Business context and reporting period
JAKKS Pacific, Inc. designs, markets and distributes toys, consumer products and costumes. This unaudited Form 10-Q covers the three months ended March 31, 2021, compared with the same quarter of 2020. Results are seasonal and the company cautions that interim results may not indicate full-year performance.
Key financial metrics
| Metric | Q1 2021 | Q1 2020 / comparison |
|---|---|---|
| Net sales | $83.8 million | $66.6 million; up 26.0% |
| Gross profit / margin | $26.1 million / 31.1% | $16.4 million / 24.6% |
| Operating loss / margin | $2.7 million / 3.3% | $16.0 million / 24.0% |
| Net loss | $24.1 million | $12.0 million |
| Net loss attributable to common stockholders / diluted loss per share | $24.4 million / $4.54 | $12.3 million / $4.09 |
| Cash used in operating activities | $7.0 million | $18.9 million |
| Cash, cash equivalents and restricted cash | $84.1 million at March 31 | $92.7 million at December 31, 2020 |
| Working capital | $107.8 million | $112.6 million at December 31, 2020 |
| Debt on balance sheet, net | $161.7 million | $156.4 million at December 31, 2020 |
Capital expenditures were $1.5 million; investing activities used $1.5 million. Financing activities used $0.2 million. The company reported total stockholders’ deficit of $5.6 million. Its $125.3 million term-loan balance includes $5.5 million of payment-in-kind interest; it also had a $6.2 million PPP loan and convertible notes with $20.9 million principal, including PIK interest. The revolving credit facility had no borrowings, $10.8 million of letters of credit and $35.0 million of excess borrowing capacity.
Material changes versus the prior comparable period
- Toys/Consumer Products sales increased 27.6% to $79.9 million; Costumes sales were essentially flat at $4.0 million.
- Gross margin improved, principally from lower average manufacturing costs, reduced lower-margin closeout sales and a lower average royalty rate. Costumes margin declined as customer credits for slower-moving products increased.
- SG&A fell $3.5 million to $28.8 million, reflecting a $1.9 million employee retention credit, cost-saving initiatives and pandemic-related cost reductions.
- Despite improved sales and operating results, net loss widened. Fair-value remeasurement produced a $9.0 million loss on convertible notes and a $7.4 million loss on the preferred-stock derivative, versus gains of $7.7 million and $2.1 million, respectively, in Q1 2020.
- Operating cash outflow improved year over year, but cash and working capital declined from year-end.
Outlook, commentary, risks and unusual items
- No specific revenue or earnings guidance is provided. Management said it could not estimate COVID-19’s effects on 2021 and 2022 results, financial condition or liquidity. It cited potential disruption to consumer demand, retail operations, production, product availability, suppliers and supply chains.
- Management stated that available cash, projected operating cash flow and credit-facility access were expected to cover working-capital and capital-expenditure needs for the next 12 months. This assessment depends on forecasts and ongoing access to liquidity.
- The business is seasonal, with sales generally highest in the third and fourth quarters; orders are generally cancelable until shipment, making forecasting difficult. Two customers, Target and Walmart, accounted for 52.9% of Q1 sales.
- Debt is substantial. The first-lien term loan bears 10.5% annual interest (8.0% cash and 2.5% PIK) and matures in February 2023. Its EBITDA covenant was amended to defer testing until no earlier than March 31, 2022, with a $25.0 million threshold. The company reported compliance with applicable financial covenants at quarter-end.
- Future minimum royalty guarantees totaled $33.7 million, of which $21.6 million was due within 12 months, in addition to $15.1 million of advances already paid. PPP-loan forgiveness was uncertain; the company intended to apply and noted that an adverse review could require repayment.
- A purported shareholder class action alleges proxy-statement and voting issues related to the 2020 reverse stock split. The company could not estimate potential damages; after shareholder ratification in April 2021, it said it intended to seek settlement and dismissal.
- Other notable matters include related-party debt and manufacturing relationships, and Level 3 fair-value estimates for the convertible notes and preferred-stock derivative. The company identified no Q1 2021 goodwill impairment.
Important facts for investors to verify
- Whether sales growth and improved product margins continue, and whether seasonal demand and customer orders support the company’s forecasts.
- Cash conversion, working-capital needs, cash balances and available ABL borrowing capacity, including the effect of letters of credit and covenants.
- Debt service, term-loan covenant requirements and the potential for additional term-loan prepayment; also confirm PPP-loan forgiveness status.
- Exposure to Target and Walmart, supplier and licensor continuity, and the timing and amount of royalty commitments.
- Developments in the shareholder litigation and changes in Level 3 fair-value estimates, which materially affected reported quarterly loss.