JAKKS Pacific, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; filed May 15, 2020. JAKKS designs, develops, markets and distributes toys and consumer products, including Halloween costumes and accessories. Results are unaudited and the business is seasonal.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net sales | $66.6 million | $70.8 million |
| Gross profit / margin | $16.4 million / 24.6% | $14.3 million / 20.2% |
| Operating loss | $16.0 million | $24.0 million |
| Net loss attributable to JAKKS | $12.0 million | $29.2 million |
| Loss per common share | $0.41 | $1.24 |
| Cash used in operating activities | $18.9 million | $1.9 million |
| Capital expenditures | $1.6 million | $2.5 million |
Revenue decreased about 6.0% year over year. Toys/Consumer Products sales fell 6.8% to $62.6 million; Halloween sales rose 11.1% to $4.0 million. Gross margin improved, which management attributed to better product margins and lower inventory obsolescence expense, partly offset by higher royalties. SG&A declined to $32.3 million from $35.3 million, mainly reflecting lower payroll, temporary-help and travel costs.
The smaller reported net loss included favorable non-cash fair-value changes: a $7.7 million gain on convertible notes and a $2.1 million gain on the preferred-stock derivative. Interest expense increased to $5.5 million from $3.0 million.
Balance sheet, debt and liquidity
- Cash, cash equivalents and restricted cash totaled $44.0 million at March 31, 2020, down from $66.3 million at December 31, 2019. Working capital was $87.4 million, versus $107.5 million at year-end.
- Total assets were $276.9 million; total liabilities were $286.0 million. Stockholders’ deficit was $9.8 million.
- The company had $134.8 million principal outstanding under its first-lien term loan, bearing 10.5% annual interest (8.0% cash and 2.5% payment-in-kind), due February 2023. It had no Wells Fargo ABL borrowings; reported excess borrowing capacity was $32.0 million, with $9.8 million of letters of credit outstanding.
- $1.9 million principal of 4.875% convertible notes remained due June 1, 2020. Oasis notes had $37.6 million principal and a reported fair value of $43.7 million.
- The company reported compliance with its financial covenants at March 31. Beginning with the quarter ending September 30, 2020, the term loan requires trailing-12-month EBITDA of at least $34.0 million and liquidity of at least $10.0 million. The ABL agreement also includes minimum-liquidity and availability requirements.
Outlook, risks and unusual items
Management said COVID-19 had affected consumer behavior, retail traffic, production, product availability and supply chains. It expected the pandemic to materially adversely affect fiscal 2020 sales, but said the scale and duration of the impact could not be reliably estimated; the filing provides no quantified earnings or revenue guidance. The company began reviewing spending and revenue expectations and identified cost-saving measures.
The filing states that uncertainty over future operations and the ability to meet the term-loan EBITDA threshold raises substantial doubt about the company’s ability to continue as a going concern for one year after issuance of the financial statements. Management planned to seek lender waivers or other accommodations, but lenders were not obligated to provide them. The company had applied after quarter-end for a $10.0 million Paycheck Protection Program loan; receipt and forgiveness were uncertain at filing.
As a subsequent event, JAKKS began a planned 26% workforce reduction on April 17 and expected approximately $1.7 million of cash severance and restructuring costs during 2020. Future minimum royalty guarantees totaled $51.2 million, including $40.9 million due within 12 months. Walmart and Target represented 49.8% of Q1 sales; the three largest customers represented 76.7% of gross receivables at quarter-end.
Important facts for investors to verify
- Whether COVID-19 effects on demand, customer orders, supply chains and inventory alter sales, cash generation or the company’s going-concern outlook.
- Progress toward the $34.0 million term-loan EBITDA test and required liquidity thresholds, and whether lenders grant any needed waivers or accommodations.
- Repayment or other resolution of the $1.9 million notes due June 1, 2020, and the status and terms of the requested PPP funds.
- Execution and cash costs of the 26% workforce reduction, along with the timing and near-term cash burden of royalty commitments.
- Customer concentration, receivables collectability and the adequacy of sales-return and inventory reserves.