JAKKS Pacific, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. The filing covers a global toy and consumer-products company, with Toys/Consumer Products and Halloween reporting segments. Results are unaudited.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Net sales | $78.8 million | $95.2 million | $145.3 million | $166.0 million |
| Gross profit / margin | $16.8 million / 21.3% | $17.7 million / 18.6% | $33.1 million / 22.8% | $32.1 million / 19.3% |
| Operating loss | $9.7 million | $18.6 million | $25.7 million | $42.7 million |
| Net loss | $23.3 million | $22.5 million | $35.3 million | $51.6 million |
| Net loss attributable to common stockholders / loss per share | $23.6 million / $7.70 | $22.5 million / $9.55 | $35.9 million / $11.81 | $51.7 million / $21.93 |
Sales declined 17.3% in Q2 and 12.5% in the first half. Q2 gross profit fell despite an improved gross margin; operating losses narrowed in both comparison periods, while Q2 net loss increased. Q2 included a $7.7 million fair-value loss on convertible notes and $5.5 million of interest expense. First-half interest expense was $11.1 million.
- Segment sales: Q2 Toys/Consumer Products sales were $56.2 million, down 4.4%; Halloween sales were $22.5 million, down 38.2%. First-half sales were $118.8 million for Toys/Consumer Products, down 5.7%, and $26.5 million for Halloween, down 33.8%.
- Cash flow: First-half operating cash use was $11.9 million, compared with $8.9 million in 2019. Investing cash use was $4.3 million; financing provided $4.1 million, including the PPP loan. Cash, cash equivalents and restricted cash ended at $52.7 million, down from $66.3 million at year-end 2019.
- Liquidity: Working capital was $85.3 million, versus $107.5 million at December 31, 2019. Cash and cash equivalents excluding restricted cash were $48.1 million. The Wells Fargo ABL had no borrowings, $10.4 million of letters of credit and $23.6 million of excess borrowing capacity.
- Debt and equity: The first-lien term loan had $134.8 million principal outstanding and matures in February 2023, with 10.5% stated interest (8% cash and 2.5% payment-in-kind). Convertible notes had $30.7 million principal outstanding at June 30; $7.1 million of notes converted to shares in June. The company also received a $6.2 million PPP loan. Stockholders’ equity was a $23.2 million deficit, compared with $4.0 million positive equity at year-end.
Changes, outlook and risks
- Management attributed weaker sales to COVID-19-related retail closures and reduced Halloween orders, as well as the discontinuation of the Funnoodle business. Prior-year Halloween comparisons also benefited from a stronger entertainment release calendar.
- SG&A fell to $24.7 million in Q2 and $57.0 million in the first half, reflecting cost-saving initiatives and pandemic-related cost mitigation. The company recorded $1.6 million of restructuring charges and $0.2 million of pandemic-related charges in the first half.
- Management said the pandemic’s duration and financial effects were highly uncertain and likely to materially adversely affect 2020 sales. It did not provide specific financial guidance. The company implemented work-from-home arrangements, travel restrictions and expense reductions; its distribution center was operating but could be temporarily shut.
- Going concern and covenants: The company stated that conditions raise substantial doubt about its ability to continue as a going concern for one year from issuance of the financial statements. It was compliant with financial covenants at June 30, but management considered it probable that the company would miss the term loan’s $34 million minimum trailing-12-month EBITDA test for the quarter ending September 30, 2020. A failure could trigger defaults under both the term loan and ABL unless lenders grant a waiver or other accommodation; lenders are not obligated to do so. The ABL also has a $25 million minimum-liquidity requirement.
- Other commitments and risks: Future minimum royalty guarantees were $45.0 million, including $35.1 million due within 12 months, excluding $30.9 million in advances already paid. Sales are seasonal, orders are generally cancellable before shipment, and Walmart and Target together represented 52.2% of Q2 sales. The company also relies on vendors, including related-party manufacturer Meisheng.
- The company said PPP loan forgiveness was uncertain; an adverse review could require repayment. A 1-for-10 reverse stock split took effect July 9, 2020, and Nasdaq notified the company on July 31 that it had regained minimum-bid-price compliance.
Investor verification priorities
- Whether JAKKS obtains covenant waivers or other lender accommodations, and its ability to meet the September 2020 EBITDA and liquidity tests.
- Available liquidity in practice, including ABL borrowing availability, restrictions on cash held by foreign subsidiaries, and ongoing operating cash needs.
- COVID-19’s effect on Halloween demand, retailer orders, inventory and returns, supplier continuity, and subsequent sales.
- Debt service burden, convertible-note terms and dilution, PPP eligibility and forgiveness, and the status of royalty obligations.
- Customer and supplier concentration, including exposure to Walmart, Target and Meisheng, and the implications of the related-party relationships.