JAKKS Pacific, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. The company designs, markets and distributes toys and consumer products, and costumes. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions where shown.
Key financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $112.4m | $78.8m | $196.2m | $145.3m |
| Gross profit | $31.9m | $16.8m | $58.0m | $33.1m |
| Gross margin | 28.4% | 21.3% | 29.6% | 22.8% |
| Operating income (loss) | $1.8m | $(9.7)m | $(0.9)m | $(25.7)m |
| Net loss | $(15.1)m | $(23.3)m | $(39.1)m | $(35.3)m |
| Loss per common share | $(2.48) | $(7.70) | $(6.86) | $(11.81) |
| Cash used in operating activities | Six-month period: $(18.5)m | Prior-year six-month period: $(11.9)m |
Q2 sales increased 42.7% year over year. Toys/Consumer Products sales rose 45.0% to $81.5m and Costumes sales rose 36.9% to $30.8m. For the first half, sales increased 35.0%; Toys/Consumer Products rose 35.9% and Costumes rose 31.3%.
Management attributed improved gross margins to product design and manufacturing cost initiatives, fewer low-margin closeout sales, and product mix; lower royalty rates also helped Q2. Higher warehousing and freight costs contributed to Q2 SG&A growth. First-half operating results improved substantially, but remained slightly loss-making.
Liquidity, cash flow and debt
- At June 30, cash and cash equivalents were $37.5m and restricted cash was $0.8m, versus combined cash and restricted cash of $92.7m at December 31, 2020. Working capital, including cash and restricted cash, was $45.9m, down $66.7m from year-end.
- First-half operating cash use was $18.5m, reflecting the net loss and increases in receivables, inventory, and prepaid and other assets, partly offset by higher accounts payable. Investing cash use was $3.7m, primarily for molds and tooling.
- On June 2, the company refinanced its prior term loan with a $99.0m first-lien BSP term loan, maturing in June 2027, and replaced its prior revolving facility with a $67.5m JPMorgan asset-based revolving facility, maturing in June 2026. The BSP loan carries floating-rate pricing of LIBOR plus 6.50%–7.00% or base rate plus 5.50%–6.00%, subject to floors and leverage-based pricing.
- At quarter-end, the company reported $99.0m principal outstanding on the BSP loan, $6.2m under the PPP loan, and $14.1m of New Oasis convertible notes, including PIK interest. The JPMorgan facility had no borrowings, $11.0m in letters of credit, and $53.4m in excess borrowing availability. The balance sheet reports debt net of discounts and issuance costs and carries the convertible notes at fair value.
- The BSP loan requires a minimum cash balance of $20.0m and a net leverage ratio of 4.0x, with scheduled step-downs to 3.0x through 2024. The company stated it was in compliance with its financial covenants at June 30. Management believes available cash, projected operating cash flow and credit-facility borrowings are sufficient for working capital and capital expenditures over the next 12 months.
Material changes, outlook and risks
- Q2 net loss narrowed year over year, but included a $7.4m debt-extinguishment loss, a $3.8m loss from the fair-value change in convertible notes, and a $1.5m loss from the preferred-stock derivative. First-half losses also included $12.8m of convertible-note fair-value losses and $8.9m of preferred-stock derivative losses. These items materially affect comparisons with operating performance.
- The $99.0m BSP loan replaced the prior term loan, which was repaid in full. Repayment accelerated the maturity of the Oasis notes to September 2021. After quarter-end, the company reported note conversions in July and August; it also terminated the $19.0m delayed-draw loan option on July 29, citing sufficient liquidity to fund remaining notes.
- Management said COVID-19 effects remained uncertain and that it could not estimate the pandemic’s impact on results, financial condition or liquidity for fiscal 2021 and 2022. Risks include disruptions to suppliers, production, freight and retail operations; the company paused its planned U.S. office return amid Delta-variant cases.
- The business is seasonal, with sales generally strongest in the third and fourth quarters and working-capital needs highest in the second and third quarters. Orders are generally cancelable until shipment, limiting backlog’s usefulness as a sales indicator. No specific financial guidance is provided in the filing.
- Customer concentration is significant: Walmart and Target together represented 58.1% of Q2 sales and 55.9% of first-half sales. Inventory rose to $60.6m from $38.6m at year-end; future demand, product obsolescence, vendor capacity and freight costs are relevant risks.
- Future minimum royalty guarantees were $29.8m, including $20.0m due within twelve months, exclusive of $12.2m in advances already paid. The company also applied for forgiveness of its $6.2m PPP loan; forgiveness was not assured at filing.
- A Delaware shareholder class action alleges proxy-statement and voting irregularities relating to the 2020 reverse stock split. Damages sought are unspecified; the company intends to defend the case and seek settlement and dismissal. The filing says it cannot estimate a potential loss range.
- The BSP term loan arranger is affiliated with a company affiliate that held company shares, preferred stock and convertible notes; the company also disclosed related-party note ownership. Meisheng, a significant manufacturer and company shareholder, received $29.2m in inventory-related payments in the first half, and $19.6m was payable to it at quarter-end.
Important facts for investors to verify
- Whether seasonal second-half demand, including Halloween, materialized as retailers expected, and whether sales growth translated into sustainable operating profitability and cash generation.
- How the accelerated Oasis note maturity and subsequent conversions affected remaining debt, share count and dilution; the filing reported 9,876,200 common shares outstanding on August 6, 2021.
- Whether the company maintained the BSP loan’s minimum cash and leverage requirements, and whether liquidity remained adequate after working-capital needs, royalty commitments and debt payments.
- Whether freight, supplier and inventory pressures affected margins, fulfillment and the $60.6m inventory balance; also monitor exposure to Walmart and Target.
- Outcomes of the PPP forgiveness application and shareholder litigation, and any material changes in COVID-19 impacts or related-party financing arrangements.