see Note 12).
Note 11—Credit Facilities
Credit facilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
December 31, 2018
|
|
Principal
Amount
|
|
Debt
Issuance
Costs
|
|
Net
Amount
|
|
Principal Amount
|
|
Debt
Issuance
Costs
|
|
Net
Amount
|
Wells Fargo credit facility
|
$
|
5,000
|
|
|
$
|
—
|
|
|
$
|
5,000
|
|
|
$
|
7,500
|
|
|
$
|
—
|
|
|
$
|
7,500
|
|
Great American Capital Partners term loan
|
—
|
|
|
—
|
|
|
—
|
|
|
20,000
|
|
|
289
|
|
|
19,711
|
|
Total credit facilities, net of debt issuance costs
|
$
|
5,000
|
|
|
$
|
—
|
|
|
$
|
5,000
|
|
|
$
|
27,500
|
|
|
$
|
289
|
|
|
$
|
27,211
|
|
Wells Fargo
In March 2014, the Company and its domestic subsidiaries entered into a secured credit facility with General Electric Capital Corporation (“GECC”). The Credit Facility, as amended and subsequently assigned to Wells Fargo Bank, N.A. (“Wells Fargo”) pursuant to its acquisition of GECC, provides for a
$75.0 million
revolving credit facility subject to availability based on prescribed advance rates on certain domestic accounts receivable and inventory amounts used to compute the borrowing base (the “Credit Facility”). The Credit Facility includes a sub-limit of up to
$35.0 million
for the issuance of letters of credit. The amounts outstanding under the Credit Facility, as amended, are payable in full upon maturity of the facility on March 27, 2019, except that the Credit Facility would mature on June 15, 2018 if the Company does not refinance or extend the maturity of the convertible senior notes that mature in 2018, provided that any such refinancing or extension shall have a maturity date that is no sooner than six months after the stated maturity of the Credit Facility (i.e., on or about September 27, 2019). On June 14, 2018, the Company entered into a Term Loan Agreement with Great American Capital Partners to provide the necessary capital to refinance the 2018 convertible senior notes (see additional details regarding the Term Loan Agreement below). In addition, on June 14, 2018, the Company revised certain of the Credit Facility documents (and entered into new ones) so that certain of its Hong Kong based subsidiaries became additional parties to the Credit Facility. As a result, the receivables of these subsidiaries can now be included in the borrowing base computation, subject to certain limitations, thereby effectively increasing the amount of funds the Company can borrow under the Credit Facility. Any additional borrowings under the Credit Facility will be used for general working capital purposes. On February 25, 2019, the Credit Facility was amended to extend the maturity date to September 27, 2019.
The Credit Facility is secured by a security interest in favor of Wells Fargo covering a substantial amount of the consolidated assets and a pledge of the majority of the capital stock of various of the Company’s subsidiaries. As of
December 31, 2017
, the amount of outstanding borrowings was
$5.0 million
and outstanding stand-by letters of credit totaled
$20.0 million
; the total excess borrowing capacity was
$14.1 million
. As of
December 31, 2018
, the amount of outstanding borrowings was
$7.5 million
and outstanding stand-by letters of credit totaled
$12.8 million
; the total excess borrowing capacity was
$40.7 million
. The
$7.5 million
of outstanding borrowings as of December 31, 2018 was repaid in the 2019 first quarter.
The Company’s ability to borrow under the Credit Facility is also subject to its ongoing compliance with certain financial covenants, including the maintenance by the Company of a fixed charge coverage ratio of at least
1.25
:1.0 based on the trailing four fiscal quarters in the event minimum excess availability of
$10.0 million
under the Credit Facility is not maintained. As of
December 31, 2017
and
2018
, the Company was in compliance with the financial covenants under the Credit Facility.
The Company may borrow funds at LIBOR or at a Base Rate, plus applicable margins of
225 basis point
spread over LIBOR and
125 basis point
spread on Base Rate loans. The Base Rate is the highest of (i) the Federal Funds Rate plus a margin of
0.50%
, (ii) the rate last quoted by The Wall Street Journal as the “Prime Rate,” or (iii) the sum of a LIBOR rate plus
1.00%
. In addition to standard fees, the Credit Facility has an unused credit line fee, which ranges from
25
to
50
basis points. As of December 31, 2017 and 2018, the weighted average interest rate on the Credit Facility was approximately
3.79%
and
5.53%
, respectively.
The Credit Facility also contains customary events of default, including a cross default provision and a change of control provision. In the event of a default, all of the obligations of the Company and its subsidiaries under the Credit Facility may be declared immediately due and payable. For certain events of default relating to insolvency and receivership, all outstanding obligations become due and payable.
Great American Capital Partners
On June 14, 2018, the Company entered into a Term Loan Agreement, Term Note, Guaranty and Security Agreement and other ancillary documents and agreements (the “Term Loan”) with Great American Capital Partners Finance Co., LLC (“GACP”), for itself as a Lender (as defined below) and as the Agent (in such capacity, “Agent”) for the Lenders from time to time party to the Term Loan (collectively, “Lenders”) and the other “Secured Parties” under and as defined therein, with respect to the issuance to the Company by Lenders of a
$20.0 million
term loan. To secure the Company’s obligations under the Term Loan, the Company granted to Agent, for the benefit of the Secured Parties, a security interest in a substantial amount of the Company’s consolidated assets and a pledge of the majority of the capital stock of various of its subsidiaries. The Term Loan is a secured obligation, second only to the Credit Facility with Wells Fargo, except with respect to certain of the Company’s inventory in which GACP has a priority secured position. The Company may use the funds from the Term Loan to repurchase or retire its outstanding convertible senior notes due August 2018, for working capital, capital expenditures and other general corporate purposes, subject to certain negative covenants set forth in the Term Loan.
The Term Loan requires the repayment of principal in the amount of
10%
of the outstanding Term Loan per year (payable monthly) beginning after the first anniversary. All then-outstanding borrowings under the Term Loan are due, and the Term Loan terminates, no later than June 14, 2021, unless sooner terminated in accordance with its terms, which includes the date of termination of the Wells Fargo Credit Facility and the date that is 91 days prior to the maturity of the Company’s various convertible senior notes due in 2020 (see Note 12). The Company is permitted, and may be required under certain circumstances as set forth in the Term Loan documents, to prepay the Term Loan, which would require a prepayment fee (i) in year one of up to any unearned and unpaid interest that would have become due and payable in year one had the prepayment not occurred plus
2%
of the initial amount of the Term Loan (i.e.,
$20.0 million
), (ii) in year two of
2%
of the initial amount of the Term Loan and (iii) in year three of
1%
of the initial amount of the Term Loan.
The Company’s ability to continue to borrow the initial Term Loan amount of
$20.0 million
is based on certain accounts receivable and inventory amounts used to compute the borrowing base. In the event the Term Loan balance exceeds the borrowing base computation, the shortfall would be (i) applied to any excess availability under the Wells Fargo Credit Facility or (ii) prepaid. Similar to the Wells Fargo Credit Facility, the Company is subject to ongoing compliance with certain financial covenants, including the maintenance by the Company of a fixed charge coverage ratio of at least
1.25
:1.0 based on the trailing four fiscal quarters in the event minimum excess availability of
$10.0 million
under the Wells Fargo Credit Facility is not maintained. The Company must also maintain a minimum amount of liquidity, as defined in the Term Loan, of
$10.0 million
. As of December 31, 2018, the Company was in compliance with the financial covenants under the Term Loan.
The Term Loan is accelerated and becomes immediately due and payable (and the Term Loan terminates) in the event of a default under the Term Loan which includes, among other things, breach of certain covenants or representations contained in the Term Loan documents, defaults under other loans or obligations, involvement in bankruptcy proceedings or an occurrence of a change of control (as such terms are defined in the Term Loan). The Term Loan Documents also contain negative covenants which, during the life of the Term Loan, prohibit and/or limit the Company from, among other things, incurring certain types of other debt, acquiring other companies, making certain expenditures or investments and changing the character of its business.
As of December 31, 2018, the amount outstanding under the Term Loan was
$20.0 million
. Borrowings under the Term Loan accrue interest at LIBOR plus
9.00%
per annum. For the year ended December 31, 2018, the weighted average interest rate on the Term Loan was approximately
11.1%
.
Amortization expense classified as interest expense related to the
$1.3 million
debt issuance costs associated with the transactions that closed on June 14, 2018 (i.e., the amendment of the Wells Fargo Credit Facility and the GACP Term Loan) was
$0.9 million
for the year ended December 31, 2018.
Note 12—Convertible Senior Notes
Convertible senior notes consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
December 31, 2018
|
|
Principal/
Fair Value
Amount
|
|
Debt
Issuance
Costs
|
|
Net
Amount
|
|
Principal/
Fair Value
Amount
|
|
Debt
Issuance
Costs
|
|
Net
Amount
|
4.25% convertible senior notes (due 2018)
|
$
|
21,178
|
|
|
$
|
103
|
|
|
$
|
21,075
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
4.875% convertible senior notes (due 2020)
|
113,000
|
|
|
1,972
|
|
|
111,028
|
|
|
113,000
|
|
|
1,182
|
|
|
111,818
|
|
3.25% convertible senior notes (due 2020) *
|
22,469
|
|
|
—
|
|
|
22,469
|
|
|
27,974
|
|
|
—
|
|
|
27,974
|
|
Total convertible senior notes, net of debt issuance costs
|
$
|
156,647
|
|
|
$
|
2,075
|
|
|
$
|
154,572
|
|
|
$
|
140,974
|
|
|
$
|
1,182
|
|
|
$
|
139,792
|
|
* The amount presented for the
3.25%
2020 convertible senior notes within the table represents the fair value. The principal amount of these notes totals
$21.5
million
and
$29.5 million
as of December 31, 2017 and December 31, 2018, respectively.
In July 2013, the Company sold an aggregate of
$100.0 million
principal amount of
4.25%
convertible senior notes due 2018 (the “2018 Notes”). The 2018 Notes, which were senior unsecured obligations of the Company, paid interest semi-annually in arrears on August 1 and February 1 of each year at a rate of
4.25%
per annum and matured on August 1, 2018. The initial conversion rate for the 2018 Notes was
114.3674
shares of the Company’s common stock per $1,000 principal amount of notes, equivalent to an initial conversion price of approximately
$8.74
per share of common stock, subject to adjustment in certain events. In 2016, the Company repurchased and retired an aggregate of approximately
$6.1 million
principal amount of the 2018 Notes. In addition, approximately
$0.1 million
of the unamortized debt issuance costs were written off and a nominal gain was recognized in conjunction with the retirement of the 2018 Notes. During the first quarter of 2017, the Company exchanged and retired
$39.1 million
principal amount of the 2018 Notes at par for
$24.1 million
in cash and approximately
2.9 million
shares of its common stock. During the second quarter of 2017, the Company exchanged and retired
$12.0 million
principal amount of the 2018 Notes at par for
$11.6 million
in cash and
112,400
shares of its common stock, and approximately
$0.1 million
of the unamortized debt issuance costs were written off and a
$0.1 million
gain was recognized in conjunction with the exchange and retirement of the 2018 Notes.
In August 2017, the Company agreed with Oasis Management and Oasis Investments II Master Fund Ltd., (collectively, “Oasis”) the holder of approximately
$21.5 million
face amount of its
4.25%
convertible senior notes due in 2018, to extend the maturity date of these notes to November 1, 2020. In addition, the interest rate was reduced to
3.25%
per annum and the conversion rate was increased to
328.0302
shares of the Company’s common stock per $1,000 principal amount of notes, among other things. After execution of a definitive agreement for the modification and final approval by the other members of the Company’s Board of Directors and Oasis’ Investment Committee the transaction closed on November 7, 2017. In connection with this transaction, the Company recognized a loss on extinguishment of the debt of approximately
$0.6 million
. On July 26, 2018, the Company closed a transaction with Oasis to exchange
$8.0 million
face amount of the
4.25%
convertible senior notes due in August 2018 with convertible senior notes similar to those issued to Oasis in November 2017. The new notes mature on November 1, 2020, accrue interest at an annual rate of
3.25%
and are convertible into shares of the Company’s common stock at an initial rate of
322.2688
shares per $1,000 principal amount of the new notes. In connection with this transaction, the Company recognized a loss on extinguishment of the debt of approximately
$0.5 million
. The conversion price for the
3.25%
convertible senior notes will be 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. The conversion price of the
3.25%
2020 Notes reset on November 1, 2018 to
$2.54
per share and the conversion rate was increased to
393.7008
shares of the Company's common stock per $1,000 principal amount of notes.
The remaining
$13.2 million
of 2018 Notes were redeemed at par at maturity on August 1, 2018.
The Company has elected to measure and present the debt held by Oasis at fair value using Level 3 inputs and as a result, recognized a loss of
$0.3 million
for the year ended December 31, 2017, and a gain of $
2.9
million for the year ended December 31, 2018 related to changes in the fair value of the
3.25%
2020 Notes. At December 31, 2017 and 2018, the
3.25%
2020 Notes had a fair value of approximately
$22.5 million
and
$28.0 million
, respectively. The Company evaluated its credit risk as of December 31, 2018, and determined that there was no change from December 31, 2017.
In June 2014, the Company sold an aggregate of
$115.0 million
principal amount of
4.875%
convertible senior notes due 2020 (the “2020 Notes”). The 2020 Notes are senior unsecured obligations of the Company paying interest semi-annually in arrears on June 1 and December 1 of each year at a rate of
4.875%
per annum and will mature on June 1, 2020. The initial and still current conversion rate for the 2020 Notes is
103.7613
shares of the Company’s common stock per $1,000 principal amount of notes, equivalent to an initial conversion price of approximately
$9.64
per share of common stock, subject to adjustment in certain events. Upon conversion, the 2020 Notes will be settled in shares of the Company’s common stock. Holders of the 2020 Notes may require that the Company repurchase for cash all or some of their notes upon the occurrence of a fundamental change (as defined in the 2020 Notes). In January 2016, the Company repurchased and retired an aggregate of
$2.0 million
principal amount of the 2020 Notes. In addition, approximately
$0.1 million
of the unamortized debt issuance costs were written off and a
$0.1 million
gain was recognized in conjunction with the retirement of the 2020 Notes.
The fair value of the
4.875%
convertible senior notes payable due 2020 as of December 31, 2017 and 2018 was
$89.7 million
and
$93.2 million
, respectively, based upon the most recent quoted market prices. The fair values of the convertible senior notes are considered to be Level 3 measurements on the fair value hierarchy.
Key components of the
4.25%
convertible senior notes due 2018 consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2016
|
|
2017
|
|
2018
|
Contractual interest expense
|
$
|
4,191
|
|
|
$
|
2,184
|
|
|
$
|
373
|
|
Amortization of debt issuance costs recognized as interest expense
|
1,172
|
|
|
844
|
|
|
103
|
|
|
$
|
5,363
|
|
|
$
|
3,028
|
|
|
$
|
476
|
|
Key components of the
3.25%
convertible senior notes due 2020 consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2016
|
|
2017
|
|
2018
|
Contractual interest expense
|
$
|
—
|
|
|
$
|
103
|
|
|
$
|
815
|
|
Amortization of debt issuance costs recognized as interest expense
|
—
|
|
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
103
|
|
|
$
|
815
|
|
Key components of the
4.875%
convertible senior notes due 2020 consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2016
|
|
2017
|
|
2018
|
Contractual interest expense
|
$
|
5,508
|
|
|
$
|
5,509
|
|
|
$
|
5,509
|
|
Amortization of debt issuance costs recognized as interest expense
|
804
|
|
|
789
|
|
|
789
|
|
|
$
|
6,312
|
|
|
$
|
6,298
|
|
|
$
|
6,298
|
|
Note 13—Income Taxes
The Company does not file a consolidated return with its foreign subsidiaries. The Company files federal and state returns and its foreign subsidiaries file returns in their respective jurisdiction.
For the years ended 2016, 2017 and 2018, the provision for income taxes, which included federal, state and foreign income taxes, was an expense of
$4.1 million
,
$1.6 million
, and
$3.0 million
reflecting effective tax provision rates of
76.8%
, (
2.0%
), and (
7.5%
) respectively.
For the years ended 2016 and 2017, provision for income taxes includes federal, state and foreign income taxes at effective tax rates of
76.8%
and (
2.0%
). Exclusive of discrete items, the effective tax rate would be
79.2%
in 2016 and (
2.8%
) in 2017. The decrease in the effective tax rate absent discrete items was primarily due to the worldwide pre-tax book loss in 2017.
The 2018 tax expense of
$3.0 million
included a discrete tax benefit of
$0.9 million
primarily comprised of return to provision and uncertain tax position adjustments. Absent these discrete tax benefits, the Company’s effective tax rate for 2018 was (
9.6%
) primarily due to state taxes and taxes on foreign income.
As of December 31, 2017 and 2018, the Company had net deferred tax liabilities of approximately
$0.8 million
and
$1.0 million
, respectively, primarily related to foreign jurisdictions.
Provision for income taxes reflected in the accompanying consolidated statements of operations are comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2016
|
|
2017
|
|
2018
|
Federal
|
$
|
1,549
|
|
|
$
|
550
|
|
|
$
|
(1,475
|
)
|
State and local
|
652
|
|
|
51
|
|
|
62
|
|
Foreign
|
1,637
|
|
|
2,256
|
|
|
4,154
|
|
Total Current
|
3,838
|
|
|
2,857
|
|
|
2,741
|
|
APIC
|
548
|
|
|
—
|
|
|
—
|
|
Deferred
|
(259
|
)
|
|
(1,251
|
)
|
|
210
|
|
Total
|
$
|
4,127
|
|
|
$
|
1,606
|
|
|
$
|
2,951
|
|
The components of deferred tax assets/(liabilities) are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2017
|
|
2018
|
|
Net deferred tax assets/(liabilities):
|
|
|
|
|
Reserve for sales allowances and possible losses
|
$
|
611
|
|
|
$
|
478
|
|
|
Accrued expenses
|
1,375
|
|
|
938
|
|
|
Prepaid royalties
|
13,631
|
|
|
2,659
|
|
|
Accrued royalties
|
1,864
|
|
|
5,973
|
|
|
Inventory
|
6,146
|
|
|
10,751
|
|
|
State income taxes
|
26
|
|
|
19
|
|
|
Property and equipment
|
4,257
|
|
|
2,635
|
|
|
Original issue discount interest
|
(2,131
|
)
|
|
—
|
|
|
Goodwill and intangibles
|
15,782
|
|
|
11,542
|
|
|
Share-based compensation
|
578
|
|
|
773
|
|
|
Undistributed foreign earnings
|
(2,524
|
)
|
|
(2,121
|
)
|
|
Interest limitation
|
—
|
|
|
2,210
|
|
|
Federal and state net operating loss carryforwards
|
14,091
|
|
|
46,759
|
|
|
Credit carryforwards
|
35,195
|
|
|
1,121
|
|
|
Other
|
22
|
|
|
(633
|
)
|
|
Gross
|
88,923
|
|
|
83,104
|
|
|
Valuation allowance
|
(89,706
|
)
|
|
(84,097
|
)
|
|
Total net deferred tax liabilities
|
$
|
(783
|
)
|
|
$
|
(993
|
)
|
*
|
*As of December 31, 2018, a deferred tax asset of
$438
was reported as other long term assets in the consolidated balance sheets and
$1,431
was reported as the deferred income tax liability, net in the consolidated balance sheets.
The U.S. Tax Cuts and Jobs Act ("the Act") was signed into law on December 22, 2017 and introduced significant changes to the Internal Revenue Code. Effective for tax years beginning after December 31, 2017, the Act reduced the U.S. statutory tax rate from 35% to 21% and created new taxes on certain foreign-sourced earnings and related-party payments, which are referred to as the global intangible low-taxed income (“GILTI”) and the base erosion and anti-abuse tax, respectively. In addition, the Act included a one-time transition tax as of December 31, 2017 on accumulated foreign subsidiary earnings that were previously tax deferred.
Due to the timing of the enactment and the complexity involved in applying the provisions of the Act, the SEC issued guidance on December 22, 2017 to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the Act. The Company applied this guidance when accounting for the enactment date effects of the Act in 2017 and throughout 2018. At December 31, 2018, the Company has now completed its accounting for all of the enactment-date income tax effects of the Act.
The Act required the Company to pay U.S. income taxes on accumulated foreign subsidiary earnings not previously subject to U.S. income tax at a rate of
15.5%
to the extent of foreign cash and certain other net current assets and
8%
on the remaining earnings. At December 31, 2017, the Company recorded a provisional amount for the one-time transitional tax liability for its foreign subsidiaries of approximately
$35.1 million
, which did not entirely impact income tax expense for 2017 since the Company reflected the transition tax liability as a partial reduction to existing fully-valued tax attribute carryforwards. Upon further analyses of the Act and Notices and regulations issued and proposed by the U.S. Treasury Department and the Internal Revenue Service, the Company finalized its calculations of the transition tax liability during 2018 and recorded an income tax benefit of
$1.1 million
due to the utilization of foreign tax credits instead of the net operating loss carryforward as originally projected as of December 31, 2017.
The Act reduced the U.S. statutory tax rate from 35% to 21% for tax years after December 31, 2017. Accordingly, the Company re-measured its deferred taxes at December 31, 2017 to reflect the reduced rate that would apply in future periods when these deferred taxes are settled or realized. The provisional amount related to the re-measurement was fully offset by a concurrent change in the valuation allowance, resulting in no tax expense impact. The Company has completed its accounting for the re-measurement of deferred taxes and there has been no change to the provisional amount recorded. The Act repealed the Alternative Minimum Tax (“AMT”) for tax years beginning after 2017. However, AMT credits are fully refundable by tax years beginning after 2021. The Company has
$0.4 million
of deferred tax assets related to the AMT credit carryforwards. The Company will continue to classify AMT credits along with its other deferred tax assets.
The Act subjects a U.S. shareholder to tax on global intangible low-taxed income earned by certain foreign subsidiaries. The Company has elected to account for GILTI in the year the tax is incurred.
Provision for income taxes varies from the U.S. federal statutory rate. The following reconciliation shows the significant differences in the tax at statutory and effective rates:
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2016
|
|
2017
|
|
2018
|
Federal income tax expense
|
35.0
|
%
|
|
35.0
|
%
|
|
21.0
|
%
|
State income tax expense, net of federal tax effect
|
(3.6
|
)
|
|
5.0
|
|
|
9.7
|
|
Effect of differences in U.S. and foreign statutory rates
|
(53.7
|
)
|
|
1.9
|
|
|
2.0
|
|
Uncertain tax positions
|
3.4
|
|
|
—
|
|
|
(0.8
|
)
|
Earn-out adjustments
|
—
|
|
|
—
|
|
|
—
|
|
Provision to return
|
4.5
|
|
|
(0.7
|
)
|
|
(40.6
|
)
|
Non-deductible expenses
|
8.9
|
|
|
(48.0
|
)
|
|
(16.9
|
)
|
Other
|
0.6
|
|
|
(0.2
|
)
|
|
(0.6
|
)
|
Foreign deemed dividend
|
262.2
|
|
|
—
|
|
|
—
|
|
Foreign tax credit
|
(126.1
|
)
|
|
20.3
|
|
|
—
|
|
Undistributed foreign earnings
|
906.5
|
|
|
57.3
|
|
|
4.5
|
|
Effect of change in federal statutory rate
|
—
|
|
|
(23.0
|
)
|
|
—
|
|
Valuation allowance
|
(960.9
|
)
|
|
(49.6
|
)
|
|
14.2
|
|
|
76.8
|
%
|
|
(2.0
|
)%
|
|
(7.5
|
)%
|
Deferred taxes result from temporary differences between tax bases of assets and liabilities and their reported amounts in the consolidated financial statements. The temporary differences result from costs required to be capitalized for tax purposes by the U.S. Internal Revenue Code (“IRC”), and certain items accrued for financial reporting purposes in the year incurred but not deductible for tax purposes until paid. The Company has established a valuation allowance on net deferred tax assets in the United States since, in the opinion of management, it is not more likely than not that the U.S. net deferred tax assets will be realized.
The components of income (loss) before provision for income taxes are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2016
|
|
2017
|
|
2018
|
Domestic
|
$
|
(7,760
|
)
|
|
$
|
(85,288
|
)
|
|
$
|
(58,693
|
)
|
Foreign
|
13,136
|
|
|
3,866
|
|
|
19,219
|
|
|
$
|
5,376
|
|
|
$
|
(81,422
|
)
|
|
$
|
(39,474
|
)
|
The Company uses a recognition threshold and measurement process for recording in the consolidated financial statements uncertain tax positions (“UTP”) taken or expected to be taken in a tax return.
Approximately
$0.4 million
of the liability for UTP related to foreign withholding taxes was de-recognized in 2018. Additionally, approximately
$0.6 million
of additional UTP related to foreign withholding taxes and audit examination in Hong Kong was recognized in 2018. During 2017, approximately
$0.1 million
of additional UTP was recognized, and approximately
$1.1 million
of the liability for UTP was de-recognized.
Current interest on uncertain income tax liabilities is recognized as a component of the income tax provision recognized in the consolidated statements of operations. During 2016, the Company recognized approximately
$0.1 million
of current interest expense relating to UTPs. During 2017, the Company did
no
t recognize any current year interest expense relating to UTPs. During 2018, the Company recognized
$0.1 million
of current interest expense relating to UTPs.
The following table provides further information of UTPs that would affect the effective tax rate, if recognized, as of December 31, 2018 (in millions):
|
|
|
|
|
Balance, December 31, 2015
|
$
|
2.2
|
|
Current year additions
|
0.1
|
|
Current year reduction due to lapse of applicable statute of limitations
|
—
|
|
Balance, December 31, 2016
|
2.3
|
|
Current year additions
|
0.1
|
|
Current year reduction due to lapse of applicable statute of limitations
|
(1.1
|
)
|
Balance, December 31, 2017
|
1.3
|
|
Current year additions
|
0.6
|
|
Current year reduction due to audit settlement
|
(0.4
|
)
|
Balance, December 31, 2018
|
$
|
1.5
|
|
We do not expect our gross unrecognized tax benefits to significantly change within the next 12 months.
Tax years 2016 through 2017 remain subject to examination in the United States. The tax years 2014 through 2017 are generally still subject to examination in the various states. The tax years 2012 through 2017 are still subject to examination in Hong Kong. In the normal course of business, the Company is audited by federal, state and foreign tax authorities.
Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets by jurisdiction. The Company is required to establish a valuation allowance for the U.S. deferred tax assets and record a charge to income if management determines, based upon available evidence at the time the determination is made, that it is more likely than not that some portion or all of the deferred tax assets may not be realized.
Based on management's evaluation of all positive and negative evidence, as of December 31, 2018, a valuation allowance of
$84.1 million
has been recorded against the deferred tax assets that more likely than not will not be realized. For the year ended December 31, 2018, the valuation allowance decreased by
$5.6 million
from
$89.7 million
at December 31, 2017 to
$84.1 million
at December 31, 2018. The net deferred tax liabilities of
$0.8 million
in 2017 represent the net deferred tax liabilities in the foreign jurisdiction, where the Company is in a cumulative income position, partially offset by the U.S. deferred tax assets related to the AMT credit carryforwards. The net deferred tax liabilities of
$1.0 million
in 2018 represent the net deferred tax liabilities in the foreign jurisdiction, where the Company is in a cumulative income position, partially offset by the U.S. deferred tax assets related to the AMT credit carryforwards.
At December 31, 2018, the Company has U.S. federal net operating loss carryforwards, or "NOLs", of approximately
$140.1 million
, which will begin to expire in 2031. At December 31, 2018, the Company's state NOLs were mainly from California. The majority of the approximately
$189.9 million
of California NOLs will begin to expire in 2031. At December 31, 2018, the Company had foreign tax credit carryforwards of approximately
$0.1 million
, which will begin to expire in 2027. At December 31, 2018, the Company had federal research and development tax credit carryforwards ("credit carryforwards") of approximately
$0.5 million
, which will begin to expire in 2029. At December 31, 2018, the Company had state research and development tax credits of approximately
$0.1 million
, which carry forward indefinitely. Utilization of certain NOLs and research credit carryforwards may be subject to an annual limitation due to ownership change limitations set forth in Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, and comparable state income tax laws. Any future annual limitation may result in the expiration of NOLs and credit carryforwards before utilization.
During the first quarter of 2017, the Company adopted ASU 2016-09, “Improvement to Employee Share-Based Payment Accounting,” which simplifies several aspects of the accounting for share-based payments, including treatment of excess tax benefits and forfeitures, as well as consideration of minimum statutory tax withholding requirements. This accounting standard did not have a material effect on the Company’s income tax provision.
Note 14—Leases
The Company leases office, warehouse and showroom facilities and certain equipment under operating leases. Rent expense for the years ended
December 31, 2016
,
2017
and
2018
totaled
$12.3 million
,
$12.2 million
and
$12.7 million
, respectively. Following is a schedule of minimum annual lease payments (in thousands).
|
|
|
|
|
2019
|
$
|
11,934
|
|
2020
|
9,699
|
|
2021
|
9,456
|
|
2022
|
9,486
|
|
2023
|
5,969
|
|
Thereafter
|
1,160
|
|
|
$
|
47,704
|
|
Note 15—Common Stock, Preferred Stock and Warrants
The Company has
105,000,000
authorized shares of stock consisting of
100,000,000
shares of
$.001
par value common stock and
5,000,000
shares of
$.001
par value preferred stock. On
December 31, 2017
shares issued and outstanding were
26,957,354
, and on
December 31, 2018
, shares issued and outstanding were
29,169,913
.
All issuances of common stock, including those issued pursuant to stock option and warrant exercises, restricted stock or unit grants and acquisitions, are issued from the Company’s authorized but not issued and outstanding shares.
In June 2014, the Company effectively repurchased
3,112,840
shares of its common stock at an average cost of
$7.71
per share for an aggregate amount of
$24.0 million
pursuant to a prepaid forward share repurchase agreement entered into with Merrill Lynch International (“ML”). These repurchased shares are treated as retired for basic and diluted EPS purposes although they remain legally outstanding. The Company reflects the aggregate purchase price as a reduction to stockholders’ equity classified as Treasury Stock. No shares have been delivered to the Company by ML as of
December 31, 2018
.
In June 2015, and as subsequently increased, the Board of Directors authorized the repurchase of up to an aggregate of
$35.0 million
of the Company’s outstanding common stock and/or convertible senior notes (collectively, “securities”). During 2015, the Company repurchased
1,547,361
shares of its common stock at an aggregate value of
$13.2 million
. During 2016, the Company repurchased
1,766,284
shares of its common stock at an aggregate value of
$13.5 million
and also repurchased
$2.0 million
principal amount of its 2020 Notes at a cost of
$1.9 million
and
$6.1 million
principal amount of its 2018 Notes at a cost of
$6.1 million
. As of December 31, 2016, the Company completed the authorized repurchases of securities and retired all of the repurchased securities.
In January 2016, the Company issued an aggregate of
449,120
shares of restricted stock at a value of approximately
$3.6 million
to
two
executive officers, which vest, subject to certain company financial performance criteria and market conditions, over a
3
year period. In addition, an aggregate of
62,710
shares of restricted stock at an aggregate value of approximately
$0.5 million
were issued to its
five
non-employee directors, which vested in January 2017.
In March 2016, the Company issued an aggregate of
134,058
shares of restricted stock at a value of approximately
$0.9 million
to an executive officer, which vest, subject to certain company financial performance criteria and market conditions, over a
three
year period.
In October 2016, the Company issued an aggregate of
2,463
shares of restricted stock at a nominal value to a non-employee director, which vested in January 2017.
During 2016, certain employees, including an executive officer, surrendered an aggregate of
50,719
shares of restricted stock for
$1.5 million
to cover income taxes due on the vesting of restricted shares.
In January and February 2017, the Company issued an aggregate of
873,787
shares of restricted stock at a value of approximately
$4.5 million
to
two
executive officers, which vest, subject to certain company financial performance criteria and market conditions, over a three year period. In addition, an aggregate of
94,102
shares of restricted stock at an aggregate value of approximately
$0.5 million
were issued to its
five
non-employee directors, which vested in January 2018.
In January and February 2017, the Company issued an aggregate of
2,865,000
shares of its common stock at a value of
$15.1 million
to holders of its 2018 convertible senior notes as partial consideration for the exchange at par of
$39.1 million
principal amount of such notes.
In March 2017, the Company entered into an agreement to issue
3,660,891
shares of its common stock at an aggregate price of
$19.3 million
to a Hong Kong affiliate of its China joint venture partner. After their shareholder and China regulatory approval, the transaction closed on April 27, 2017. Upon the closing, the Company added a representative of Meisheng as a non-employee director and issued
13,319
shares of restricted stock at a value of
$0.1 million
, which vested in January 2018.
In June 2017, the Company issued an aggregate of
112,400
shares of its common stock at a value of approximately
$0.4 million
to holders of its 2018 convertible senior notes as partial consideration for the exchange at par of
$11.6 million
principal amount of such notes.
During 2017, certain employees, including an executive officer, surrendered an aggregate of
29,689
shares of restricted stock for
$79,000
to cover income taxes due on the vesting of restricted shares.
In January 2018, the Company issued an aggregate of
1,914,894
shares of restricted stock at a value of approximately
$4.5 million
to
two
executive officers, which vest, subject to certain company financial performance criteria and market conditions, over a three year period. In addition, an aggregate of
249,480
shares of restricted stock at an aggregate value of approximately
$0.6 million
were issued to its
six
non-employee directors, which vested in January 2019.
During 2018, an executive officer surrendered an aggregate of
42,346
shares of restricted stock for
$98,000
to cover income taxes due on the vesting of restricted shares.
In January 2019, the Company was obligated to issue an aggregate of
3,061,224
shares of restricted stock at a value of approximately
$4.5 million
to
two
executive officers pursuant to the applicable employment contracts. Such shares have not yet been issued due to insufficient shares available in the 2002 Stock Award and Incentive Plan.
All issuances of common stock, including those issued pursuant to stock option and warrant exercises, restricted stock grants and acquisitions, are issued from the Company’s authorized but not issued and outstanding shares.
No
dividend was declared or paid in
2017
and
2018
.
Note 16—Commitments
The Company has entered into various license agreements whereby the Company may use certain characters and intellectual properties in conjunction with its products. Generally, such license agreements provide for royalties to be paid ranging from
1%
to
21%
of net sales with minimum guarantees and advance payments.
In the event the Company estimates that a shortfall in achieving the minimum guarantee is probable, a liability is recorded for the estimated shortfall and charged to royalty expense.
Future annual minimum royalty guarantees as of
December 31, 2018
are as follows (in thousands):
|
|
|
|
|
2019
|
$
|
33,077
|
|
2020
|
28,613
|
|
2021
|
9,774
|
|
2022
|
175
|
|
2023
|
15
|
|
|
$
|
71,654
|
|
The Company has entered into employment and consulting agreements with certain executives expiring through December 31, 2021. The aggregate future annual minimum guaranteed amounts due under those agreements as of
December 31, 2018
are as follows (in thousands):
|
|
|
|
|
2019
|
$
|
8,510
|
|
2020
|
3,645
|
|
2021
|
551
|
|
|
$
|
12,706
|
|
Note 17—Share-Based Payments
Under its 2002 Stock Award and Incentive Plan (“the Plan”), which incorporated its Third Amended and Restated 1995 Stock Option Plan, the Company has reserved shares of its common stock for issuance upon the exercise of options granted under the Plan, as well as for the awarding of other securities. Under the Plan, employees (including officers), non-employee directors and independent consultants may be granted options to purchase shares of common stock, restricted stock units and other securities (see Note 15). The vesting of these share-based awards may vary, but typically vest over a requisite service period or based on performance criteria, with a maximum vesting period of
4
years. Restricted shares typically vest in the same manner, with the exception of certain awards vesting over one to two years. Share-based compensation expense is recognized on a straight-line basis over the requisite service period. Compensation expense for performance-awards is measured based on the amount of shares ultimately expected to vest, estimated at each reporting date based on management expectations regarding the relevant performance criteria. As of
December 31, 2018
,
1,157,210
shares were available for future grant. Additional shares may become available to the extent that options or shares of restricted stock presently outstanding under the Plan terminate or expire.
Restricted Stock
Under the Plan, share-based compensation payments may include the issuance of shares of restricted stock. Restricted stock award grants are based upon employment contracts, which vary by individual and year, and are subject to vesting conditions. Non-employee directors each receive grants of restricted stock at a value of
$100,000
annually which vest after one year – this amount is prorated if a director is appointed within the year. In addition, at the discretion of Management and approval of the Board, non-executive employees also may receive restricted stock awards, which occurs approximately once per year.
The following table summarizes the restricted stock award activity, annually, for the years ended
December 31, 2016
,
2017
and
2018
:
|
|
|
|
|
|
|
|
|
Restricted Stock Awards (RSA)
|
|
Number of
Shares
|
|
Weighted
Average Grant Date
Fair Value
|
Outstanding, December 31, 2015
|
411,409
|
|
|
$
|
6.61
|
|
Awarded
|
648,351
|
|
|
7.00
|
|
Released
|
(255,307
|
)
|
|
6.68
|
|
Forfeited
|
(608,000
|
)
|
|
6.88
|
|
Outstanding, December 31, 2016
|
196,453
|
|
|
7.01
|
|
Awarded
|
981,208
|
|
|
5.15
|
|
Released
|
(187,224
|
)
|
|
7.05
|
|
Forfeited
|
(9,229
|
)
|
|
6.32
|
|
Outstanding, December 31, 2017
|
981,208
|
|
|
4.12
|
|
Awarded
|
2,164,374
|
|
|
1.88
|
|
Released
|
(194,800
|
)
|
|
5.14
|
|
Forfeited
|
—
|
|
|
—
|
|
Outstanding, December 31, 2018
|
2,950,782
|
|
|
2.41
|
|
As of
December 31, 2018
, there was
$2.9 million
of total unrecognized compensation cost related to non-vested restricted stock, which is expected to be recognized over a weighted-average period of
2.39
years.
Restricted Stock Units
Under the Plan, share-based compensation payments may include the issuance of Restricted Stock Units (RSUs) to employees, which occurs approximately once per year and are subject to vesting conditions. RSUs are valued at the market price of the shares underlying the award on the date of grant.
The following table summarizes the RSU award activity, annually for the years ended December 31, 2017 and 2018:
|
|
|
|
|
|
|
|
|
Restricted Stock Units (RSUs)
|
|
Number of
Shares
|
|
Weighted
Average Grant Date
Fair Value
|
Outstanding, December 31, 2016
|
—
|
|
|
$
|
—
|
|
Awarded
|
1,001,206
|
|
|
4.68
|
|
Released
|
—
|
|
|
—
|
|
Forfeited
|
(42,014
|
)
|
|
4.68
|
|
Outstanding, December 31, 2017
|
959,192
|
|
|
4.68
|
|
Awarded
|
357,143
|
|
|
1.96
|
|
Released
|
(125,290
|
)
|
|
5.15
|
|
Forfeited
|
(138,879
|
)
|
|
4.56
|
|
Outstanding, December 31, 2018
|
1,052,166
|
|
|
3.72
|
|
As of
December 31, 2018
, there was
$1.9 million
of total unrecognized compensation cost related to non-vested restricted stock units, which is expected to be recognized over a weighted-average period of
1.82
years.
Share-Based Compensation Expense
The following table summarizes the total share-based compensation expense and related tax benefits recognized (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2017
|
|
2018
|
Share-based compensation expense
|
$
|
1,621
|
|
|
$
|
3,112
|
|
|
$
|
2,434
|
|
Stock Options
There has been no stock option activity since December 31, 2015.
Non
-Employee Stock Warrants
In 2012, the Company granted
1,500,000
stock warrants with an exercise price of
$16.28
per share and a
five
year term to a third party as partial consideration for the exclusive right to use certain recognition technology in connection with the Company’s toy products. All warrants vested upon grant and expired unexercised on September 12, 2017.
The Company measured the fair value of the warrants granted on the measurement date. The fair value of the 2012 stock warrant was capitalized as an intangible asset and had been amortized to expense in the consolidated statements of operations as the related product net sales were recognized.
Note 18—Employee Benefits Plan
The Company sponsors for its U.S. employees, a defined contribution plan under Section 401(k) of the Internal Revenue Code. The Plan provides that employees may defer up to
50%
of their annual compensation subject to annual dollar limitations, and that the Company will make a matching contribution equal to
100%
of each employee’s deferral, up to
5%
of the employee’s annual compensation. Company matching contributions, which vest immediately, totaled
$2.5 million
,
$2.3 million
and
$2.4 million
for the years ended
December 31, 2016
,
2017
and
2018
, respectively.
Note 19—Supplemental Information to Consolidated Statements of Cash Flows
In 2016, certain employees – including an executive officer, surrendered an aggregate of
50,719
shares of restricted stock at a value of
$1.5 million
to cover their income taxes due on the 2016 vesting of the restricted shares granted to them in 2015 and prior. Additionally, the Company recognized a
$0.5 million
excess tax benefit from the vesting of restricted stock.
In 2017, certain employees – including an executive officer, surrendered an aggregate of
29,689
shares of restricted stock at a value of less than
$0.1 million
to cover their income taxes due on the 2017 vesting of the restricted shares granted to them in 2011 and 2013.
In 2017, the Company issued approximately
3.0 million
shares of its common stock with a value of $
15.5 million
to extinguish a portion of the 2018 convertible senior notes (see Note 12).
In 2018, an executive officer surrendered an aggregate of
42,346
shares of restricted stock at a value of less than
$0.1
million to cover income taxes due on the 2018 vesting of the restricted shares granted to them in 2016 and 2017.
Note 20—Selected Quarterly Financial Data (Unaudited)
Selected unaudited quarterly financial data for the years
2017
and
2018
are summarized below. The Company has derived this data from the unaudited consolidated interim financial statements that, in the Company's opinion, have been prepared on substantially the same basis as the audited financial statements contained elsewhere in this report and include all normal recurring adjustments necessary for a fair presentation of the financial information for the periods presented. These unaudited quarterly results should be read in conjunction with the financial statements and notes thereto included elsewhere in this report. The operating results in any quarter are not necessarily indicative of the results that may be expected for any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2018
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
(in thousands, except per share data)
|
Net sales
|
$
|
94,505
|
|
|
$
|
119,565
|
|
|
$
|
262,413
|
|
|
$
|
136,628
|
|
|
$
|
93,004
|
|
|
$
|
105,781
|
|
|
$
|
236,699
|
|
|
$
|
132,326
|
|
Gross profit
|
$
|
30,021
|
|
|
$
|
33,719
|
|
|
$
|
61,781
|
|
|
$
|
30,160
|
|
|
$
|
22,959
|
|
|
$
|
27,941
|
|
|
$
|
64,330
|
|
|
$
|
40,486
|
|
Income (loss) from operations
|
$
|
(15,724
|
)
|
|
$
|
(14,108
|
)
|
|
$
|
(7,746
|
)
|
|
$
|
(26,580
|
)
|
|
$
|
(35,658
|
)
|
|
$
|
(12,140
|
)
|
|
$
|
20,043
|
|
|
$
|
(4,418
|
)
|
Income (loss) before provision (benefit) for income taxes
|
$
|
(18,629
|
)
|
|
$
|
(16,371
|
)
|
|
$
|
(16,651
|
)
|
|
$
|
(29,771
|
)
|
|
$
|
(38,529
|
)
|
|
$
|
(16,497
|
)
|
|
$
|
17,652
|
|
|
$
|
(2,100
|
)
|
Net income (loss)
|
$
|
(18,285
|
)
|
|
$
|
(16,687
|
)
|
|
$
|
(17,569
|
)
|
|
$
|
(30,487
|
)
|
|
$
|
(36,193
|
)
|
|
$
|
(18,588
|
)
|
|
$
|
15,699
|
|
|
$
|
(3,343
|
)
|
Basic earnings (loss) per share
|
$
|
(1.01
|
)
|
|
$
|
(0.77
|
)
|
|
$
|
(0.77
|
)
|
|
$
|
(1.33
|
)
|
|
$
|
(1.57
|
)
|
|
$
|
(0.80
|
)
|
|
$
|
0.68
|
|
|
$
|
(0.14
|
)
|
Weighted average shares
outstanding
|
18,104
|
|
|
21,616
|
|
|
22,772
|
|
|
22,799
|
|
|
23,100
|
|
|
23,106
|
|
|
23,106
|
|
|
23,106
|
|
Diluted earnings (loss) per share
|
$
|
(1.01
|
)
|
|
$
|
(0.77
|
)
|
|
$
|
(0.77
|
)
|
|
$
|
(1.33
|
)
|
|
$
|
(1.57
|
)
|
|
$
|
(0.80
|
)
|
|
$
|
0.38
|
|
|
$
|
(0.14
|
)
|
Weighted average shares and
equivalents outstanding
|
18,104
|
|
|
21,616
|
|
|
22,772
|
|
|
22,799
|
|
|
23,100
|
|
|
23,106
|
|
|
45,686
|
|
|
23,106
|
|
Quarterly and year-to-date computations of income (loss) per share amounts are made independently. Therefore, the sum of the per-share amounts for the quarters may not agree with the per share amounts for the year.
Note 21 – Litigation and Contingencies
The Company is a party to, and certain of its property is the subject of, various pending claims and legal proceedings that routinely arise in the ordinary course of its business. The Company accrues for losses when the loss is deemed probable and the liability can reasonably be estimated. Where a liability is probable and there is a range of estimated loss with no best estimate in the range, the Company records the minimum estimated liability related to the claim. As additional information becomes available, the Company assesses the potential liability related to its pending litigation and revises its estimates.
In the normal course of business, the Company may provide certain indemnifications and/or other commitments of varying scope to a) its licensors, customers and certain other parties, including against third party claims of intellectual property infringement , and b) its officers, directors and employees, including against third party claims regarding the periods in which they serve in such capacities with the Company. The duration and amount of such obligations is, in certain cases, indefinite. The Company's director’s and officer’s liability insurance policy may, however, enable it to recover a portion of any future payments related to its officer, director or employee indemnifications. For the past five years, costs related to director and officer indemnifications have not been significant. Other than certain liabilities recorded in the normal course of business related to royalty payments due our licensors, no liabilities have been recorded for indemnifications and/or other commitments.
Note 22 - Liquidity
As of December 31, 2017 and December 31, 2018, the Company held cash and cash equivalents, including restricted cash, of
$65.0 million
and
$58.2 million
, respectively. Cash, and cash equivalents, including restricted cash held outside of the United States in various foreign subsidiaries totaled
$52.8 million
and
$33.9 million
as of December 31, 2017 and December 31, 2018, respectively. The cash and cash equivalents, including restricted cash balances in the Company's foreign subsidiaries have either been fully taxed in the U.S. or tax has been accounted for in connection with the Tax Cuts and Jobs Act, or may be eligible for a full foreign dividends received deduction under such Act, and thus would not be subject to additional U.S. tax should such amounts be repatriated in the form of dividends or deemed distributions. Any such repatriation may result in foreign withholding taxes, which the Company expects would not be significant as of December 31, 2018.
The Company’s primary sources of working capital are cash flows from operations and borrowings under its credit facility (see Note 11 - Credit Facilities in the accompanying notes to the consolidated financial statements for additional information).
Typically, cash flows from operations are impacted by the effect on sales of (1) the appeal of the Company’s products, (2) the success of its licensed brands, (3) the highly competitive conditions existing in the toy industry, (4) dependency on a limited set of large customers, and (5) general economic conditions. A downturn in any single factor or a combination of factors could have a material adverse impact upon the Company’s ability to generate sufficient cash flows to operate the business. In addition, the Company’s business and liquidity are dependent to a significant degree on its vendors and their financial health, as well as the ability to accurately forecast the demand for products. The loss of a key vendor, or material changes in support by them, or a significant variance in actual demand compared to the forecast, can have a material adverse impact on the Company’s cash flows and business. Given the conditions in the toy industry environment in general, vendors, including licensors, may seek further assurances or take actions to protect against non-payment of amounts due to them. Changes in this area could have a material adverse impact on the Company’s liquidity.
Cash and cash equivalents, including restricted cash, projected cash flow from operations and borrowings under the Company’s credit facility should be sufficient to meet working capital and capital expenditure requirements, for the next 12 months from the issuance of these financial statements with certain mitigating plans described herein. In October 2018, the Company initiated a global restructuring program to adapt the Company’s cost structure and overhead to the evolving retail landscape. During the 2019 first quarter, two amendments were executed related to the Company's credit facility with Wells Fargo. The first amendment allows the Company to factor its Hong Kong receivables due from a significant customer providing the Company with additional flexibility. The second amendment extends the maturity date of the credit facility from March 27, 2019 to September 27, 2019, which also effectively extends the GACP term loan to September 27, 2019. The Company is currently in the initial phases of negotiations to amend and extend the Wells Fargo credit facility on a longer term basis. The Company is in negotiations with Meisheng related to an equity investment in the Company and with an ad hoc group of holders (the “Ad Hoc Group”) of the June 2020 convertible senior notes and with Oasis Investments II Master Fund Ltd. (“Oasis”), the holder of the November 2020 convertible senior notes, to extend the maturities of the aforementioned convertible senior notes (together, the “Proposed Equity and Recapitalization Transactions”). The Company cannot make assurances that it will be able to extend the credit facility on a longer term basis or that the Company can complete the Proposed Equity and Recapitalization Transactions, or similar strategic transaction(s), or that the Company will have the financial resources required to obtain, or that the conditions of the capital markets will support any future debt or equity financings. In addition, the Company’s ability to fund operations and retire debt when due is dependent on a number of factors, some of which are beyond the Company’s control and/or inherently difficult to estimate, including the Company’s future operating performance and the factors mentioned above. If the Company is unable to amend the credit facility to extend the term on a longer term basis and complete a strategic transaction, or secure another source of capital on commercially reasonable terms, the Company may be required to take additional measures, such as further reorganizations of the cost structure and adjusting inventory purchases and/or payment terms with suppliers, which could have a material adverse impact on the Company’s business, results of operations and financial condition.